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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
     
þ   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2008, or
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-10587
FULTON FINANCIAL CORPORATION
 
(Exact name of registrant as specified in its charter)
     
PENNSYLVANIA   23-2195389
 
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   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)
Securities registered pursuant to Section 12(b) of the Act:
     
Title of each class   Name of exchange on which registered
     
Common Stock, $2.50 par value   The NASDAQ Stock Market, LLC
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No o
Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ
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 þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
      Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
             
     Large accelerated filer þ    Accelerated filer o    Non-accelerated filer   o
(Do not check if a smaller reporting company)
  Smaller reporting company o 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ
The aggregate market value of the voting Common Stock held by non-affiliates of the registrant, based on the average bid and asked prices on June 30, 2008, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $1.7 billion. The number of shares of the registrant’s Common Stock outstanding on January 31, 2009 was 175,432,000.
Portions of the Definitive Proxy Statement of the Registrant for the Annual Meeting of Shareholders to be held on April 29, 2009 are incorporated by reference in Part III.
 
 

 


 

TABLE OF CONTENTS
             
    Description   Page  
PART I  
 
       
 
Item 1.       3  
Item 1A.       9  
Item 1B.       13  
Item 2.       13  
Item 3.       14  
Item 4.       14  
 
PART II  
 
       
 
Item 5.       15  
Item 6.       17  
Item 7.       18  
Item 7A.       43  
Item 8.          
        50  
        51  
        52  
        53  
        54  
        96  
        97  
        98  
Item 9.       99  
Item 9A.       99  
Item 9B.       99  
   
 
       
PART III  
 
       
   
 
       
Item 10.       100  
Item 11.       100  
Item 12.       100  
Item 13.       100  
Item 14.       100  
   
 
       
PART IV  
 
       
   
 
       
Item 15.       101  
 
        104  
        106  
 EX-21
 EX-23
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2

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PART I
Item 1. Business
General
Fulton Financial Corporation (the Corporation) was incorporated under the laws of Pennsylvania on February 8, 1982 and became a bank holding company through the acquisition of all of the outstanding stock of Fulton Bank on June 30, 1982. In 2000, the Corporation became a financial holding company as defined in the Gramm-Leach-Bliley Act (GLB Act), which allowed the Corporation to expand its financial services activities under its holding company structure (See “Competition” and “Regulation and Supervision”). The Corporation directly owns 100% of the common stock of ten community banks, two financial services companies and eleven non-bank entities. As of December 31, 2008, the Corporation had approximately 3,630 full-time equivalent employees.
The common stock of Fulton Financial Corporation is listed for quotation on the Global Select Market of The NASDAQ Stock Market under the symbol FULT. The Corporation’s internet address is www.fult.com. Electronic copies of the Corporation’s 2008 Annual Report on Form 10-K are available free of charge by visiting the “Investor Information” section of www.fult.com. Electronic copies of quarterly reports on Form 10-Q and current reports on Form 8-K are also available at this internet address. These reports are posted as soon as reasonably practicable after they are electronically filed with the Securities and Exchange Commission (SEC).
Bank and Financial Services Subsidiaries
The Corporation’s ten subsidiary banks are located primarily in suburban or semi-rural geographical markets throughout a five state region (Pennsylvania, Delaware, Maryland, New Jersey and Virginia). Pursuant to its “super-community” banking strategy, the Corporation operates the banks autonomously to maximize the advantage of community banking and service to its customers. Where appropriate, operations are centralized through common platforms and back-office functions; however, decision-making generally remains with the local bank management. The Corporation is committed to a decentralized operating philosophy; however, in some markets, merging one subsidiary bank into another subsidiary bank creates operating and marketing efficiencies by leveraging existing brand awareness over a larger geographic area. In March 2008, the former Resource Bank subsidiary consolidated with Fulton Bank. In addition, during 2008, the Corporation announced the consolidation of its Maryland banking subsidiaries. The consolidation, which is expected to take place in 2009, will merge the Corporation’s Hagerstown Trust Company and Peoples Bank of Elkton subsidiaries into its Columbia Bank subsidiary.
The subsidiary banks are located in areas that are home to a wide range of manufacturing, distribution, health care and other service companies. The Corporation and its banks are not dependent upon one or a few customers or any one industry, and the loss of any single customer or a few customers would not have a material adverse impact on any of the subsidiary banks.
Each of the subsidiary banks offers a full range of consumer and commercial banking services in its local market area. Personal banking services include various checking account and savings deposit products, certificates of deposit and individual retirement accounts. The subsidiary banks offer a variety of consumer lending products to creditworthy customers in their market areas. Secured loan products include home equity loans and lines of credit, which are underwritten based on loan-to-value limits specified in the lending policy. Subsidiary banks also offer a variety of fixed and variable-rate products, including construction loans and jumbo loans. Residential mortgages are offered through Fulton Mortgage Company which operates as a division of each subsidiary bank (except for The Columbia Bank, which maintains its own mortgage lending operation). Consumer loan products also include automobile loans, automobile and equipment leases, personal lines of credit, credit cards and checking account overdraft protection.
Commercial banking services are provided to small and medium sized businesses (generally with sales of less than $100 million) in the subsidiary banks’ market areas. The maximum total lending commitment to an individual borrower was $33 million as of December 31, 2008, which is below the Corporation’s regulatory lending limit. Commercial lending options include commercial, financial, agricultural and real estate loans. Both floating and fixed rate loans are provided, with floating rate loans generally tied to an index such as the Prime Rate or the London Interbank Offering Rate. The Corporation’s commercial lending policy encourages relationship banking and provides strict guidelines related to customer creditworthiness and collateral requirements. In addition, construction lending, equipment leasing, credit cards, letters of credit, cash management services and traditional deposit products are offered to commercial customers.
Through its financial services subsidiaries, the Corporation offers investment management, trust, brokerage, insurance and investment advisory services in the market areas serviced by the subsidiary banks.

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The Corporation’s subsidiary banks deliver their products and services through traditional branch banking, with a network of full service branch offices. Electronic delivery channels include a network of automated teller machines, telephone banking and online banking through the internet. The variety of available delivery channels allows customers to access their account information and perform certain transactions such as transferring funds and paying bills at virtually any hour of the day.
The following table provides certain information for the Corporation’s banking and financial services subsidiaries as of December 31, 2008.
                             
    Main Office   Total   Total    
Subsidiary   Location   Assets   Deposits   Branches (1)
        (dollars in millions)        
Fulton Bank
  Lancaster, PA   $ 7,936     $ 4,854       102  
The Bank
  Woodbury, NJ     2,036       1,567       51  
The Columbia Bank
  Columbia, MD     1,679       1,128       26  
Lafayette Ambassador Bank
  Easton, PA     1,418       1,042       25  
Skylands Community Bank
  Hackettstown, NJ     1,276       956       27  
Hagerstown Trust Company
  Hagerstown, MD     527       423       12  
Delaware National Bank
  Georgetown, DE     469       319       12  
FNB Bank, N.A.
  Danville, PA     364       273       10  
Swineford National Bank
  Hummels Wharf, PA     296       225       7  
The Peoples Bank of Elkton
  Elkton, MD     140       123       2  
Fulton Financial Advisors, N.A. and Fulton Insurance Services Group, Inc.
  Lancaster, PA                  
 
                           
 
                        274  
 
                           
 
(1)   Remote service facilities (mainly stand-alone automated teller machines) are excluded. See additional information in “Item 2. Properties”.
Non-Bank Subsidiaries
The Corporation owns 100% of the common stock of five non-bank subsidiaries which are consolidated for financial reporting purposes: (i) Fulton Reinsurance Company, LTD, which engages in the business of reinsuring credit life and accident and health insurance directly related to extensions of credit by the banking subsidiaries of the Corporation; (ii) Fulton Financial Realty Company, which holds title to or leases certain properties upon which Corporation branch offices and other facilities are located; (iii) Central Pennsylvania Financial Corp., which owns certain limited partnership interests in partnerships invested in low and moderate income housing projects; (iv) FFC Management, Inc., which owns certain investment securities and other passive investments; and (v) FFC Penn Square, Inc. which owns $44.0 million of trust preferred securities issued by a subsidiary of the Corporation’s largest bank subsidiary.
The Corporation owns 100% of the common stock of six non-bank subsidiaries which are not consolidated for financial reporting purposes. The following table provides information for these non-bank subsidiaries, whose sole assets consist of junior subordinated deferrable interest debentures issued by the Corporation, as of December 31, 2008:
             
Subsidiary   State of Incorporation   Total Assets (in thousands)
Fulton Capital Trust I
  Pennsylvania   $ 154,640  
SVB Bald Eagle Statutory Trust I
  Connecticut     4,124  
Columbia Bancorp Statutory Trust
  Delaware     6,186  
Columbia Bancorp Statutory Trust II
  Delaware     4,124  
Columbia Bancorp Statutory Trust III
  Delaware     6,186  
PBI Capital Trust
  Delaware     10,310  

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Competition
The banking and financial services industries are highly competitive. Within its geographical region, the Corporation’s subsidiaries face direct competition from other commercial banks, varying in size from local community banks to larger regional and national banks, credit unions and non-bank entities. With the growth in electronic commerce and distribution channels, the banks also face competition from banks that do not have a physical presence in the Corporation’s geographical markets.
The industry is also highly competitive due to the GLB Act. Under the GLB Act, banks, insurance companies or securities firms may affiliate under a financial holding company structure, allowing expansion into non-banking financial services activities that were previously restricted. These include a full range of banking, securities and insurance activities, including securities and insurance underwriting, issuing and selling annuities and merchant banking activities. While the Corporation does not currently engage in all of these activities, the ability to do so without separate approval from the Federal Reserve Board (FRB) enhances the ability of the Corporation – and financial holding companies in general – to compete more effectively in all areas of financial services.
As a result of the GLB Act, there is a great deal of competition for customers that were traditionally served by the banking industry. While the GLB Act increased competition, it also provided opportunities for the Corporation to expand its financial services offerings, such as insurance products, through Fulton Insurance Services Group, Inc. The Corporation also competes through the variety of products that it offers and the quality of service that it provides to its customers. However, there is no guarantee that these efforts will insulate the Corporation from competitive pressure, which could impact its pricing decisions for loans, deposits and other services and could ultimately impact financial results.
Market Share
Although there are many ways to assess the size and strength of banks, deposit market share continues to be an important industry statistic. This publicly available information is compiled, as of June 30th of each year, by the Federal Deposit Insurance Corporation (FDIC). The Corporation’s banks maintain branch offices in 53 counties across five states. In nine of these counties, the Corporation ranked in the top three in deposit market share (based on deposits as of June 30, 2008). The following table summarizes information about the counties in which the Corporation has branch offices and its market position in each county.
                                                 
                    No. of Financial   Deposit Market Share
                    Institutions   (June 30, 2008)
        Population       Banks/   Credit        
County   State   (2008 Est.)   Banking Subsidiary   Thrifts   Unions   Rank   %
Lancaster
  PA     500,000     Fulton Bank     19       13       1       19.4 %
Berks
  PA     408,000     Fulton Bank     21       12       9       2.9 %
Bucks
  PA     628,000     Fulton Bank     37       16       17       1.9 %
Centre
  PA     142,000     Fulton Bank     15       4       18       0.4 %
Chester
  PA     493,000     Fulton Bank     42       5       15       1.4 %
Columbia
  PA     65,000     FNB Bank, N.A.     7             6       5.1 %
Cumberland
  PA     229,000     Fulton Bank     22       5       15       1.3 %
Dauphin
  PA     255,000     Fulton Bank     19       9       7       3.0 %
Delaware
  PA     557,000     Fulton Bank     43       16       42       0.1 %
Lebanon
  PA     129,000     Fulton Bank     10       2       1       26.7 %
Lehigh
  PA     342,000     Lafayette Ambassador Bank     19       13       9       3.5 %
Lycoming
  PA     117,000     FNB Bank, N.A.     11       10       14       0.8 %
Montgomery
  PA     779,000     Fulton Bank     50       23       34       0.3 %
Montour
  PA     18,000     FNB Bank, N.A.     4       3       1       29.3 %
Northampton
  PA     297,000     Lafayette Ambassador Bank     17       13       3       13.6 %
Northumberland
  PA     91,000     Swineford National Bank     18       3       14       1.8 %
 
              FNB Bank, N.A.                     8       4.8 %

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                    No. of Financial   Deposit Market Share
                    Institutions   (June 30, 2008)
        Population       Banks/   Credit        
County   State   (2008 Est.)   Banking Subsidiary   Thrifts   Unions   Rank   %
Schuylkill
  PA     147,000     Fulton Bank     20       4       10       3.5 %
Snyder
  PA     38,000     Swineford National Bank     8             1       28.8 %
Union
  PA     44,000     Swineford National Bank     8       1       6       6.0 %
York
  PA     426,000     Fulton Bank     18       16       5       8.7 %
New Castle
  DE     531,000     Delaware National Bank     31       24       24       0.1 %
Sussex
  DE     186,000     Delaware National Bank     16       4       6       0.7 %
Anne Arundel
  MD     512,000     The Columbia Bank     32       8       37        
Baltimore
  MD     794,000     The Columbia Bank     44       18       24       0.9 %
Baltimore City
  MD     639,000     The Columbia Bank     40       16       25       0.3 %
Cecil
  MD     103,000     Peoples Bank of Elkton     8       3       5       10.3 %
Frederick
  MD     228,000     The Columbia Bank     18       2       16       0.5 %
Howard
  MD     277,000     The Columbia Bank     20       3       2       13.2 %
Montgomery
  MD     941,000     The Columbia Bank     36       20       33       0.3 %
Prince Georges
  MD     846,000     The Columbia Bank     23       20       14       1.5 %
Washington
  MD     147,000     Hagerstown Trust Company     13       3       2       18.8 %
Atlantic
  NJ     275,000     The Bank     15       6       15       0.9 %
Burlington
  NJ     454,000     The Bank     23       10       23       0.2 %
Camden
  NJ     519,000     The Bank     21       8       12       1.5 %
Cumberland
  NJ     157,000     The Bank     12       4       9       2.4 %
Gloucester
  NJ     288,000     The Bank     22       4       2       13.4 %
Hunterdon
  NJ     132,000     Skylands Community Bank     14       3       12       2.1 %
Mercer
  NJ     371,000     The Bank     27       19       18       0.6 %
Middlesex
  NJ     791,000     Skylands Community Bank     44       25       38       0.2 %
Monmouth
  NJ     637,000     The Bank     27       9       24       0.7 %
Morris
  NJ     498,000     Skylands Community Bank     33       10       17       1.4 %
Ocean
  NJ     571,000     The Bank     23       6       16       0.8 %
Salem
  NJ     67,000     The Bank     8       4       1       27.6 %
Somerset
  NJ     330,000     Skylands Community Bank     26       7       8       3.4 %
Sussex
  NJ     155,000     Skylands Community Bank     14       1       13       0.7 %
Warren
  NJ     112,000     Skylands Community Bank     14       2       5       10.1 %
Chesapeake
  VA     222,000     Fulton Bank     14       6       14       1.4 %
Fairfax
  VA     1,022,000     Fulton Bank     40       14       25       0.2 %
Henrico
  VA     291,000     Fulton Bank     24       10       25       0.1 %
Manassas
  VA     37,000     Fulton Bank     14       1       10       1.9 %
Newport News
  VA     180,000     Fulton Bank     12       7       15       0.8 %
Richmond City
  VA     192,000     Fulton Bank     16       15       17       0.2 %
Virginia Beach
  VA     436,000     Fulton Bank     16       8       9       2.3 %
Supervision and Regulation
The Corporation operates in an industry that is subject to various laws and regulations that are enforced by a number of Federal and state agencies. Changes in these laws and regulations, including interpretation and enforcement activities, could impact the cost of

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operating in the financial services industry, limit or expand permissible activities or affect competition among banks and other financial institutions.
The following discussion summarizes the current regulatory environment for financial holding companies and banks, including a summary of the more significant laws and regulations.
Regulators – The Corporation is a registered financial holding company, and its subsidiary banks are depository institutions whose deposits are insured by the FDIC. The Corporation and its subsidiaries are subject to various regulations and examinations by regulatory authorities. The following table summarizes the charter types and primary regulators for each of the Corporation’s subsidiary banks.
         
        Primary
Subsidiary   Charter   Regulator(s)
Fulton Bank
  PA   PA/FDIC
The Bank
  NJ   NJ/FDIC
The Columbia Bank
  MD   MD/FDIC
Lafayette Ambassador Bank
  PA   PA/FRB
Skylands Community Bank
  NJ   NJ/FDIC
Hagerstown Trust Company
  MD   MD/FDIC
Delaware National Bank
  National   OCC (1)
FNB Bank, N.A.
  National   OCC
Swineford National Bank
  National   OCC
The Peoples Bank of Elkton
  MD   MD/FDIC
Fulton Financial Advisors, N.A.
  National (2)   OCC
Fulton Financial (Parent Company)
  N/A   FRB
 
(1)   Office of the Comptroller of the Currency.
 
(2)   Fulton Financial Advisors, N.A. is chartered as an uninsured national trust bank.
Federal statutes that apply to the Corporation and its subsidiaries include the GLB Act, the Bank Holding Company Act (BHCA), the Federal Reserve Act and the Federal Deposit Insurance Act, among others. In general, these statutes and related interpretations establish the eligible business activities of the Corporation, certain acquisition and merger restrictions, limitations on intercompany transactions such as loans and dividends and capital adequacy requirements, among other statutes and regulations.
The Corporation is subject to regulation and examination by the FRB, and is required to file periodic reports and to provide additional information that the FRB may require. In addition, the FRB must approve certain proposed changes in organizational structure or other business activities before they occur. The BHCA imposes certain restrictions upon the Corporation regarding the acquisition of substantially all of the assets of or direct or indirect ownership or control of any bank for which it is not already the majority owner.
Capital Requirements – There are a number of restrictions on financial and bank holding companies and FDIC-insured depository subsidiaries that are designed to minimize potential loss to depositors and the FDIC insurance funds. If an FDIC-insured depository subsidiary is “undercapitalized”, the bank holding company is required to ensure (subject to certain limits) the subsidiary’s compliance with the terms of any capital restoration plan filed with its appropriate banking agency. Also, a bank holding company is required to serve as a source of financial strength to its depository institution subsidiaries and to commit resources to support such institutions in circumstances where it might not do so absent such policy. Under the BHCA, the FRB has the authority to require a bank holding company to terminate any activity or to relinquish control of a non-bank subsidiary upon the FRB’s determination that such activity or control constitutes a serious risk to the financial soundness and stability of a depository institution subsidiary of the bank holding company.
Bank holding companies are required to comply with the FRB’s risk-based capital guidelines that require a minimum ratio of total capital to risk-weighted assets of 8%. At least half of the total capital is required to be Tier 1 capital. In addition to the risk-based capital guidelines, the FRB has adopted a minimum leverage capital ratio under which a bank holding company must maintain a level of Tier 1 capital to average total consolidated assets of at least 3% in the case of a bank holding company which has the highest regulatory examination rating and is not contemplating significant growth or expansion. All other bank holding companies are expected to maintain a leverage capital ratio of at least 1% to 2% above the stated minimum.

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Dividends and Loans from Subsidiary Banks – There are also various restrictions on the extent to which the Corporation and its non-bank subsidiaries can receive loans from its banking subsidiaries. In general, these restrictions require that such loans be secured by designated amounts of specified collateral and are limited, as to any one of the Corporation or its non-bank subsidiaries, to 10% of the lending bank’s regulatory capital (20% in the aggregate to all such entities).
The Corporation is also limited in the amount of dividends that it may receive from its subsidiary banks. Dividend limitations vary, depending on the subsidiary bank’s charter and whether or not it is a member of the Federal Reserve System. Generally, subsidiaries are prohibited from paying dividends when doing so would cause them to fall below the regulatory minimum capital levels. Additionally, limits may exist on paying dividends in excess of net income for specified periods. See “Note J – Regulatory Matters” in the Notes to Consolidated Financial Statements for additional information regarding regulatory capital and dividend and loan limitations.
Federal Deposit Insurance – Substantially all of the deposits of the Corporation’s subsidiary banks are insured up to the applicable limits by the Bank Insurance Fund (BIF) of the FDIC, generally up to $100,000 per insured depositor and up to $250,000 for retirement accounts. Effective October 3, 2008 with the enactment of the Emergency Economic Stabilization Act of 2008 (EESA), the $100,000 insurance limit was increased to $250,000 through December 31, 2009. See additional discussion of the EESA under “Regulatory Developments”. The subsidiary banks pay deposit insurance premiums to the FDIC based on an assessment rate established by the FDIC for Bank Insurance Fund member institutions. The FDIC has established a risk-based assessment system under which institutions are classified and pay premiums according to their perceived risk to the Federal deposit insurance funds. The FDIC is not required to charge deposit insurance premiums when the ratio of deposit insurance reserves to insured deposits is maintained above specified levels. For the period from 1997 through 2006, the Corporation’s subsidiary banks (based on the FDIC’s classification system), did not pay any premiums as the BIF was sufficiently funded. However, in 2006, legislation was passed reforming the bank deposit insurance system. The reform act allowed the FDIC to raise the minimum reserve ratio and allowed eligible insured institutions an initial one-time credit to be used against premiums due. During 2007 and 2008, the Corporation’s subsidiary banks were assessed insurance premiums, which were partially offset by each affiliate’s one-time credit. It is likely that premiums will continue to be assessed in the near term and that the Corporation’s expense will increase as deposits grow and one-time credits expire. Furthermore, with the recent increase in bank failures, the BIF has become underfunded and the FDIC has proposed changes in the assessment rates which will become effective in 2009. In addition, the FDIC has adopted an interim rule imposing an emergency special assessment of 20 basis points on insured deposits. If this interim rule is implemented, the Corporation could incur additional FDIC insurance premiums of approximately $20 million in 2009.
USA Patriot Act – Anti-terrorism legislation enacted under the USA Patriot Act of 2001 (Patriot Act) expanded the scope of anti-money laundering laws and regulations and imposed significant new compliance obligations for financial institutions, including the Corporation’s subsidiary banks. These regulations include obligations to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing.

Failure to comply with the Patriot Act’s requirements could have serious legal, financial and reputational consequences. The Corporation has adopted appropriate policies, procedures and controls to address compliance with the Patriot Act and will continue to revise and update its policies, procedures and controls to reflect changes required, as necessary.
Sarbanes-Oxley Act of 2002 The Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley), which was signed into law in July 2002, impacts all companies with securities registered under the Securities Exchange Act of 1934, including the Corporation. Sarbanes-Oxley created new requirements in the areas of corporate governance and financial disclosure including, among other things, (i) increased responsibility for Chief Executive Officers and Chief Financial Officers with respect to the content of filings with the SEC; (ii) enhanced requirements for audit committees, including independence and disclosure of expertise; (iii) enhanced requirements for auditor independence and the types of non-audit services that auditors can provide; (iv) accelerated filing requirements for SEC reports; (v) disclosure of a code of ethics (vi) increased disclosure and reporting obligations for companies, their directors and their executive officers; and (vii) new and increased civil and criminal penalties for violations of securities laws. Many of the provisions became effective immediately, while others became effective as a result of rulemaking procedures delegated by Sarbanes-Oxley to the SEC.
Section 404 of Sarbanes Oxley requires management to issue a report on the effectiveness of its internal controls over financial reporting. In addition, the Corporation’s independent registered public accountants are required to issue an opinion on the effectiveness of the Corporation’s internal control over financial reporting. These reports can be found in Item 8, “Financial Statements and Supplementary Data”. Certifications of the Chief Executive Officer and the Chief Financial Officer as required by Sarbanes-Oxley and the resulting SEC rules can be found in the “Signatures” and “Exhibits” sections.

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Regulatory Developments – On October 3, 2008 the EESA, also known as the Troubled Asset Relief Program (TARP), was enacted. In connection with the EESA, the U.S. Treasury Department (UST) initiated a Capital Purchase Program (CPP), which allows for qualifying financial institutions to issue preferred stock to the UST, subject to certain limitations and terms. The EESA was developed to attract broad participation by strong financial institutions, to stabilize the financial system and increase lending to benefit the national economy and citizens of the U.S.
On December 23, 2008, the Corporation entered into a Securities Purchase Agreement with the UST pursuant to which the Corporation sold to the UST for an aggregate purchase price of $376.5 million, 376,500 shares of preferred stock and warrants to purchase up to 5.5 million shares of common stock of the Corporation. The preferred stock ranks senior to the Corporation’s common shares and pays a compounding cumulative dividend at a rate of 5% per year for the first five years, and 9% per year thereafter. The preferred stock is non-voting, other than class voting rights on matters that could adversely affect the preferred stock. The preferred stock is callable at par after three years. Prior to the end of three years, the preferred stock may be redeemed with the proceeds from one or more qualified equity offerings, as defined, of any Tier 1 perpetual preferred or common stock of at least $94.1 million. The UST may also transfer the preferred stock to a third-party at any time. The Corporation’s preferred stock is included as a component of Tier 1 capital in accordance with regulatory capital requirements.
As a condition of its participation in the CPP, and as long as the preferred stock issued to the UST is outstanding, without the consent of the UST, common stock repurchases are currently limited to purchases in connection with the administration of any employee benefit plan, consistent with past practices, including purchases to offset share dilution in connection with any such plans until December 2011 or until the UST no longer owns any of the Corporation’s preferred shares issued under the CPP. In addition, the Corporation is prohibited from paying any dividend with respect to shares of common stock or repurchasing or redeeming any shares of the Corporation’s common shares in any quarter unless all accrued and unpaid dividends are paid on the preferred stock for all past dividend periods (including the latest completed dividend period), subject to certain limited exceptions. In addition, without the consent of the UST, the Corporation is prohibited from declaring or paying any cash dividends on common shares in excess of $0.15 per share, which was the last quarterly cash dividend per share declared prior to October 14, 2008.
See also Note M, “Stock-based Compensation Plans and Shareholders’ Equity” in the Notes to Consolidated Financial Statements for additional details related to the Corporation’s participation in the CPP.
Item 1A. Risk Factors
An investment in the Corporation’s common stock involves certain risks, including, among others, the risks described below. In addition to the other information contained in this report, you should carefully consider the following risk factors.
Changes in interest rates may have an adverse effect on the Corporation’s net income or loss.
The Corporation is affected by fiscal and monetary policies of the Federal government, including those of the Federal Reserve Board (FRB), which regulates the national money supply in order to manage recessionary and inflationary pressures. Among the techniques available to the FRB are engaging in open market transactions of U.S. Government securities, changing the discount rate and changing reserve requirements against bank deposits. The use of these techniques may also affect interest rates charged on loans and paid on deposits.
Net interest income is the most significant component of the Corporation’s net income, accounting for approximately 76% of total revenues in 2008. The narrowing of interest rate spreads, the difference between interest rates earned on loans and investments and interest rates paid on deposits and borrowings, could adversely affect the Corporation’s net interest income and financial condition. Based on the current interest rate environment and the price sensitivity of customers, loan demand could continue to outpace the growth of core demand and savings accounts, resulting in compression of net interest margin. Finally, regional and local economic conditions as well as fiscal and monetary policies of the Federal government, including those of the FRB, may affect prevailing interest rates. The Corporation cannot predict or control changes in interest rates.
The severity and duration of the current recession and the composition of the Corporation’s loan portfolio could impact the level of loan charge-offs and the provision for loan losses and may affect the Corporation’s net income or loss.
National and regional economic conditions could impact the loan portfolios of the Corporation’s subsidiary banks. For example, an increase in unemployment, a decrease in real estate values or increases in interest rates, as well as other factors, could further weaken

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the economies of the communities the Corporation serves. Weakness in the market areas served by the Corporation’s subsidiary banks could depress its earnings and consequently its financial condition because:
    borrowers may not be able to repay their loans;
 
    the value of the collateral securing the Corporation’s loans to borrowers may decline; and
 
    the quality of the Corporation’s loan portfolio may decline.
Any of these scenarios could require the Corporation to charge-off a higher percentage of its loans and/or increase its provision for loan losses, which would negatively impact its results of operations.
In addition, the amount of the Corporation’s provision for loan losses and the percentage of loans it is required to charge-off may be impacted by the overall risk composition of the loan portfolio. During 2008, the Corporation’s provision for loan losses was $119.6 million. While the Corporation believes that its allowance for loan losses as of December 31, 2008 is sufficient to cover losses inherent in the loan portfolio on that date, the Corporation may be required to increase its loan loss provision or charge-off a higher percentage of loans due to changes in the risk characteristics of the loan portfolio, thereby negatively impacting its results of operations. A decrease in real estate values could cause higher loan losses and require higher loan loss provisions for loans that are secured by real estate.
Price fluctuations in securities markets, as well as recent market events, such as a continuation of the disruption in credit and other markets and the abnormal functioning of markets for securities, could have an impact on the Corporation’s results of operations.
As of December 31, 2008, the Corporation’s equity investments consisted of Federal Home Loan Bank (FHLB) and Federal Reserve Bank stock ($85.3 million), common stocks of publicly traded financial institutions ($43.4 million), and money market mutual funds and other equity investments ($10.0 million). The value of the securities in the Corporation’s equity portfolio may be affected by a number of factors, including factors that impact the performance of the U.S. securities market in general and, due to the concentration in stocks of financial institutions in the Corporation’s equity portfolio, specific risks associated with that sector. Historically, gains on sales of stocks of other financial institutions have been a recurring component of the Corporation’s earnings. However, general economic conditions and uncertainty surrounding the financial institution sector as a whole has impacted the value of these securities over the past two years. Further declines in bank stock values could result in additional other-than-temporary impairment charges. During 2008, $43.1 million of impairment charges were recorded for stocks of financial institutions.
As of December 31, 2008, the Corporation has $119.9 million of corporate debt securities issued by financial institutions whose values declined significantly during 2008. As with stocks of financial institutions, continued declines in the values of these securities, combined with adverse changes in the expected cash flows from these investments, could result in additional other-than-temporary impairment charges. During 2008, $20.7 million of impairment charges were recorded for debt securities issued by financial institutions.
The Corporation’s investment management and trust services income could also be impacted by fluctuations in the securities market. A portion of this revenue is based on the value of the underlying investment portfolios. If the values of those investment portfolios decrease, whether due to factors influencing U.S. securities markets in general, or otherwise, the Corporation’s revenue could be negatively impacted. In addition, the Corporation’s ability to sell its brokerage services is dependent, in part, upon consumers’ level of confidence in the outlook for rising securities prices.
During 2008, developments in the market for student loan auction rate securities (also known as “auction rate certificates” or “ARCs”) resulted in the Corporation recording charges of $19.8 million.
The Corporation’s investment management and trust subsidiary, Fulton Financial Advisors, N.A. (FFA), holds ARCs for some of its customers’ accounts. ARCs are one of several types of securities that were previously utilized by FFA as short-term investment vehicles for its customers. ARCs are long-term securities structured to allow their sale in periodic auctions, resulting in the treatment of ARCs as short-term instruments in normal market conditions. However, in mid-February, 2008, market auctions for ARCs began to fail due to an insufficient number of buyers; these market failures were the first widespread and continuing failures in the over 20-year history of the auction rate securities markets. As a result, although the credit quality of ARCs has not been impacted, ARCs are currently not liquid investments for their holders, including FFA’s customers. It is unclear when liquidity will return to this market.

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FFA has agreed to purchase ARCs from customer accounts upon notification from customers that they have liquidity needs or otherwise desire to liquidate their holdings. Specifically, FFA will generally purchase customer ARCs at par value with an interest adjustment, which would position customers as if they had owned 90-day U.S. Treasury bills instead of ARCs.
Management believes that the financial guarantee liability recorded as of December 31, 2008 is adequate. Future purchases of ARCs, changes in their estimated fair value or changes in the likelihood of their purchase could require the Corporation to make adjustments to the amount of the liability and have a material impact on the Corporation’s results of operations.
If the goodwill that the Corporation has recorded in connection with its acquisitions becomes impaired, it could have a negative impact on the Corporation’s results of operations.
The Corporation has historically supplemented its internal growth with strategic acquisitions of banks, branches and other financial services companies. Applicable accounting standards require that the purchase method of accounting be used for all business combinations. Under purchase accounting, if the purchase price of an acquired company exceeds the fair value of the company’s net assets, the excess is carried on the acquirer’s balance sheet as goodwill. During 2008, the Corporation recorded a $90.0 million goodwill impairment charge for one of its defined reporting units. As of December 31, 2008, the Corporation had $534.4 million of goodwill on its consolidated balance sheet. Companies must evaluate goodwill for impairment at least annually. Write-downs of the amount of any impairment, if necessary, are to be charged to earnings in the period in which the impairment occurs. Despite the current year’s impairment charge, there can be no assurance that future evaluations of goodwill will not result in additional findings of impairment.
Difficult conditions in the capital markets and the economy generally may materially adversely affect the Corporation’s business and results of operations. The Corporation does not expect these conditions to improve in the near future.
The Corporation’s results of operations and financial condition are affected by conditions in the capital markets and the economy generally. The capital and credit markets have been experiencing extreme volatility and disruption for more than twelve months. The volatility and disruption in these markets have produced downward pressure on stock prices of, and credit availability to, certain companies without regard to those companies’ underlying financial strength.
In response to the financial crises affecting the banking system and financial markets and going concern threats to investment banks and other financial institutions, on October 3, 2008, President Bush signed the Emergency Economic Stabilization Act of 2008 (EESA) into law. Pursuant to the EESA, the U.S. Treasury (UST) was authorized to, among other things, deploy up to $750 billion into the financial system. On February 17, 2009, President Obama signed the American Recovery and Reinvestment Act of 2009 (ARRA) into law. The Federal Government, the Federal Reserve and other governmental and regulatory bodies have taken or are considering taking other actions to address the financial crisis. There can be no assurance as to what impact such actions will have on the financial markets, including the extreme levels of volatility currently being experienced. Such actions, although intended to aid the financial markets, and continued volatility in the markets could materially and adversely affect our business, financial condition and results of operations, or the trading price of our common stock.
Recently, concerns over the availability and cost of credit and a declining U.S. real estate market have contributed to increased volatility and diminished expectations for the economy and the capital and credit markets going forward. These factors, combined with declining business and consumer confidence, have precipitated an economic slowdown and induced fears of a prolonged recession. These events and the continuing market upheavals may have a continued adverse effect on the Corporation.
Included among the potential adverse effects of the current economic downturn on the Corporation are the following:
    A prolonged economic downturn, especially one affecting the Corporation’s geographic market areas, could reduce the Corporation’s customer base level of deposits and demand for financial products, such as loans. The Corporation’s success depends significantly upon the growth in population, income levels, deposits and housing starts in its geographic markets. Unlike many larger institutions, the Corporation is not able to spread the risks of unfavorable local economic conditions across a large number of diversified economies and geographic locations. If the communities in which the Corporation operates do not grow, or if prevailing economic conditions locally or nationally are unfavorable, its business could be adversely affected.
 
    Recent negative developments in the financial industry and the credit markets may subject the Corporation to additional regulation. As discussed above, the Corporation and its subsidiaries are subject to regulations and examinations by various regulatory authorities. In addition, as a result of its participation in the UST’s Capital Purchase Program (CPP), the Corporation is subject to certain restrictions associated with participation in the CPP.

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      As a result of the recent global financial crisis, the potential exists for new Federal or state laws and regulations regarding lending and funding practices and liquidity standards, and bank regulatory agencies are expected to be active in responding to concerns and trends identified in examinations, which may result in the issuance of formal enforcement orders. Negative developments in the financial industry and the domestic and international credit markets, and the impact of new legislation in response to those developments, may negatively impact the Corporation’s operations, including its ability to originate or sell loans, and adversely impact its financial performance.
 
    The Corporation’s future growth and liquidity needs may require the Corporation to raise additional capital in the future, but that capital may not be available when it is needed or may be available at an excessive cost. The Corporation is required by regulatory authorities to maintain adequate levels of capital to support its operations. In October 2008, the UST announced plans to direct $250 billion of its authority under EESA into preferred stock investments in banks under the CPP. In November 2008, the Corporation voluntarily applied to the UST to participate in the CPP and the application was approved. As a result, on December 23, 2008, the Corporation issued $376.5 million of preferred stock, as well as warrants to purchase 5.5 million shares of the Corporation’s common stock, to the UST.
 
      The Corporation anticipates that current capital levels will satisfy regulatory requirements for the foreseeable future. The Corporation may at some point choose to raise additional capital to support its continued growth or to redeem the preferred stock issued under the CPP. The Corporation’s ability to raise additional capital will depend, in part, on conditions in the capital markets at that time, which are outside of the Corporation’s control. Accordingly, the Corporation may be unable to raise additional capital, if and when needed, on terms acceptable to the Corporation, or at all. If the Corporation cannot raise additional capital when needed, its ability to further expand operations through internal growth and acquisitions could be materially impacted. In addition, if the Corporation decides to raise additional equity capital, shareholders’ interests could be diluted.
 
      In addition to primary sources of liquidity in the form of principal and interest payments on outstanding loans and investments and deposits, the Corporation maintains secondary sources that provide it with additional liquidity. These secondary sources include secured and unsecured borrowings from sources such as the Federal Reserve Bank and FHLB and third-party commercial banks. The Corporation’s strong liquidity position was further enhanced by its participation in the CPP and it believes that it is well positioned to withstand current market conditions. However, market liquidity conditions have been negatively impacted by the recent disruptions in the capital markets and could, in the future, have a negative impact on secondary sources of liquidity.
The competition the Corporation faces is significant and may reduce the Corporation’s customer base and negatively impact the Corporation’s results of operations.
There is significant competition among commercial banks in the market areas served by the Corporation’s subsidiary banks. In addition, as a result of the deregulation of the financial industry, the Corporation’s subsidiary banks also compete with other providers of financial services such as savings and loan associations, credit unions, consumer finance companies, securities firms, insurance companies, commercial finance and leasing companies, the mutual funds industry, full service brokerage firms and discount brokerage firms, some of which are subject to less extensive regulations than the Corporation is with respect to the products and services they provide. Some of the Corporation’s competitors, including certain super-regional and national bank holding companies that have made acquisitions in its market area, have greater resources than the Corporation has and, as such, may have higher lending limits and may offer other services not offered by the Corporation.
The Corporation also experiences competition from a variety of institutions outside its market areas. Some of these institutions conduct business primarily over the internet and may thus be able to realize certain cost savings and offer products and services at more favorable rates and with greater convenience to the customer.
Competition may adversely affect the rates the Corporation pays on deposits and charges on loans, thereby potentially adversely affecting the Corporation’s profitability. The Corporation’s profitability depends upon its continued ability to successfully compete in the market areas it serves while achieving its objectives.
The supervision and regulation to which the Corporation is subject can be a competitive disadvantage.
The Corporation is a registered financial holding company, and its subsidiary banks are depository institutions whose deposits are insured by the Federal Deposit Insurance Corporation (FDIC). As a result, the Corporation and its subsidiaries are subject to

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regulations and examinations by various regulatory authorities. In general, statutes establish: the eligible business activities for the Corporation; certain acquisition and merger restrictions; limitations on intercompany transactions such as loans and dividends; capital adequacy requirements; requirements for anti-money laundering programs and other compliance matters, among other regulations. The Corporation is extensively regulated under federal and state banking laws and regulations that are intended primarily for the protection of depositors, federal deposit insurance funds and the banking system as a whole. Compliance with these statutes and regulations is important to the Corporation’s ability to engage in new activities and to consummate additional acquisitions. In addition, the Corporation is subject to changes in federal and state tax laws as well as changes in banking and credit regulations, accounting principles and governmental economic and monetary policies. The Corporation cannot predict whether any of these changes may adversely and materially affect it. Federal and state banking regulators also possess broad powers to take supervisory actions, as they deem appropriate. These supervisory actions may result in higher capital requirements, higher insurance premiums and limitations on the Corporation’s activities that could have a material adverse effect on its business and profitability. While these statutes and regulations are generally designed to minimize potential loss to depositors and the FDIC insurance funds, they do not eliminate risk, and compliance with such statutes and regulations increases the Corporation’s expense, requires management’s attention and can be a disadvantage from a competitive standpoint with respect to non-regulated competitors.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
The following table summarizes the Corporation’s branch properties, by subsidiary bank, as of December 31, 2008. Remote service facilities (mainly stand-alone automated teller machines) are excluded.
                         
                    Total
Subsidiary Bank   Owned   Leased   Branches
Fulton Bank
    37       65       102  
The Bank
    32       19       51  
The Columbia Bank
    5       21       26  
Lafayette Ambassador Bank
    8       17       25  
Skylands Community Bank
    7       20       27  
Hagerstown Trust Company
    6       6       12  
Delaware National Bank
    9       3       12  
FNB Bank, N.A.
    8       2       10  
Swineford National Bank
    5       2       7  
The Peoples Bank of Elkton
    1       1       2  
 
                       
Total
    118       156       274  
 
                       
The following table summarizes the Corporation’s other significant administrative properties. Banking subsidiaries also maintain administrative offices at their respective main banking branches. These properties are included within the preceding table.
             
            Owned/
Entity   Property   Location   Leased
Fulton Bank/Fulton Financial Corporation
  Corporate Headquarters   Lancaster, PA   (1)
Fulton Financial Corporation
  Operations Center   East Petersburg, PA   Owned
Fulton Bank
  Operations Center   Mantua, NJ   Owned
Lafayette Ambassador Bank
  Operations Center   Bethlehem, PA   Owned
 
(1)   Includes approximately 100,000 square feet which is owned by an independent third-party who financed the construction through a loan from Fulton Bank. The Corporation is leasing this space from the third-party in an arrangement accounted for as a capital lease. The lease term expires in 2027. The Corporation owns the remainder of the Corporate Headquarters location. This property also includes a Fulton Bank branch, which is included in the preceding table.

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Item 3. Legal Proceedings
There are no legal proceedings pending against Fulton Financial Corporation or any of its subsidiaries which are expected to have a material impact upon the financial position and/or the operating results of the Corporation.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders of Fulton Financial Corporation during the fourth quarter of 2008.

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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Common Stock
As of December 31, 2008, the Corporation had 175.0 million shares of $2.50 par value common stock outstanding held by approximately 48,000 holders of record. The common stock of the Corporation is traded on The NASDAQ Stock Market under the symbol FULT.
The following table presents the quarterly high and low prices of the Corporation’s common stock and per-share cash dividends declared for each of the quarterly periods in 2008 and 2007.
                         
    Price Range   Per-Share
    High   Low   Dividend
2008
                       
First Quarter
  $ 13.69     $ 9.83     $ 0.1500  
Second Quarter
    13.66       10.03       0.1500  
Third Quarter
    17.00       7.35       0.1500  
Fourth Quarter
    13.04       7.89       0.1500  
 
                       
2007
                       
First Quarter
  $ 16.81     $ 14.50     $ 0.1475  
Second Quarter
    15.32       14.21       0.1500  
Third Quarter
    16.26       11.25       0.1500  
Fourth Quarter
    15.02       9.91       0.1500  
Securities Authorized for Issuance under Equity Compensation Plans
The following table provides information about options outstanding under the Corporation’s 1996 Incentive Stock Option Plan and 2004 Stock Option and Compensation Plan as of December 31, 2008:
                         
                    Number of securities  
                    remaining available for  
                    future issuance under  
    Number of securities to     Weighted-average     equity compensation  
    be issued upon exercise     exercise price of     plans (excluding  
    of outstanding options,     outstanding options,     securities reflected in  
Plan Category   warrants and rights     warrants and rights     first column)  
Equity compensation plans approved by security holders
    7,056,184     $ 13.66       13,609,429  
 
                       
Equity compensation plans not approved by security holders
                 
 
                       
 
                 
Total
    7,056,184     $ 13.66       13,609,429  
 
                 

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Performance Graph
The graph below shows cumulative investment returns to shareholders based on the assumptions that (A) an investment of $100.00 was made on December 31, 2003, in each of the following: (i) Fulton Financial Corporation common stock; (ii) the stock of all U. S. companies traded on The NASDAQ Stock Market and (iii) common stock of the performance peer group approved by the Board of Directors on September 21, 2004 consisting of bank and financial holding companies located throughout the United States with assets between $6-20 billion which were not a party to a merger agreement as of the end of the period and (B) all dividends were reinvested in such securities over the past five years. The graph is not indicative of future price performance.
The graph below is furnished under this Part II Item 5 of this Form 10-K and shall not be deemed to be “soliciting material” or to be “filed” with the Commission or subject to Regulation 14A or 14C, or to the liabilities of Section 18 of the Exchange Act of 1934, as amended.
(PERFORMANCE GRAPH)
                                                 
                                                 
    Period Ending December 31
                                                 
Index   2003   2004   2005   2006   2007   2008
                                                 
Fulton Financial Corporation
    100.00       115.21       112.35       115.99       81.37       73.52  
                                                 
NASDAQ Composite
    100.00       108.59       110.08       120.56       132.39       78.72  
                                                 
Fulton Financial 2008 Peer Group
    100.00       116.00       115.67       126.42       102.33       88.74  
 
 
(1)   A listing of the Fulton Financial Peer Group is located under the heading “Compensation Discussion and Analysis” within the Corporation’s 2009 Proxy Statement.
Issuer Purchases of Equity Securities

Not Applicable.

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Item 6. Selected Financial Data

5-YEAR CONSOLIDATED SUMMARY OF FINANCIAL RESULTS
(dollars in thousands, except per-share data)
                                         
    2008     2007     2006     2005     2004  
SUMMARY OF OPERATIONS
                                       
Interest income
  $ 867,494     $ 939,577     $ 864,507     $ 625,767     $ 493,643  
Interest expense
    343,346       450,833       378,944       213,219       135,994  
 
                             
Net interest income
    524,148       488,744       485,563       412,548       357,649  
Provision for loan losses
    119,626       15,063       3,498       3,120       4,717  
Investment securities (losses) gains, net
    (58,241 )     1,740       7,439       6,625       17,712  
Other income
    155,387       146,284       142,436       137,673       121,152  
Gain on sale of credit card portfolio
    13,910                          
Other expenses
    406,625       405,455       365,991       316,291       277,515  
Goodwill impairment
    90,000                          
 
                             
Income before income taxes
    18,953       216,250       265,949       237,435       214,281  
Income taxes
    24,570       63,532       80,422       71,361       64,673  
 
                             
Net income (loss)
    (5,617 )     152,718       185,527       166,074       149,608  
Preferred stock dividends and discount accretion
    (463 )                        
 
                             
Net income (loss) available to common shareholders
  $ (6,080 )   $ 152,718     $ 185,527     $ 166,074     $ 149,608  
 
                             
 
                                       
PER COMMON SHARE (1)
                                       
Net income (loss) (basic)
  $ (0.03 )   $ 0.88     $ 1.07     $ 1.01     $ 0.95  
Net income (loss) (diluted)
    (0.03 )     0.88       1.06       1.00       0.94  
Cash dividends
    0.600       0.598       0.581       0.540       0.493  
 
                                       
RATIOS
                                       
Return on average assets
    (0.04 %)     1.01 %     1.30 %     1.41 %     1.45 %
Return on average equity
    (0.35 )     9.98       12.84       13.24       13.98  
Return on average tangible equity (2)
    9.29       18.16       23.87       20.28       18.58  
Net interest margin
    3.70       3.66       3.82       3.93       3.83  
Efficiency ratio
    56.31       61.20       56.00       55.50       55.90  
Ending tangible common equity to tangible assets
    5.97       6.03       5.98       6.98       7.94  
Dividend payout ratio
    N/M       68.00       54.80       54.00       52.50  
 
                                       
PERIOD-END BALANCES
                                       
Total assets
  $ 16,185,106     $ 15,923,098     $ 14,918,964     $ 12,401,555     $ 11,160,148  
Investment securities
    2,724,841       3,153,552       2,878,238       2,562,145       2,449,859  
Loans, net of unearned income
    12,042,620       11,204,424       10,374,323       8,424,728       7,533,915  
Deposits
    10,551,916       10,105,445       10,232,469       8,804,839       7,895,524  
Federal Home Loan Bank advances and long-term debt
    1,787,797       1,642,133       1,304,148       860,345       684,236  
Shareholders’ equity
    1,859,647       1,574,920       1,516,310       1,282,971       1,244,087  
 
                                       
AVERAGE BALANCES
                                       
Total assets
  $ 15,976,871     $ 15,090,458     $ 14,297,681     $ 11,781,485     $ 10,348,268  
Investment securities
    2,924,340       2,843,478       2,869,862       2,498,538       2,563,143  
Loans, net of unearned income
    11,595,243       10,736,566       9,892,082       7,981,604       6,857,386  
Deposits
    10,016,528       10,222,594       9,955,247       8,364,435       7,285,134  
Federal Home Loan Bank advances and long-term debt
    1,822,115       1,579,527       1,069,868       839,694       641,154  
Shareholders’ equity
    1,609,828       1,530,613       1,444,793       1,254,476       1,069,904  
 
N/M   – Not meaningful.
 
(1)   Adjusted for stock dividends and stock splits.
 
(2)   Net income (loss), as adjusted for intangible amortization (net of tax) and goodwill impairment charges, divided by average common shareholders’ equity, net of goodwill and intangible assets.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations (Management’s Discussion) concerns Fulton Financial Corporation (the Corporation), a financial holding company registered under the Bank Holding Company Act and incorporated under the laws of the Commonwealth of Pennsylvania in 1982, and its wholly owned subsidiaries. Management’s Discussion should be read in conjunction with the consolidated financial statements and other financial information presented in this report.
FORWARD-LOOKING STATEMENTS
The Corporation has made, and may continue to make, certain forward-looking statements with respect to its acquisition and growth strategies; market risk; changes or adverse developments in economic, political, or regulatory conditions; a continuation or worsening of the current disruption in credit and other markets, including the lack of or reduced access to, and the abnormal functioning of, markets for mortgages and other asset-backed securities and for commercial paper and other short-term borrowings; the effect of competition and interest rates on net interest margin and net interest income; investment strategy and income growth; investment securities gains; declines in the value of securities which may result in charges to earnings; changes in rates of deposit and loan growth; asset quality and the impact on assets from adverse changes in the economy and in credit or other markets and resulting effects on credit risk and asset values; balances of risk-sensitive assets to risk-sensitive liabilities; salaries and employee benefits and other expenses; amortization of intangible assets; goodwill impairment; capital and liquidity strategies and other financial and business matters for future periods. The Corporation cautions that these forward-looking statements are subject to various assumptions, risks and uncertainties. Because of the possibility of changes in these assumptions, actual results could differ materially from forward-looking statements. The Corporation undertakes no obligations to update or revise any forward-looking statements.
OVERVIEW
During 2008, the Corporation faced significant challenges associated with the overall economic downturn. Poor economic conditions, which were initially evident within the residential housing market beginning in 2007, spread throughout most sectors of the economy in 2008. The values of various assets, including loans, investment securities and intangible assets, declined significantly in the current year, resulting in a number of significant charges to earnings.
Despite these setbacks and the expectation of a challenging economy – at least in the short-term – the Corporation believes it is positioned to withstand the current conditions through its strong capital and liquidity positions, conservative underwriting of loans and prudent management of interest rate risk.
Summary Financial Results
The Corporation generates the majority of its revenue through net interest income, or the difference between interest earned on loans and investments and interest paid on deposits and borrowings. Growth in net interest income is dependent upon balance sheet growth and/or maintaining or increasing the net interest margin, which is net interest income (fully taxable-equivalent) as a percentage of average interest-earning assets. The Corporation also generates revenue through fees earned on the various services and products offered to its customers and through sales of assets, such as loans, investments, or properties. Offsetting these revenue sources are provisions for credit losses on loans, operating expenses and income taxes.

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The following table presents a summary of the Corporation’s earnings and selected performance ratios:
                 
    2008   2007
Net income (loss) available to common shareholders (in thousands)
  $ (6,080 )   $ 152,718  
Income before income taxes (in thousands)
  $ 18,953     $ 216,250  
Diluted net income (loss) per common share (1)
  $ (0.03 )   $ 0.88  
Return on average assets
    (0.04 %)     1.01 %
Return on average equity (2)
    (0.35 %)     9.98 %
Return on average tangible equity (3)
    9.29 %     18.16 %
Net interest margin (4)
    3.70 %     3.66 %
Non-performing assets to total assets
    1.35 %     0.76 %
 
(1)   Calculated as net income (loss) available to common shareholders divided by diluted weighted average common shares outstanding.
 
(2)   Calculated as net income (loss), divided by average shareholders’ equity.
 
(3)   Calculated as net income (loss), adjusted for intangible amortization (net of tax) and goodwill impairment charges, divided by average shareholders’ equity, excluding goodwill and intangible assets.
 
(4)   Presented on a fully taxable-equivalent (FTE) basis, using a 35% Federal tax rate and statutory interest expense disallowances. See also “Net Interest Income” section of Management’s Discussion.
The Corporation’s income before income taxes in 2008 decreased $197.3 million, or 91.2%, from 2007. The decrease in income before income taxes in 2008 in comparison to 2007 was primarily due to the following:
Decreases in income before income taxes:
  An increase in the provision for loan losses of $104.6 million, or 694.2%, to $119.6 million in 2008.
 
    During 2008, deteriorating economic conditions negatively impacted the quality of the Corporation’s loan portfolio. In general, significant declines in residential real estate values led to a slowing of the housing markets. This, in turn, had a detrimental impact on residential real estate developers and their ability to meet the contractual payments on their loans. Ultimately, as the slowdown spread through other sectors of the economy and recessionary conditions became evident, other types of credit began to deteriorate as the confidence of both businesses and consumers declined.
 
    The Corporation’s non-performing assets increased significantly, from $120.9 million, or 0.76% of total assets, as of December 31, 2007 to $219.0 million, or 1.35% of total assets, as of December 31, 2008, with significant increases occurring in non-performing construction loans, commercial mortgages and commercial loans. Net charge-offs for 2008 were 0.45% of average loans, compared to 0.09% in 2007. As a result of these increases in non-performing assets and net charge-offs, the Corporation increased the provision for loan losses as additional allocations of the allowance for loan losses became necessary.
 
  A goodwill impairment charge of $90.0 million, recorded in 2008.
 
    As required by Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (Statement 142), the Corporation completes an annual goodwill impairment test as of October 31st each year. In connection with its 2008 impairment test, the Corporation determined that the goodwill associated with its Columbia Bank reporting unit was impaired; resulting in a $90.0 million impairment charge.
 
  A $65.0 million increase in charges related to the other-than-temporary impairment of securities.
 
    During 2008, the Corporation recorded pre-tax charges of $65.3 million for the other-than-temporary impairment of investment securities, recorded within investment securities (losses) gains on the consolidated statements of operations. During 2007, the Corporation recorded $324,000 of other-than-temporary impairment charges. Other-than-temporary impairment charges were recognized mainly for the Corporation’s investments in stocks of financial institutions and debt securities issued by financial institutions. Uncertainty surrounding the sector as a whole negatively impacted the value of securities issued by financial institutions.
 
    During 2008, the Corporation’s other-than-temporary impairment charges related to stocks of financial institutions were $43.1 million, while its other-than-temporary impairment charges for debt securities were $20.7 million, primarily for pooled trust preferred securities issued by financial institutions.

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  Contingent losses of $19.8 million associated with the Corporation’s guarantee to purchase illiquid auction rate securities from customers.
 
    The Corporation’s investment management and trust subsidiary, Fulton Financial Advisors, N.A. (FFA), held student loan auction rate securities, also known as auction rate certificates (ARCs), for some of its customers’ accounts. ARCs were one of several types of securities that were previously utilized by FFA as short-term investment vehicles for its customers. ARCs are long-term securities structured to allow their sale in periodic auctions, giving the securities some of the characteristics of short-term instruments in normal market conditions. However, in 2008, market auctions for ARCs began to fail due to an insufficient number of buyers. As a result, although the credit quality of ARCs was not impacted, they were not liquid investments for their holders, including FFA’s customers.
 
    During 2008, FFA agreed to purchase ARCs from customer accounts upon notification from customers that they have liquidity needs or otherwise desire to liquidate their holdings. The estimated fair value of this guarantee resulted in a $19.8 million pre-tax charge to earnings in 2008, included within operating risk loss on the consolidated statements of operations.
Increases in income before income taxes:
  A $35.4 million, or 7.2%, increase in net interest income.
 
    The 2008 improvement in net interest income in comparison to 2007 was largely due to an increase in average interest-earning assets, and a four basis point increase in net interest margin. Decreases in interest rates on short-term borrowings and deposit balances were the result of the Federal Reserve Board (FRB) lowering the target Federal funds rate a total of 400-425 basis points since December 31, 2007 (from 4.25% to 0-0.25%).
 
    During 2008, interest rates paid on short-term borrowings and many deposit balances declined more quickly than interest rates earned on assets. The more pronounced decrease in interest expense during 2008 in comparison to 2007 produced an increase in net interest income and net interest margin. Further decreases in rates on interest-bearing liabilities are not expected in the near future, due both to the current low-interest rate environment and the ongoing strong competition for deposits. As a result, the Corporation expects net interest margin compression in 2009. See the discussion under the heading, “Net Interest Income” below, for additional details.
 
  A $22.8 million reduction in pre-tax contingent losses associated with the potential repurchase of previously sold residential mortgage and home equity loans.
 
    During 2007, the Corporation recorded $25.1 million of pre-tax charges associated with the potential repurchase of residential mortgage and home equity loans sold to secondary market investors through its former Resource Mortgage affiliate. During 2008, the Corporation recorded an additional $2.3 million of contingent losses related to such loans, all of which were originated prior to 2008. See Note O, “Commitments and Contingencies” in the Notes to Consolidated Financial Statements for additional details.
 
  A $13.9 million pre-tax gain on the sale of the Corporation’s credit card portfolio.
 
    In 2008, the Corporation sold its approximately $87 million credit card portfolio to U.S. Bank National Association ND, d/b/a Elan Financial Services (Elan), and recorded a $13.9 million pre-tax gain on the transaction.
 
    Under a separate agreement, the Corporation provides ongoing marketing services on behalf of Elan and receives fee income for each new account originated and a percentage of the revenue earned on both new accounts and accounts sold. During 2008, the Corporation recognized $3.6 million of credit card fee income, included within other income on the consolidated statements of operations, in connection with this agreement.
 
    The sale of the credit card portfolio reduced the Corporation’s net interest income for 2008. During the year ended December 31, 2007, interest income earned on the credit card portfolio was $14.8 million, or 1.6% of total interest income, at an average yield of 19.2%. In 2008, prior to the sale of the credit card portfolio, the Corporation recognized interest income on the credit card portfolio of $5.1 million at an average yield of 20.1%. Assuming the funding for credit cards was provided by Federal funds purchased, the net interest income contribution of the credit card portfolio in 2008 and 2007 was approximately $4.3 million and

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    $10.9 million, respectively. Despite the negative impact to the Corporation’s net interest income, the sale of the credit card portfolio has resulted in a reduction of consumer credit risk, while providing a future revenue stream.
Participation in United States Treasury Capital Purchase Program
In connection with the Emergency Economic Stabilization Act of 2008 (EESA), the U.S. Treasury Department (UST) initiated a Capital Purchase Program (CPP) which allows for qualifying financial institutions to issue preferred stock to the UST, subject to certain limitations and terms. The EESA was developed to attract broad participation by strong financial institutions, to stabilize the financial system and increase lending to benefit the national economy and citizens of the U.S.
In December 2008, the Corporation voluntarily applied to the UST to participate in the CPP and the application was approved. As a result, the Corporation issued $376.5 million of preferred stock, including warrants to purchase 5.5 million shares of the Corporation’s common stock, to the UST in December 2008.
For additional details related to the terms of the preferred stock and common stock warrants issued by the Corporation, see Note M, “Stock-based Compensation Plans and Shareholders Equity” in the Notes to Consolidated Financial Statements and the “Financial Condition” section of Management’s Discussion.

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RESULTS OF OPERATIONS
Net Interest Income
Net interest income is the most significant component of the Corporation’s net income. The “Market Risk” section of Management’s Discussion provides additional information on the policies and procedures used by the Corporation to manage net interest income. The following table provides a comparative average balance sheet and net interest income analysis for 2008 compared to 2007 and 2006. Interest income and yields are presented on a fully taxable-equivalent (FTE) basis, using a 35% Federal tax rate and statutory interest expense disallowances. The discussion following this table is based on these tax-equivalent amounts.
                                                                         
(dollars in thousands)   2008     2007     2006  
    Average             Yield/     Average             Yield/     Average             Yield/  
    Balance     Interest (1)     Rate     Balance     Interest (1)     Rate     Balance     Interest (1)     Rate  
ASSETS
                                                                       
Interest-earning assets:
                                                                       
Loans, net of unearned income (2)
  $ 11,595,243     $ 732,533       6.32 %   $ 10,736,566     $ 805,881       7.51 %   $ 9,892,082     $ 731,057       7.39 %
Taxable inv. securities (3)
    2,228,204       110,220       4.82       2,157,325       99,621       4.62       2,268,209       97,652       4.31  
Tax-exempt inv. securities (3)
    512,920       27,904       5.44       496,820       25,856       5.20       447,000       21,770       4.87  
Equity securities (3)
    183,216       6,520       3.56       189,333       9,073       4.79       154,653       7,341       4.75  
 
                                                     
Total investment securities
    2,924,340       144,644       4.95       2,843,478       134,550       4.73       2,869,862       126,763       4.42  
Loans held for sale
    93,085       5,701       6.12       166,437       11,501       6.91       215,255       15,564       7.23  
Other interest-earning assets
    21,503       586       2.71       33,015       1,630       4.90       53,211       2,530       4.73  
 
                                                     
Total interest-earning assets
    14,634,171       883,464       6.04       13,779,496       953,562       6.93       13,030,410       875,914       6.73  
Noninterest-earning assets:
                                                                       
Cash and due from banks
    318,524                       329,814                       335,935                  
Premises and equipment
    197,967                       190,910                       185,084                  
Other assets (3)
    951,270                       899,292                       852,186                  
Less: Allowance for loan losses
    (125,061 )                     (109,054 )                     (105,934 )                
 
                                                                 
Total Assets
  $ 15,976,871                     $ 15,090,458                     $ 14,297,681                  
 
                                                                 
 
                                                                       
LIABILITIES AND SHAREHOLDERS’ EQUITY
                                                                       
Interest-bearing liabilities:
                                                                       
Demand deposits
  $ 1,714,029     $ 13,168       0.77 %   $ 1,696,624     $ 28,331       1.67 %   $ 1,673,407     $ 25,112       1.50 %
Savings deposits
    2,152,158       28,520       1.32       2,258,113       53,312       2.36       2,340,402       51,394       2.19  
Time deposits
    4,502,399       170,426       3.79       4,553,994       212,752       4.67       4,134,190       170,435       4.12  
 
                                                     
Total interest-bearing deposits
    8,368,586       212,114       2.53       8,508,731       294,395       3.46       8,147,999       246,941       3.03  
Short-term borrowings
    2,336,526       50,091       2.12       1,574,495       73,983       4.66       1,653,974       78,043       4.67  
Long-term debt
    1,822,115       81,141       4.45       1,579,527       82,455       5.22       1,069,868       53,960       5.04  
 
                                                     
Total interest-bearing liabilities
    12,527,227       343,346       2.74       11,662,753       450,833       3.86       10,871,841       378,944       3.48  
Noninterest-bearing liabilities:
                                                                       
Demand deposits
    1,647,942                       1,713,863                       1,807,248                  
Other
    191,874                       183,229                       173,799                  
 
                                                                 
Total Liabilities
    14,367,043                       13,559,845                       12,852,888                  
Shareholders’ equity
    1,609,828                       1,530,613                       1,444,793                  
 
                                                                 
Total Liabs. and Equity
  $ 15,976,871                     $ 15,090,458                     $ 14,297,681                  
 
                                                                 
Net interest income/net interest margin (FTE)
            540,118       3.70 %             502,729       3.66 %             496,970       3.82 %
 
                                                                 
Tax equivalent adjustment
            (15,970 )                     (13,985 )                     (11,407 )        
 
                                                                 
Net interest income
          $ 524,148                     $ 488,744                     $ 485,563          
 
                                                                 
 
(1)   Includes dividends earned on equity securities.
 
(2)   Includes non-performing loans.
 
(3)   Balances include amortized historical cost for available for sale securities. The related unrealized holding gains (losses) are included in other assets.

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The following table sets forth a summary of changes in FTE interest income and expense resulting from changes in average balances (volumes) and changes in rates:
                                                 
    2008 vs. 2007     2007 vs. 2006  
    Increase (decrease) due     Increase (decrease) due  
    to change in     to change in  
    Volume     Rate     Net     Volume     Rate     Net  
    (in thousands)  
Interest income on:
                                               
Loans, net of unearned income
  $ 61,027     $ (134,375 )   $ (73,348 )   $ 63,236     $ 11,588     $ 74,824  
Taxable investment securities
    4,588       6,011       10,599       (4,913 )     6,882       1,969  
Tax-exempt investment securities
    854       1,194       2,048       2,529       1,557       4,086  
Equity securities
    (285 )     (2,268 )     (2,553 )     1,661       71       1,732  
Loans held for sale
    (4,610 )     (1,190 )     (5,800 )     (3,399 )     (664 )     (4,063 )
Short-term investments
    (457 )     (587 )     (1,044 )     (984 )     84       (900 )
 
                                   
 
                                               
Total interest-earning assets
  $ 61,117     $ (131,215 )   $ (70,098 )   $ 58,130     $ 19,518     $ 77,648  
 
                                   
 
                                               
Interest expense on:
                                               
Demand deposits
  $ 288     $ (15,451 )   $ (15,163 )   $ 352     $ 2,867     $ 3,219  
Savings deposits
    (2,375 )     (22,417 )     (24,792 )     (1,914 )     3,832       1,918  
Time deposits
    (2,384 )     (39,942 )     (42,326 )     18,304       24,013       42,317  
Short-term borrowings
    26,332       (50,224 )     (23,892 )     (3,892 )     (168 )     (4,060 )
Long-term debt
    11,713       (13,027 )     (1,314 )     26,543       1,952       28,495  
 
                                   
 
                                               
Total interest-bearing liabilities
  $ 33,574     $ (141,061 )   $ (107,487 )   $ 39,393     $ 32,496     $ 71,889  
 
                                   
Note: Changes which are partially attributable to rate and volume are allocated based on the proportion of the direct changes attributable to rate and volume.
2008 vs. 2007
Interest income decreased $70.1 million, or 7.4%, due to a $131.2 million decrease caused by an 89 basis point decline in average rates, offset by a $61.1 million increase in interest income realized from an $854.7 million, or 6.2%, increase in average balances.
The increase in average interest-earning assets was almost entirely due to loan growth. Average loans increased by $858.7 million, or 8.0%, to $11.6 billion in 2008. The following table presents the growth in average loans, net of unearned income, by type:
                                 
                    Increase (decrease)  
    2008     2007     $     %  
            (dollars in thousands)          
Real estate — commercial mortgage
  $ 3,746,914     $ 3,322,421     $ 424,493       12.8 %
Commercial — industrial, financial and agricultural
    3,536,125       3,213,357       322,768       10.0  
Real estate — home equity
    1,597,376       1,454,753       142,623       9.8  
Real estate — construction
    1,310,076       1,402,029       (91,953 )     (6.6 )
Real estate — residential mortgage
    918,830       751,649       167,181       22.2  
Consumer
    399,112       506,201       (107,089 )     (21.2 )
Leasing and other
    86,810       86,156       654       0.8  
 
                       
Total
  $ 11,595,243     $ 10,736,566     $ 858,677       8.0 %
 
                       
The growth in average loans was primarily due to increases in commercial mortgage and commercial loans. The $424.5 million, or 12.8%, increase in commercial mortgage loans was mostly in floating and adjustable rate loan products. The $322.8 million, or 10.0%, increase in commercial loans was primarily in floating and adjustable rate loans and partially in fixed rate loan products.
The $167.2 million, or 22.2%, increase in residential mortgage loans was primarily due to growth in traditional adjustable rate mortgages. The $142.6 million, or 9.8%, increase in home equity loans was due to an increase in home equity lines of credit, due in

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part to the introduction of a new blended fixed/floating rate loan product in late 2007 and an increase in line of credit usage for existing borrowings.
Offsetting the above increases were a $107.1 million, or 21.2%, decrease in consumer loans and a $92.0 million, or 6.6%, decrease in construction loans. The decrease in consumer loans was due primarily to the Corporation’s sale of its approximately $87 million credit card portfolio in April 2008 and a decrease in the indirect automobile loan portfolio. The decrease in construction loans was primarily due to a decrease in floating rate commercial construction loans.
The average yield on loans during 2008 of 6.32% represented a 119 basis point, or 15.8%, decrease in comparison to 2007. The decrease in the average yield on loans reflected a lower average rate environment, as illustrated by a lower average prime rate in 2008 (5.12%) as compared to 2007 (8.03%). The decrease in the average yield was not as pronounced as the decrease in the average prime rate as fixed rate loans do not reprice when short-term rates decline.
Average loans held for sale decreased $73.4 million, or 44.1%, as a result of a $466.4 million, or 32.9%, decrease in the volume of loans originated for sale. The decrease in volumes of loans originated for sale was mainly due to the Corporation’s exit from the national wholesale mortgage business in the second half of 2007.
Average investments increased $80.9 million, or 2.8%. In late 2007, the Corporation “pre-purchased” investments, based on the expected cash flows to be generated from maturing securities over an approximate six-month period. The result of this pre-purchase was a higher average investment balance for 2008. Also contributing to the increase was the sale of approximately $250 million of lower-yielding investment securities during the first quarter of 2007, which lowered the balance of average investment securities for 2007.
The average yield on investment securities increased 22 basis points from 4.73% in 2007 to 4.95% in 2008. The increase in yield was due to the systematic reinvestment of normal portfolio cash flows, primarily from shorter-duration, lower-yielding mortgage-backed securities, into a combination of higher-yielding mortgage-backed pass-through securities, conservative U.S. government issued collateralized mortgage obligations and longer-term municipal securities.
Interest expense decreased $107.5 million, or 23.8%, to $343.3 million in 2008 from $450.8 million in 2007. Interest expense decreased $141.1 million due to a 112 basis point, or 29.0%, decrease in the average cost of total interest-bearing liabilities. This decrease was partially offset by an increase in interest expense of $33.6 million caused by an $864.5 million, or 7.4%, increase in average interest-bearing liabilities.
The following table summarizes the change in average deposits, by type:
                                 
                    Increase (decrease)  
    2008     2007     $     %  
            (dollars in thousands)          
Noninterest-bearing demand
  $ 1,647,942     $ 1,713,863     $ (65,921 )     (3.8 %)
Interest-bearing demand
    1,714,029       1,696,624       17,405       1.0  
Savings/money market
    2,152,158       2,258,113       (105,955 )     (4.7 )
Time deposits
    4,502,399       4,553,994       (51,595 )     (1.1 )
 
                       
Total
  $ 10,016,528     $ 10,222,594     $ (206,066 )     (2.0 %)
 
                       
The Corporation experienced a net decrease in noninterest-bearing and interest-bearing demand and savings accounts of $154.5 million, or 2.7%, primarily due to personal accounts. The $51.6 million decrease in time deposits was due to a $137.2 million decrease in brokered certificates of deposit, offset by an $85.6 million increase in customer certificates of deposit.

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The following table summarizes the changes in average borrowings, by type:
                                 
                    Increase (decrease)  
    2008     2007     $     %  
            (dollars in thousands)          
Short-term borrowings:
                               
Federal funds purchased
  $ 1,328,888     $ 808,358     $ 520,530       64.4 %
Short-term promissory notes
    454,473       404,527       49,946       12.3  
FHLB overnight repurchase agreements
    303,224       89,742       213,482       237.9  
Customer repurchase agreements
    227,130       247,948       (20,818 )     (8.4 )
Other short-term borrowings
    22,811       23,920       (1,109 )     (4.6 )
 
                       
 
                               
Total short-term borrowings
    2,336,526       1,574,495       762,031       48.4  
 
                       
 
                               
Long-term debt:
                               
FHLB Advances
    1,439,197       1,212,085       227,112       18.7  
Other long-term debt
    382,918       367,442       15,476       4.2  
 
                       
 
                               
Total long-term debt
    1,822,115       1,579,527       242,588       15.4  
 
                       
 
                               
Total borrowings
  $ 4,158,641     $ 3,154,022     $ 1,004,619       31.9 %
 
                       
The $762.0 million, or 48.4%, increase in short-term borrowings was mainly due to a $520.5 million increase in Federal funds purchased and a $213.5 million increase in Federal Home Loan Bank (FHLB) overnight repurchase agreements. The $242.6 million, or 15.4%, increase in long-term debt was primarily due to increases in FHLB advances as longer-term rates were locked and durations were extended to manage interest rate risk. The total increase in borrowings of $1.0 billion was principally employed to support overall balance sheet growth.
2007 vs. 2006
In February 2006, the Corporation acquired Columbia Bancorp (Columbia Bank), of Columbia, Maryland, a $1.3 billion bank holding company whose primary subsidiary was The Columbia Bank. Results for 2007 in comparison to 2006 were impacted by a full year contribution by Columbia Bank in 2007, compared to an eleven-month contribution in 2006.
Net interest income increased $5.8 million, or 1.2%, from $497.0 million in 2006 to $502.7 million in 2007, due to an increase in average interest-earning assets, offset by a decline in net interest margin.
Average interest-earning assets grew 5.7%, from $13.0 billion in 2006 to $13.8 billion in 2007. Interest income increased $77.6 million, or 8.9%, primarily as a result of an increase in average interest-earning assets, which contributed $58.1 million to the increase, with the remaining growth in interest income due to the 20 basis point, or 3.0%, increase in average rates on interest-earning assets. Columbia Bank contributed approximately $99 million to the increase in average interest-earning assets.
Loan growth was particularly strong in the commercial loan and commercial mortgage categories, which together increased $662.8 million, or 11.3%, with Columbia Bank contributing approximately $35 million to the increase. The remaining growth in commercial loans was across all commercial loan types, and throughout most subsidiary banks and geographical regions. The remaining growth in commercial mortgages was primarily in adjustable rate mortgages.
The increases in residential mortgage loans of $113.0 million, or 17.6%, was due to growth in adjustable rate mortgage loans ($87.9 million, or a 20.6% increase) and the impact of $23.7 million of residential mortgage loans repurchased in 2007 that were previously sold to secondary market investors.
Additional increases in loans were due to increases in construction loans of $39.4 million, or 2.9%, and home equity loans of $37.5 million, or 2.6%. Columbia Bank contributed approximately $36 million and $16 million to the increases in construction loans and home equity loans, respectively. The remaining increase in home equity loans was due to the repurchase of previously sold loans during 2007 and due to the introduction of a blended fixed/floating rate product in late 2007.

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Offsetting these increases was a $16.6 million, or 3.2%, decrease in average consumer loans. The Corporation’s indirect automobile portfolio decreased $33.9 million, or 10.9%, while growth in credit card outstandings of $17.0 million, or 28.2%, somewhat offset this decline.
The average yield on loans during 2007 of 7.51% represented a 12 basis point, or 1.6%, increase in comparison to 2006. The increase in the average yield on loans reflected a higher average rate environment, as illustrated by a higher average prime rate in 2007 (8.03%) as compared to 2006 (7.96%).
Average loans held for sale decreased $48.8 million, or 22.7%, as a result of lower volumes mainly due to the Corporation’s exit from the national wholesale mortgage business.
Average investments decreased $26.4 million, or 0.9%, while the average yield on investment securities increased 31 basis points from 4.42% in 2006 to 4.73% in 2007. The increase in yield was primarily attributable to the Corporation’s systematic reinvestment of normal portfolio cash flows, primarily from lower duration, significantly lower yielding balloon mortgage-backed securities, into a combination of higher yielding mortgage-backed pass-through securities, conservative collateralized mortgage obligations, as well as longer term municipal securities. Also contributing to the increase in yield was a reduction in premium amortization, which is accounted for as an offset to interest income, from $4.8 million in 2006 to $3.5 million in 2007. The decrease in amortization reflects the cumulative impact of initiatives to reduce the premium levels of mortgage-backed securities purchased during 2006 and 2007 and stable prepayment experience on relatively short duration mortgage-backed securities purchased prior to that period.
The increase in interest income was offset by an increase in interest expense of $71.9 million, or 19.0%, to $450.8 million in 2007 from $378.9 million in 2006. Interest expense increased $39.4 million due to a $790.9 million, or 7.3%, increase in average interest-bearing liabilities and $32.5 million due to a 38 basis point, or 10.9%, increase in the average cost of total interest-bearing liabilities. The increase in the average cost of interest-bearing liabilities primarily resulted from a change in deposit composition as non-interest bearing demand and lower cost savings and money market deposits shifted toward higher cost certificates of deposit. Columbia Bank contributed approximately $81 million to the increase in average interest-bearing liabilities.
The time deposit increase of $419.8 million was due to normal growth and existing customers shifting funds from noninterest-bearing and interest-bearing demand and savings accounts to time deposits to take advantage of higher rates. The net decrease in demand and savings accounts of $152.5 million, or 2.6%, was net of an approximately $42 million increase related to the Columbia Bank acquisition. Growing core deposits continued to be a challenge for the Corporation, and banks in general, as more attractive investment opportunities existed for consumers over the past two years, including equity markets and higher yielding time deposits.
During 2007, the Corporation obtained additional borrowings to fund loan growth. Average borrowings increased $430.2 million, or 15.8%, during 2007, with Columbia Bank contributing approximately $21 million to the increase. The $79.5 million, or 4.8%, decrease in short-term borrowings was mainly due to a decrease in Federal funds purchased, offset by a net increase of $136.8 million, or 26.5%, in short-term promissory notes and customer repurchase agreements. Average long-term debt increased $509.7 million, or 47.6%, to $1.6 billion. The increase in long-term debt was primarily due to increases in FHLB advances as longer-term rates were locked and durations were extended to manage interest rate risk, and partially due to the May 2007 issuance of $100.0 million of ten-year subordinated notes. On an ending balance basis, however, short-term borrowings increased $703.1 million, or 41.8%, as continued growth in loans and investments during the latter part of 2007 required additional funding that could not be generated by deposit growth.
Provision and Allowance for Credit Losses
The Corporation accounts for the credit risk associated with lending activities through its allowance for credit losses and provision for loan losses. The provision is the expense recognized on the consolidated statements of operations to adjust the allowance to its proper balance, as determined through the application of the Corporation’s allowance methodology procedures. These procedures include the evaluation of the risk characteristics of the portfolio and documentation in accordance with the Securities and Exchange Commission’s (SEC) Staff Accounting Bulletin No. 102, “Selected Loan Loss Allowance Methodology and Documentation Issues” (SAB 102). See the “Critical Accounting Policies” section of Management’s Discussion for a discussion of the Corporation’s allowance for credit loss evaluation methodology.

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A summary of the Corporation’s loan loss experience follows:
                                         
    2008     2007     2006     2005     2004  
            (dollars in thousands)          
Loans, net of unearned income outstanding at end of year
  $ 12,042,620     $ 11,204,424     $ 10,374,323     $ 8,424,728     $ 7,533,915  
 
                             
Daily average balance of loans, net of unearned income
  $ 11,595,243     $ 10,736,566     $ 9,892,082     $ 7,981,604     $ 6,857,386  
 
                             
Balance of allowance for credit losses at beginning of year
  $ 112,209     $ 106,884     $ 92,847     $ 89,627     $ 77,700  
Loans charged off:
                                       
Commercial — financial and agricultural
    18,592       6,796       3,013       4,095       3,482  
Real estate — mortgage
    28,275       1,206       429       467       1,466  
Consumer
    5,188       3,678       3,138       3,436       3,476  
Leasing and other
    4,804       2,059       389       206       453  
 
                             
Total loans charged off
    56,859       13,739       6,969       8,204       8,877  
 
                             
Recoveries of loans previously charged off:
                                       
Commercial — financial and agricultural
    1,795       1,664       2,863       2,705       2,042  
Real estate — mortgage
    446       178       268       1,245       906  
Consumer
    1,487       1,246       1,289       1,169       1,496  
Leasing and other
    1,433       913       97       77       76  
 
                             
Total recoveries
    5,161       4,001       4,517       5,196       4,520  
 
                             
Net loans charged off
    51,698       9,738       2,452       3,008       4,357  
Provision for loan losses
    119,626       15,063       3,498       3,120       4,717  
Allowance of purchased entities
                12,991       3,108       11,567  
 
                             
Balance at end of year
  $ 180,137     $ 112,209     $ 106,884     $ 92,847     $ 89,627  
 
                             
 
                                       
Components of Allowance for Credit Losses:
                                       
Allowance for loan losses
  $ 173,946     $ 107,547     $ 106,884     $ 92,847     $ 89,627  
Reserve for unfunded lending commitments (1)
    6,191       4,662                    
 
                             
Allowance for credit losses
  $ 180,137     $ 112,209     $ 106,884     $ 92,847     $ 89,627  
 
                             
 
                                       
Selected Asset Quality Ratios:
                                       
Net charge-offs to average loans, net of unearned income
    0.45 %     0.09 %     0.02 %     0.04 %     0.06 %
Allowance for loan losses to loans, net of unearned income outstanding at end of year
    1.44 %     0.96 %     1.03 %     1.10 %     1.19 %
Allowance for credit losses to loans, net of unearned income outstanding at end of year
    1.50 %     1.00 %     1.03 %     1.10 %     1.19 %
Non-performing assets (2) to total assets
    1.35 %     0.76 %     0.39 %     0.38 %     0.30 %
Non-accrual loans to total loans, net of unearned income
    1.34 %     0.68 %     0.32 %     0.43 %     0.30 %
 
(1)   Reserve for unfunded lending commitments transferred to other liabilities as of December 31, 2007. Prior periods were not reclassified.
 
(2)   Includes accruing loans past due 90 days or more.

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The following table presents the aggregate amount of non-accrual and past due loans and other real estate owned (1):
                                         
    December 31  
    2008     2007     2006     2005     2004  
    (in thousands)  
Non-accrual loans (1) (2) (3)
  $ 161,962     $ 76,150     $ 33,113     $ 36,560     $ 22,574  
Accruing loans past due 90 days or more
    35,177       29,782       20,632       9,012       8,318  
 
                             
Total non-performing loans
    197,139       105,932       53,745       45,572       30,892  
Other real estate
    21,855       14,934       4,103       2,072       2,209  
 
                             
Total non-performing assets
  $ 218,994     $ 120,866     $ 57,848     $ 47,644     $ 33,101  
 
                             
 
(1)   In 2008, the total interest income that would have been recorded if non-accrual loans had been current in accordance with their original terms was approximately $14.0 million. The amount of interest income on non-accrual loans that was included in 2008 income was approximately $987,000.
 
(2)   Accrual of interest is generally discontinued when a loan becomes 90 days past due as to principal and interest. When interest accruals are discontinued, interest credited to income is reversed. Non-accrual loans are restored to accrual status when all delinquent principal and interest becomes current or the loan is considered secured and in the process of collection. Certain loans, primarily adequately collateralized mortgage loans, may continue to accrue interest after reaching 90 days past due.
 
(3)   Excluded from the amounts presented as of December 31, 2008 were $427.6 million in loans where possible credit problems of borrowers have caused management to have doubts as to the ability of such borrowers to comply with the present loan repayment terms. These loans were reviewed for impairment under the Financial Accounting Standards Board’s Statement of Financial Accounting Standards No. 114, “Accounting by Creditors for Impairment of a Loan”, but continue to pay according to their contractual terms and are, therefore, not included in non-performing loans. Non-accrual loans include $77.1 million of impaired loans.
The following table summarizes the Corporation’s non-performing loans, by type, as of the indicated dates:
                                         
    December 31  
    2008     2007     2006     2005     2004  
    (in thousands)  
Real estate — construction
  $ 80,083     $ 30,927     $ 13,385     $ 374     $ 92  
Real estate — commercial mortgage
    41,745       14,515       8,776       9,853       7,652  
Commercial — industrial, agricultural and financial
    40,294       27,715       21,706       25,585       10,583  
Real estate — residential mortgage and home equity
    26,304       25,774       7,085       7,384       9,720  
Consumer
    8,374       4,741       2,793       2,287       2,657  
Leasing
    339       2,260             89       188  
 
                             
Total non-performing loans
  $ 197,139     $ 105,932     $ 53,745     $ 45,572     $ 30,892  
 
                             

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The following table summarizes the allocation of the allowance for loan losses by loan type:
                                                                                 
    December 31  
    2008     2007     2006     2005     2004  
    (dollars in thousands)  
            % of             % of             % of             % of             % of  
            Loans             Loans             Loans in             Loans in             Loans in  
          In Each           In Each           Each           Each           Each  
    Allowance     Category     Allowance     Category     Allowance     Category     Allowance     Category     Allowance     Category  
Comm’l —financial & agricultural
  $ 66,147       30.2 %   $ 53,194       30.6 %   $ 52,942       28.6 %   $ 52,379       28.2 %   $ 43,207       30.1 %
Real estate — mortgage
    82,477       66.0       35,584       64.2       37,197       65.5       17,602       64.7       19,784       62.5  
Consumer, leasing & other
    8,167       3.8       8,142       5.2       6,475       5.9       7,935       7.1       16,289       7.4  
Unallocated
    17,155             10,627             10,270             14,931             10,347        
 
                                                           
Total
  $ 173,946       100.0 %   $ 107,547       100.0 %   $ 106,884       100.0 %   $ 92,847       100.0 %   $ 89,627       100.0 %
 
                                                           
Non-performing assets increased to $219.0 million, or 1.35% of total assets, as of December 31, 2008, from $120.9 million, or 0.76% of total assets, as of December 31, 2007.
Non-performing loans increased $91.2 million, or 86.1%, due to increases in non-performing construction loans ($49.2 million, or 158.9%), commercial mortgages ($27.2 million, or 187.6%) and commercial loans ($12.6 million, or 45.4%). The increase in construction loans was due to residential real estate developers, specifically in the Corporation’s Maryland and Virginia markets, who have been severely impacted by declining demand for residential housing. The increase in non-performing commercial and commercial mortgage loans was due to worsening general economic conditions, with increases across most industries and geographical areas.
The $21.9 million balance of other real estate owned as of December 31, 2008 was primarily due to foreclosures on repurchased residential mortgage loans, which contributed $15.9 million to the balance of other real estate owned.
The Corporation’s net charge-offs for 2008 increased at levels consistent with the increase in non-performing assets. Geographically, these charge-offs were spread throughout the Corporation’s footprint. In comparison to 2007, net charge-offs increased $42.0 million, or 430.9%. Net charge-offs as a percentage of average loans were 0.45% in 2008, a 36 basis point increase from 0.09% in 2007. Of the $56.9 million of gross charge-offs in 2008, $25.6 million were the result of individual charge-offs greater than $1.0 million, including $17.1 million related to residential construction and land development loans, $5.7 million related to commercial loans and $2.8 related to leases of commercial equipment.
As a result of the significant increases in non-performing loans and net charge-offs detailed above, the provision for loan losses increased $104.6 million, or 694.2%, from $15.1 million in 2007 to $119.6 million in 2008.
The provision for loan losses is determined by the allowance allocation process, whereby an estimated “need” is allocated to impaired loans as defined by the Financial Accounting Standards Board’s (FASB) Statement of Financial Accounting Standards No. 114, “Accounting by Creditors for Impairment of a Loan” (Statement 114), or to pools of loans under Statement of Financial Accounting Standards No. 5, “Accounting for Contingencies” (Statement 5). The allocation is based on risk factors, collateral levels, economic conditions and other relevant factors, as appropriate. The Corporation also maintains an unallocated allowance, which was approximately 10% as of December 31, 2008. The unallocated allowance is used to cover any factors or conditions that might exist at the balance sheet date, but are not specifically identifiable. Management believes such an unallocated allowance is reasonable and appropriate as the estimates used in the allocation process are inherently imprecise. See additional disclosures in Note A, “Summary of Significant Accounting Policies”, in the Notes to Consolidated Financial Statements and “Critical Accounting Policies”, in Management’s Discussion. Management believes that the allowance for loan losses balance of $173.9 million as of December 31, 2008 is sufficient to cover losses inherent in the loan portfolio on that date and is appropriate based on applicable accounting standards.

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Other Income and Expenses
2008 vs. 2007
Other Income

The following table presents the components of other income for the past two years:
                                 
                    Increase (decrease)  
    2008     2007     $     %  
            (dollars in thousands)          
Service charges on deposit accounts
  $ 61,640     $ 46,500     $ 15,140       32.6 %
Other service charges and fees
    36,247       32,151       4,096       12.7  
Investment management and trust services
    32,734       38,665       (5,931 )     (15.3 )
Gain on sale of credit card portfolio
    13,910             13,910       N/A  
Gains on sale of mortgage loans
    10,332       14,294       (3,962 )     (27.7 )
Credit card servicing income
    3,587             3,587       N/A  
Other
    10,847       14,674       (3,827 )     (26.1 )
 
                       
Total, excluding investment securities (losses) gains
    169,297       146,284       23,013       15.7  
Investment securities (losses) gains
    (58,241 )     1,740       (59,981 )     N/M  
 
                       
Total
  $ 111,056     $ 148,024     $ (36,968 )     (25.0 %)
 
                       
 
    N/A — Not Applicable.
N/M — Not Meaningful.
The increase in service charges on deposit accounts was primarily due to an increase in overdraft fees of $13.0 million, or 58.1%, and an increase in cash management fees of $1.7 million, or 15.1%. The increase in overdraft fees was mainly due to a new overdraft program that was introduced in November 2007. The increase in cash management fees was due to increased sales during 2007, resulting in a higher revenue stream in 2008.
The $4.1 million, or 12.7%, increase in other service charges and fees was due to a $2.7 million, or 63.2%, increase in foreign currency processing revenue, due primarily to an increase in volume, a $1.1 million, or 12.5%, increase in debit card fees, also due to increased volumes, and a $658,000, or 12.5%, increase in letter of credit fees.
The decrease in investment management and trust services income was primarily due to a $4.9 million, or 38.2%, decrease in brokerage revenue. During 2008, the Corporation began transitioning its brokerage business from a transaction-based model to a relationship model, which generates fees based on the values of assets under management rather than transaction volume. This transition had a negative impact on brokerage revenue due to expected business disruptions. The negative performance of equity markets also contributed to the decrease in investment management and trust services income.
The decreases in gains on sale of mortgage loans resulted from lower sales volumes. Total loans sold were $648.1 million in 2008 and $1.3 billion in 2007, mainly due to the exit from the national wholesale residential mortgage business in 2007.
The $3.6 million of credit card servicing income was related to income earned subsequent to the Corporation’s April 2008 credit card portfolio sale. Under a separate agreement entered into with the purchaser, the Corporation receives fee income for each new account originated and a percentage of the revenue earned on both new accounts and accounts sold.
The $3.8 million decrease in other income was primarily due to a $2.1 million gain related to the resolution of litigation and the sale of certain assets between the Corporation and an unaffiliated bank and a $700,000 gain related to the redemption of a partnership interest, both recorded in 2007. In 2008, the Corporation recorded a $1.0 million mortgage servicing rights impairment charge as a reduction to servicing income. For additional details related to this impairment, see Note G, “Mortgage Servicing Rights” in the Notes to Consolidated Financial Statements.
Investment securities losses of $58.2 million for 2008 were primarily due to charges to recognize other-than-temporary impairment of $43.1 million related to financial institution stocks, $20.7 million related to debt securities and $1.5 million for other equity securities.

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In addition, the Corporation recorded a $2.7 million loss related to the write-off of a collaterialized mortgage obligation that was delivered as collateral for interest rate swaps with a failed financial institution. The recovery of this asset is contingent upon the outcome of bankruptcy proceedings. These impairment charges were offset by $4.8 million in gains from the redemption of Class B shares in connection with Visa, Inc.’s (Visa) initial public offering and gains on the sale of MasterCard, Incorporated shares, in addition to net gains of $2.9 million and $2.1 million on the sale of equity securities and debt securities, respectively.
Other Expenses

The following table presents the components of other expenses for each of the past two years:
                                 
                    Increase (decrease)  
    2008     2007     $     %  
            (dollars in thousands)          
Salaries and employee benefits
  $ 213,557     $ 217,526     $ (3,969 )     (1.8 %)
Net occupancy expense
    42,239       39,965       2,274       5.7  
Operating risk loss
    24,308       27,229       (2,921 )     (10.7 )
Equipment expense
    13,332       13,892       (560 )     (4.0 )
Marketing
    13,267       11,334       1,933       17.1  
Data processing
    12,813       12,755       58       0.5  
Telecommunications
    8,172       8,094       78       1.0  
Professional fees
    7,618       7,277       341       4.7  
Intangible amortization
    7,162       8,334       (1,172 )     (14.1 )
Supplies
    5,773       5,825       (52 )     (0.9 )
Postage
    5,474       5,312       162       3.0  
FDIC insurance premiums
    4,562       1,808       2,754       152.3  
Goodwill impairment
    90,000             90,000       N/A  
Other
    48,348       46,104       2,244       4.9  
 
                       
Total
  $ 496,625     $ 405,455     $ 91,170       22.5 %
 
                       
 
    N/A — Not Applicable.
Salaries and employee benefits decreased $4.0 million, or 1.8%, with salaries decreasing $1.1 million, or 0.6%, and benefits decreasing $2.9 million, or 7.1%.
The decrease in salaries was due to staff reductions that were made as part of a corporate-wide workforce management and centralization initiative that began in 2007 and a decrease in stock-based compensation, offset by normal merit increases. Average full-time equivalent employees decreased from 3,840 in 2007 to 3,660 in 2008.
Employee benefits decreased $2.9 million, or 7.1%, due to a $2.0 million reduction associated with the curtailment of the Corporation’s defined benefit pension plan and a net decrease in expenses for the Corporation’s retirement plans as a result of changes in contribution formulas in 2008. Also contributing to the decrease was a reduction in severance expenses.
Net occupancy expense increased $2.3 million, or 5.7%. The increase was due to additional expenses related to rental, maintenance, utility and depreciation of real property as a result of growth in the branch network during 2008 in comparison to 2007. The Corporation added 5 full service branches to its network in both 2008 and 2007.
Included within operating risk loss were charges recorded for losses on the actual and potential repurchase of residential mortgage and home equity loans that had been originated and sold in the secondary market and losses related to the Corporation’s decision to purchase illiquid ARCs from customer accounts. The $2.9 million, or 10.7%, decrease in operating risk loss was due to a $22.8 million decrease in losses on the actual and potential repurchase of residential mortgage and home equity loans, offset by $19.8 million of charges, recorded in 2008, related to the Corporation’s guarantee to purchase ARCs from customer accounts. See Note O, “Commitments and Contingencies” in the Notes to Consolidated Financial Statements for additional information.
The $560,000 decrease in equipment expense and the $1.2 million decrease in intangible amortization were due to both equipment and intangible assets becoming fully depreciated and amortized during 2008. The $1.9 million increase in marketing expenses was due to deposit promotional campaigns, new branch promotions and customer service initiatives undertaken during 2008.

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The $2.8 million increase in Federal Deposit Insurance Corporation (FDIC) insurance premiums was due to the expiration of one-time credits and an increase in insured deposits. In 2008, gross FDIC insurance premiums were $7.0 million, reduced by $2.4 million of one-time credits. In 2007, gross FDIC insurance premiums were $6.7 million, reduced by $4.9 million of one-time credits. The FDIC adjusted its insurance assessment rates for 2009. Based on the estimated level of insured deposits and the current 2009 assessment rates, the Corporation expects to incur approximately $14 million of FDIC insurance premiums in 2009, net of one-time credits. In addition, the FDIC has adopted an interim rule imposing an emergency special assessment of 20 basis points on insured deposits. If this interim rule is implemented, the Corporation could incur additional FDIC insurance premiums of approximately $20 million in 2009.
The $2.2 million, or 4.9%, increase in other expenses was due to a $5.2 million increase in costs associated with the maintenance and disposition of foreclosed real estate and a $2.9 million increase in consulting fees, primarily associated with new information technology initiatives. Offsetting these increases was a $2.9 million decrease in other expenses due to the reversal of litigation reserves associated with the Corporation’s share of indemnification liabilities with Visa, which were no longer necessary as a result of Visa’s initial public offering in 2008, and a $2.7 million decrease in state taxes due to the consolidation of certain subsidiary banks in 2007 and 2008.
2007 vs. 2006
Other Income
Service charges on deposit accounts increased $2.7 million, or 6.2%. The increase in service charges on deposit accounts was due to increases of $1.5 million and $1.8 million in cash management fees and overdraft fees, respectively, offset by a $591,000 decrease in other service charges earned on both business and personal deposit accounts. The increase in overdraft fees was partially due to a new overdraft program which began in November 2007. Investment management and trust services increased $1.2 million, or 3.3%. The increase in investment management and trust services was primarily due to trust revenue ($1.4 million, or 5.9%), offset by a decrease in brokerage revenue of $206,000, or 1.6%. The increase in trust revenue was due to improvements in equity markets increasing the values of assets under management.
Other service charges and fees grew $5.4 million, or 20.0%, led by an increase of $3.0 million in foreign currency processing revenue as a result of the acquisition of a foreign currency processing company at the end of 2006, a $1.2 million, or 15.9%, increase in debit card fees and an increase in merchant fees of $664,000, or 9.7%. Both debit card fees and merchant fees increased as a result of growth in transaction volume.
Gains on sale of mortgage loans decreased $6.8 million, or 32.2%, due to lower sales volumes, offset by an increase on the spread on sales of 3 basis points, or 2.9%. Total loans sold were $1.3 billion in 2007 and $2.0 billion in 2006. Of the $679.4 million, or 34.9%, decrease, $636.4 million occurred mainly due to the Corporation’s exit from the national wholesale residential mortgage business.
Other income increased $1.3 million, or 10.0%. The increase in other income was primarily due to a $2.1 million gain related to the resolution of litigation and the sale of certain assets between the Corporation and an unaffiliated bank, offset by lower gains on sales of bank facilities in 2007.
Investment securities gains decreased $5.7 million, or 76.6%, in 2007. Investment securities gains, net of realized losses, included realized gains on the sale of equity securities of $1.6 million in 2007, compared to $7.0 million in 2006, and net gains of $96,000 on the sales of available for sale debt securities in 2007, compared to $474,000 in 2006.
Other Expenses
Salaries and employee benefits increased $3.6 million, or 1.7%, with salaries increasing $1.6 million, or 0.9%, and benefits increasing $2.0 million, or 5.3%.
The slight increase in salaries was due to lower salary deferrals as residential mortgage origination volumes declined, offset by reductions in bonus expense. Full-time and part-time salaries decreased by $619,000, or 0.4%, due to normal salary increases being offset by decreases from the Corporation’s Resource Bank subsidiary and other staff reductions made as part of a corporate-wide workforce management and centralization initiative. Average full-time equivalent employees decreased from 4,020 in 2006 to 3,840 in 2007. As of December 31, 2007, full-time equivalent employees were approximately 3,680.

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Employee benefits increased $2.0 million, or 5.3%, primarily due to $2.0 million of severance expense related to staff reductions and a $578,000 increase in healthcare costs, offset by reduced retirement expense as a result of the curtailment of the defined benefit pension plan during 2007.
Net occupancy expense increased $3.5 million, or 9.5%. The increase in net occupancy expense was due to additional expenses related to rental, maintenance, utility and depreciation of real property as a result of growth in the branch network during 2007 in comparison to 2006, as well as the impact of the Columbia Bank acquisition. During 2007 and 2006, the Corporation added 5 and 11 full service branches to its network, respectively.
Operating risk loss increased $22.4 million, or 465.2%. The increase in operating risk loss was due to $25.1 million of charges recorded during 2007 for losses on the actual and potential repurchase of residential mortgage and home equity loans that had been originated and sold in the secondary market. Professional fees increased $2.2 million, or 43.9%, due to fees incurred for an independent review related to repurchases of previously sold loans, greater reductions in legal fees during 2006 related to recoveries of non-accrual loans, and an increase in other unrelated legal fees.
The $6.6 million, or 16.0%, increase in other expenses included the following: $1.5 million of charges for the Corporation’s subsidiary banks’ share, as members of Visa USA, of settled and pending litigation incurred by Visa in various lawsuits, a $1.1 million charge for the write-off of trade name intangible assets resulting from the consolidation of certain bank subsidiaries, a $1.1 million increase in the provision for customer reward points earned on credit cards, a $1.3 million increase in costs associated with the disposition and maintenance of foreclosed real estate, $570,000 in costs associated with the closure of national wholesale residential mortgage offices and a $504,000 unfavorable net impact of the change in fair values of derivative financial instruments. These increases were offset by a $1.6 million expense related to the settlement of a lawsuit during 2006.
Income Taxes
Income taxes decreased $39.0 million, or 61.3%, in 2008 and decreased $16.9 million, or 21.0%, in 2007. The Corporation’s effective tax rate (income taxes divided by income before income taxes) was 129.6%, 29.4% and 30.2% in 2008, 2007 and 2006, respectively.
The effective tax rate for 2008 was significantly impacted by the $90.0 million goodwill impairment charge, which is not deductible for income tax purposes. Excluding the impact of the goodwill charge, the Corporation’s effective tax rate for 2008 was 22.6%. This adjusted effective rate for 2008 is lower than the prior years’ effective tax rates due to non-taxable income and tax credits having a larger impact on the effective rate due to the decrease in income before taxes.
The Corporation’s effective tax rates are generally lower than the 35% Federal statutory rate due to tax-exempt interest income and investments in low and moderate income housing partnerships (LIH Investments), which generate Federal tax credits. Net credits associated with LIH investments were $3.9 million, $3.7 million and $3.9 million in 2008, 2007 and 2006, respectively.
For additional information regarding income taxes, see Note K, “Income Taxes”, in the Notes to Consolidated Financial Statements.

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FINANCIAL CONDITION
The table below presents condensed consolidated ending balance sheets for the Corporation.
                                 
    December 31     Increase (decrease)  
    2008     2007     $     %  
            (dollars in thousands)          
Assets:
                               
 
                               
Cash and due from banks
  $ 331,164     $ 381,283     $ (50,119 )     (13.1 %)
Other earning assets
    117,550       125,137       (7,587 )     (6.1 )
Investment securities
    2,724,841       3,153,552       (428,711 )     (13.6 )
Loans, net of allowance
    11,868,674       11,096,877       771,797       7.0  
Premises and equipment
    202,657       193,296       9,361       4.8  
Goodwill and intangible assets
    557,833       654,908       (97,075 )     (14.8 )
Other assets
    382,387       318,045       64,342       20.2  
 
                       
 
                               
Total Assets
  $ 16,185,106     $ 15,923,098     $ 262,008       1.6 %
 
                       
 
                               
Liabilities and Shareholders’ Equity:
                               
 
                               
Deposits
  $ 10,551,916     $ 10,105,445     $ 446,471       4.4 %
Short-term borrowings
    1,762,770       2,383,944       (621,174 )     (26.1 )
Long-term debt
    1,787,797       1,642,133       145,664       8.9  
Other liabilities
    222,976       216,656       6,320       2.9  
 
                       
 
                               
Total Liabilities
    14,325,459       14,348,178       (22,719 )     (0.2 )
 
                       
 
                               
Shareholders’ equity
    1,859,647       1,574,920       284,727       18.1  
 
                       
 
                               
Total Liabilities and Shareholders’ Equity
  $ 16,185,106     $ 15,923,098     $ 262,008       1.6 %
 
                       
Total assets increased $262.0 million, or 1.6%, to $16.2 billion as of December 31, 2008, from $15.9 billion as of December 31, 2007. Total loans, net of the allowance for loan losses, increased $771.8 million, or 7.0%, while investment securities decreased $428.7 million, or 13.6%. Total liabilities decreased $22.7 million, or 0.2%, due to a net decrease in short and long-term borrowings of $475.5 million, or 11.8%, offset by a $446.5 million, or 4.4% increase in deposits. Shareholders’ equity increased $284.7 million, or 18.1%, mainly as a result of the issuance of preferred stock to the UST.

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Loans
The following table presents loans outstanding, by type, as of the dates shown:
                                         
    December 31  
    2008     2007     2006     2005     2004  
    (in thousands)  
Real-estate — commercial mortgage
  $ 4,017,075     $ 3,480,958     $ 3,202,706     $ 2,831,405     $ 2,461,016  
Commercial — industrial, financial and agricultural
    3,635,544       3,427,085       2,965,186       2,375,669       2,273,138  
Real-estate — home equity
    1,695,671       1,501,231       1,455,439       1,205,523       1,107,067  
Real-estate — construction
    1,268,955       1,366,923       1,440,180       851,555       595,567  
Real-estate — residential mortgage
    972,797       848,901       696,568       567,629       543,072  
Consumer
    365,419       500,708       523,066       520,098       488,059  
Leasing and other
    97,687       89,383       100,711       79,738       72,795  
 
                             
Gross loans
    12,053,148       11,215,189       10,383,856       8,431,617       7,540,714  
Unearned income
    (10,528 )     (10,765 )     (9,533 )     (6,889 )     (6,799 )
 
                             
Loans, net of unearned income
  $ 12,042,620     $ 11,204,424     $ 10,374,323     $ 8,424,728     $ 7,533,915  
 
                             
Total loans, net of unearned income, increased $838.2 million, or 7.5%, in 2008 primarily due to an increase in commercial mortgage loans of $536.1 million, or 15.4%, and an increase in commercial loans of $208.5 million, or 6.1%. The increase in commercial mortgage loans was in floating and adjustable rate loan products, while the increase in commercial loans was in fixed, floating and adjustable rate loans. Also contributing to the increase in loans were increases in home equity loans of $194.4 million, or 13.0%, and residential mortgages of $123.9 million, or 14.6%. The increase in home equity loans was due to both new lines of credit and increases in borrowings outstanding on existing lines of credit. The increase in residential mortgages was primarily in traditional adjustable rate loans. These increases were offset by a decrease in construction loans of $98.0 million, or 7.2%, and a decrease in consumer loans of $135.3 million, or 27.0%. The decrease in construction loans was related to the slowdown in residential housing construction and the decrease in consumer loans was due primarily to the Corporation’s sale of its credit card portfolio.
Approximately $5.3 billion, or 43.9%, of the Corporation’s loan portfolio was in commercial mortgage and construction loans as of December 31, 2008. While the Corporation does not have a concentration of credit risk with any single borrower, industry or geographical location, the performance of real estate markets and general economic conditions have adversely impacted the performance of these loans.
Investment Securities
The following table presents the carrying amount of investment securities held to maturity (HTM) and available for sale (AFS) as of the dates shown:
                                                                         
    December 31  
    2008     2007     2006  
    HTM     AFS     Total     HTM     AFS     Total     HTM     AFS     Total  
    (in thousands)  
U.S. Government securities
  $     $ 14,628     $ 14,628     $     $ 14,536     $ 14,536     $     $ 17,066     $ 17,066  
U.S. Government sponsored agency securities
    6,782       77,002       83,784       6,478       202,523       209,001       7,648       288,465       296,113  
State and municipal
    825       523,536       524,361       1,120       521,538       522,658       1,262       488,279       489,541  
Corporate debt securities
    25       119,894       119,919       25       165,982       166,007       75       70,637       70,712  
Collateralized mortgage obligations
          504,193       504,193             594,775       594,775             492,524       492,524  
Mortgage-backed securities
    2,004       1,141,351       1,143,355       2,662       1,452,188       1,454,850       3,539       1,343,107       1,346,646  
Auction rate securities (1)
          195,900       195,900                                      
 
                                                     
Total debt securities
    9,636       2,576,504       2,586,140       10,285       2,951,542       2,961,827       12,524       2,700,078       2,712,602  
Equity securities
          138,701       138,701             191,725       191,725             165,636       165,636  
 
                                                     
Total
  $ 9,636     $ 2,715,205     $ 2,724,841     $ 10,285     $ 3,143,267     $ 3,153,552     $ 12,524     $ 2,865,714     $ 2,878,238  
 
                                                     
 
(1)   See Note O, “Commitments and Contingencies” in the Notes to Consolidated Financial Statements for additional details related to auction rate securities.

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Total investment securities decreased $428.7 million, or 13.6%, to $2.7 billion as of December 31, 2008. During 2008, proceeds from maturities and sales were not fully reinvested in the portfolio based on balance sheet management considerations, such as the Corporation’s overall funding position and the current and expected interest rate environment. In addition, the Corporation “pre-purchased” investments in late 2007 based on the expected cash flows to be generated from maturing securities over an approximate six-month period. Finally, the Corporation sold approximately $180 million of securities at the end of the second quarter of 2008 in order to fund balance sheet growth and to manage interest rate risk. The impact of the above factors was partially offset by $224.0 million of ARCs that were purchased from customers during 2008. See Note O, “Commitments and Contingencies” in the Notes to the Consolidated Financial Statements for additional details.
The Corporation classified 99.6% of its investment portfolio as available for sale as of December 31, 2008 and, as such, these investments were recorded at their estimated fair values. The net unrealized loss on available for sale investment securities decreased from $29.9 million as of December 31, 2007 to $3.9 million as of December 31, 2008, generally due to $65.3 million of other-than-temporary impairment charges recorded by the Corporation during 2008, offset by the overall increase in portfolio values due to interest rate changes on collaterialized mortgage obligations and mortgage-backed securities.
Other Assets
Cash and due from banks decreased $50.1 million, or 13.1%. Because of the daily fluctuations that result in the normal course of business, cash is more appropriately analyzed in terms of average balances. On an average balance basis for the month of December, cash and due from banks decreased $13.6 million, or 4.3%, from $319.7 million in 2007 to $306.1 million in 2008.
Other earning assets decreased $7.6 million, or 6.1%, primarily due to an $8.1 million, or 7.8%, decrease in loans held for sale. Premises and equipment increased $9.4 million, or 4.8%, to $202.7 million. The increase reflects additions primarily for the construction of new branch facilities and information technology hardware and software additions, offset by the sales of branch and office facilities during 2008. The Corporation incurred approximately $12.3 million of capital expenditures related to hardware and software for strategic information technology initiatives in 2008. The Corporation expects to incur an additional $1.0 million of capital expenditures related to these initiatives in 2009.
Goodwill and intangible assets decreased $97.1 million, or 14.8%. The decrease was due primarily to the $90.0 million goodwill impairment charge for the Columbia Bank reporting unit and $7.2 million of intangible amortization expense. See also Note F, “Goodwill and Intangible Assets”, in the Notes to Consolidated Financial Statements for additional information.
Other assets increased $64.3 million, or 20.2%, to $382.4 million. The increase was primarily due to a $45.9 million increase in deferred tax assets as other-than-temporary impairment losses on investment securities and increased loan loss provisions resulted in higher temporary differences, a $10.3 million increase in LIH investments and a $6.9 million increase in other real estate owned. These increases in other assets were offset by a decrease associated with a change in the funded status of Corporation’s defined benefit pension plan. As of December 31, 2007, the defined benefit pension plan was overfunded by $6.8 million, recorded as a component of other assets. As of December 31, 2008, the defined benefit pension plan’s underfunded status was $12.2 million as a result of a significant decrease in the fair value of plan assets, recorded as a component of other liabilities. See Note L, “Employee Benefit Plans”, in the Notes to Consolidated Financial Statements for additional information related to the Corporation’s defined benefit pension plan.
Deposits and Borrowings
Deposits increased $446.5 million, or 4.4%, to $10.6 billion as of December 31, 2008. During 2008, total demand deposits increased $5.7 million, or 0.2%, savings deposits decreased $120.8 million, or 5.7%, and time deposits increased $561.6 million, or 12.4%. The increase in time deposits resulted from a $502.1 million increase in customer certificates of deposit and a $59.5 million increase in brokered certificates of deposit. The majority of this increase occurred during the fourth quarter of 2008 as time deposit rates became more competitive to reduce the reliance on wholesale funding.
Short-term borrowings decreased $621.2 million, or 26.1%, primarily due to a $650.0 million decrease in FHLB overnight repurchase agreements and an $86.2 million decrease in short-term promissory notes, offset by a $90.3 million increase in Federal funds purchased. The decrease resulted from the aforementioned increase in time deposits as well as the December 2008 preferred stock issuance. Long-term debt increased $145.7 million, or 8.9%, primarily due to an increase in FHLB advances to fund loan growth.

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Other Liabilities
Other liabilities increased $6.3 million, or 2.9%. The increase was primarily attributable to a $12.2 million increase associated with the underfunded status of the Corporation’s defined benefit pension plan as of December 31, 2008, an $8.7 million increase associated with the Corporation’s guarantee to purchase illiquid ARCs from customer accounts, a $3.7 million increase associated with deferred revenue related to a change in third-party administrators for the Corporation’s brokerage business in 2008, a $3.2 million increase for amounts payable on LIH investments and a $1.5 million increase in the reserve for unfunded lending commitments. These increases to other liabilities were offset by a $15.6 million decrease in accrued interest payable, related to a decrease in average interest rates in 2008, and a $6.7 million decrease in the reserve for potential repurchases of previously sold residential mortgage and home equity loans.
Shareholders’ Equity
Total shareholders’ equity increased $284.7 million, or 18.1%, to $1.9 billion, or 11.5% of total assets as of December 31, 2008. Increases resulted from the issuance of $376.5 million of preferred stock and common stock warrants, to the UST under the CPP in December 2008 and $13.2 million of common stock issuances. These increases were offset by $104.6 million of dividends paid to shareholders. Changes in shareholders’ equity are summarized in the consolidated statements of shareholders’ equity and comprehensive income (loss).
The Corporation and its subsidiary banks are subject to regulatory capital requirements administered by various banking regulators. Failure to meet minimum capital requirements can initiate certain actions by regulators that could have a material effect on the Corporation’s financial statements. The regulations require that banks maintain minimum amounts and ratios of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and Tier I capital to average assets (as defined). As of December 31, 2008, the Corporation and each of its bank subsidiaries met the minimum capital requirements. In addition, all of the Corporation’s bank subsidiaries’ capital ratios exceeded the amounts required to be considered “well capitalized” as defined in the regulations. See also Note J, “Regulatory Matters”, in the Notes to Consolidated Financial Statements.
On December 23, 2008, the Corporation entered into a Securities Purchase Agreement with the UST pursuant to which the Corporation sold to the UST for an aggregate purchase price of $376.5 million, 376,500 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A (preferred stock), par value $1,000 per share, and warrants to purchase up to 5.5 million shares of common stock, par value $2.50 per share. As a condition under the CPP, without the consent of the UST, the Corporation’s share repurchases are limited to purchases in connection with the administration of any employee benefit plan, including purchases to offset share dilution in connection with any such plans. This restriction is effective until December 2011 or until the UST no longer owns any of the Corporation’s preferred shares issued under the CPP. The Corporation’s preferred stock is included as a component of Tier 1 capital in accordance with regulatory capital requirements.
The preferred stock ranks senior to the Corporation’s common shares and pays a compounding cumulative dividend at a rate of 5% per year for the first five years, and 9% per year thereafter. Dividends are payable quarterly on February 15th, May 15th, August 15th and November 15th. The Corporation is prohibited from paying any dividend with respect to shares of common stock or repurchasing or redeeming any shares of the Corporation’s common shares in any quarter unless all accrued and unpaid dividends are paid on the preferred stock for all past dividend periods (including the latest completed dividend period), subject to certain limited exceptions. In addition, without the consent of the UST, the Corporation is prohibited from declaring or paying any cash dividends on common shares in excess of $0.15 per share, which was the last quarterly cash dividend per share declared prior to October 14, 2008. The preferred stock is non-voting, other than class voting rights on matters that could adversely affect the preferred stock. The preferred stock is callable at par after three years. Prior to the end of three years, the preferred stock may be redeemed with the proceeds from one or more qualified equity offerings of any Tier 1 perpetual preferred or common stock of at least $94.1 million (a Qualified Equity Offering). The UST may also transfer the preferred stock to a third-party at any time.
The 5.5 million of common stock warrants issued to the UST have a term of 10 years and are exercisable at any time, in whole or in part, at an exercise price of $10.25 per share (subject to certain anti-dilution adjustments). The UST may not exercise the warrants for, or transfer the warrants with respect to, more than half of the initial shares of common stock underlying the warrants prior to the earlier of (i) the date on which the Corporation receives aggregate gross proceeds of not less than $376.5 million from one or more Qualified Equity Offerings and (ii) December 31, 2009. The number of shares to be delivered upon settlement of the warrants will be reduced by 50% if the Company receives aggregate gross proceeds of at least 100% of the aggregate liquidation preference of the preferred stock from one or more Qualified Equity Offerings prior to December 31, 2009.

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The $376.5 million of proceeds was allocated to the preferred stock and the warrants based on their relative fair values at issuance ($368.9 million was allocated to the preferred stock and $7.6 million to the warrants). The difference between the initial value allocated to the preferred stock of approximately $368.9 million and the liquidation value of $376.5 million (the preferred stock discount) will be charged to retained earnings over the first five years of the contract as an adjustment to the dividend yield using the effective yield method.
Contractual Obligations and Off-Balance Sheet Arrangements
The Corporation has various financial obligations that require future cash payments. These obligations include the payment of liabilities recorded on the Corporation’s consolidated balance sheet as well as contractual obligations for purchased services or for operating leases. The following table summarizes significant contractual obligations to third parties, by type, that were fixed and determinable as of December 31, 2008:
                                         
    Payments Due In
    One Year   One to   Three to   Over Five    
    or Less   Three Years   Five Years   Years   Total
              (in thousands)                
Deposits with no stated maturity (1)
  $ 5,453,799     $     $     $     $ 5,453,799  
Time deposits (2)
    3,827,384       1,012,469       210,623       47,641       5,098,117  
Short-term borrowings (3)
    1,762,770                         1,762,770  
Long-term debt (3)
    246,490       563,211       107,186       870,910       1,787,797  
Operating leases (4)
    13,602       22,948       17,454       46,796       100,800  
Purchase obligations (5)
    19,585       19,735       905             40,225  
Uncertain tax positions (6)
    5,526                         5,526  
 
(1)   Includes demand deposits and savings accounts, which can be withdrawn by customers at any time.
 
(2)   See additional information regarding time deposits in Note H, “Deposits”, in the Notes to Consolidated Financial Statements.
 
(3)   See additional information regarding borrowings in Note I, “Short-Term Borrowings and Long-Term Debt”, in the Notes to Consolidated Financial Statements.
 
(4)   See additional information regarding operating leases in Note N, “Leases”, in the Notes to Consolidated Financial Statements.
 
(5)   Includes significant information technology, telecommunication and data processing outsourcing contracts. Variable obligations, such as those based on transaction volumes, are not included.
 
(6)   Includes accrued interest. See additional information related to uncertain tax positions in Note K, “Income Taxes” in the Notes to Consolidated Financial Statements.
In addition to the contractual obligations listed in the preceding table, the Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit, which involve, to varying degrees, elements of credit and interest rate risk that are not recognized on the consolidated balance sheets. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Standby letters of credit are conditional commitments issued to guarantee the financial or performance obligation of a customer to a third-party. Commitments and standby letters of credit do not necessarily represent future cash needs as they may expire without being drawn.
The following table presents the Corporation’s commitments to extend credit and letters of credit as of December 31, 2008 (in thousands):
         
Commercial mortgage, construction and land development
  $ 459,121  
Home equity
    886,693  
Credit card
    140  
Commercial and other
    2,014,545  
 
     
Total commitments to extend credit
  $ 3,360,499  
 
     
 
       
Standby letters of credit
  $ 789,804  
Commercial letters of credit
    37,620  
 
     
Total letters of credit
  $ 827,424  
 
     

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CRITICAL ACCOUNTING POLICIES
The following is a summary of those accounting policies that the Corporation considers to be most important to the portrayal of its financial condition and results of operations, as they require management’s most difficult judgments as a result of the need to make estimates about the effects of matters that are inherently uncertain.
Allowance for Credit Losses – The Corporation accounts for the credit risk associated with its lending activities through the 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 existing loan portfolio. The reserve for unfunded lending commitments represents management’s estimate of losses inherent in its unfunded loan commitments, the balance of which is included in other liabilities. The provision for loan losses is the periodic charge to earnings, which is necessary to adjust the allowance for credit losses to its proper balance. The Corporation assesses the adequacy of its allowance through a methodology that consists of the following:
  -   Identifying loans for individual review under Statement 114. In general, these consist of large balance commercial loans and commercial mortgages that are rated less than “satisfactory” based upon the Corporation’s internal credit-rating process.
 
  -   Assessing whether the loans identified for review under Statement 114 are “impaired”. That is, whether it is probable that all amounts will not be collected according to the contractual terms of the loan agreement.
 
  -   For loans reviewed under Statement 114, calculating the estimated fair value, using observable market prices, discounted cash flows or the value of the underlying collateral.
 
  -   Classifying all non-impaired large balance loans based on credit risk ratings and allocating an allowance for loan losses based on appropriate factors, including recent loss history for similar loans.
 
  -   Identifying all smaller balance homogeneous loans for evaluation collectively under the provisions of Statement 5. In general, these loans include residential mortgages, consumer loans, installment loans, commercial loans and commercial mortgages rated “satisfactory” or better, smaller balance commercial loans and mortgages and lease receivables.
 
  -   Statement 5 loans are segmented into groups with similar characteristics and an allowance for loan losses is allocated to each segment based on recent loss history and other relevant information.
 
  -   Reviewing the results to determine the appropriate balance of the allowance for credit losses. This review gives additional consideration to factors such as the mix of loans in the portfolio, the balance of the allowance relative to total loans and non-performing assets, trends in the overall risk profile of the portfolio, trends in delinquencies and non-accrual loans and local and national economic conditions.
 
  -   An unallocated allowance is maintained to recognize the inherent imprecision in estimating and measuring loss exposure.
 
  -   Documenting the results of its review in accordance with SAB 102.
The allowance review methodology is based on information known at the time of the review. Changes in factors underlying the assessment could have a material impact on the amount of the allowance that is necessary and the amount of provision to be charged against earnings. Such changes could impact future results.
Accounting for Business Combinations – The Corporation accounts for all business acquisitions using the purchase method of accounting as required by Statement of Financial Accounting Standards No. 141, “Business Combinations” (Statement 141). Purchase accounting requires the purchase price to be allocated to the estimated fair values of the assets acquired and liabilities assumed. It also requires assessing the existence of and, if necessary, assigning a value to certain intangible assets. The remaining excess purchase price over the fair value of net assets acquired is recorded as goodwill.
The purchase price is established as the value of securities issued for the acquisition, cash consideration paid and certain acquisition-related expenses. The fair values of assets acquired and liabilities assumed are typically established through appraisals, observable market values or discounted cash flows. Management has engaged independent third-party valuation experts to assist in valuing certain assets, particularly intangibles. Other assets and liabilities are generally valued using the Corporation’s internal asset/liability modeling system. The assumptions used and the final valuations, whether prepared internally or by a third-party, are reviewed by management. Due to the complexity of purchase accounting, final determinations of values can be time consuming and, occasionally, amounts included in the Corporation’s consolidated balance sheets and consolidated statements of operations are based on preliminary estimates of value.

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All acquisitions consummated with an effective date of January 1, 2009 or later will be accounted for under the requirements of Statement of Financial Accounting Standards No. 141 (revised 2007), “Business Combinations” (Statement 141R). The statement establishes principles and requirements for how an acquirer: recognizes and measures in its financial statement the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree; recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.
Goodwill and Intangible Assets – Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (Statement 142) addresses the accounting for goodwill and intangible assets subsequent to acquisition. Intangible assets are amortized over their estimated lives. Some intangible assets have indefinite lives and are, therefore, not amortized. All intangible assets must be evaluated for impairment if certain events occur. Any impairment write-downs are recognized as expense on the consolidated statements of operations.
Goodwill is not amortized to expense, but is evaluated at least annually for impairment. The Corporation completes its annual goodwill impairment test as of October 31st of each year. The Corporation tests for impairment by first allocating its goodwill and other assets and liabilities, as necessary, to defined reporting units. A fair value is then determined for each reporting unit. If the fair values of the reporting units exceed their book values, no write-down of the recorded goodwill is necessary. If the fair values are less than the book values, an additional valuation procedure is necessary to assess the proper carrying value of the goodwill. In 2008, the Corporation recorded a $90.0 million goodwill impairment charge due to one of its defined reporting units failing the annual impairment test and based on the additional valuation procedures performed. The Corporation determined that no impairment write-offs were necessary during 2007 and 2006. For additional details related to the Corporation’s 2008 goodwill impairment, see Note F, “Goodwill and Intangible Assets” in the Notes to the Consolidated Financial Statements.
Business unit valuation is inherently subjective, with a number of factors based on assumptions and management judgments. Among these are future growth rates for the reporting units, selection of comparable market transactions, discount rates and earnings capitalization rates. Changes in assumptions and results due to economic conditions, industry factors and reporting unit performance and cash flow projections could result in different assessments of the fair values of reporting units and could result in impairment charges.
If an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount, an impairment test between annual tests is necessary. Such events may include adverse changes in legal factors or in the business climate, adverse actions by a regulator, unauthorized competition, the loss of key employees, or similar events. The Corporation has not performed an interim goodwill impairment test during the past three years as no such events have occurred. However, such an interim test could be necessary in the future.
Income Taxes – The provision for income taxes is based upon income before income taxes, adjusted for the effect of certain tax-exempt income and non-deductible expenses. In addition, certain items of income and expense are reported in different periods for financial reporting and tax return purposes. The tax effects of these temporary differences are recognized currently in the deferred income tax provision or benefit. Deferred tax assets or liabilities are computed based on the difference between the financial statement and income tax bases of assets and liabilities using the applicable enacted marginal tax rate.
The Corporation must also evaluate the likelihood that deferred tax assets will be recovered from future taxable income. If any such assets are more likely than not to not be recovered, a valuation allowance must be recognized. The Corporation recorded a valuation allowance of $7.5 million as of December 31, 2008 for certain state net operating losses that are not expected to be recovered. The assessment of the carrying value of deferred tax assets is based on certain assumptions, changes in which could have a material impact on the Corporation’s consolidated financial statements.
The Corporation accounts for uncertain tax positions as required by FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes”. Specifically, the interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.
See also Note K, “Income Taxes”, in the Notes to Consolidated Financial Statements.

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Fair Value Measurements On January 1, 2008, the Corporation adopted the provisions of Statement of Financial Accounting Standards No. 157, “Fair Value Measurement” (Statement 157) for all assets and liabilities required to be measured at fair value on a recurring basis and all financial assets and liabilities measured at fair value on a nonrecurring basis. Statement 157 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into the following three categories (from highest to lowest priority):
    Level 1 – Inputs that represent quoted prices for identical instruments in active markets.
 
    Level 2 – Inputs that represent quoted prices for similar instruments in active markets, or quoted prices for identical instruments in non-active markets. Also includes valuation techniques whose inputs are derived principally from observable market data other than quoted prices, such as interest rates or other market-corroborated means.
 
    Level 3 – Inputs that are largely unobservable, as little or no market data exists for the instrument being valued.
As required by Statement 157, the Corporation has categorized all financial assets and liabilities and all nonfinancial assets and liabilities required to be measured at fair value on a recurring basis into the above three levels. In addition, the Corporation has categorized all financial assets and liabilities measured at fair value on a nonrecurring basis into the above three levels. See Note P, “Fair Value Measurements” in the Notes to Consolidated Financial Statements for the disclosures required by Statement 157.
In October 2008, the FASB issued Staff Position No. 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active” (FSP 157-3). FSP 157-3 clarifies the application of Statement 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. FSP 157-3 was effective upon issuance for the Corporation. The Corporation applied the provisions of FSP 157-3 to certain debt security investments for which there was no active market.
The determination of fair value for assets and liabilities categorized as Level 3 assets requires a great deal of subjectivity due to the use of unobservable inputs. In addition, determining when a market is no longer active and placing little or no reliance on distressed market prices requires the use of management’s judgment. The need for greater management judgment in determining fair values for Level 3 assets and liabilities has further been heightened by the current challenging economic conditions, which have resulted in a great deal of volatility in the fair values of investment securities.
The Corporation engages third-party valuation experts to assist in valuing most of the assets and liabilities measured at fair value on a recurring basis which are classified as Level 2 or Level 3 items, including: available-for-sale investment securities, guarantee liabilities associated with the Corporation’s commitment to purchase ARCs from customer accounts and hedged certificates of deposits and their related interest rate swaps.
Recent Accounting Pronouncements
In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (Statement 161). Statement 161 establishes the disclosure requirements for derivative instruments and hedging activities, including disclosure of information that should enable users of financial information to understand how and why a company uses derivative instruments, how derivative instruments and related hedged items are accounted for, and how derivative instruments and related hedged items affect a company’s financial position, financial performance, and cash flows. The standard is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, or the Corporation’s March 31, 2009 quarterly report on Form 10-Q. The adoption of Statement 161 is not expected to have a material impact on the Corporation’s consolidated financial statements.
In September 2008, the FASB issued FASB Staff Position No. 133-1 and 45-4, “Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161”. This staff position requires companies who sell credit derivatives or issue financial guarantees to disclose information about these instruments to enable users of the financial statements to assess the potential effect of the instruments on the reporting entity’s financial position, financial performance and cash flows. The disclosure requirements of this staff position were effective for the Corporation on December 31, 2008, and impacted the Corporation’s disclosures related to guarantees subject to FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others – an interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34” (FIN 45), which include: standby and commercial letters of credit and ARC purchase guarantees. See Note O, “Commitments and Contingencies” in the Notes to Consolidated Financial Statements for disclosures related to this staff position.
In June 2008, the FASB ratified Emerging Issues Task Force (EITF) Issue No. 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (EITF 03-6-1). EITF 03-6-1 requires companies to include

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participating share-based payment transactions, prior to vesting, in the earnings allocation in computing earnings per share. EITF 03-6-1 defines participating share-based payment awards as those that contain nonforfeitable rights to dividends, even if granted prior to when an award vests. EITF 03-6-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, or the Corporation’s March 31, 2009 quarterly report on Form 10-Q. The adoption of EITF 03-6-1 is not expected to impact the Corporation’s earning per share computations.
In December 2008, the FASB issued FASB Staff Position No. FAS 140-4 and FIN 46(R)-8, “Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities”. This staff position requires companies to disclose additional information about transfers of financial assets and interests in variable interest entities, including the following: a transferor’s continuing involvement in financial assets that it has transferred in a securitization or asset-backed financing arrangement, the nature of any restrictions and the carrying amounts of any assets held by an entity that relate to a transferred asset and how servicing assets and liabilities are reported under Statement 140. This staff position is effective for the first reporting period ending after December 15, 2008, or December 31, 2008 for the Corporation. See Note G, “Mortgage Servicing Rights” and Note I, “Short-term Borrowings and Long-term Debt” in the Notes to Consolidated Financial Statements for disclosures related to this staff position.
In December 2008, the FASB issued FASB Staff Position No. FAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets”. This staff position amends FASB Statement No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Postretirement Benefits”, to provide guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plans. This staff position is effective for disclosures about plan assets provided for fiscal years ending after December 15, 2009, or December 31, 2009 for the Corporation. The adoption of this staff position will impact future disclosures related to the Corporation’s defined benefit pension plan.
In January 2009, the FASB issued FASB Staff Position EITF 99-20-1, “Amendments to the Impairment Guidance in EITF Issue No. 99-20” (FSP EITF 99-20-1). This staff position amends the impairment guidance in EITF No. 99-20, “Recognition of Interest Income and Impairment on Purchased Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets”, to achieve more consistent determination of whether an other-than-temporary impairment has occurred for certain debt securities. Specifically, this staff position provides that when determining whether an impairment of a securitized financial asset is other-than-temporary the holder of that instrument must assess whether there has been a probable adverse change in expected cash flows and is not required to use “market participant” assumptions in that determination. FSP EITF 99-20-1 is effective for reporting periods ending after December 15, 2008, or December 31, 2008 for the Corporation. The application of this staff position did not impact the Corporation’s consolidated financial statements.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the exposure to economic loss that arises from changes in the values of certain financial instruments. The types of market risk exposures generally faced by financial institutions include interest rate risk, equity market price risk, debt security market price risk, foreign currency risk and commodity price risk. Due to the nature of its operations, only equity and debt market price risk and interest rate risk are significant to the Corporation.
Equity Market Price Risk
Equity market price risk is the risk that changes in the values of equity investments could have a material impact on the financial position or results of operations of the Corporation. As of December 31, 2008, the Corporation’s equity investments consisted of FHLB and Federal Reserve Bank stock ($85.3 million), common stocks of publicly traded financial institutions ($43.4 million), and money market mutual funds and other equity investments ($10.0 million). The equity investments most susceptible to equity market price risk are the financial institutions stocks, which had an adjusted cost basis of $42.8 million and a fair value of $43.4 million as of December 31, 2008. Gross unrealized gains and losses in this portfolio were approximately $2.1 million and $1.5 million as of December 31, 2008, respectively.
Although the carrying value of financial institution stocks accounted for less than 0.3% of the Corporation’s total assets as of December 31, 2008, the Corporation has a history of realizing gains from this portfolio. However, significant declines in the values of financial institution stocks held in this portfolio have not only impacted the Corporation’s ability to realize gains on their sale in 2008 and 2007, but have also resulted in significant other-than-temporary impairment charges.
The Corporation has evaluated whether any unrealized losses on individual equity investments constituted other-than-temporary impairment, which would require a write-down through a charge to earnings. Based on the results of such evaluations, the Corporation recorded write-downs of $43.1 million in 2008, $292,000 in 2007, and $122,000 in 2006 for specific equity securities which were deemed to exhibit other-than-temporary impairment in value. In addition, the Corporation recorded other-than-temporary impairment charges of $1.2 million and $357,000 for a mutual fund investment and other government agency-sponsored stocks, respectively, in 2008. Additional impairment charges may be necessary depending upon the performance of the equity markets in general and the performance of the individual investments held by the Corporation. See also Note C, “Investment Securities”, in the Notes to Consolidated Financial Statements.
Management continuously monitors the fair value of its equity investments and evaluates current market conditions and operating results of the companies. Periodic sale and purchase decisions are made based on this monitoring process. None of the Corporation’s equity securities are classified as trading. Future cash flows from these investments are not provided in the table on page 48 as such investments do not have maturity dates.
Another source of equity market price risk is the Corporation’s investment in FHLB stock. The Corporation is required to own FHLB stock in order to borrow funds from the FHLB. FHLBs obtain funding primarily through issuance of consolidated obligations of the Federal Home Loan Bank system. The U.S. government does not guarantee these obligations, and each of the FHLB banks is generally jointly and severally liable for repayment of each other’s debt. Recently, the FHLB system has experienced financial stress, and some of the regional banks within the FHLB system have suspended or reduced their dividends, or eliminated the ability of members to redeem capital stock. The ultimate impact of these developments on the FHLB system or its programs for advances to members is uncertain. The Corporation’s FHLB stock and its ability to obtain FHLB funds could be adversely impacted if the financial health of the FHLB system worsens.
In addition to its equity portfolio, the Corporation’s investment management and trust services revenue is impacted by fluctuations in the securities markets. A portion of the Corporation’s trust and brokerage revenue is based on the value of the underlying investment portfolios. If the values of those investment portfolios decrease, whether due to factors influencing U.S. securities markets in general, or otherwise, the Corporation’s revenue would be negatively impacted. In addition, the Corporation’s ability to sell its brokerage services is dependent, in part, upon consumers’ level of confidence in the outlook for rising securities prices.
Debt Security Price Risk
Debt security market price risk is the risk that changes in the values of debt security investments could have a material impact on the financial position or results of operations of the Corporation. The Corporation’s debt security investments consist primarily of mortgage-backed securities and collateralized mortgage obligations whose principal payments are guaranteed by U.S. government sponsored agencies, state and municipal securities, U.S. government sponsored and U.S. government debt securities, auction rate

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certificates and corporate debt securities. Only the auction rate certificates and corporate debt securities have significant debt security price risk.
Auction rate certificates (ARCs)
Beginning in the second quarter of 2008, the Corporation’s debt securities included ARCs purchased from customers. Due to the current market environment, these ARCs are susceptible to significant market price risk. As of December 31, 2008, ARCs had a cost basis of $208.3 million and fair value of $195.9 million, or 1.2% of total assets.
ARCs are long-term securities structured to allow their sale in periodic auctions, resulting in both the treatment of ARCs as short-term instruments in normal market conditions and fair values that could be derived based on periodic auction prices. However, beginning in mid-February 2008, market auctions for these securities began to fail due to an insufficient number of buyers, resulting in an illiquid market. This illiquidity has resulted in recent market prices that represent forced liquidations or distressed sales and do not provide an accurate basis for fair value. Therefore, as of December 31, 2008, the fair value of the ARC securities held by the Corporation were derived using significant unobservable inputs based on an expected cash flow model which produced fair values which were materially different from those that would be expected from settlement of these investments in the illiquid market that presently exists. The expected cash flow model produced fair values which assumed a return to market liquidity sometime within the next three to five years. If liquidity does not return within a time frame that is materially consistent with the Corporation’s assumptions, the fair value of ARCs could significantly change.
The credit quality of the underlying debt associated with the ARCs is also a factor in the determination of their estimated fair value. As of December 31, 2008, the total combined estimated fair value of ARCs held by the Corporation and ARCs held within customers’ accounts was approximately $292 million, with $195.9 million held by the Corporation, as stated above. Approximately 98% of the approximately $292 million of ARCs are backed by student loans, while the remaining ARCs are backed by state and municipal securities. Approximately 80% of the student loan ARCs have credit ratings of AAA, with a majority of the remaining 20% AA-rated. The current illiquid market did not impact the credit risk associated with the assets underlying the ARCs, both those held by the Corporation and those that remain in customer accounts. Therefore, as of December 31, 2008, the risk of changes in the estimated fair values of ARCs due to deterioration in the credit quality of their underlying debt instruments is not significant.
Corporate Debt Securities
The Corporation holds corporate debt securities in the form of pooled trust preferred securities, single-issuer trust preferred securities and subordinated debt issued by financial institutions, as presented in the following table:
                 
    December 31, 2008  
    Amortized
cost
    Estimated fair
value
 
    (in thousands)  
Single-issuer trust preferred securities (1)
  $ 97,887     $ 69,819  
Subordinated debt
    34,788       31,745  
Pooled trust preferred securities
    19,351       15,381  
 
           
Total corporate debt securities issued by financial institutions
  $ 152,026     $ 116,945  
 
           
 
(1)   Single-issuer trust preferred securities with estimated fair values totaling $7.5 million as of December 31, 2008 are classified as Level 3 assets. See Note P, “Fair Value Measurements” in the Notes to Consolidated Financial Statements for additional details.
Historically, the Corporation determined the fair value of these securities based on prices received from third-party brokers and pricing agencies who determined fair values using both quoted prices for similar assets, when available, and model-based valuation techniques that derived fair value based on market-corroborated data, such as instruments with similar prepayment speeds and default interest rates.
The Corporation has determined that the market for pooled trust preferred securities and certain single-issuer trust preferred securities held by the Corporation was not active. Consistent with Staff Position No. 157-3, the Corporation determined, through the use of a third-party valuation specialist, the fair value of its investments in pooled trust preferred securities using a discounted cash flows

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model, which applied a credit and liquidity adjusted discount rate to expected cash flows. For certain single-issuer trust preferred securities, the Corporation determined fair values based on quotes provided by third-party brokers who determined fair values based predominantly on internal valuation models and were not indicative prices or binding offers.
In 2008, the Corporation recorded $15.8 million of other-than-temporary impairment charges related to investments in pooled trust preferred securities. In addition, the Corporation recorded a $4.9 million other-than-temporary impairment charge related to subordinated debt issued by a failed financial institution. The current illiquid market for debt securities issued by financial institutions may continue to impact the fair values of these securities. Additional impairment charges may be necessary in the future depending upon the performance of the individual investments held by the Corporation.
See Note P, “Fair Value Measurements”, in the Notes to Consolidated Financial Statements for further discussion related to the fair values of debt securities.
Interest Rate Risk, Asset/Liability Management and Liquidity

Interest rate risk creates exposure in two primary areas. First, changes in rates have an impact on the Corporation’s liquidity position and could affect its ability to meet obligations and continue to grow. Second, movements in interest rates can create fluctuations in the Corporation’s net interest income and changes in the economic value of its equity.
The Corporation employs various management techniques to minimize its exposure to interest rate risk. An Asset/Liability Management Committee (ALCO), consisting of key financial and senior management personnel, meets on a bi-weekly basis. The ALCO is responsible for reviewing the interest rate sensitivity position of the Corporation, approving asset and liability management policies, and overseeing the formulation and implementation of strategies regarding balance sheet positions and earnings. The primary goal of asset/liability management is to address the liquidity and net interest income risks noted above.
From a liquidity standpoint, the Corporation must maintain a sufficient level of liquid assets to meet the cash needs of its customers, who, as depositors, may want to withdraw funds or who, as borrowers, need credit availability. Liquidity is provided on a continuous basis through scheduled and unscheduled principal and interest payments on outstanding loans and investments and through the availability of deposits and borrowings. The Corporation also maintains secondary sources that provide liquidity on a secured and unsecured basis to meet short-term needs.
The consolidated statements of cash flows provide details related to the Corporation’s sources and uses of cash. The Corporation generated $194.7 million in cash from operating activities during 2008, mainly due to net loss, as adjusted for non-cash charges such as the provision for loan losses, goodwill impairment and investment securities losses. Investing activities resulted in a net cash outflow of $501.5 million in 2008 due to the purchase of investment securities and the net increase in loans exceeding the proceeds from sales and maturities of investments. Financing activities resulted in net cash proceeds of $256.7 million in 2008, compared to net cash proceeds of $800.2 million in 2007 as net funds provided by the issuance of preferred stock, additions of long-tern debt and increases in time deposits exceeded net repayments of short-term borrowings and decreases in demand and savings accounts, and shareholder dividends.
Liquidity must also be managed at the Fulton Financial Corporation Parent Company level. For safety and soundness reasons, banking regulations limit the amount of cash that can be transferred from subsidiary banks to the Parent Company in the form of loans and dividends. Generally, these limitations are based on the subsidiary banks’ regulatory capital levels and their net income. The Parent Company meets its cash needs through dividends and loans from subsidiary banks, and through external borrowings.
Management continues to monitor the liquidity and capital needs of the Parent Company and will implement appropriate strategies, as necessary, to remain well capitalized and to meet its cash needs.
As of December 31, 2008, liquid assets (defined as cash and due from banks, short-term investments, Federal funds sold, mortgages available for sale, securities available for sale, and non-mortgage-backed securities held to maturity due in one year or less) totaled $3.1 billion, or 19.4% of total assets, as compared to $3.6 billion, or 22.9% of total assets, as of December 31, 2007.

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The following tables present the expected maturities of investment securities as of December 31, 2008 and the weighted average yields of such securities (calculated based on historical cost):
HELD TO MATURITY (at amortized cost)
                                                                 
    MATURING  
                    After One But     After Five But        
    Within One Year     Within Five Years     Within Ten Years     After Ten Years  
    Amount     Yield     Amount     Yield     Amount     Yield     Amount     Yield  
    (dollars in thousands)  
U.S. Government sponsored agency securities
  $           $ 6,782       2.10 %   $           $        
State and municipal (1)
    322       6.32       503       5.25                          
Corporate debt securities
    25                                            
 
                                               
Total
  $ 347       5.86 %   $ 7,285       2.32 %   $           $        
 
                                               
 
                                                               
Mortgage-backed securities (2)
  $ 2,004       6.13 %                                                
 
                                               
AVAILABLE FOR SALE (at estimated fair value)
                                                                 
    MATURING  
                    After One But     After Five But        
    Within One Year     Within Five Years     Within Ten Years     After Ten Years  
    Amount     Yield     Amount     Yield     Amount     Yield     Amount     Yield  
    (dollars in thousands)  
U.S. Government securities
  $ 14,628       2.02 %   $           $           $        
U.S. Government sponsored agency securities (3)
    18,266       4.72       42,224       5.23       16,147       4.94       365       3.93  
State and municipal (1)
    93,472       4.43       233,410       5.05       29,610       5.71       167,044       6.69  
Auction rate securities (4)
                            2,473       4.31       193,427       2.19  
Corporate debt securities
    229       4.13       2,734       6.92       31,745       5.42       85,186       7.48  
 
                                               
Total
  $ 126,595       4.19 %   $ 278,368       5.10 %   $ 79,975       5.40 %   $ 446,022       4.99 %
 
                                               
 
Collateralized mortgage obligations (2)
  $ 504,193       5.29 %                                                
 
                                               
Mortgage-backed securities (2)
  $ 1,141,351       5.02 %                                                
 
                                               
 
(1)   Weighted average yields on tax-exempt securities have been computed on a fully taxable-equivalent basis assuming a tax rate of 35% and statutory interest expense disallowances.
 
(2)   Maturities for mortgage-backed securities and collateralized mortgage obligations are dependent upon the interest rate environment and prepayments on the underlying loans. For the purpose of this table, the entire balance and weighted average rate is shown in one period.
 
(3)   Includes Small Business Administration securities, whose maturities are dependent upon prepayments on the underlying loans. For the purpose of this table, amounts are based upon contractual maturities.
 
(4)   Maturities of auction rate securities are based on contractual maturities. See Note O, “ Commitments and Contingencies” in the Notes to Consolidated Financial Statements for additional disclosures related to auction rate securities.
The Corporation’s investment portfolio consists mainly of mortgage-backed securities and collateralized mortgage obligations which have stated maturities that may differ from actual maturities due to borrowers’ ability to prepay obligations. Cash flows from such investments are dependent upon the performance of the underlying mortgage loans and are generally influenced by the level of interest rates. As rates increase, cash flows generally decrease as prepayments on the underlying mortgage loans decrease. As rates decrease, cash flows generally increase as prepayments increase.

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The following table presents the approximate contractual maturity and interest rate sensitivity of certain loan types subject to changes in interest rates as of December 31, 2008:
                                 
            One              
    One Year     Through     More Than        
    or Less     Five Years     Five Years     Total  
            (in thousands)          
Commercial, financial and agricultural:
                               
Adjustable and floating rate
  $ 721,809     $ 1,623,480     $ 281,003     $ 2,626,292  
Fixed rate
    398,137       505,098       106,017       1,009,252  
 
                       
Total
  $ 1,119,946     $ 2,128,578     $ 387,020     $ 3,635,544  
 
                       
 
                               
Real-estate – mortgage (1):
                               
Adjustable and floating rate
  $ 1,087,956     $ 2,408,846     $ 1,382,040     $ 4,878,842  
Fixed rate
    563,338       874,191       442,077       1,879,606  
 
                       
Total
  $ 1,651,294     $ 3,283,037     $ 1,824,117     $ 6,758,448  
 
                       
 
                               
Real-estate – construction:
                               
Adjustable and floating rate
  $ 643,806     $ 283,493     $ 38,689     $ 965,988  
Fixed rate
    75,838       68,766       85,458       230,062  
 
                       
Total
  $ 719,644     $ 352,259     $ 124,147     $ 1,196,050  
 
                       
 
(1)   Includes commercial mortgages, residential mortgages and home equity loans.
Contractual maturities of time deposits of $100,000 or more outstanding as of December 31, 2008 are as follows (in thousands):
         
Three months or less
  $ 324,075  
Over three through six months
    381,865  
Over six through twelve months
    637,895  
Over twelve months
    370,450  
 
     
Total
  $ 1,714,285  
 
     
Each of the Corporation’s subsidiary banks is a member of the FHLB and has access to FHLB overnight and term credit facilities. As of December 31, 2008, the Corporation had $1.4 billion in overnight and term advances outstanding from the FHLB with an additional $1.2 billion of borrowing capacity (including both short-term funding on its lines of credit and long-term borrowings). This availability, along with Federal funds lines at various correspondent banks, provides the Corporation with additional liquidity.
The Corporation maintains liquidity sources in the form of “core” demand and savings deposits, time deposits in various denominations, including jumbo and brokered time deposits, repurchase agreements and short-term promissory notes. During the fourth quarter of 2008, a combination of commercial real estate loans, commercial loans and securities were pledged to the Federal Reserve Bank of Philadelphia to provide access to overnight Federal Reserve Bank borrowings under the discount window and term borrowings under the Federal Reserve Bank’s term auction facility. As of December 31, 2008, the Corporation had $1.7 billion of collateralized borrowing availability at the discount window and term auction facility and no outstanding borrowings.

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The following table provides information about the Corporation’s interest rate sensitive financial instruments. The table presents expected cash flows and weighted average rates for each significant interest rate sensitive financial instrument, by expected maturity period (dollars in thousands).
                                                                         
    Expected Maturity Period           Estimated        
    2009   2010   2011   2012   2013   Beyond   Total   Fair Value        
Fixed rate loans (1)
  $ 1,174,691     $ 621,482     $ 457,152     $ 340,733     $ 307,692     $ 643,464     $ 3,545,214     $ 3,545,828          
Average rate
    5.27 %     6.60 %     6.62 %     6.60 %     6.76 %     6.46 %     6.15 %                
Floating rate loans (1) (7)
    2,456,683       1,076,624       825,502       667,909       1,756,089       1,701,744       8,484,551       8,208,920          
Average rate
    4.89 %     5.33 %     5.35 %     5.38 %     4.32 %     6.11 %     5.16 %                
 
                                                                       
Fixed rate investments (2)
    630,221       457,989       408,593       273,470       96,231       426,969       2,293,473       2,324,178          
Average rate
    4.75 %     4.86 %     4.75 %     4.79 %     5.04 %     4.64 %     4.77 %                
Floating rate investments (2)
    32       500       208,281             141       89,182       298,136       262,890          
Average rate
    5.42 %     5.63 %     3.28 %           1.91 %     4.63 %     3.69 %                
 
                                                                       
Other interest-earning assets
    117,550                                     117,550       117,550          
Average rate
    5.10 %                                   5.10 %                
     
Total
  $ 4,379,177     $ 2,156,595     $ 1,899,528     $ 1,282,112     $ 2,160,503     $ 2,861,359     $ 14,738,924     $ 14,459,366          
Average rate
    4.98 %     5.60 %     5.30 %     5.58 %     4.70 %     5.92 %     5.30 %                
     
 
                                                                       
Fixed rate deposits (3)
  $ 3,827,542     $ 736,148     $ 276,233     $ 154,590     $ 56,134     $ 47,470     $ 5,098,117     $ 5,137,200          
Average rate
    3.23 %     3.86 %     3.60 %     4.48 %     4.05 %     1.91 %     3.38 %                
Floating rate deposits (4)
    1,498,076       169,870       169,870       156,174       148,899       1,657,469       3,800,358       3,800,359          
Average rate
    1.15 %     0.77 %     0.77 %     0.70 %     0.66 %     0.59 %     0.83 %                
 
                                                                       
Fixed rate borrowings (5)
    249,961       469,756       94,794       102,760       5,799       508,404       1,431,474       1,399,552          
Average rate
    4.33 %     4.84 %     3.60 %     4.01 %     2.88 %     5.50 %     4.84 %                
Floating rate borrowings (6)
    1,763,093                               356,000       2,119,093       2,128,880          
Average rate
    0.64 %                             2.96 %     1.03 %                
     
Total
  $ 7,338,672     $ 1,375,774     $ 540,897     $ 413,524     $ 210,832     $ 2,569,343     $ 12,449,042     $ 12,465,991          
Average rate
    2.22 %     3.81 %     2.71 %     2.94 %     1.62 %     1.91 %     2.37 %                
     
 
(1)   Amounts are based on contractual payments and maturities, adjusted for expected prepayments.
 
(2)   Amounts are based on contractual maturities; adjusted for expected prepayments on mortgage-backed securities, collateralized mortgage obligations and expected calls on agency and municipal securities.
 
(3)   Amounts are based on contractual maturities of time deposits.
 
(4)   Estimated based on history of deposit flows.
 
(5)   Amounts are based on contractual maturities of debt instruments, adjusted for possible calls. Amounts also include junior subordinated deferrable interest debentures.
 
(6)   Amounts include Federal funds purchased, short-term promissory notes, floating FHLB advances and securities sold under agreements to repurchase, which mature in less than 90 days, in addition to junior subordinated deferrable interest debentures.
 
(7)   Line of credit amounts are based on historical cash flow assumptions, with an average life of approximately 5 years.
The preceding table and discussion addressed the liquidity implications of interest rate risk and focused on expected cash flows from financial instruments. Expected maturities, however, do not necessarily reflect the net interest income impact of interest rate changes. Certain financial instruments, such as adjustable rate loans, have repricing periods that differ from expected cash flows. Fair market value adjustments related to acquisitions are not included in the preceding table.
Included within the $8.5 billion of floating rate loans above are $3.4 billion of loans, or 40% of the total, that float with the prime interest rate, $1.1 billion, or 13%, of loans which float with other interest rates, primarily LIBOR, and $4.0 billion, or 47%, of adjustable rate loans. The $4.0 billion of adjustable rate loans include loans that are fixed rate instruments for a certain period of time, and then convert to floating rates.

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The following table presents the percentage of adjustable rate loans, stratified by their remaining fixed term at December 31, 2008:
         
    Percent of Total
    Adjustable Rate
Fixed Rate Term   Loans
One year
    19.7 %
Two years
    0.8  
Three years
    2.4  
Four years
    1.3  
Five years
    60.7  
Greater than five years
    15.7  
The Corporation uses three complementary methods to measure and manage interest rate risk. They are static gap analysis, simulation of earnings, and estimates of economic value of equity. Using these measurements in tandem provides a reasonably comprehensive summary of the magnitude of interest rate risk in the Corporation, level of risk as time evolves, and exposure to changes in interest rate relationships.
Static gap provides a measurement of repricing risk in the Corporation’s balance sheet as of a point in time. This measurement is accomplished through stratification of the Corporation’s assets and liabilities into repricing periods. The sum of assets and liabilities in each of these periods are compared for mismatches within that maturity segment. Core deposits having no contractual maturities are placed into repricing periods based upon historical balance performance. Repricing for mortgage loans, mortgage-backed securities and collateralized mortgage obligations includes the effect of expected prepayments, based upon industry projections for prepayment speeds. The Corporation’s policy limits the cumulative six-month ratio of rate sensitive assets to rate sensitive liabilities (RSA/RSL) to a range of 0.85 to 1.15. As of December 31, 2008, the cumulative six-month ratio of RSA/RSL was 1.14. While the RSA/RSL is within policy limits at December 31, 2008, the Corporation is taking measures to reduce its static gap position, which is at its current level due primarily to the receipt of $376.5 million in CPP funds on December 23, 2008, which reduced the Corporation’s overnight borrowings.
Simulation of net interest income and net income is performed for the next twelve-month period. A variety of interest rate scenarios are used to measure the effects of sudden and gradual movements upward and downward in the yield curve. These results are compared to the results obtained in a flat or unchanged interest rate scenario. Simulation of earnings is used primarily to measure the Corporation’s short-term earnings exposure to rate movements. The Corporation’s policy limits the potential exposure of net interest income to 10% of the base case net interest income for a 100 basis point shock in interest rates, 15% for a 200 basis point shock and 20% for a 300 basis point shock. A “shock’ is an immediate upward or downward movement of interest rates across the yield curve based upon changes in the prime rate. The shocks do not take into account changes in customer behavior that could result in changes to mix and/or volumes in the balance sheet nor do they account for competitive pricing over the forward 12-month period. The following table summarizes the expected impact of interest rate shocks on net interest income (due to the current level of interest rates, the 200 and 300 basis point downward shock scenarios are not shown):
         
    Annual change    
    in net interest    
Rate Shock   income   % Change
+300 bp
  + $45.1 million   + 9.0%
+200 bp
  + $30.3 million   + 6.0%
+100 bp
  + $13.7 million   + 2.7%
-100 bp
  - $18.9 million    - 3.8%
Economic value of equity estimates the discounted present value of asset and liability cash flows. Discount rates are based upon market prices for like assets and liabilities. Upward and downward shocks of interest rates are used to determine the comparative effect of such interest rate movements relative to the unchanged environment. This measurement tool is used primarily to evaluate the longer-term repricing risks and options in the Corporation’s balance sheet. A policy limit of 10% of economic equity may be at risk for every 100 basis point shock movement in interest rates. As of December 31, 2008, the Corporation was within economic value of equity policy limits.

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Item 8. Financial Statements and Supplementary Data
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per-share data)
                 
    December 31
    2008     2007  
   
Assets
               
Cash and due from banks
  $ 331,164     $ 381,283  
Interest-bearing deposits with other banks
    16,791       11,330  
Federal funds sold
    4,919       9,823  
Loans held for sale
    95,840       103,984  
Investment securities:
               
Held to maturity (estimated fair value of $9,765 in 2008 and $10,399 in 2007)
    9,636       10,285  
Available for sale
    2,715,205       3,143,267  
 
               
Loans, net of unearned income
    12,042,620       11,204,424  
Less: Allowance for loan losses
    (173,946 )     (107,547 )
 
           
Net Loans
    11,868,674       11,096,877  
 
           
 
               
Premises and equipment
    202,657       193,296  
Accrued interest receivable
    58,566       73,435  
Goodwill
    534,385       624,072  
Intangible assets
    23,448       30,836  
Other assets
    323,821       244,610  
 
           
 
               
Total Assets
  $ 16,185,106     $ 15,923,098  
 
           
 
               
Liabilities
               
Deposits:
               
Noninterest-bearing
  $ 1,653,440     $ 1,722,211  
Interest-bearing
    8,898,476       8,383,234  
 
           
Total Deposits
    10,551,916       10,105,445  
 
           
 
               
Short-term borrowings:
               
Federal funds purchased
    1,147,673       1,057,335  
Other short-term borrowings
    615,097       1,326,609  
 
           
Total Short-Term Borrowings
    1,762,770       2,383,944  
 
           
 
               
Accrued interest payable
    53,678       69,238  
Other liabilities
    169,298       147,418  
Federal Home Loan Bank advances and long-term debt
    1,787,797       1,642,133  
 
           
Total Liabilities
    14,325,459       14,348,178  
 
           
 
               
Shareholders’ Equity
               
Preferred stock, $1,000 par value, 376,500 shares authorized and outstanding
    368,944        
Common stock, $2.50 par value, 600 million shares authorized, 192.4 million shares issued in 2008 and 191.8 million shares issued in 2007
    480,978       479,559  
Additional paid-in capital
    1,260,947       1,254,369  
Retained earnings
    31,075       141,993  
Accumulated other comprehensive loss
    (17,907 )     (21,773 )
Treasury stock (17.3 million shares in 2008 and 18.3 million shares in 2007), at cost
    (264,390 )     (279,228 )
 
           
Total Shareholders’ Equity
    1,859,647       1,574,920  
 
           
 
               
Total Liabilities and Shareholders’ Equity
  $ 16,185,106     $ 15,923,098  
 
           
See Notes to Consolidated Financial Statements

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CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per-share data)
                         
    2008     2007     2006  
   
Interest Income
                       
Loans, including fees
  $ 727,124     $ 801,175     $ 727,297  
Investment securities:
                       
Taxable
    110,220       99,621       97,652  
Tax-exempt
    18,137       17,423       14,896  
Dividends
    5,726       8,227       6,568  
Loans held for sale
    5,701       11,501       15,564  
Other interest income
    586       1,630       2,530  
 
                 
Total Interest Income
    867,494       939,577       864,507  
 
                       
Interest Expense
                       
Deposits
    212,114       294,395       246,941  
Short-term borrowings
    50,091       73,983       78,043  
Long-term debt
    81,141       82,455       53,960  
 
                 
Total Interest Expense
    343,346       450,833       378,944  
 
                 
 
                       
Net Interest Income
    524,148       488,744       485,563  
Provision for Loan Losses
    119,626       15,063       3,498  
 
                 
Net Interest Income After Provision for Loan Losses
    404,522       473,681       482,065  
 
                 
 
                       
Other Income
                       
Service charges on deposit accounts
    61,640       46,500       43,773  
Other service charges and fees
    36,247       32,151       26,792  
Investment management and trust services
    32,734       38,665       37,441  
Gain on sale of credit card portfolio
    13,910              
Gains on sale of mortgage loans
    10,332       14,294       21,086  
Investment securities (losses) gains, net
    (58,241 )     1,740       7,439  
Other
    14,434       14,674       13,344  
 
                 
Total Other Income
    111,056       148,024       149,875  
 
                       
Other Expenses
                       
Salaries and employee benefits
    213,557       217,526       213,913  
Net occupancy expense
    42,239       39,965       36,493  
Operating risk loss
    24,308       27,229       4,818  
Equipment expense
    13,332       13,892       14,251  
Marketing
    13,267       11,334       10,638  
Data processing
    12,813       12,755       12,228  
Intangible amortization
    7,162       8,334       7,907  
Goodwill impairment
    90,000              
Other
    79,947       74,420       65,743  
 
                 
Total Other Expenses
    496,625       405,455       365,991  
 
                 
 
                       
Income Before Income Taxes
    18,953       216,250       265,949  
Income taxes
    24,570       63,532       80,422  
 
                 
 
                       
Net Income (Loss)
    (5,617 )     152,718       185,527  
Preferred stock dividends and discount accretion
    (463 )            
 
                 
Net Income (Loss) Available to Common Shareholders
  $ (6,080 )   $ 152,718     $ 185,527  
 
                 
 
                       
Per Common Share:
                       
Net Income (Loss) (Basic)
  $ (0.03 )   $ 0.88     $ 1.07  
Net Income (Loss) (Diluted)
    (0.03 )     0.88       1.06  
Cash Dividends
    0.600       0.598       0.581  
See Notes to Consolidated Financial Statements

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CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)
                                                                 
                                            Accumulated              
            Common Stock     Additional             Other              
    Preferred     Shares             Paid-in     Retained     Comprehensive     Treasury        
    Stock     Outstanding     Amount     Capital     Earnings     Income (Loss)     Stock     Total  
                            (in thousands)                          
Balance at January 1, 2006
  $       164,868     $ 430,827     $ 996,708     $ 138,529     $ (42,285 )   $ (240,808 )   $ 1,282,971  
Comprehensive Income (Loss):
                                                               
Net Income
                                    185,527                       185,527  
Other comprehensive income
                                            11,993               11,993  
 
                                                             
Total comprehensive income
                                                            197,520  
 
                                                             
Adjustment to initially apply Statement 158 (net of $4.7 million tax effect)
                                            (8,799 )             (8,799 )
Stock dividend - 5%
                    22,648       107,952       (130,600 )                      
Stock issued, including related tax benefits
            1,222       2,989       6,868                               9,857  
Stock-based compensation awards
                            1,687                               1,687  
Stock issued for acquisition of Columbia Bancorp
            8,619       20,523       133,608                               154,131  
Acquisition of treasury stock
            (1,061 )                                     (16,770 )     (16,770 )
Accelerated share repurchase settlement
                                                    (3,423 )     (3,423 )
Cash dividends — $0.581 per share
                                    (100,864 )                     (100,864 )
 
                                               
 
                                                               
Balance at December 31, 2006
  $       173,648     $ 476,987     $ 1,246,823     $ 92,592     $ (39,091 )   $ (261,001 )   $ 1,516,310  
Comprehensive Income (Loss):
                                                               
Net Income
                                    152,718                       152,718  
Other comprehensive income
                                            17,318               17,318  
 
                                                             
Total comprehensive income
                                                            170,036  
 
                                                             
Stock issued, including related tax benefits
            1,029       2,572       4,907                               7,479  
Stock-based compensation awards
                            2,639                               2,639  
Cumulative effect of FIN 48 adoption
                                    220                       220  
Acquisition of treasury stock
            (1,174 )                                     (18,227 )     (18,227 )
Cash dividends — $0.598 per share
                                    (103,537 )                     (103,537 )
 
                                               
 
                                                               
Balance at December 31, 2007
  $       173,503     $ 479,559     $ 1,254,369     $ 141,993     $ (21,773 )   $ (279,228 )   $ 1,574,920  
Comprehensive Income (Loss):
                                                               
Net Loss
                                    (5,617 )                     (5,617 )
Other comprehensive income
                                            3,866               3,866  
 
                                                             
Total comprehensive loss
                                                            (1,751 )
 
                                                             
Preferred stock and common stock warrants issued
    368,900                       7,600                               376,500  
Stock issued, including related tax benefits
            1,541       1,419       (3,080 )                     14,838       13,177  
Stock-based compensation awards
                            2,058                               2,058  
Impact of pension plan measurement date change (net of $23,000 tax effect)
                                    43                       43  
Cumulative effect of EITF 06-4 adoption
                                    (677 )                     (677 )
Preferred stock discount accretion
    44                               (44 )                      
Cash dividends — $0.600 per share
                                    (104,623 )                     (104,623 )
 
                                               
 
                                                               
Balance at December 31, 2008
  $ 368,944       175,044     $ 480,978     $ 1,260,947     $ 31,075     $ (17,907 )   $ (264,390 )   $ 1,859,647  
 
                                               
See Notes to Consolidated Financial Statements

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CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
                         
    2008     2007     2006  
CASH FLOWS FROM OPERATING ACTIVITIES:
                       
Net Income (Loss)
  $ (5,617 )   $ 152,718     $ 185,527  
 
                       
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
                       
Provision for loan losses
    119,626       15,063       3,498  
Depreciation and amortization of premises and equipment
    19,693       19,711       19,270  
Net amortization of investment security premiums
    290       2,111       3,608  
Goodwill impairment
    90,000              
Deferred income tax benefit
    (52,483 )     (13,646 )     (5,779 )
Gain on sale of credit card portfolio
    (13,910 )            
Investment securities losses (gains)
    58,241       (1,740 )     (7,439 )
Gains on sale of mortgage loans
    (10,332 )     (14,294 )     (21,086 )
Proceeds from sales of mortgage loans held for sale
    658,437       1,283,176       1,969,362  
Originations of mortgage loans held for sale
    (655,459 )     (1,164,101 )     (1,943,940 )
Amortization of intangible assets
    7,162       8,334       7,907  
Intangible assets impairment
          1,069        
Stock-based compensation
    2,058       2,639       1,687  
Excess tax benefits from stock based compensation
    (20 )     (111 )     (783 )
Decrease (increase) in accrued interest receivable
    14,869       (1,610 )     (11,908 )
(Increase) decrease in other assets
    (3,825 )     16,315       (12,613 )
(Decrease) increase in accrued interest payable
    (15,560 )     7,846       21,741  
Decrease in other liabilities
    (18,424 )     (8,789 )     (7,384 )
 
                 
Total adjustments
    200,363       151,973       16,141  
 
                 
Net cash provided by operating activities
    194,746       304,691       201,668  
 
                 
 
                       
CASH FLOWS FROM INVESTING ACTIVITIES:
                       
Proceeds from sales of securities available for sale
    740,353       365,559       147,194  
Proceeds from maturities of securities held to maturity
    6,644       3,191       5,923  
Proceeds from maturities of securities available for sale
    631,324       490,252       598,111  
Proceeds from sale of credit card portfolio
    100,516              
Purchase of securities held to maturity
    (6,038 )     (2,287 )     (698 )
Purchase of securities available for sale
    (983,713 )     (1,111,203 )     (868,876 )
(Increase) decrease in short-term investments
    (557 )     7,035       20,598  
Net increase in loans
    (961,002 )     (809,562 )     (886,372 )
Net cash paid for acquisitions
                (109,729 )
Net purchase of premises and equipment
    (29,054 )     (21,606 )     (32,642 )
 
                 
Net cash used in investing activities
    (501,527 )     (1,078,621 )     (1,126,491 )
 
                 
 
                       
CASH FLOWS FROM FINANCING ACTIVITIES:
                       
Net decrease in demand and savings deposits
    (115,100 )     (233,523 )     (137,546 )
Net increase in time deposits
    561,571       106,499       596,240  
Additions to long-term debt
    344,690       1,463,633       550,166  
Repayments of long-term debt
    (199,026 )     (1,125,648 )     (186,499 )
(Decrease) increase in short-term borrowings
    (621,174 )     703,104       197,795  
Dividends paid
    (103,976 )     (103,122 )     (98,022 )
Net proceeds from issuance of preferred stock and common stock warrants
    376,500              
Net proceeds from issuance of common stock
    13,157       7,368       9,074  
Excess tax benefits from stock based compensation
    20       111       783  
Acquisition of treasury stock
          (18,227 )     (20,193 )
 
                 
Net cash provided by financing activities
    256,662       800,195       911,798  
 
                 
 
                       
Net (decrease) increase in Cash and Due From Banks
    (50,119 )     26,265       (13,025 )
Cash and Due From Banks at Beginning of Year
    381,283       355,018       368,043  
 
                 
Cash and Due From Banks at End of Year
  $ 331,164     $ 381,283     $ 355,018  
 
                 
 
                       
Supplemental Disclosures of Cash Flow Information
                       
Cash paid during period for:
                       
Interest
  $ 358,906     $ 442,987     $ 357,203  
Income taxes
    80,327       65,053       77,327  
See Notes to Consolidated Financial Statements

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business: Fulton Financial Corporation (Parent Company) is a multi-bank financial holding company which provides a full range of banking and financial services to businesses and consumers through its ten wholly owned banking subsidiaries: Fulton Bank, Swineford National Bank, Lafayette Ambassador Bank, FNB Bank N.A., Hagerstown Trust Company, Delaware National Bank, The Bank, The Peoples Bank of Elkton, Skylands Community Bank and The Columbia Bank as well as its financial services subsidiaries, Fulton Financial Advisors, N.A., and Fulton Insurance Services Group, Inc. In addition, the Parent Company owns the following non-bank subsidiaries: Fulton Financial Realty Company, Fulton Reinsurance Company, LTD, Central Pennsylvania Financial Corp., FFC Management, Inc. and FFC Penn Square, Inc. Collectively, the Parent Company and its subsidiaries are referred to as the Corporation.
During 2008 and 2007, the Corporation completed the consolidation of certain wholly owned banking subsidiaries. In February 2007, the former First Washington State Bank subsidiary consolidated with The Bank. In May 2007, the former Somerset Valley Bank subsidiary consolidated with Skylands Community Bank. In July 2007, the former Lebanon Valley Farmers Bank subsidiary consolidated with Fulton Bank. In March 2008, the former Resource Bank subsidiary consolidated with Fulton Bank. In addition, during 2008, the Corporation announced the consolidation of its Maryland banking subsidiaries. The consolidation, which is expected to take place in 2009, will merge the Corporation’s Hagerstown Trust Company and Peoples Bank of Elkton subsidiaries into The Columbia Bank.
The Corporation’s primary sources of revenue are interest income on loans and investment securities and fee income on its products and services. Its expenses consist of interest expense on deposits and borrowed funds, provision for loan losses, other operating expenses and income taxes. The Corporation’s primary competition is other financial services providers operating in its region. Competitors also include financial services providers located outside the Corporation’s geographical market as a result of the growth in electronic delivery systems. The Corporation is subject to the regulations of certain Federal and state agencies and undergoes periodic examinations by such regulatory authorities.
The Corporation offers, through its banking subsidiaries, a full range of retail and commercial banking services throughout central and eastern Pennsylvania, Delaware, Maryland, New Jersey and Virginia. Industry diversity is the key to the economic well being of these markets, and the Corporation is not dependent upon any single customer or industry.
Basis of Financial Statement Presentation: The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States (U.S. GAAP) and include the accounts of the Parent Company and all wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates.
Fair Value Measurements: On January 1, 2008, the Corporation adopted the provisions of the Financial Accounting Standards Board’s (FASB) Statement of Financial Accounting Standards No. 157, “Fair Value Measurement” (Statement 157) for assets and liabilities required to be measured at fair value on a recurring basis and all financial assets and liabilities measured at fair value on a nonrecurring basis.
Statement 157 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into the following three categories (from highest to lowest priority):
    Level 1 – Inputs that represent quoted prices for identical instruments in active markets.
 
    Level 2 – Inputs that represent quoted prices for similar instruments in active markets, or quoted prices for identical instruments in non-active markets. Also includes valuation techniques whose inputs are derived principally from observable market data other than quoted prices, such as interest rates or other market-corroborated means.
 
    Level 3 – Inputs that are largely unobservable, as little or no market data exists for the instrument being valued.

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As required by Statement 157, the Corporation has categorized all assets and liabilities required to be measured at fair value on a recurring basis into the above three levels. In addition, the Corporation has categorized all financial assets and liabilities measured at fair value on a nonrecurring basis into the same three levels.
In February 2008, the FASB issued Staff Position No. 157-2, “Effective Date of FASB Statement No. 157” (FSP 157-2). FSP 157-2 delayed the effective date of Statement 157 for nonfinancial assets and liabilities measured at fair value on a nonrecurring basis, until fiscal years beginning after November 15, 2008, or January 1, 2009 for the Corporation. In accordance with FSP 157-2, the Corporation did not apply the provisions of Statement 157 for the following nonfinancial assets and liabilities, which are not measured at fair value on a recurring basis: loans, deposits and borrowings acquired in prior years’ business combinations, other intangible assets initially measured at fair value upon acquisition and reporting units tested annually for goodwill impairment under Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets”. The application of FSP 157-2 for these nonfinancial assets and liabilities is not expected to have a material impact on their reported values.
In October 2008, the FASB issued Staff Position No. 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active” (FSP 157-3). FSP 157-3 clarifies the application of Statement 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. FSP 157-3 was effective upon issuance for the Corporation. The Corporation applied the provisions of FSP 157-3 to certain debt security investments for which there was no active market.
See Note P, “Fair Value Measurements” for additional details.
Fair Value Option: In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an Amendment of FASB Statement No. 115” (Statement 159). Statement 159 permits entities to choose to measure many financial instruments and certain other items at fair value and amends Statement 115 to, among other things, require certain disclosures for amounts for which the fair value option is applied. Statement 159 became effective for the Corporation on January 1, 2008.
Upon adoption of Statement 159, the Corporation elected to account for its hedged certificates of deposit, as detailed under the heading “Derivative Financial Instruments” below, at fair value according to the provisions of Statement 159. Prior to the adoption of Statement 159, the Corporation accounted for these certificates of deposit at fair value under Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (Statement 133), after performing required tests to determine the hedges were highly effective. The adoption of Statement 159 for these instruments did not result in a change in the reported values of the certificates of deposit on the Corporation’s consolidated balance sheets and, as such, no cumulative-effect impact upon adoption of Statement 159 for these instruments was necessary. However, adoption of Statement 159 for these instruments eliminated the requirement to perform periodic tests of hedge effectiveness.
Mortgage loans held for sale originated prior to October 1, 2008 were measured at the lower of aggregate cost or market. The Corporation elected to adopt Statement 159 for mortgage loans held for sale originated after this date to more accurately reflect the financial performance of its entire mortgage banking activities in its consolidated financial statements. Derivative financial instruments related to these activities are also recorded at fair value under Statement 133, as detailed under the heading “Derivative Financial Instruments” below. During 2008, the Corporation originated mortgage loans for sale primarily to the Federal National Mortgage Association (FNMA), the Federal Home Loan Mortgage Corporation (FHLMC) and the Federal Home Loan Bank (FHLB). These loans conformed to standards published by these agencies. Fair value is the price that secondary market investors would pay for loans with similar characteristics, including interest rate and term, as of the date fair value is measured. The Corporation classifies interest income earned on mortgage loans held for sale within interest income on the consolidated statements of operations, which is separate from the fair value adjustments on loans held for sale, which are recorded as components of gains on sale of mortgage loans.

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The following table presents a summary of the Corporation’s fair value elections under Statement 159 and their impact on the Corporation’s consolidated financial statements as of and for the year ended December 31, 2008:
                                 
                        Fair Value      
    Cost –     Fair Value –         Adjustment     Statement of
    Asset     Asset     Balance Sheet   – Gain     Operations
    (Liability)     (Liability)     Classification   (Loss)     Classification
    (in thousands)
Mortgage loans held for sale (1)
  $ 64,787     $ 66,567     Loans held for sale   $ 1,780     Gains on sale of mortgage loans
Hedged certificates of deposit
    (7,458 )     (7,517 )   Interest-bearing deposits     (59 )   Other expense
 
                         
 
  $ 57,329     $ 59,050         $ 1,721      
 
                         
 
(1)   Cost basis of mortgage loans held for sale represents the unpaid principal balance.
Investments: Debt securities are classified as held to maturity at the time of purchase when the Corporation has both the intent and ability to hold these investments until they mature. Such debt securities are carried at cost, adjusted for amortization of premiums and accretion of discounts using the effective yield method. The Corporation does not engage in trading activities, however, since the investment portfolio serves as a source of liquidity, most debt securities and all marketable equity securities are classified as available for sale. Securities available for sale are carried at estimated fair value with the related unrealized holding gains and losses reported in shareholders’ equity as a component of other comprehensive income, net of tax. Realized securities gains and losses are computed using the specific identification method and are recorded on a trade date basis. Securities are evaluated periodically to determine whether declines in value are other-than-temporary. Declines in value that are determined to be other-than-temporary are recorded as losses on the consolidated statements of operations.
Loans and Revenue Recognition: Loan and lease financing receivables are stated at their principal amount outstanding, except for mortgage loans held for sale, which the Corporation has elected to carry at fair value, and floating rate residential mortgage construction loans held for sale, which are carried at the lower of aggregate cost or fair value. Loans transferred from held for sale to portfolio are reclassified at fair value, with write-downs recorded as other expense. Interest income on loans is accrued as earned. Unearned income on lease financing receivables is recognized on a basis which approximates the effective yield method. Premiums and discounts on purchased loans are amortized as adjustments to interest income using the effective yield method.
Accrual of interest income is generally discontinued when a loan becomes 90 days past due as to principal or interest, except for adequately collateralized mortgage loans. When interest accruals are discontinued, unpaid interest previously credited to income is reversed. Non-accrual loans are restored to accrual status when all delinquent principal and interest become current or the loan is considered secured and in the process of collection.
Loan Origination Fees and Costs: Loan origination fees and the related direct origination costs are offset and the net amount is deferred and amortized over the life of the loan using the effective interest method as an adjustment to interest income. For mortgage loans sold, the net amount is included in gain or loss upon the sale of the related mortgage loan.
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 loan losses, and decreased by charge-offs, net of recoveries. Management’s periodic evaluation of the adequacy of the allowance for credit losses is based on the Corporation’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrowers’ ability to repay, the estimated fair value of underlying collateral and current economic conditions, among other considerations. Management believes that the allowance for loan losses and the reserve for unfunded lending commitments are adequate, however, future changes to the allowance or reserve may be necessary based on changes in any of these factors.
The allowance for loan losses consists of two components – specific allowances allocated to individually impaired loans, as defined by Statement of Financial Accounting Standards No. 114, “Accounting by Creditors for Impairment of a Loan” (Statement 114), and allowances calculated for pools of loans under Statement of Financial Accounting Standards No. 5, “Accounting for Contingencies” (Statement 5).

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Commercial loans, commercial mortgages and construction loans are reviewed for impairment under Statement 114 if they are both greater than $100,000 and rated less than “satisfactory” based upon the Corporation’s internal credit-rating process. A satisfactory loan does not present more than a normal credit risk based on the strength of the borrower’s management, financial condition and trends, and the type and sufficiency of underlying collateral; it is expected that the borrower will be able to satisfy the terms of the loan agreement.
A loan is considered to be impaired when, based on current information and events, it is probable that the Corporation will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, or at the loan’s observable market price or fair value of the collateral if the loan is collateral dependent. An allowance is allocated to an impaired loan if the carrying value exceeds the estimated fair value.
All loans not reviewed for impairment under Statement 114 are evaluated under Statement 5. These loans are segmented into groups with similar characteristics and an allowance for loan losses is allocated to each segment based on quantitative factors, such as recent loss history, and qualitative factors, such as economic conditions and trends.
Loans and lease financing receivables deemed to be a loss are written off through a charge against the allowance for loan losses. Closed end consumer loans are generally charged off when they become 120 days past due (180 days for open-end consumer loans) if they are not adequately secured by real estate. All other loans are evaluated for possible charge-off when it is probable that the balance will not be collected, based on the ability of the borrower to pay and the value of the underlying collateral. Recoveries of loans previously charged off are recorded as increases to the allowance for loan losses. Past due status is determined based on contractual due dates for loan payments.
Lease financing receivables include both open and closed end leases for the purchase of vehicles and equipment. Residual values are set at the inception of the lease and are reviewed periodically for impairment. If the impairment is considered to be other-than-temporary, the resulting reduction in the net investment in the lease is recognized as a loss in the period when impairment occurs.
Premises and Equipment: Premises and equipment are stated at cost, less accumulated depreciation and amortization. The provision for depreciation and amortization is generally computed using the straight-line method over the estimated useful lives of the related assets, which are a maximum of 50 years for buildings and improvements, 8 years for furniture and 5 years for equipment. Leasehold improvements are amortized over the shorter of 15 years or the non-cancelable lease term. Interest costs incurred during the construction of major bank premises are capitalized.
Other Real Estate Owned: Assets acquired in settlement of mortgage loan indebtedness are recorded as other real estate owned and are included in other assets on the consolidated balance sheets, initially at the lower of the estimated fair value of the asset less estimated selling costs or the carrying amount of the loan. Costs to maintain the assets and subsequent gains and losses on sales are included in other expense or other income, as appropriate.
Mortgage Servicing Rights: The estimated fair value of mortgage servicing rights (MSRs) related to loans sold and serviced by the Corporation is recorded as an asset upon the sale of such loans. MSRs are amortized as a reduction to servicing income over the estimated lives of the underlying loans.
MSRs are evaluated quarterly for impairment, by comparing the carrying amount to estimated fair value. Fair value is determined at the end of each quarter through a discounted cash flows valuation. Significant inputs to the valuation include expected servicing income, net of expense, the discount rate and the expected life of the underlying loans. To the extent the amortized cost of the MSRs exceed their estimated fair values; a valuation allowance is established for such impairment, through a charge against servicing income on the consolidated statements of operations. If the Corporation determines, based on subsequent quarterly valuations, that an impairment no longer exists, then the valuation allowance is reduced through a credit to earnings.
Derivative Financial Instruments: In connection with its mortgage banking activities, the Corporation enters into commitments to originate certain fixed-rate residential mortgage loans for customers, also referred to as interest rate locks. In addition, the Corporation enters into forward commitments for the future sale or purchase of mortgage-backed securities to or from third-party investors to hedge the effect of changes in interest rates on the value of the interest rate locks. Forward sales commitments may also be in the form of commitments to sell individual mortgage loans at a fixed price at a future date. Both the interest rate locks and the forward commitments are accounted for as derivatives and carried at fair value, determined as the amount that would be necessary to settle each derivative financial instrument at the end of the period. Gross derivative assets and liabilities are recorded within other assets and

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other liabilities on the consolidated balance sheets, with changes in fair value during the period recorded within gains on sale of mortgage loans on the consolidated statements of operations.
As of December 31, 2008, interest rate swaps with a notional amount of $10.0 million were used to hedge certain long-term fixed rate certificates of deposit. The terms of the certificates of deposit and the interest rate swaps are similar and were committed to simultaneously. Under the terms of the swap agreements, the Corporation is the fixed rate receiver and the floating rate payer (generally tied to the three month London Interbank Offering Rate, or LIBOR, a common index used for setting rates between financial institutions). The interest rate swaps and the certificates of deposits are recorded at fair value, with changes in the fair values during the period recorded to other expense. See additional discussion under the heading “Fair Value Option” above.
The following table presents a summary of the notional amounts and fair values of derivative financial instruments as of December 31:
                                 
    2008     2007  
    Notional             Notional        
    Amount     Fair Value     Amount     Fair Value  
    (in thousands)  
Interest rate locks with customers (1)
  $ 141,145     $ 425     $ 35,204     $ (81 )
Forward commitments (1)
    490,448       (1,445 )     70,053       236  
Interest rate swaps (2)
    10,000       18       248,000       (1,142 )
 
                           
 
          $ (1,002 )           $ (987 )
 
                           
 
(1)   As of December 31, 2008, the Corporation recorded gross mortgage banking derivative assets of $1.5 million and gross mortgage banking derivative liabilities of $2.5 million. As of December 31, 2007, gross mortgage banking derivative assets were $486,000 and gross mortgage banking derivative liabilities were $331,000.
 
(2)   Interest rate swaps recorded as a component of other liabilities on the consolidated balance sheets.
In prior years, the Corporation entered into forward-starting interest rate swaps in anticipation of the issuance of fixed-rate debt. In October 2005, the Corporation entered into a forward-starting interest rate swap with a notional amount of $150.0 million in anticipation of the issuance of trust preferred securities in January 2006. In February 2007, the Corporation entered into a forward-starting interest swap with a notional amount of $100.0 million in anticipation of the issuance of subordinated debt in May 2007. These swaps were accounted for as cash flow hedges because they hedged the variability of interest payments attributable to changes in interest rates on the forecasted issuance of fixed-rate debt. The total amount recorded as a reduction to accumulated other comprehensive income upon settlement of these derivatives is being amortized to interest expense over the life of the related securities using the effective interest method. The amount of net losses in accumulated other comprehensive income that will be reclassified into earnings in 2009 is expected to be approximately $120,000.
Income Taxes: The provision for income taxes is based upon income before income taxes, adjusted primarily for the effect of tax-exempt income, non-deductible expenses and net credits received from investments in low and moderate income housing partnerships (LIH investments) and similar investments. Certain items of income and expense are reported in different periods for financial reporting and tax return purposes. The tax effects of these temporary differences are recognized currently in the deferred income tax provision or benefit. Deferred tax assets or liabilities are computed based on the difference between the financial statement and income tax bases of assets and liabilities using the applicable enacted marginal tax rate. The deferred income tax provision or benefit is based on the changes in the deferred tax asset or liability from period to period.
Stock-Based Compensation: The Corporation accounts for its stock-based compensation awards in accordance with Statement of Financial Accounting Standards No. 123R, “Share-Based Payment” (Statement 123R), which requires public companies to recognize compensation expense related to stock-based compensation awards in their statements of operations. Compensation expense is equal to the fair value of the stock-based compensation awards, net of estimated forfeitures, and is recognized over the vesting period of such awards.
Net Income (Loss) Per Common Share: The Corporation’s basic net income (loss) per common share is calculated as net income (loss) available to common shareholders divided by the weighted average number of common shares outstanding. Net income (loss) available to common shareholders is calculated as net income (loss) less accrued dividends and discount accretion related to preferred stock. See Note M, “Stock-based Compensation Plans and Shareholders’ Equity” for additional details related to the Corporation’s issuance of preferred stock and common stock warrants.

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For diluted net income (loss) per common share, net income (loss) available to common shareholders 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, restricted stock and common stock warrants.
A reconciliation of net income (loss) available to common shareholders and weighted average common shares outstanding used to calculate basic net income (loss) per common share and diluted net income (loss) per common share follows.
                         
    2008     2007     2006  
    (in thousands)  
Net income (loss)
  $ (5,617 )   $ 152,718     $ 185,527  
Preferred stock dividends
    (419 )            
Preferred stock discount accretion
    (44 )            
 
                 
Net income (loss) available to common shareholders
  $ (6,080 )   $ 152,718     $ 185,527  
 
                 
 
                       
Weighted average common shares outstanding (basic)
    174,236       173,295       172,830  
Impact of common stock equivalents
          1,091       2,042  
 
                 
Weighted average common shares outstanding (diluted)
    174,236       174,386       174,872  
 
                 
 
                       
In 2007 and 2006, 4.4 million and 2.2 million stock options, respectively, were excluded from the diluted earnings per share computation as their effect would have been anti-dilutive. In 2008, all common stock equivalents were excluded because their effect would have been anti-dilutive due to the net loss for the year.
Disclosures about Segments of an Enterprise and Related Information: The Corporation does not have any operating segments which require disclosure of additional information. While the Corporation owns ten separate banks, each engages in similar activities, provides similar products and services, and operates in the same general geographical area. The Corporation’s non-banking activities are immaterial and, therefore, separate information has not been disclosed.
Financial Guarantees: Financial guarantees, which consist primarily of standby and commercial letters of credit, are accounted for by recognizing a liability equal to the fair value of the guarantees and crediting the liability to income over the term of the guarantee. Fair value is estimated using the fees currently charged to enter into similar agreements with similar terms. In 2008, the Corporation issued guarantees to purchase auction rate securities held in customer accounts. See Note O, “Commitments and Contingencies” for additional details.
In September 2008, the FASB issued FASB Staff Position No. 133-1 and 45-4, “Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161”. This staff position requires companies who sell credit derivatives or issue financial guarantees to disclose information about these instruments to enable users of the financial statements to assess the potential effect of the instruments on the reporting entity’s financial position, financial performance and cash flows. The disclosure requirements of this staff position were effective for the Corporation on December 31, 2008, and impacted the Corporation’s disclosures related to guarantees subject to FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others – an interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34” (FIN 45), which include: standby and commercial letters of credit and ARC purchase guarantees. See Note O, “Commitments and Contingencies” for additional information.
Business Combinations and Intangible Assets: The Corporation accounts for its acquisitions using the purchase accounting method as required by Statement of Financial Accounting Standards No. 141, “Business Combinations”. Purchase accounting requires the total purchase price to be allocated to the estimated fair values of assets and liabilities acquired, including certain intangible assets that must be recognized. Typically, this allocation results in the purchase price exceeding the fair value of net assets acquired, which is recorded as goodwill.
As required by Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (Statement 142), goodwill is not amortized to expense, but is tested for impairment at least annually. Write-downs of the balance, if necessary as a

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result of the impairment test, are to be charged to expense in the period in which goodwill is determined to be impaired. The Corporation performs its annual test of goodwill impairment as of October 31st of each year. If certain events occur which might indicate goodwill has been impaired between annual tests, goodwill must be tested when such events occur.
In 2008, the Corporation recorded a $90.0 million goodwill impairment charge for its Columbia Bank reporting unit. See Note F, “Goodwill and Intangible Assets” for additional details. Based on the results of goodwill impairment tests performed in 2007 and 2006, the Corporation concluded that there was no impairment.
Variable Interest Entities: FASB Interpretation No. 46R, “Consolidation of Variable Interest Entities (revised December 2003) – An Interpretation of ARB No. 51” (FIN 46R), provides guidance on when to consolidate certain Variable Interest Entities (VIE’s) in the financial statements of the Corporation. VIE’s are entities in which equity investors do not have a controlling financial interest or do not have sufficient equity at risk for the entity to finance activities without additional financial support from other parties. Under FIN 46R, a company must consolidate a VIE if the company has a variable interest that will absorb a majority of the VIE’s losses, if they occur, and/or receive a majority of the VIE’s residual returns, if they occur.
The provisions of FIN 46R related to Subsidiary Trusts, as interpreted by the Securities and Exchange Commission (SEC), disallow consolidation of Subsidiary Trusts in the financial statements of the Corporation. As a result, securities that were issued by the trusts (Trust Preferred Securities) are not included on the Corporation’s consolidated balance sheets. The junior subordinated debentures issued by the Parent Company to the Subsidiary Trusts, which have the same total balance and rate as the combined equity securities and trust preferred securities issued by the Subsidiary Trusts, remain in long-term debt. See Note I, “Short-Term Borrowings and Long-Term Debt” for additional information.
LIH investments are amortized under the effective interest method over the life of the Federal income tax credits generated as a result of such investments, generally ten years. As of December 31, 2008 and 2007, the Corporation’s LIH Investments, included in other assets on the consolidated balance sheets, totaled $47.5 million and $37.2 million, respectively. The net income tax benefit associated with these investments was $3.9 million, $3.7 million and $3.9 million in 2008, 2007 and 2006, respectively. None of the Corporation’s LIH investments met the consolidation criteria of FIN 46R, or its related interpretations, as of December 31, 2008 or 2007.
New Accounting Standards: In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (Statement 161). Statement 161 establishes the disclosure requirements for derivative instruments and for hedging activities, including disclosure of information that should enable users of financial information to understand how and why a company uses derivative instruments, how derivative instruments and related hedged items are accounted for, and how derivative instruments and related hedged items affect a company’s financial position, financial performance, and cash flows. The standard is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, or the Corporation’s March 31, 2009 quarterly report on Form 10-Q. The adoption of Statement 161 is not expected to have a material impact on the Corporation’s consolidated financial statements.
In June 2008, the FASB ratified Emerging Issues Task Force (EITF) Issue No. 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (EITF 03-6-1). EITF 03-6-1 requires companies to include participating share-based payment transactions, prior to vesting, in the earnings allocation in computing earnings per share. EITF 03-6-1 defines participating share-based payment awards as those that contain nonforfeitable rights to dividends, even if granted prior to when an award vests. EITF 03-6-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, or the Corporation’s March 31, 2009 quarterly report on Form 10-Q. The adoption of EITF 03-6-1 is not expected to impact the Corporation’s earning per share computations.
In December 2008, the FASB issued FASB Staff Position No. FAS 140-4 and FIN 46(R)-8, “Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities”. This staff position requires companies to disclose additional information about transfers of financial assets and interests in variable interest entities, including the following: a transferor’s continuing involvement in financial assets that it has transferred in a securitization or asset-backed financing arrangement, the nature of any restrictions and the carrying amounts of any assets held by an entity that relate to a transferred asset and how servicing assets and liabilities are reported under Statement 140. This staff position is effective for the first reporting period ending after December 15, 2008, or December 31, 2008 for the Corporation. See Note G, “Mortgage Servicing Rights” and Note I, “Short-term Borrowings and Long-term Debt” for additional disclosures related to the Corporation’s MSRs and Trust Preferred Securities.

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In December 2008, the FASB issued FASB Staff Position No. FAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets”. This staff position amends FASB Statement No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Postretirement Benefits”, to provide guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plans. This staff position is effective for disclosures about plan assets provided for fiscal years ending after December 15, 2009, or December 31, 2009 for the Corporation. The adoption of this staff position will impact future disclosures related to the Corporation’s defined benefit pension plan.
In January 2009, the FASB issued FASB Staff Position EITF 99-20-1, “Amendments to the Impairment Guidance in EITF Issue No. 99-20” (FSP EITF 99-20-1). This staff position amends the impairment guidance in EITF No. 99-20, “Recognition of Interest Income and Impairment on Purchased Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets”, to achieve more consistent determination of whether an other-than-temporary impairment has occurred for certain debt securities. Specifically, this staff position provides that when determining whether an impairment of a securitized financial asset is other-than-temporary the holder of that instrument must assess whether there has been a probable adverse change in expected cash flows and is not required to use “market participant” assumptions in that determination. FSP EITF 99-20-1 is effective for reporting periods ending after December 15, 2008, or December 31, 2008 for the Corporation. The application of this staff position did not impact the Corporation’s consolidated financial statements.
Reclassifications: Certain amounts in the 2007 and 2006 consolidated financial statements and notes have been reclassified to conform to the 2008 presentation.
NOTE B – RESTRICTIONS ON CASH AND DUE FROM BANKS
The Corporation’s subsidiary banks are required to maintain reserves, in the form of cash and balances with the Federal Reserve Bank, against their deposit liabilities. The amount of such reserves as of December 31, 2008 and 2007 was $70.9 million and $80.3 million, respectively.

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NOTE C – INVESTMENT SECURITIES
The following tables present the amortized cost and estimated fair values of investment securities as of December 31:
                                 
            Gross     Gross     Estimated  
    Amortized     Unrealized     Unrealized     Fair  
    Cost     Gains     Losses     Value  
    (in thousands)  
2008 Held to Maturity
                               
U.S. Government sponsored agency securities
  $ 6,782     $ 60     $     $ 6,842  
State and municipal securities
    825       5             830  
Corporate debt securities
    25                   25  
Mortgage-backed securities
    2,004       66       (2 )     2,068  
 
                       
 
  $ 9,636     $ 131     $ (2 )   $ 9,765  
 
                       
 
2008 Available for Sale                                
Equity securities
  $ 138,071     $ 2,133     $ (1,503 )   $ 138,701  
U.S. Government securities
    14,545       83             14,628  
U.S. Government sponsored agency securities
    74,616       2,406       (20 )     77,002  
State and municipal securities
    520,429       5,317       (2,210 )     523,536  
Corporate debt securities
    154,976       1,085       (36,167 )     119,894  
Collateralized mortgage obligations
    489,686       14,713       (206 )     504,193  
Mortgage-backed securities
    1,118,508       24,160       (1,317 )     1,141,351  
Auction rate securities (1)
    208,281             (12,381 )     195,900  
 
                       
 
  $ 2,719,112     $ 49,897     $ (53,804 )   $ 2,715,205  
 
                       
 
 
(1)   See Note O, “Commitments and Contingencies” for additional details related to auction rate securities.
 
2007 Held to Maturity                                
U.S. Government sponsored agency securities
  $ 6,478     $ 33     $     $ 6,511  
State and municipal securities
    1,120       7             1,127  
Corporate debt securities
    25                   25  
Mortgage-backed securities
    2,662       74             2,736  
 
                       
 
  $ 10,285     $ 114     $     $ 10,399  
 
                       
 
2007 Available for Sale                                
Equity securities
  $ 215,177     $ 282     $ (23,734 )   $ 191,725  
U.S. Government securities
    14,489       47             14,536  
U.S. Government sponsored agency securities
    200,899       1,658       (34 )     202,523  
State and municipal securities
    520,670       2,488       (1,620 )     521,538  
Corporate debt securities
    172,907       1,259       (8,184 )     165,982  
Collateralized mortgage obligations
    588,848       6,604       (677 )     594,775  
Mortgage-backed securities
    1,460,219       6,167       (14,198 )     1,452,188  
 
                       
 
  $ 3,173,209     $ 18,505     $ (48,447 )   $ 3,143,267  
 
                       
Securities carried at $2.0 billion and $1.5 billion as of December 31, 2008 and 2007, respectively, were pledged as collateral to secure public and trust deposits, customer repurchase agreements and interest rate swaps. Available for sale equity securities include restricted investment securities issued by the FHLB and the Federal Reserve Bank totaling $85.3 million and $109.3 million as of December 31, 2008 and 2007, respectively.

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The amortized cost and estimated fair value of debt securities as of December 31, 2008, 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     Estimated     Amortized     Estimated  
    Cost     Fair Value     Cost     Fair Value  
    (in thousands)  
Due in one year or less
  $ 347     $ 352     $ 125,787     $ 126,595  
Due from one year to five years
    7,285       7,345       274,010       278,368  
Due from five years to ten years
                81,921       79,975  
Due after ten years
                491,129       446,022  
 
                       
 
    7,632       7,697       972,847       930,960  
Collateralized mortgage obligations
                489,686       504,193  
Mortgage-backed securities
    2,004       2,068       1,118,508       1,141,351  
 
                       
 
  $ 9,636     $ 9,765     $ 2,581,041     $ 2,576,504  
 
                       
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 other-than-temporary impairment of investments. Gross realized losses on equity and debt securities are net of other-than-temporary impairment charges:
                                 
                    Other-than-        
    Gross     Gross     temporary        
    Realized     Realized     Impairment     Net (Losses)  
    Gains     Losses     Losses     Gains  
2008:
                               
Equity securities
  $ 7,626     $     $ (44,649 )   $ (37,023 )
Debt securities
    3,887       (4,418 )     (20,687 )     (21,218 )
 
                       
Total
  $ 11,513     $ (4,418 )   $ (65,336 )   $ (58,241 )
 
                       
 
                               
2007:
                               
Equity securities
  $ 1,987     $ (51 )   $ (292 )   $ 1,644  
Debt securities
    2,158       (2,030 )     (32 )     96  
 
                       
Total
  $ 4,145     $ (2,081 )   $ (324 )   $ 1,740  
 
                       
 
                               
2006:
                               
Equity securities
  $ 7,128     $ (40 )   $ (123 )   $ 6,965  
Debt securities
    555       (81 )           474  
 
                       
Total
  $ 7,683     $ (121 )   $ (123 )   $ 7,439  
 
                       

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The following table presents a summary of other-than-temporary impairment charges recorded by the Corporation, by investment security type:
                         
    2008     2007     2006  
    (in thousands)  
Financial institution stocks
  $ 43,131     $ 117     $ 123  
U.S. government sponsored agency stock
    356       175        
Mutual funds
    1,162              
 
                 
Total equity securities charges
    44,649       292       123  
 
                 
 
                       
Collaterialized mortgage obligations
          32        
Bank-issued subordinated debt
    4,855              
Pooled trust preferred securities
    15,832              
 
                 
Total debt securities charges
    20,687       32        
 
                 
 
                       
Total other-than-temporary impairment charges
  $ 65,336     $ 324     $ 123  
 
                 
In 2008, the values of financial institution stocks, including those held by the Corporation, declined significantly. The $43.1 million other-than-temporary impairment charge in 2008 was due to the increasing severity and duration of the decline in fair values of such holdings. These factors, in conjunction with management’s evaluation of the near-term prospects of each specific issuer, resulted in the charges recognized during 2008. As of December 31, 2008, after other-than-temporary impairment charges, the financial institution stock portfolio had a cost basis of $42.8 million and a fair value of $43.4 million.
In addition to financial institution stocks, the Corporation recorded other-than-temporary impairment charges on other equity securities of $1.5 million in 2008. The charges included a write-down of the Corporation’s entire investment in the stock of U.S. government sponsored agencies.
The estimated fair value of debt securities issued by financial institutions also declined significantly during 2008. The $4.9 million other-than-temporary impairment charge for bank-issued subordinated debt was related to an investment in a financial institution which failed during the third quarter of 2008. The $15.8 million other-than-temporary impairment charge for pooled trust preferred securities was due to adverse changes in the expected cash flows from certain of these investments.
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, as of December 31, 2008. The unrealized losses included within the table below are subsequent to the other-than-temporary impairment charges detailed above:
                                                 
    Less Than 12 months     12 Months or Longer     Total  
    Estimated     Unrealized     Estimated     Unrealized     Estimated     Unrealized  
    Fair Value     Losses     Fair Value     Losses     Fair Value     Losses  
    (in thousands)  
U.S. Government sponsored agency securities
  $ 357     $ (3 )   $ 1,834     $ (17 )   $ 2,191     $ (20 )
State and municipal securities
    98,846       (2,209 )     1,039       (1 )     99,885       (2,210 )
Corporate debt securities
    36,832       (6,310 )     53,198       (29,857 )     90,030       (36,167 )
Collateralized mortgage obligations
    4,560       (206 )                 4,560       (206 )
Mortgage-backed securities
    123,065       (563 )     90,804       (756 )     213,869       (1,319 )
Auction rate securities (1)
    195,900       (12,381 )                 195,900       (12,381 )
 
                                   
Total debt securities
    459,560       (21,672 )     146,875       (30,631 )     606,435       (52,303 )
Equity securities
    10,377       (1,414 )     327       (89 )     10,704       (1,503 )
 
                                   
 
  $ 469,937     $ (23,086 )   $ 147,202     $ (30,720 )   $ 617,139     $ (53,806 )
 
                                   
 
(1)   See Note O, “Commitments and Contingencies” for additional details related to auction rate securities.

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As noted above, for its investments in equity securities, most notably 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 December 31, 2008 to be other-than-temporarily impaired.
In relation to the Corporation’s investments in mortgage-backed securities and collateralized mortgage obligations, the contractual terms of those investments 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 for mortgage-backed securities and collateralized mortgage obligations held by the Corporation is attributable to changes in interest rates and not credit quality, and because the Corporation has the ability and intent to hold those investments until a recovery of fair value, which may be maturity, the Corporation does not consider those investments to be other-than-temporarily impaired as of December 31, 2008.
A significant 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 as of December 31:
                                 
    2008     2007  
    Amortized     Estimated fair     Amortized     Estimated fair  
    cost     value     cost     value  
    (in thousands)  
Single-issuer trust preferred securities (1)
  $ 97,887     $ 69,819     $ 96,781     $ 92,515  
Subordinated debt
    34,788       31,745       37,886       36,760  
Pooled trust preferred securities
    19,351       15,381       35,271       33,743  
 
                       
Corporate debt securities issued by financial institutions
    152,026       116,945       169,938       163,018  
Other corporate debt securities
    2,950       2,949       2,969       2,964  
 
                       
Available for sale corporate debt securities
  $ 154,976     $ 119,894     $ 172,907     $ 165,982  
 
                       
 
(1)   Single-issuer trust preferred securities with estimated fair values totaling $7.5 million as of December 31, 2008 are classified as Level 3 assets under Statement 157. See Note P, “Fair Value Measurements” for additional details.
Based on management’s other-than-temporary impairment evaluations and the Corporation’s ability and intent to hold these investments for a reasonable period of time sufficient for a recovery of fair value, the Corporation does not consider these investments to be other-than-temporarily impaired as of December 31, 2008.
NOTE D – LOANS AND ALLOWANCE FOR CREDIT LOSSES
Gross loans are summarized as follows as of December 31:
                 
    2008     2007  
    (in thousands)  
Real-estate – commercial mortgage
  $ 4,017,075     $ 3,480,958  
Commercial – industrial, financial and agricultural
    3,635,544       3,427,085  
Real-estate – home equity
    1,695,671       1,501,231  
Real-estate – construction
    1,268,955       1,366,923  
Real-estate – residential mortgage
    972,797       848,901  
Consumer
    365,419       500,708  
Leasing and other
    84,832       79,175  
Overdrafts
    12,855       10,208  
 
           
 
    12,053,148       11,215,189  
Unearned income
    (10,528 )     (10,765 )
 
           
 
  $ 12,042,620     $ 11,204,424  
 
           

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The Corporation has extended credit to the officers and directors of the Corporation and to their associates. These related-party loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and do not involve more than the normal risk of collectibility. The aggregate dollar amount of these loans, including unadvanced commitments, was $290.9 million and $303.0 million as of December 31, 2008 and 2007, respectively. During 2008, additions totaled $49.3 million and repayments totaled $61.4 million.
The total portfolio of mortgage loans serviced by the Corporation for unrelated third parties was $1.2 billion and $952.1 million as of December 31, 2008 and 2007, respectively.
Changes in the allowance for credit losses were as follows for the years ended December 31:
                         
    2008     2007     2006  
    (in thousands)  
Balance at beginning of year
  $ 112,209     $ 106,884     $ 92,847  
 
                       
Loans charged off
    (56,859 )     (13,739 )     (6,969 )
Recoveries of loans previously charged off
    5,161       4,001       4,517  
 
                 
Net loans charged off
    (51,698 )     (9,738 )     (2,452 )
 
                       
Provision for loan losses
    119,626       15,063       3,498  
Allowance of purchased entity
                12,991  
 
                 
 
                       
Balance at end of year
  $ 180,137     $ 112,209     $ 106,884  
 
                 
The following table presents the components of the allowance for credit losses for the years ended December 31:
                         
    2008     2007     2006  
    (in thousands)  
Allowance for loan losses
  $ 173,946     $ 107,547     $ 106,884  
Reserve for unfunded lending commitments (1)
    6,191       4,662        
 
                 
Allowance for credit losses
  $ 180,137     $ 112,209     $ 106,884  
 
                 
 
(1)   Reserve for unfunded commitments transferred to other liabilities as of December 31, 2007. Prior periods were not reclassified.
The following table presents non-performing assets as of December 31:
                 
    2008     2007  
    (in thousands)  
Non-accrual loans
  $ 161,962     $ 76,150  
Accruing loans greater than 90 days past due
    35,177       29,782  
Other real estate owned
    21,855       14,934  
 
           
 
  $ 218,994     $ 120,866  
 
           

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The recorded investment in loans that were considered to be impaired, as defined by Statement 114, and the related allowance for loan losses as of December 31 is summarized as follows:
                                 
    2008     2007  
            Related             Related  
    Recorded     Allowance for     Recorded     Allowance for  
    Investment     Loan Loss (1)     Investment     Loan Loss (1)  
    (in thousands)  
Performing loans
  $ 350,502     $ (66,730 )   $ 240,255     $ (60,102 )
Non-accrual loans
    77,053       (27,452 )     24,500       (9,600 )
 
                       
Total impaired loans (as defined by Statement 114)
  $ 427,555     $ (94,182 )   $ 264,755     $ (69,702 )
 
                       
 
(1)   As of December 31, 2008 and 2007, there were no impaired loans that did not have a related allowance for loan loss.
The average recorded investment in impaired performing loans during 2008, 2007 and 2006 was approximately $273.6 million, $216.8 million and $200.7 million, respectively. The average recorded investment in impaired non-accrual loans during 2008, 2007 and 2006 was approximately $54.7 million, $19.3 million and $13.7 million, respectively.
The Corporation generally applies all payments received on non-accruing impaired loans to principal until such time as the principal is paid off, after which time any additional payments received are recognized as interest income. The Corporation recognized interest income of approximately $16.8 million, $16.3 million and $15.7 million on impaired loans in 2008, 2007 and 2006, respectively.
NOTE E – PREMISES AND EQUIPMENT
The following is a summary of premises and equipment as of December 31:
                 
    2008     2007  
    (in thousands)  
Land
  $ 33,577     $ 31,902  
Buildings and improvements
    222,586       210,915  
Furniture and equipment
    148,945       139,174  
Construction in progress
    12,622       11,639  
 
           
 
    417,730       393,630  
Less: Accumulated depreciation and amortization
    (215,073 )     (200,334 )
 
           
 
  $ 202,657     $ 193,296  
 
           
NOTE F – GOODWILL AND INTANGIBLE ASSETS
The following table summarizes the changes in goodwill:
                         
    2008     2007     2006  
    (in thousands)  
Balance at beginning of year
  $ 624,072     $ 626,042     $ 418,735  
Goodwill impairment
    (90,000 )            
Other goodwill additions (reductions)
    313       (1,970 )     207,307  
 
                 
Balance at end of year
  $ 534,385     $ 624,072     $ 626,042  
 
                 
The Corporation did not complete any acquisitions during the years ended December 31, 2008 and 2007. The other goodwill additions (reductions) in 2008 and 2007 were primarily due to additional purchase price incurred for prior acquisitions as a result of contingencies being met, offset by tax benefits realized on the exercise of stock options assumed in acquisitions.

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The goodwill addition in 2006 was due to the Corporation’s acquisition of Columbia Bancorp of Columbia, Maryland for a total purchase price of $306.0 million. Columbia Bancorp was a $1.3 billion bank holding company whose primary subsidiary was The Columbia Bank.
Based on its 2008 annual goodwill impairment test performed as required by Statement 142, the Corporation determined that the goodwill allocated to its Columbia Bank reporting unit (Columbia) was impaired, resulting in a $90.0 million goodwill impairment charge. The Columbia reporting unit consisted of the following wholly owned banking subsidiaries: The Columbia Bank (which the Corporation acquired in 2006), Hagerstown Trust Company and The Peoples Bank of Elkton.
The Corporation tests for impairment by first allocating its goodwill and other assets and liabilities, as necessary, to defined reporting units. A fair value is then determined for each reporting unit based on three evenly weighted metrics: (1) a primary market approach, which measures fair value based on trading multiples of independent publicly traded financial institutions of comparable sizes to the reporting units, (2) a secondary market approach, which measures fair value based on acquisition multiples of publicly traded financial institutions which were acquired in the year of the current goodwill impairment test, and (3) an income approach, which estimates fair value based on discounted cash flows. If the fair values of the reporting units exceed their book values, no write-downs of goodwill are necessary. If the fair values are less than the book values, an additional valuation procedure is required to assess the proper carrying value of the goodwill.
Columbia’s goodwill impairment resulted from a number of external and internal factors. Among the external factors that contributed to Columbia’s impairment was the current year’s decreases in the values of financial institution stocks and in the acquisition multiples paid for banks of comparable size and character to Columbia, which produced a lower fair value for Columbia under the primary and secondary market approaches. The Corporation acquired Columbia Bancorp in 2006, paying a price that was commensurate with the market at that time, when bank values were higher than they were as of the date of the 2008 impairment test. Among the internal factors which contributed to the current year’s impairment charge was a decrease in expected cash flows for Columbia due to the current interest rate environment, which negatively affected Columbia’s net interest income, and a deterioration in the credit quality of Columbia’s commercial real estate portfolio.
As required by Statement 142, the Corporation recorded all fair value adjustments net of deferred taxes. The resulting $90.0 million goodwill impairment charge recorded for Columbia was non-deductible for Federal income tax purposes. In addition, since goodwill is excluded from regulatory capital, the impairment charge did not impact the Corporation’s regulatory capital ratios. For additional details related to the income tax effect of the goodwill impairment charge, see Note K, “Income Taxes”. For details related to the Corporation’s regulatory capital, see Note J, “Regulatory Matters”.
The following table summarizes intangible assets as of December 31:
                                                         
    2008     2007  
            Accumulated                     Accumulated     Impairment        
    Gross     Amortization     Net     Gross     Amortization     Write-off     Net  
    (in thousands)  
Amortizing:
                                                       
Core deposit
  $ 50,279     $ (30,976 )   $ 19,303     $ 50,279     $ (24,754 )   $     $ 25,525  
Trade name
                      797       (212 )     (585 )      
Unidentifiable and other
    11,878       (8,996 )     2,882       11,878       (7,830 )           4,048  
 
                                         
Total amortizing
    62,157       (39,972 )     22,185       62,954       (32,796 )     (585 )     29,573  
Non-amortizing
    1,263             1,263       1,747             (484 )     1,263  
 
                                         
 
  $ 63,420     $ (39,972 )   $ 23,448     $ 64,701     $ (32,796 )   $ (1,069 )   $ 30,836  
 
                                         
Core deposit intangible assets are amortized using an accelerated method over the estimated remaining life of the acquired core deposits. As of December 31, 2008, these assets had a weighted average remaining life of approximately six years. Unidentifiable intangible assets, consisting of premiums paid on branch acquisitions that did not qualify for business combinations accounting under Statement 141, had a weighted average remaining life of five years. All other amortizing intangible assets had a weighted average remaining life of approximately seven years. Amortization expense related to intangible assets totaled $7.2 million, $8.3 million and $7.9 million in 2008, 2007 and 2006, respectively.

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In 2007, the Corporation recorded $1.1 million of charges to other expense representing the balance of impaired trade name intangibles for three subsidiary banks that consolidated with other subsidiary banks. See Note A, “Summary of Significant Accounting Policies” for additional information related to these transactions.
Amortization expense for the next five years is expected to be as follows (in thousands):
         
Year        
2009
  $ 5,741  
2010
    5,235  
2011
    4,239  
2012
    3,036  
2013
    2,240  
NOTE G – MORTGAGE SERVICING RIGHTS
The following table summarizes the changes in MSRs, which are included in other assets on the consolidated balance sheets:
                 
    2008     2007  
    (in thousands)  
Amortized cost: