FULT 3.31.2012 10Q

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20459 

FORM 10-Q 

(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012, or

¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to              

Commission File No. 0-10587
FULTON FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter) 
PENNSYLVANIA
 
23-2195389
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
One Penn Square, P.O. Box 4887, Lancaster, Pennsylvania
 
17604
(Address of principal executive offices)
 
(Zip Code)

(717) 291-2411
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
ý
  
Accelerated filer
 
¨
Non-accelerated filer
 
¨
  
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý

APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
Common Stock, $2.50 Par Value – 200,791,000 shares outstanding as of April 30, 2012.


FULTON FINANCIAL CORPORATION
FORM 10-Q FOR THE THREE MONTHS ENDED MARCH 31, 2012
INDEX
 
Description
 
Page
 
 
 
 
PART I. FINANCIAL INFORMATION
 
 
 
 
 
 
 
 
 
 
(a)
 
 
 
 
 
(b)
 
 
 
 
 
(c)
 
 
 
 
 
(d)
 
 
 
 
 
(e)
 
 
 
 
 
(f)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2


Item 1. Financial Statements
 
FULTON FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS 
 
(in thousands, except per-share data)
 
March 31,
2012
 
December 31,
2011
 
(unaudited)
 
ASSETS
 
 
 
Cash and due from banks
$
286,875

 
$
292,598

Interest-bearing deposits with other banks
106,227

 
175,336

Loans held for sale
70,128

 
47,009

Investment securities:
 
 
 
Held to maturity (estimated fair value of $6,626 in 2012 and $6,699 in 2011)
6,608

 
6,669

Available for sale
3,082,799

 
2,673,298

Loans, net of unearned income
11,957,600

 
11,968,970

Less: Allowance for loan losses
(256,496
)
 
(256,471
)
Net Loans
11,701,104

 
11,712,499

Premises and equipment
215,756

 
212,274

Accrued interest receivable
51,247

 
51,098

Goodwill
535,980

 
536,005

Intangible assets
7,403

 
8,204

Other assets
472,095

 
655,518

Total Assets
$
16,536,222

 
$
16,370,508

LIABILITIES
 
 
 
Deposits:
 
 
 
Noninterest-bearing
$
2,682,259

 
$
2,588,034

Interest-bearing
9,658,463

 
9,937,705

Total Deposits
12,340,722

 
12,525,739

Short-term borrowings:
 
 
 
Federal funds purchased
585,547

 
253,470

Other short-term borrowings
379,003

 
343,563

Total Short-Term Borrowings
964,550

 
597,033

Accrued interest payable
27,674

 
25,686

Other liabilities
246,432

 
189,362

Federal Home Loan Bank advances and long-term debt
933,981

 
1,040,149

Total Liabilities
14,513,359

 
14,377,969

SHAREHOLDERS’ EQUITY
 
 
 
Common stock, $2.50 par value, 600 million shares authorized, 216.2 million shares issued in 2012 and 2011
540,594

 
540,386

Additional paid-in capital
1,423,875

 
1,423,727

Retained earnings
288,151

 
264,059

Accumulated other comprehensive income
12,109

 
7,955

Treasury stock, at cost, 15.9 million shares outstanding in 2012 and 16.0 million shares oustanding in 2011
(241,866
)
 
(243,588
)
Total Shareholders’ Equity
2,022,863

 
1,992,539

Total Liabilities and Shareholders’ Equity
$
16,536,222

 
$
16,370,508

 
 
 
 
See Notes to Consolidated Financial Statements
 
 
 
 

3

FULTON FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
 
(in thousands, except per-share data)
 
Three Months Ended
March 31
 
2012
 
2011
INTEREST INCOME
 
 
 
Loans, including fees
$
144,346

 
$
149,496

Investment securities:
 
 
 
Taxable
18,661

 
21,807

Tax-exempt
2,701

 
3,175

Dividends
699

 
683

Loans held for sale
431

 
500

Other interest income
53

 
33

Total Interest Income
166,891

 
175,694

INTEREST EXPENSE
 
 
 
Deposits
16,250

 
23,286

Short-term borrowings
281

 
254

Long-term debt
11,665

 
12,591

Total Interest Expense
28,196

 
36,131

Net Interest Income
138,695

 
139,563

Provision for credit losses
28,000

 
38,000

Net Interest Income After Provision for Credit Losses
110,695

 
101,563

OTHER INCOME
 
 
 
Service charges on deposit accounts
14,842

 
13,305

Other service charges and fees
10,555

 
11,482

Mortgage banking income
10,050

 
5,463

Investment management and trust services
9,377

 
9,204

Other
5,605

 
3,722

Investment securities gains (losses), net:
 
 
 
Other-than-temporary impairment losses
—

 
(995
)
Less: Portion of gain recognized in other comprehensive income (before taxes)
—

 
(296
)
Net other-than-temporary impairment losses
—

 
(1,291
)
Net gains on sales of investment securities
1,251

 
3,576

Investment securities gains, net
1,251

 
2,285

Total Other Income
51,680

 
45,461

OTHER EXPENSES
 
 
 
Salaries and employee benefits
60,360

 
54,308

Net occupancy expense
10,935

 
11,366

Data processing
3,688

 
3,372

Equipment expense
3,369

 
3,132

Operating risk loss
3,368

 
(462
)
FDIC insurance expense
3,021

 
4,754

Other real estate owned and repossession expense
2,928

 
1,271

Professional fees
2,582

 
2,849

Marketing
2,472

 
2,836

Software
2,175

 
2,031

Intangible amortization
801

 
1,178

Other
15,012

 
14,229

Total Other Expenses
110,711

 
100,864

Income Before Income Taxes
51,664

 
46,160

Income taxes
13,532

 
12,375

Net Income
$
38,132

 
$
33,785

 
 
 
 
PER SHARE:
 
 
 
Net Income (Basic)
$
0.19

 
$
0.17

Net Income (Diluted)
0.19

 
0.17

Cash Dividends
0.07

 
0.04

See Notes to Consolidated Financial Statements
 
 
 

4

FULTON FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
 
 
Three Months Ended March 31
 
2012
 
2011
 
(in thousands)
Net Income
$
38,132

 
$
33,785

Other Comprehensive Income:
 
 
 
Unrealized gain on securities (net of a $2.5 million and $1.9 million tax effect in 2012 and 2011, respectively)
4,584

 
3,568

Non-credit related unrealized gain on other-than-temporarily impaired debt securities (net of a $73,000 and $134,000 tax effect in 2012 and 2011, respectively)
135

 
249

Unrealized gain on derivative financial instruments (net of an $18,000 tax effect in 2012 and 2011)
34

 
34

Amortization (accretion) of net unrecognized pension and postretirement plan items (net of a $115,000 and $6,000 tax effect in 2012 and 2011, respectively)
214

 
(12
)
Reclassification adjustment for securities gains included in net income (net of a $438,000 and $800,000 tax effect in 2012 and 2011, respectively)
(813
)
 
(1,485
)
Other Comprehensive Income
4,154

 
2,354

Total Comprehensive Income
$
42,286

 
$
36,139

 
 
 
 
See Notes to Consolidated Financial Statements
 
 
 


5

FULTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2012 AND 2011
 
(in thousands, except per-share data)
 
Common Stock
 
 
 
Retained
Earnings
 
 
 
Treasury
Stock
 
Total
 
Shares
Outstanding
 
Amount
 
Additional Paid-in
Capital
 
Accumulated
Other Comprehensive
Income
 
 
 
Balance at December 31, 2011
200,164

 
$
540,386

 
$
1,423,727

 
$
264,059

 
$
7,955

 
$
(243,588
)
 
$
1,992,539

Net income

 

 

 
38,132

 

 

 
38,132

Other comprehensive income

 

 

 

 
4,154

 

 
4,154

Stock issued, including related tax benefits
190

 
208

 
(565
)
 

 

 
1,722

 
1,365

Stock-based compensation awards

 

 
713

 

 

 

 
713

Common stock cash dividends - $0.07 per share

 

 

 
(14,040
)
 

 

 
(14,040
)
Balance at March 31, 2012
200,354

 
$
540,594

 
$
1,423,875

 
$
288,151

 
$
12,109

 
$
(241,866
)
 
$
2,022,863

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2010
199,050

 
$
538,492

 
$
1,420,127

 
$
158,453

 
$
12,495

 
$
(249,178
)
 
$
1,880,389

Net income

 

 

 
33,785

 

 

 
33,785

Other comprehensive income

 

 

 

 
2,354

 

 
2,354

Stock issued, including related tax benefits
141

 
177

 
(8
)
 

 

 
1,062

 
1,231

Stock-based compensation awards

 

 
547

 

 

 

 
547

Common stock cash dividends - $0.04 per share

 

 

 
(7,984
)
 

 

 
(7,984
)
Balance at March 31, 2011
199,191

 
$
538,669

 
$
1,420,666

 
$
184,254

 
$
14,849

 
$
(248,116
)
 
$
1,910,322

 
 
 
 
 
 
 
 
 
 
 
 
 
 
See Notes to Consolidated Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 

6

FULTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
(in thousands)
 
Three Months Ended
March 31
 
2012
 
2011
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net Income
$
38,132

 
$
33,785

Adjustments to reconcile net income to net cash provided by operating activities:

 

Provision for credit losses
28,000

 
38,000

Depreciation and amortization of premises and equipment
5,327

 
5,104

Net amortization of investment securities premiums
2,849

 
1,704

Investment securities gains
(1,251
)
 
(2,285
)
Net (increase) decrease in loans held for sale
(23,119
)
 
53,037

Amortization of intangible assets
801

 
1,178

Stock-based compensation
713

 
547

Excess tax benefits from stock-based compensation
(3
)
 
—

(Increase) decrease in accrued interest receivable
(149
)
 
963

(Increase) decrease in other assets
(428
)
 
14,626

Increase in accrued interest payable
1,988

 
1,059

Increase (decrease) in other liabilities
10,282

 
(6,362
)
Total adjustments
25,010

 
107,571

Net cash provided by operating activities
63,142

 
141,356

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Proceeds from sales of securities available for sale
183,685

 
411,196

Proceeds from maturities of securities held to maturity
75

 
92

Proceeds from maturities of securities available for sale
177,855

 
161,756

Purchase of securities held to maturity
(14
)
 
(8
)
Purchase of securities available for sale
(539,783
)
 
(282,144
)
Decrease (increase) in short-term investments
69,109

 
(49,996
)
Net (increase) decrease in loans
(16,670
)
 
17,757

Net purchases of premises and equipment
(8,809
)
 
(5,458
)
Net cash (used in) provided by investing activities
(134,552
)
 
253,195

CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Net (decrease) increase in demand and savings deposits
(47,636
)
 
210,068

Net decrease in time deposits
(137,381
)
 
(190,039
)
Increase (decrease) in short-term borrowings
367,517

 
(259,679
)
Repayments of long-term debt
(106,168
)
 
(83,761
)
Net proceeds from issuance of stock
1,362

 
1,231

Excess tax benefits from stock-based compensation
3

 
—

Dividends paid
(12,010
)
 
(5,972
)
Net cash provided by (used in) financing activities
65,687

 
(328,152
)
 
 
 
 
Net (Decrease) Increase in Cash and Due From Banks
(5,723
)
 
66,399

Cash and Due From Banks at Beginning of Period
292,598

 
198,954

Cash and Due From Banks at End of Period
$
286,875

 
$
265,353

 
 
 
 
Supplemental Disclosures of Cash Flow Information:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
26,208

 
$
35,072

Income taxes
4,169

 
145

See Notes to Consolidated Financial Statements
 
 
 
 

7

FULTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
NOTE A – Basis of Presentation
The accompanying unaudited consolidated financial statements of Fulton Financial Corporation (the Corporation) have been prepared in conformity with U.S. generally accepted accounting principles (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the amounts of assets and liabilities as of the date of the financial statements as well as revenues and expenses during the period. Actual results could differ from those estimates. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month period ended March 31, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. The Corporation evaluates subsequent events through the date of filing with the Securities and Exchange Commission (SEC).

NOTE B – Net Income Per Share
The Corporation’s basic net income per common share is calculated as net income divided by the weighted average number of common shares outstanding.
For diluted net income per common share, net income is divided by the weighted average number of common shares outstanding plus the incremental number of shares added as a result of converting common stock equivalents, calculated using the treasury stock method. The Corporation’s common stock equivalents consist of outstanding stock options and restricted stock.
A reconciliation of weighted average common shares outstanding used to calculate basic net income per common share and diluted net income per common share follows for the three months ended March 31:
 
2012
 
2011
 
(in thousands)
Weighted average shares outstanding (basic)
199,492

 
198,599

Effect of dilutive securities
852

 
687

Weighted average shares outstanding (diluted)
200,344

 
199,286

For the three months ended March 31, 2012 and 2011, 5.2 million and 4.6 million stock options, respectively, were excluded from the diluted net income per share computation as their effect would have been anti-dilutive.

NOTE C – Accumulated Other Comprehensive Income
The following tables present changes in each component of accumulated other comprehensive income for the three months ended March 31, 2012 and 2011: 
 
Unrealized Gains on Investment Securities Not Other-Than-Temporarily Impaired
 
Unrealized Non-Credit Losses on Other-Than-Temporarily Impaired Debt Securities
 
Unrecognized Pension and Postretirement Plan Items
 
Unrealized Effective Portions of Losses on Forward-Starting Interest Rate Swaps
 
Total
 
(in thousands)
Three months ended March 31, 2012
 
 
 
 
 
 
 
 
 
Balance at December 31, 2011
$
27,054

 
$
(1,011
)
 
$
(15,134
)
 
$
(2,954
)
 
$
7,955

Current-period other comprehensive income
3,771

 
135

 
214

 
34

 
4,154

Balance at March 31, 2012
$
30,825

 
$
(876
)
 
$
(14,920
)
 
$
(2,920
)
 
$
12,109

Three months ended March 31, 2011

 

 

 

 

Balance at December 31, 2010
$
22,354

 
$
(2,355
)
 
$
(4,414
)
 
$
(3,090
)
 
$
12,495

Current-period other comprehensive income (loss)
1,437

 
895

 
(12
)
 
34

 
2,354

Balance at March 31, 2011
$
23,791

 
$
(1,460
)
 
$
(4,426
)
 
$
(3,056
)
 
$
14,849





8

NOTE D – Investment Securities
The following tables present the amortized cost and estimated fair values of investment securities:
Held to Maturity at March 31, 2012
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
 
(in thousands)
U.S. Government sponsored agency securities
$
6,001

 
$
—

 
$
(21
)
 
$
5,980

State and municipal securities
179

 
—

 
—

 
179

Mortgage-backed securities
428

 
39

 
—

 
467

 
$
6,608

 
$
39

 
$
(21
)
 
$
6,626

Available for Sale at March 31, 2012
 
 
 
 
 
 
 
Equity securities
$
110,336

 
$
3,811

 
$
(1,028
)
 
$
113,119

U.S. Government securities
330

 
—

 
—

 
330

U.S. Government sponsored agency securities
3,980

 
71

 
(1
)
 
4,050

State and municipal securities
296,231

 
14,437

 
(36
)
 
310,632

Corporate debt securities
132,686

 
6,235

 
(11,341
)
 
127,580

Collateralized mortgage obligations
1,077,326

 
19,678

 
(419
)
 
1,096,585

Mortgage-backed securities
1,174,146

 
33,126

 
(646
)
 
1,206,626

Auction rate securities
241,682

 
151

 
(17,956
)
 
223,877

 
$
3,036,717

 
$
77,509

 
$
(31,427
)
 
$
3,082,799

Held to Maturity at December 31, 2011
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
 
(in thousands)
U.S. Government sponsored agency securities
$
5,987

 
$
—

 
$
(14
)
 
$
5,973

State and municipal securities
179

 
—

 
—

 
179

Mortgage-backed securities
503

 
44

 
—

 
547

 
$
6,669

 
$
44

 
$
(14
)
 
$
6,699

Available for Sale at December 31, 2011
 
 
 
 
 
 
 
Equity securities
$
117,486

 
$
2,383

 
$
(2,819
)
 
$
117,050

U.S. Government securities
334

 
—

 
—

 
334

U.S. Government sponsored agency securities
3,987

 
87

 
(1
)
 
4,073

State and municipal securities
306,186

 
15,832

 
—

 
322,018

Corporate debt securities
132,855

 
4,979

 
(14,528
)
 
123,306

Collateralized mortgage obligations
982,851

 
19,186

 
(828
)
 
1,001,209

Mortgage-backed securities
848,675

 
31,837

 
(415
)
 
880,097

Auction rate securities
240,852

 
120

 
(15,761
)
 
225,211

 
$
2,633,226

 
$
74,424

 
$
(34,352
)
 
$
2,673,298

Securities carried at $1.8 billion as of March 31, 2012 and December 31, 2011 were pledged as collateral to secure public and trust deposits and customer repurchase agreements. Available for sale equity securities include restricted investment securities issued by the Federal Home Loan Bank (FHLB) and the Federal Reserve Bank totaling $79.7 million and $82.5 million as of March 31, 2012 and December 31, 2011, respectively.

9

The amortized cost and estimated fair values of debt securities as of March 31, 2012, by contractual maturity, are shown in the following table. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
 
Held to Maturity
 
Available for Sale
 
Amortized
Cost
 
Estimated
Fair Value
 
Amortized
Cost
 
Estimated
Fair Value
 
(in thousands)
Due in one year or less
$
179

 
$
179

 
$
55,804

 
$
56,063

Due from one year to five years
6,001

 
5,980

 
42,008

 
43,985

Due from five years to ten years
—

 
—

 
151,445

 
162,134

Due after ten years
—

 
—

 
425,652

 
404,287

 
6,180

 
6,159

 
674,909

 
666,469

Collateralized mortgage obligations
—

 
—

 
1,077,326

 
1,096,585

Mortgage-backed securities
428

 
467

 
1,174,146

 
1,206,626

 
$
6,608

 
$
6,626

 
$
2,926,381

 
$
2,969,680

The following table presents information related to the Corporation’s gains and losses on the sales of equity and debt securities, and losses recognized for the other-than-temporary impairment of investments:
 
Gross
Realized
Gains
 
Gross
Realized
Losses
 
Other-than-
temporary
Impairment
Losses
 
Net Gains
(Losses)
 
(in thousands)
Three months ended March 31, 2012
 
 
 
 
 
 
 
Equity securities
$
1,086

 
$
—

 
$
—

 
$
1,086

Debt securities
165

 
—

 
—

 
165

Total
$
1,251

 
$
—

 
$
—

 
$
1,251

Three months ended March 31, 2011:
 
 
 
 
 
 
 
Equity securities
$
5

 
$
—

 
$
(297
)
 
$
(292
)
Debt securities
3,589

 
(18
)
 
(994
)
 
2,577

Total
$
3,594

 
$
(18
)
 
$
(1,291
)
 
$
2,285

The following table presents a summary of the cumulative credit related other-than-temporary impairment charges, recognized as components of earnings, for debt securities still held by the Corporation at March 31, 2012 and 2011:
 
2012
 
2011
 
(in thousands)
Balance of cumulative credit losses on debt securities, beginning of period
$
(22,781
)
 
$
(27,560
)
Additions for credit losses recorded which were not previously recognized as components of earnings
—

 
(994
)
Reductions for increases in cash flows expected to be collected that are recognized over the remaining life of the security
89

 
37

Balance of cumulative credit losses on debt securities, end of period
$
(22,692
)
 
$
(28,517
)

10

The following table presents the gross unrealized losses and estimated fair values of investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2012:

 
Less than 12 months
 
12 months or longer
 
Total
 
Estimated
Fair Value
 
Unrealized
Losses
 
Estimated
Fair Value
 
Unrealized
Losses
 
Estimated
Fair Value
 
Unrealized
Losses
 
(in thousands)
U.S. Government sponsored agency securities
$
197

 
$
(1
)
 
$
5,379

 
$
(21
)
 
$
5,576

 
$
(22
)
State and municipal securities
1,676

 
(36
)
 
—

 
—

 
1,676

 
(36
)
Corporate debt securities
9,503

 
(1,660
)
 
37,877

 
(9,681
)
 
47,380

 
(11,341
)
Collateralized mortgage obligations
161,795

 
(419
)
 
—

 
—

 
161,795

 
(419
)
Mortgage-backed securities
201,971

 
(646
)
 
—

 
—

 
201,971

 
(646
)
Auction rate securities
14,574

 
(623
)
 
193,699

 
(17,333
)
 
208,273

 
(17,956
)
Total debt securities
389,716

 
(3,385
)
 
236,955

 
(27,035
)
 
626,671

 
(30,420
)
Equity securities
8,424

 
(761
)
 
1,914

 
(267
)
 
10,338

 
(1,028
)
 
$
398,140

 
$
(4,146
)
 
$
238,869

 
$
(27,302
)
 
$
637,009

 
$
(31,448
)
For its investments in equity securities, particularly its investments in stocks of financial institutions, management evaluates the near-term prospects of the issuers in relation to the severity and duration of the impairment. Based on that evaluation and the Corporation’s ability and intent to hold those investments for a reasonable period of time sufficient for a recovery of fair value, the Corporation does not consider those investments with unrealized holding losses as of March 31, 2012 to be other-than-temporarily impaired. As of March 31, 2012, the financial institutions stock portfolio had a cost basis of $24.0 million and a fair value of $26.8 million.
The unrealized holding losses on student loan auction rate securities, also known as auction rate certificates (ARCs), are attributable to liquidity issues resulting from the failure of periodic auctions. Fulton Financial Advisors (FFA), the investment management and trust division of the Corporation’s Fulton Bank, N.A. subsidiary, held ARCs for some of its customers’ accounts. FFA had previously purchased ARCs for customers as short-term investments with fair values that could be derived based on periodic auctions under normal market conditions. During 2008 and 2009, the Corporation purchased ARCs from customers due to the failure of these periodic auctions, which made these previously short-term investments illiquid.
As of March 31, 2012, approximately $173 million, or 77%, of the ARCs were rated above investment grade, with approximately $27 million, or 12%, AAA rated and $106 million, or 47%, AA rated. Approximately $51 million, or 23%, of ARCs were either not rated or rated below investment grade by at least one ratings agency. Of this amount, approximately $32 million, or 63%, of the student loans underlying these ARCs have principal payments which are guaranteed by the federal government. In total, approximately $203 million, or 91%, of the student loans underlying the ARCs have principal payments which are guaranteed by the federal government. As of March 31, 2012, all ARCs were current and making scheduled interest payments. Based on management’s evaluations, ARCs with a fair value of $223.9 million were not subject to any other-than-temporary impairment charges as of March 31, 2012. The Corporation does not have the intent to sell and does not believe it will more likely than not be required to sell any of these securities prior to a recovery of their fair value to amortized cost, which may be at maturity.
The Corporation’s collateralized mortgage obligations and mortgage-backed securities have contractual terms that generally do not permit the issuer to settle the securities at a price less than the amortized cost of the investment. Because the decline in market value of these securities is attributable to changes in interest rates and not credit quality, and because the Corporation does not have the intent to sell and does not believe it will more likely than not be required to sell any of these securities prior to a recovery of their fair value to amortized cost, the Corporation does not consider these investments to be other-than-temporarily impaired as of March 31, 2012.

11

The majority of the Corporation's available for sale corporate debt securities are issued by financial institutions. The following table presents the amortized cost and estimated fair values of corporate debt securities:
 
March 31, 2012
 
December 31, 2011
 
Amortized
cost
 
Estimated
fair value
 
Amortized
cost
 
Estimated
fair value
 
(in thousands)
Single-issuer trust preferred securities
$
83,935

 
$
77,625

 
$
83,899

 
$
74,365

Subordinated debt
40,211

 
42,357

 
40,184

 
41,296

Pooled trust preferred securities
6,004

 
5,062

 
6,236

 
5,109

Corporate debt securities issued by financial institutions
130,150

 
125,044

 
130,319

 
120,770

Other corporate debt securities
2,536

 
2,536

 
2,536

 
2,536

Available for sale corporate debt securities
$
132,686

 
$
127,580

 
$
132,855

 
$
123,306


The Corporation’s investments in single-issuer trust preferred securities had an unrealized loss of $6.3 million at March 31, 2012. The Corporation did not record any other-than-temporary impairment charges for single-issuer trust preferred securities during the three months ended March 31, 2012 or 2011, respectively. The Corporation held 13 single-issuer trust preferred securities that were rated below investment grade by at least one ratings agency, with an amortized cost of $41.2 million and an estimated fair value of $40.6 million at March 31, 2012. The majority of the single-issuer trust preferred securities rated below investment grade were rated BB or Ba. Single-issuer trust preferred securities with an amortized cost of $7.8 million and an estimated fair value of $6.3 million at March 31, 2012 were not rated by any ratings agency.
The Corporation held ten pooled trust preferred securities as of March 31, 2012. Nine of these securities, with an amortized cost of $5.6 million and an estimated fair value of $4.7 million, were rated below investment grade by at least one ratings agency, with ratings ranging from C to Ca. For each of the nine pooled trust preferred securities rated below investment grade, the class of securities held by the Corporation was below the most senior tranche, with the Corporation’s interests being subordinate to other investors in the pool. The Corporation determines the fair value of pooled trust preferred securities based on quotes provided by third-party brokers.
The amortized cost of pooled trust preferred securities is the purchase price of the securities, net of cumulative credit related other-than-temporary impairment charges, determined using an expected cash flows model. The most significant input to the expected cash flows model is the expected payment deferral rate for each pooled trust preferred security. The Corporation evaluates the financial metrics, such as capital ratios and non-performing asset ratios, of the individual financial institution issuers that comprise each pooled trust preferred security to estimate its expected deferral rate. The actual weighted average cumulative defaults and deferrals as a percentage of original collateral were approximately 39% as of March 31, 2012. The discounted cash flows modeling for pooled trust preferred securities held by the Corporation as of March 31, 2012 assumed, on average, an additional 15% expected deferral rate.
Based on management’s evaluations, corporate debt securities with a fair value of $127.6 million were not subject to any other-than-temporary impairment charges as of March 31, 2012. The Corporation does not have the intent to sell and does not believe it will more likely than not be required to sell any of these securities prior to a recovery of their fair value to amortized cost, which may be maturity.



12


NOTE E – Loans and Allowance for Credit Losses
Loans, Net of Unearned Income
Loans, net of unearned income are summarized as follows:
 
March 31, 2012
 
December 31, 2011
 
(in thousands)
Real-estate - commercial mortgage
$
4,634,428

 
$
4,602,596

Commercial - industrial, financial and agricultural
3,518,228

 
3,639,368

Real-estate - home equity
1,601,880

 
1,624,562

Real-estate - residential mortgage
1,176,947

 
1,097,192

Real-estate - construction
647,700

 
615,445

Consumer
308,495

 
318,101

Leasing and other
62,994

 
63,254

Overdrafts
13,782

 
15,446

Loans, gross of unearned income
11,964,454

 
11,975,964

Unearned income
(6,854
)
 
(6,994
)
Loans, net of unearned income
$
11,957,600

 
$
11,968,970

Allowance for Credit Losses
The allowance for credit losses consists of the allowance for loan losses and the reserve for unfunded lending commitments. The allowance for loan losses represents management’s estimate of losses inherent in the loan portfolio as of the balance sheet date and is recorded as a reduction to loans. The reserve for unfunded lending commitments represents management’s estimate of losses inherent in its unfunded loan commitments and is recorded in other liabilities on the consolidated balance sheet. The allowance for credit losses is increased by charges to expense, through the provision for credit losses, and decreased by charge-offs, net of recoveries.
The Corporation’s established methodology for evaluating the adequacy of the allowance for loan losses considers both components of the allowance: (1) specific allowances allocated to loans evaluated for impairment under the Financial Accounting Standards Board’s (FASB) Accounting Standards Codification (ASC) Section 310-10-35, and (2) allowances calculated for pools of loans measured for impairment under FASB ASC Subtopic 450-20.
Effective April 1, 2011, the Corporation revised and enhanced its allowance for credit loss methodology. The significant revisions to the methodology included: (1) a reduction in the amount of loans evaluated for impairment under FASB ASC Section 310-10-35, resulting in only non-accrual loans and certain troubled debt restructurings (TDRs) being identified as impaired; (2) more frequent, quarterly evaluations of impaired loans, including obtaining more timely third-party appraisals for commercial loans collateralized by real estate; and (3) the use of a detailed regression analysis to compute allocation needs for pools of loans measured for impairment under FASB ASC Section 450-20. The Corporation’s conclusion as of March 31, 2011 that its total allowance for credit losses of $271.2 million was sufficient to cover losses inherent in the loan portfolio did not change as a result of implementing its new allowance for credit loss methodology.
The development of the Corporation’s allowance for credit losses is based first on a segmentation of its loan portfolio by general loan type, or "portfolio segments," as presented in the table under the heading, "Loans, Net of Unearned Income," above. Certain portfolio segments are further disaggregated and evaluated collectively for impairment based on “class segments,” which are largely based on the type of collateral underlying each loan. For commercial loans, class segments include loans secured by collateral and unsecured loans. Construction loan class segments include loans secured by commercial real estate and loans secured by residential real estate. Consumer loan class segments are based on collateral types and include direct consumer installment loans and indirect automobile loans.

13

The following table presents the components of the allowance for credit losses:
 
March 31,
2012
 
December 31,
2011
 
(in thousands)
Allowance for loan losses
$
256,496

 
$
256,471

Reserve for unfunded lending commitments
1,641

 
1,706

Allowance for credit losses
$
258,137

 
$
258,177

The following table presents the activity in the allowance for credit losses for the three months ended March 31:
 
2012
 
2011
 
(in thousands)
Balance at beginning of period
$
258,177

 
$
275,498

Loans charged off
(30,259
)
 
(45,529
)
Recoveries of loans previously charged off
2,219

 
3,187

Net loans charged off
(28,040
)
 
(42,342
)
Provision for credit losses
28,000

 
38,000

Balance at end of period
$
258,137

 
$
271,156


The following tables present the activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2012 and 2011:
 
Real Estate -
Commercial
Mortgage
 
Commercial -
Industrial,
Financial and
Agricultural
 
Real Estate -
Home
Equity
 
Real Estate -
Residential
Mortgage
 
Real Estate -
Construction
 
Consumer
 
Leasing
and other
and
overdrafts
 
Unallocated
 
Total
 
(in thousands)
Three months ended March 31, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2011
$
85,112

 
$
74,896

 
$
12,841

 
$
22,986

 
$
30,066

 
$
2,083

 
$
2,397

 
$
26,090

 
$
256,471

Loans charged off
(11,891
)
 
(5,669
)
 
(2,206
)
 
(847
)
 
(8,571
)
 
(634
)
 
(441
)
 
—

 
(30,259
)
Recoveries of loans previously charged off
816

 
636

 
20

 
73

 
64

 
350

 
260

 
—

 
2,219

Net loans charged off
(11,075
)
 
(5,033
)
 
(2,186
)
 
(774
)
 
(8,507
)
 
(284
)
 
(181
)
 
—

 
(28,040
)
Provision for loan losses (1)
7,615

 
9,893

 
2,428

 
2,639

 
9,627

 
(156
)
 
1,058

 
(5,039
)
 
28,065

Balance at March 31, 2012
$
81,652

 
$
79,756

 
$
13,083

 
$
24,851

 
$
31,186

 
$
1,643

 
$
3,274

 
$
21,051

 
$
256,496

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended March 31, 2011

 

 

 

 

 

 

 

 

Balance at December 31, 2010
$
40,831

 
$
101,436

 
$
6,454

 
$
17,425

 
$
58,117

 
$
4,669

 
$
3,840

 
$
41,499

 
$
274,271

Loans charged off
(10,047
)
 
(13,336
)
 
(1,468
)
 
(4,996
)
 
(13,894
)
 
(1,291
)
 
(497
)
 
—

 
(45,529
)
Recoveries of loans previously charged off
1,535

 
391

 
1

 
44

 
563

 
309

 
344

 
—

 
3,187

Net loans charged off
(8,512
)
 
(12,945
)
 
(1,467
)
 
(4,952
)
 
(13,331
)
 
(982
)
 
(153
)
 
—

 
(42,342
)
Provision for loan losses (1)
16,239

 
11,689

 
669

 
7,102

 
10,705

 
1,049

 
(1,111
)
 
(7,999
)
 
38,343

Balance at March 31, 2011
$
48,558

 
$
100,180

 
$
5,656

 
$
19,575

 
$
55,491

 
$
4,736

 
$
2,576

 
$
33,500

 
$
270,272

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
Provision for loan losses is gross of a $65,000 and $343,000 decrease, respectively, in provision applied to unfunded commitments for the three months ended March 31, 2012 and 2011. The total provision for credit losses, comprised of allocations for both funded and unfunded loans, was $28.0 million and $38.0 million for the three months ended March 31, 2012 and 2011, respectively.

14

The following tables present loans, net of unearned income and their related allowance for loan losses, by portfolio segment, as of March 31, 2012 and 2011:
 
Real Estate -
Commercial
Mortgage
 
Commercial -
Industrial,
Financial and
Agricultural
 
Real Estate -
Home
Equity
 
Real Estate -
Residential
Mortgage
 
Real Estate -
Construction
 
Consumer
 
Leasing
and other
and
overdrafts
 
Unallocated
(1)
 
Total
 
(in thousands)
Allowance for loan losses at March 31, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Measured for impairment under FASB ASC Subtopic 450-20
$
50,619

 
$
47,484

 
$
9,549

 
$
8,045

 
$
17,551

 
$
1,638

 
$
3,253

 
$
21,051

 
$
159,190

Evaluated for impairment under FASB ASC Section 310-10-35
31,033

 
32,272

 
3,534

 
16,806

 
13,635

 
5

 
21

 
N/A

 
97,306

 
$
81,652

 
$
79,756

 
$
13,083

 
$
24,851

 
$
31,186

 
$
1,643

 
$
3,274

 
$
21,051

 
$
256,496

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans, net of unearned income at March 31, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Measured for impairment under FASB ASC Subtopic 450-20
$
4,523,691

 
$
3,441,018

 
$
1,595,522

 
$
1,136,199

 
$
581,381

 
$
308,487

 
$
69,890

 
N/A

 
$
11,656,188

Evaluated for impairment under FASB ASC Section 310-10-35
110,737

 
77,210

 
6,358

 
40,748

 
66,319

 
8

 
32

 
N/A

 
301,412

 
$
4,634,428

 
$
3,518,228

 
$
1,601,880

 
$
1,176,947

 
$
647,700

 
$
308,495

 
$
69,922

 
N/A

 
$
11,957,600

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses at March 31, 2011
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Measured for impairment under FASB ASC Subtopic 450-20
$
26,327

 
$
36,709

 
$
5,656

 
$
15,288

 
$
39,448

 
$
4,736

 
$
2,576

 
$
33,500

 
$
164,240

Evaluated for impairment under FASB ASC Section 310-10-35
22,231

 
63,471

 
—

 
4,287

 
16,043

 
—

 
—

 
N/A

 
106,032

 
$
48,558

 
$
100,180

 
$
5,656

 
$
19,575

 
$
55,491

 
$
4,736

 
$
2,576

 
$
33,500

 
$
270,272

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans, net of unearned income at March 31, 2011
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Measured for impairment under FASB ASC Subtopic 450-20
$
4,224,868

 
$
3,472,225

 
$
1,620,340

 
$
1,003,323

 
$
629,359

 
$
337,413

 
$
60,051

 
N/A

 
$
11,347,579

Evaluated for impairment under FASB ASC Section 310-10-35
167,811

 
220,443

 
—

 
18,928

 
118,447

 
—

 
—

 
N/A

 
525,629

 
$
4,392,679

 
$
3,692,668

 
$
1,620,340

 
$
1,022,251

 
$
747,806

 
$
337,413

 
$
60,051

 
N/A

 
$
11,873,208

 
(1)
The Corporation’s unallocated allowance, which was approximately 8% and 12% as of March 31, 2012 and 2011, respectively, was reasonable and appropriate as the estimates used in the allocation process are inherently imprecise.
N/A – Not applicable.

Impaired Loans
A loan is considered to be impaired if it is probable that all amounts will not be collected according to the contractual terms of the loan agreement.
An allowance for loan losses is established for an impaired loan if its carrying value exceeds its estimated fair value. Impaired loans with balances greater than $1.0 million are evaluated individually for impairment. Impaired loans with balances less than $1.0 million are pooled and measured for impairment collectively. As of March 31, 2012 and December 31, 2011, substantially all of the Corporation’s individually evaluated impaired loans were measured based on the estimated fair value of each loan’s collateral. Collateral could be in the form of real estate in the case of impaired commercial mortgages, construction loans and residential mortgages, or business assets, such as accounts receivable or inventory, in the case of commercial loans. Commercial loans may also be secured by real property.
As of March 31, 2012 and 2011, approximately 82% and 57%, respectively, of impaired loans with principal balances greater than $1.0 million, whose primary collateral is real estate, were measured at estimated fair value using certified third-party appraisals that had been updated within the preceding 12 months.
Where updated certified appraisals are not obtained for loans evaluated for impairment under FASB ASC Section 310-10-35 that are secured by real estate, fair values are estimated based on one or more of the following:
•
Original appraisal – if the original appraisal indicated a very strong loan to value position and, in the opinion of the Corporation’s internal loan evaluation staff, there has not been a significant deterioration in the collateral value, the original appraisal may be used to support the value of the collateral. Original appraisals are typically used only when the estimated collateral value, as adjusted, results in a current loan to value ratio that is lower than the Corporation’s policy for new loans, generally 80%.
•
Broker price opinions – in lieu of obtaining an updated certified appraisal, a less formal indication of value, such as a broker price opinion, may be obtained. These opinions are generally used to validate internal estimates of collateral value

15

and are not relied upon as the sole determinant of fair value.
•
Discounted cash flows – while substantially all of the Corporation’s impaired loans are measured based on the estimated fair value of collateral, discounted cash flows analyses may be used to validate estimates of collateral value derived from other approaches.
The following table presents total impaired loans by class segment:
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
Three Months Ended
 
March 31, 2012
 
December 31, 2011
 
March 31, 2012
 
March 31, 2011
 
Unpaid
Principal
Balance
 
Recorded
Investment
 
Related
Allowance
 
Unpaid
Principal
Balance
 
Recorded
Investment
 
Related
Allowance
 
Average
Recorded
Investment
 
Interest
Income
Recognized
(1)
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
(in thousands)
With no related allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real estate - commercial mortgage
$
54,397


$
40,526


$
—


$
54,445


$
46,768


$
—


$
43,647


$
71


$
54,346


$
403

Commercial - secured
28,420


21,679


—


35,529


28,440


—


25,060


7


25,767


146

Commercial - unsecured
13


13


—


—


—


—


7


—


528


3

Real estate - home equity
500


500


—

 
—


—

 
—

 
350


—

 
—


—

Real estate - residential mortgage
491


491


—


199


199


—


246


2


13,665


43

Construction - commercial residential
66,370


30,492


—


62,822


31,233


—


30,863


25


32,406


178

Construction - commercial
3,597


3,143


—


3,604


3,298


—


3,221


2


2,909


20

 
153,788


96,844




156,599


109,938




103,394


107


129,621


793

With a related allowance recorded:

 
















Real estate - commercial mortgage
91,655


70,211


31,033


100,529


79,566


36,060


74,889


122


108,720


839

Commercial - secured
67,416


52,478


30,005


61,970


47,652


26,248


50,065


13


194,450


1,177

Commercial - unsecured
3,408


3,040


2,267


3,139


2,789


2,177


2,915


1


6,782


31

Real estate - home equity
5,858


5,858


3,534


5,294


5,294


3,076


5,576


—


15,664


90

Real estate - residential mortgage
40,257


40,257


16,806


39,918


39,918


16,295</