UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20459

FORM 10-Q

(Mark One)

x
þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September 30, 2009~~,

March 31, 2010, or

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

For the transition period from to

Commission File No. 0-10587

FULTON FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)


PENNSYLVANIA		23-2195389
~~PENNSYLVANIA~~		~~23-2195389~~

(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)


~~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~~Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþx Noo¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yeso¨ Noo¨

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”~~company in Rule 12b-2 of the Exchange Act. ~~(Check one):~~

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso¨ Noþx

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the ~~issuer’s~~issuer's classes of common stock, as of the latest practicable date:

Common Stock, $2.50 Par Value – ~~176,264,000~~176,606,000 shares outstanding as of ~~October 31, 2009~~.

April 30, 2010.

FULTON FINANCIAL CORPORATION

FORM 10-Q FOR THE QUARTER ENDED ~~SEPTEMBER 30, 2009~~MARCH 31, 2010

INDEX

~~INDEX~~


Description				Page
~~Description~~						~~Page~~
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited):

(a)	Consolidated Balance Sheets ~~— September 30, 2009~~- March 31, 2010 and December 31, ~~2008~~2009			3

(b)	Consolidated Statements of Income —- Three ended March 31, 2010 and ~~nine months ended September 30,~~ 2009 ~~and 2008~~			4

(c)	Consolidated Statements of Shareholders’ Equity and Comprehensive Income ~~— Nine~~- Three months ended ~~September 30,~~March 31, 2010 and 2009 ~~and 2008~~			5

(d)	Consolidated Statements of Cash Flows ~~— Nine~~- Three months ended ~~September 30,~~March 31, 2010 and 2009 ~~and 2008~~			6

(e)	Notes to Consolidated Financial Statements			7

Item 2. ~~Management’s~~	Management's Discussion and Analysis of Financial Condition and Results of Operations		26		24

Item 3.	Quantitative and Qualitative Disclosures about Market Risk		50		40

Item 4.	Controls and Procedures		56		46

PART II. OTHER INFORMATION

Item 1. ~~Legal Proceedings~~		57Legal Proceedings			47

Item 1A. ~~Risk Factors~~		57Risk Factors			47

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		57		47

Item 3.	Defaults Upon Senior Securities		57		47

Item 4. ~~Submission of Matters to a Vote of Security Holders~~		57Reserved			47

Item 5. ~~Other Information~~		57Other Information			47

Item 6. ~~Exhibits~~		57

~~Signatures~~Exhibits		58

~~Exhibit Index~~	47
		59
Signatures				48

Exhibit Index				49

Certifications					60	50

Item 1.

Financial Statements

~~Item 1. Financial Statements~~

FULTON FINANCIAL CORPORATION

CONSOLIDATED BALANCE SHEETS

(in thousands, except per-share data)

September 30
2009 December 31
(unaudited) 2008
ASSETS

Cash and due from banks $ 252,004 $ 331,164
Interest-bearing deposits with other banks 24,048 16,791
Federal funds sold — 4,919
Loans held for sale 84,766 95,840
Investment securities:
Held to maturity (estimated fair value of $9,248 in 2009 and $9,765 in 2008) 9,145 9,636
Available for sale 3,265,254 2,715,205

Loans, net of unearned income 11,968,246 12,042,620
Less: Allowance for loan losses (234,511 ) (173,946 )

Net Loans
11,733,735 11,868,674

Premises and equipment 204,520 202,657
Accrued interest receivable 60,433 58,566
Goodwill 534,919 534,385
Intangible assets 19,122 23,448
Other assets 338,763 323,821

Total Assets
$ 16,526,709 $ 16,185,106

LIABILITIES

Deposits:
Noninterest-bearing $ 1,932,382 $ 1,653,440
Interest-bearing 10,100,298 8,898,476

Total Deposits
12,032,680 10,551,916

Short-term borrowings:
Federal funds purchased 210,865 1,147,673
Other short-term borrowings 511,753 615,097

Total Short-Term Borrowings
722,618 1,762,770

Accrued interest payable 49,962 53,678
Other liabilities 146,816 169,298
Federal Home Loan Bank advances and long-term debt 1,650,870 1,787,797

Total Liabilities
14,602,946 14,325,459

SHAREHOLDERS’ EQUITY

Preferred stock, $1,000 par value, 376,500 shares authorized and outstanding 369,950 368,944
Common stock, $2.50 par value, 600 million shares authorized, 192.9 million shares issued in 2009 and 192.4 million shares issued in 2008 482,195 480,978
Additional paid-in capital 1,257,608 1,260,947
Retained earnings 57,962 31,075
Accumulated other comprehensive income (loss) 11,006 (17,907 )
Treasury stock, 16.7 million shares in 2009 and 17.3 million shares in 2008, at cost (254,958 ) (264,390 )

Total Shareholders’ Equity
1,923,763 1,859,647

Total Liabilities and Shareholders’ Equity
$ 16,526,709 $ 16,185,106


	March 31 2010 (unaudited)			December 31 2009

ASSETS
Cash and due from banks	$	276,200		$	284,508
Interest-bearing deposits with other banks		7,842			16,591
Loans held for sale		53,798			85,384
Investment securities:
Held to maturity (estimated fair value of $8,254 in 2010 and $8,797 in 2009)		8,159			8,700
Available for sale		3,095,469			3,258,386
Loans, net of unearned income		11,964,840			11,972,424
Less: Allowance for loan losses		(264,915	)		(256,698	)

Net Loans		11,699,925			11,715,726

Premises and equipment		204,149			204,203
Accrued interest receivable		58,689			58,515
Goodwill		535,149			534,862
Intangible assets		16,388			17,701
Other assets		455,755			451,059

Total Assets	$	16,411,523		$	16,635,635

LIABILITIES
Deposits:
Noninterest-bearing	$	2,038,199		$	2,012,837
Interest-bearing		10,118,256			10,085,077

Total Deposits		12,156,455			12,097,914

Short-term borrowings:
Federal funds purchased		162,040			378,067
Other short-term borrowings		462,610			490,873

Total Short-Term Borrowings		624,650			868,940

Accrued interest payable		49,247			46,596
Other liabilities		170,578			144,930
Federal Home Loan Bank advances and long-term debt		1,440,755			1,540,773

Total Liabilities		14,441,685			14,699,153


SHAREHOLDERS’ EQUITY
Preferred stock, $1,000 par value, 376,500 shares authorized and outstanding		370,649			370,290
Common stock, $2.50 par value, 600 million shares authorized, 193.1 million shares issued in 2010 and 193.0 million shares issued in 2009		482,676			482,491
Additional paid-in capital		1,257,875			1,257,730
Retained earnings		89,120			71,999
Accumulated other comprehensive income:
Unrealized gains on investment securities not other-than-temporarily impaired		36,649			24,975
Unrealized non-credit related losses on other-than-temporarily impaired debt securities		(5,741	)		(8,349	)
Unrecognized pension and postretirement plan costs		(5,924	)		(5,942	)
Unamortized effective portions of losses on forward-starting interest rate swaps		(3,192	)		(3,226	)

Accumulated other comprehensive income		21,792			7,458
Treasury stock, 16.5 million shares in 2010 and 16.6 million shares in 2009, at cost		(252,274	)		(253,486	)

Total Shareholders’ Equity		1,969,838			1,936,482

Total Liabilities and Shareholders’ Equity	$	16,411,523		$	16,635,635

See Notes to Consolidated Financial Statements

FULTON FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(in thousands, except per-share data)

Three Months Ended Nine Months Ended
September 30 September 30
2009 2008 2009 2008
INTEREST INCOME

Loans, including fees $ 162,375 $ 180,170 $ 486,965 $ 550,477
Investment securities:
Taxable 29,376 26,025 85,648 84,114
Tax-exempt 3,966 4,513 12,618 13,540
Dividends 543 1,421 1,715 5,103
Loans held for sale 1,550 1,539 4,439 4,727
Other interest income 51 141 140 460

Total Interest Income
197,861 213,809 591,525 658,421

INTEREST EXPENSE

Deposits 43,825 47,192 141,727 161,807
Short-term borrowings 835 12,877 3,193 44,093
Long-term debt 20,400 19,722 61,744 60,714

Total Interest Expense
65,060 79,791 206,664 266,614

Net Interest Income
132,801 134,018 384,861 391,807
Provision for loan losses 45,000 26,700 145,000 54,626

Net Interest Income After Provision for Loan Losses
87,801 107,318 239,861 337,181

OTHER INCOME

Service charges on deposit accounts 15,321 16,177 45,276 45,463
Other service charges and fees 10,003 9,598 27,952 27,320
Investment management and trust services 8,191 8,045 23,970 25,193
Gains on sales of mortgage loans 2,778 2,266 18,764 7,247
Gain on sale of credit card portfolio — — — 13,910
Other 4,932 4,230 14,558 11,414

Total other-than-temporary impairment losses (1,211 ) (10,681 ) (15,235 ) (39,271 )
Less: Portion of (gain) loss recognized in other comprehensive income (before taxes) (1,584 ) — 6,021 —

Net other-than-temporary impairment losses (2,795 ) (10,681 ) (9,214 ) (39,271 )
Net gains on sale of investment securities 2,750 1,180 12,165 9,369

Net investment securities gains (losses) (45 ) (9,501 ) 2,951 (29,902 )

Total Other Income
41,180 30,815 133,471 100,645

OTHER EXPENSES

Salaries and employee benefits 54,086 55,310 165,189 164,786
Net occupancy expense 10,165 10,237 31,428 30,999
FDIC insurance expense 5,244 1,147 21,738 2,684
Equipment expense 3,281 3,061 9,660 9,907
Data processing 3,121 3,242 9,100 9,604
Marketing 1,982 3,097 6,277 9,521
Intangible amortization 1,429 1,730 4,326 5,386
Operating risk loss 338 3,480 6,683 19,108
Other 20,164 18,051 59,587 53,756

Total Other Expenses
99,810 99,355 313,988 305,751

Income Before Income Taxes
29,171 38,778 59,344 132,075
Income taxes 5,825 9,702 9,802 35,825

Net Income
23,346 29,076 49,542 96,250
Preferred stock dividends and discount accretion (5,046 ) — (15,123 ) —

Net Income Available to Common Shareholders
$ 18,300 $ 29,076 $ 34,419 $ 96,250

PER COMMON SHARE:

Net income (basic) $ 0.10 $ 0.17 $ 0.20 $ 0.55
Net income (diluted) 0.10 0.17 0.20 0.55
Cash dividends 0.03 0.15 0.09 0.45


	Three Months Ended March 31
	2010			2009
INTEREST INCOME
Loans, including fees	$	157,534		$	162,314
Investment securities:
Taxable		28,149			26,849
Tax-exempt		3,595			4,476
Dividends		729			617
Loans held for sale		556			1,261
Other interest income		25			50

Total Interest Income		190,588			195,567

INTEREST EXPENSE
Deposits		33,738			49,896
Short-term borrowings		549			1,436
Long-term debt		17,792			20,119

Total Interest Expense		52,079			71,451


Net Interest Income		138,509			124,116
Provision for loan losses		40,000			50,000

Net Interest Income After Provision for Loan Losses		98,509			74,116

OTHER INCOME
Service charges on deposit accounts		14,267			14,894
Other service charges and fees		9,372			8,354
Investment management and trust services		8,088			7,903
Gains on sales of mortgage loans		3,364			8,591
Other		4,599			4,253
Total other-than-temporary impairment losses		(5,251	)		(5,856	)
Less: Portion of loss recognized in other comprehensive income (before taxes)		274			2,816

Net other-than-temporary impairment losses		(4,977	)		(3,040	)
Net gains on sales of investment securities		2,754			5,959

Net investment securities gains (losses)		(2,223	)		2,919

Total Other Income		37,467			46,914

OTHER EXPENSES
Salaries and employee benefits		52,345			55,304
Net occupancy expense		11,650			11,023
FDIC insurance expense		4,954			4,288
Equipment expense		3,091			3,079
Data processing		2,624			3,072
Professional fees		2,546			2,228
Telecommunications		2,270			2,163
Marketing		1,830			2,571
Intangible amortization		1,314			1,463
Operating risk loss		511			6,201
Other		16,094			14,980

Total Other Expenses		99,229			106,372

Income Before Income Taxes		36,747			14,658
Income taxes		9,267			1,573

Net Income		27,480			13,085
Preferred stock dividends and discount accretion		(5,065	)		(5,031	)

Net Income Available to Common Shareholders	$	22,415		$	8,054


PER COMMON SHARE:
Net income (basic)	$	0.13		$	0.05
Net income (diluted)		0.13			0.05
Cash dividends		0.03			0.03

See Notes to Consolidated Financial Statements

FULTON FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF ~~SHAREHOLDERS’~~SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (UNAUDITED)

~~NINE~~

THREE MONTHS ENDED ~~SEPTEMBER 30,~~MARCH 31, 2010 AND 2009 ~~AND 2008~~

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 December 31, 2008 $ 368,944 175,044 $ 480,978 $ 1,260,947 $ 31,075 $ (17,907 ) $ (264,390 ) $ 1,859,647
Cumulative effect of FSP FAS 115-2 and FAS 124-2 adoption (net of $3.4 million tax effect) 6,298 (6,298 ) —
Comprehensive income:
Net income 49,542 49,542
Other comprehensive income 35,211 35,211

Total comprehensive income
84,753

Stock issued, including related tax benefits 1,105 1,217 (4,708 ) 9,432 5,941
Stock-based compensation awards 1,369 1,369
Preferred stock discount accretion 1,006 (1,006 ) —
Preferred stock cash dividends (12,130 ) (12,130 )
Common stock cash dividends — $0.09 per share (15,817 ) (15,817 )

Balance at September 30, 2009 $ 369,950 176,149 $ 482,195 $ 1,257,608 $ 57,962 $ 11,006 $ (254,958 ) $ 1,923,763

Balance at December 31, 2007 $ — 173,503 $ 479,559 $ 1,254,369 $ 141,993 $ (21,773 ) $ (279,228 ) $ 1,574,920
Cumulative effect of initial recognition of endorsement split-dollar life insurance liability (677 ) (677 )
Impact of pension plan measurement date change (net of $23,000 tax effect) 43 43
Comprehensive income:
Net income 96,250 96,250
Other comprehensive income 511 511

Total comprehensive income
96,761

Stock issued, including related tax benefits 1,184 1,251 (2,189 ) 10,419 9,481
Stock-based compensation awards 1,671 1,671
Common stock cash dividends — $0.45 per share (78,289 ) (78,289 )

Balance at September 30, 2008 $ — 174,687 $ 480,810 $ 1,253,851 $ 159,320 $ (21,262 ) $ (268,809 ) $ 1,603,910


	Preferred Stock		Common Stock			Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total
	Preferred Stock		Shares Outstanding	Amount		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total
	(in thousands)

Balance at December 31, 2009	$	370,290	176,364	$	482,491	$	1,257,730		$	71,999		$	7,458		$	(253,486	)	$	1,936,482
Comprehensive income:
Net income										27,480									27,480
Other comprehensive income													14,334						14,334

Total comprehensive income																			41,814

Stock issued, including related tax benefits			145		185		(148	)								1,212			1,249
Stock-based compensation awards							293												293
Preferred stock discount accretion		359								(359	)								0
Preferred stock cash dividends										(4,706	)								(4,706	)
Common stock cash dividends - $0.03 per share										(5,294	)								(5,294	)


Balance at March 31, 2010	$	370,649	176,509	$	482,676	$	1,257,875		$	89,120		$	21,792		$	(252,274	)	$	1,969,838


Balance at December 31, 2008	$	368,944	175,044	$	480,978	$	1,260,947		$	31,075		$	(17,907	)	$	(264,390	)	$	1,859,647
Cumulative effect of FSP FAS 115-2 and FAS 124-2 adoption (net of $3.4 million tax effect)										6,298			(6,298	)					0
Comprehensive income:
Net income										13,085									13,085
Other comprehensive loss													(7,313	)					(7,313	)

Total comprehensive income																			5,772

Stock issued, including related tax benefits			463		234		(2,348	)								5,625			3,511
Stock-based compensation awards							380												380
Preferred stock discount accretion		326								(326	)								0
Preferred stock cash dividends										(2,719	)								(2,719	)
Common stock cash dividends - $0.03 per share										(5,270	)								(5,270	)


Balance at March 31, 2009	$	369,270	175,507	$	481,212	$	1,258,979		$	42,143		$	(31,518	)	$	(258,765	)	$	1,861,321

See Notes to Consolidated Financial Statements

FULTON FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

Nine Months Ended
September 30
2009 2008
CASH FLOWS FROM OPERATING ACTIVITIES:

Net Income $ 49,542 $ 96,250

Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 145,000 54,626
Depreciation and amortization of premises and equipment 15,395 14,776
Net amortization of investment securities premiums 1,265 372
Gain on sale of credit card portfolio — (13,910 )
Investment securities (gains) losses (2,951 ) 29,902
Net decrease in loans held for sale 11,074 17,396
Amortization of intangible assets 4,326 5,386
Stock-based compensation expense 1,369 1,671
Excess tax benefits from stock-based compensation expense — (20 )
(Increase) decrease in accrued interest receivable (1,867 ) 11,417
Increase in other assets (18,462 ) (12,274 )
Decrease in accrued interest payable (3,716 ) (21,288 )
Increase (decrease) in other liabilities 5,417 (17,279 )

Total adjustments 156,850 70,775

Net cash provided by operating activities
206,392 167,025

CASH FLOWS FROM INVESTING ACTIVITIES:

Proceeds from sales of securities available for sale 548,119 662,993
Proceeds from maturities of securities held to maturity 3,836 5,273
Proceeds from maturities of securities available for sale 588,003 546,407
Proceeds from sale of credit card portfolio — 100,516
Purchase of securities held to maturity (3,501 ) (4,813 )
Purchase of securities available for sale (1,654,074 ) (903,817 )
Increase in short-term investments (2,338 ) (29,036 )
Net increase in loans (9,042 ) (715,219 )
Net purchases of premises and equipment (17,258 ) (20,944 )

Net cash used in investing activities
(546,255 ) (358,640 )

CASH FLOWS FROM FINANCING ACTIVITIES:

Net increase (decrease) in demand and savings deposits 1,133,516 (21,071 )
Net increase (decrease) in time deposits 347,248 (167,819 )
Additions to long-term debt — 344,690
Repayments of long-term debt (136,927 ) (166,934 )
(Decrease) increase in short-term borrowings (1,040,152 ) 206,022
Dividends paid (48,923 ) (78,196 )
Net proceeds from issuance of stock 5,941 9,461
Excess tax benefits from stock-based compensation expense — 20

Net cash provided by financing activities
260,703 126,173

Net Decrease in Cash and Due From Banks
(79,160 ) (65,442 )
Cash and Due From Banks at Beginning of Year
331,164 381,283

Cash and Due From Banks at End of Period
$ 252,004 $ 315,841

Supplemental Disclosures of Cash Flow Information

Cash paid during the period for:
Interest $ 210,380 $ 287,902
Income taxes 9,076 67,264


	Three Months Ended March 31
	2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income	$	27,480		$	13,085
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		40,000			50,000
Depreciation and amortization of premises and equipment		5,163			4,912
Net amortization of investment securities premiums		802			116
Investment securities losses (gains)		2,223			(2,919	)
Net decrease (increase) in loans held for sale		31,586			(6,193	)
Amortization of intangible assets		1,314			1,463
Stock-based compensation		293			380
Increase in accrued interest receivable		(174	)		(803	)
Decrease (increase) in other assets		4,200			(12,926	)
Increase in accrued interest payable		2,651			13,013
Increase in other liabilities		6,368			19,041

Total adjustments		94,426			66,084

Net cash provided by operating activities		121,906			79,169


CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale		89,647			162,363
Proceeds from maturities of securities held to maturity		117			983
Proceeds from maturities of securities available for sale		167,992			152,432
Purchase of securities held to maturity		(84	)		(922	)
Purchase of securities available for sale		(76,296	)		(731,005	)
Decrease in short-term investments		8,749			7,381
Net (increase) decrease in loans		(20,715	)		3,510
Net purchases of premises and equipment		(5,109	)		(7,750	)

Net cash provided by (used in) investing activities		164,301			(413,008	)


CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand and savings deposits		214,562			247,253
Net (decrease) increase in time deposits		(156,021	)		614,813
Additions to long-term debt		45,000			0
Repayments of long-term debt		(145,018	)		(1,199	)
Decrease in short-term borrowings		(244,290	)		(567,296	)
Dividends paid		(9,997	)		(28,976	)
Net proceeds from issuance of stock		1,249			3,511

Net cash (used in) provided by financing activities		(294,515	)		268,106


Net Decrease in Cash and Due From Banks		(8,308	)		(65,733	)
Cash and Due From Banks at Beginning of Year		284,508			331,164


Cash and Due From Banks at End of Period	$	276,200		$	265,431


Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest	$	49,428		$	58,438
Income taxes		37			54

See Notes to Consolidated Financial Statements

FULTON FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE A – Basis of Presentation

The accompanying unaudited consolidated financial statements of Fulton Financial Corporation (the Corporation) have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the amounts of assets and liabilities as of the date of the financial statements as well as revenues and expenses during the period. Actual results could differ from those estimates. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the ~~three and nine-month periods~~three-month period ended ~~September 30, 2009~~March 31, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2009.~~

~~In June 2009,~~2010. The Corporation evaluates subsequent events through the ~~Financial Accounting Standards Board (FASB) issued Statement No. 168, “The FASB Accounting Standards Codification and~~date of filing with the Hierarchy of Generally Accepted Accounting Principles” (Statement 168). Statement 168 established the Accounting Standards Codification (FASB ASC) as the source of authoritative U.S. GAAP for all nongovernmental entities, excluding Securities and Exchange Commission (SEC) rules and interpretative releases, which are also authoritative U.S. GAAP for SEC registrants. References to specific U.S. GAAP provisions included in the accompanying report cite FASB ASC references where applicable.

NOTE B – Net Income Per Common Share and Other Comprehensive Income

(Loss)

The Corporation’s basic net income per common share is calculated as net income available to common shareholders divided by the weighted average number of common shares outstanding. Net income available to common shareholders is calculated as net income less accrued dividends and discount accretion related to preferred stock.

For diluted net income per common share, net income 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 ~~dilutive securities,~~common stock equivalents, calculated using the treasury stock method. The Corporation’s ~~dilutive securities~~common stock equivalents consist of outstanding stock options, restricted stock and common stock warrants.

A reconciliation of ~~net income available to common shareholders and~~ weighted average common shares outstanding used to calculate basic net income per common share and diluted net income per common share follows.

Three months ended Nine months ended
September 30 September 30
2009 2008 2009 2008
(in thousands)
Net income $ 23,346 $ 29,076 $ 49,542 $ 96,250
Preferred stock dividends and discount accretion (5,046 ) — (15,123 ) —

Net income available to common shareholders $ 18,300 $ 29,076 $ 34,419 $ 96,250

Weighted average shares outstanding (basic) 175,783 174,463 175,552 174,017
Effect of dilutive securities 295 449 233 534

Weighted average shares outstanding (diluted) 176,078 174,912 175,785 174,551

Stock options and common stock warrants excluded from the diluted net income per share computation as their effect would have been anti-dilutive 11,719 5,560 11,831 5,261


	Three months ended March 31
	2010	2009
	(in thousands)

Weighted average shares outstanding (basic)	176,174	175,315
Effect of dilutive securities	507	233

Weighted average shares outstanding (diluted)	176,681	175,548

Stock options and common stock warrants excluded from the diluted net income per share computation as their effect would have been anti-dilutive	11,115	11,818

The following table presents the components of other comprehensive ~~income:~~

Nine months ended
September 30
2009 2008
(in thousands)
Unrealized gain (loss) on securities (net of $20.7 million and $11.9 million tax effect in 2009 and 2008, respectively) $ 38,437 $ (22,118 )
Non-credit related unrealized loss on other-than-temporarily impaired debt securities (net of $2.1 million tax effect) (1) (3,914 ) —
Unrealized gain on derivative financial instruments (net of $55,000 tax effect in 2009 and 2008) (2) 102 102
Unrecognized postretirement gains arising in 2009 due to plan amendment (net of $1.2 million tax effect) (3) 2,125 —
Amortization of unrecognized pension and postretirement costs (net of $204,000 tax effect) 379 —
Reclassification adjustment for securities (gains) losses included in net income (net of $1.0 million tax expense in 2009 and $12.1 million tax benefit in 2008) (1,918 ) 22,527

Other comprehensive income $ 35,211 $ 511

income (loss):


	Three months ended
	March 31
	2010			2009
	(in thousands)

Unrealized gain (loss) on securities (net of $7.0 million and $2.0 million tax effect in 2010 and 2009, respectively)	$	12,927		$	(3,789	)
Non-credit related unrealized loss on other-than-temporarily impaired debt securities (net of $49,000 and $985,000 tax effect, respectively)		(91	)		(1,831	)
Unrealized gain on derivative financial instruments (net of $18,000 tax effect in 2010 and 2009) (1)		34			34
Amortization of unrecognized pension and postretirement costs (net of $10,000 and $92,000 tax effect in 2010 and 2009, respectively)		19			170
Reclassification adjustment for securities losses (gains) included in net income (net of $778,000 tax benefit in 2010 and $1.0 million tax expense in 2009)		1,445			(1,897	)

Other comprehensive income (loss)	$	14,334		$	(7,313	)


(1)		~~See Note C, “Investment Securities” for additional details related to the other-than-temporary impairment of debt securities.~~

~~(2)~~		Amounts represent the amortization of the effective portions of losses on forward-starting interest rate swaps, designated as cash flow hedges and entered into in prior years in connection with the 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 during the next twelve months is expected to be approximately $135,000.

~~(3)~~		~~See Note F, “Employee Benefit Plans” for additional details related to the amendment of the Corporation’s postretirement plan during 2009.~~

NOTE C – ~~INVESTMENT SECURITIES~~

Investment Securities

The following tables present the amortized cost and estimated fair values of investment securities:

Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(in thousands)
Held to Maturity at September 30, 2009

U.S. Government sponsored agency securities $ 6,763 $ 14 $ — $ 6,777
State and municipal securities 765 1 — 766
Mortgage-backed securities 1,617 88 — 1,705

$ 9,145 $ 103 $ — $ 9,248

Available for Sale at September 30, 2009

Equity securities $ 130,804 $ 2,563 $ (3,986 ) $ 129,381
U.S. Government securities 13,999 1 — 14,000
U.S. Government sponsored agency securities 126,146 1,260 (34 ) 127,372
State and municipal securities 421,639 16,373 (15 ) 437,997
Corporate debt securities 158,040 370 (43,044 ) 115,366
Collateralized mortgage obligations 975,384 25,238 (215 ) 1,000,407
Mortgage-backed securities 1,110,423 44,722 (4 ) 1,155,141
Auction rate securities (1) 292,256 2,474 (9,140 ) 285,590

$ 3,228,691 $ 93,001 $ (56,438 ) $ 3,265,254

Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(in thousands)
Held to Maturity at December 31, 2008
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

Available for Sale at December 31, 2008

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 208,281 — (12,381 ) 195,900

$ 2,719,112 $ 49,897 $ (53,804 ) $ 2,715,205


~~(1)~~		~~See Note H, “Commitments and Contingencies” for additional details related to auction rate securities.~~


Held to Maturity at March 31, 2010	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value


	(in thousands)
U.S. Government sponsored agency securities	$	6,289	$	4	$	0		$	6,293
State and municipal securities		503		0		0			503
Mortgage-backed securities		1,367		91		0			1,458

	$	8,159	$	95	$	0		$	8,254


Available for Sale at March 31, 2010

Equity securities	$	140,102	$	3,791	$	(1,836	)	$	142,057
U.S. Government securities		1,325		0		0			1,325
U.S. Government sponsored agency securities		71,462		703		(4	)		72,161
State and municipal securities		378,691		8,704		(48	)		387,347
Corporate debt securities		149,935		1,157		(28,161	)		122,931
Collateralized mortgage obligations		1,093,867		30,849		(414	)		1,124,302
Mortgage-backed securities		920,196		37,104		(87	)		957,213
Auction rate securities		292,341		2,673		(6,881	)		288,133

	$	3,047,919	$	84,981	$	(37,431	)	$	3,095,469


Held to Maturity at December 31, 2009	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
	(in thousands)

U.S. Government sponsored agency securities	$	6,713	$	7	$	0	$	6,720
State and municipal securities		503		0		0		503
Mortgage-backed securities		1,484		90		0		1,574

	$	8,700	$	97	$	0	$	8,797


Available for Sale at December 31, 2009

Equity securities	$	142,531	$	2,758	$	(4,919	)	$	140,370
U.S. Government securities		1,325		0		0			1,325
U.S. Government sponsored agency securities		91,079		905		(28	)		91,956
State and municipal securities		406,011		9,819		(57	)		415,773
Corporate debt securities		154,029		424		(37,714	)		116,739
Collateralized mortgage obligations		1,102,169		25,631		(4,804	)		1,122,996
Mortgage-backed securities		1,043,518		36,948		(442	)		1,080,024
Auction rate securities		292,145		3,227		(6,169	)		289,203

	$	3,232,807	$	79,712	$	(54,133	)	$	3,258,386

The amortized cost and estimated fair value of debt securities as of ~~September 30, 2009,~~March 31, 2010, 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 $ 7,085 $ 7,100 $ 86,874 $ 87,290
Due from one year to five years 443 443 253,567 259,695
Due from five years to ten years — — 105,271 105,528
Due after ten years — — 566,368 527,812

7,528 7,543 1,012,080 980,325
Collateralized mortgage obligations — — 975,384 1,000,407
Mortgage-backed securities 1,617 1,705 1,110,423 1,155,141

$ 9,145 $ 9,248 $ 3,097,887 $ 3,135,873


	Held to Maturity				Available for Sale
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
	(in thousands)

Due in one year or less	$	6,446	$	6,450	$	60,096	$	60,715
Due from one year to five years		346		346		191,911		195,954
Due from five years to ten years		0		0		93,561		94,257
Due after ten years		0		0		548,186		520,971

		6,792		6,796		893,754		871,897
Collateralized mortgage obligations		0		0		1,093,867		1,124,302
Mortgage-backed securities		1,367		1,458		920,196		957,213

	$	8,159	$	8,254	$	2,907,817	$	2,953,412

The following table presents information related to the Corporation’s gains and losses on the sales of equity and debt securities, and losses recognized for the other-than-temporary impairment of ~~investments. Gross realized losses on equity and debt securities are net of other-than-temporary impairment charges:~~

Other-than-
Gross Gross temporary
Realized Realized Impairment Net Gains
Gains Losses Losses (Losses)
(in thousands)
Three months ended Sept. 30, 2009:

Equity securities $ 49 $ (408 ) $ (949 ) $ (1,308 )
Debt securities 3,130 (21 ) (1,846 ) 1,263

Total $ 3,179 $ (429 ) $ (2,795 ) $ (45 )

Three months ended Sept. 30, 2008:
Equity securities $ 1,276 $ — $ (2,836 ) $ (1,560 )
Debt securities 418 (514 ) (7,845 ) (7,941 )

Total $ 1,694 $ (514 ) $ (10,681 ) $ (9,501 )

Nine months ended Sept. 30, 2009:

Equity securities $ 640 $ (689 ) $ (2,739 ) $ (2,788 )
Debt securities 12,343 (129 ) (6,475 ) 5,739

Total $ 12,983 $ (818 ) $ (9,214 ) $ 2,951

Nine months ended Sept. 30, 2008:
Equity securities $ 6,884 $ — $ (31,426 ) $ (24,542 )
Debt securities 3,504 (1,019 ) (7,845 ) (5,360 )

Total $ 10,388 $ (1,019 ) $ (39,271 ) $ (29,902 )

investments:


	Gross Realized Gains		Gross Realized Losses			Other-than- temporary Impairment Losses			Net Gains (Losses)
	(in thousands)
Three months ended March 31, 2010:
Equity securities	$	836	$	0		$	(824	)	$	12
Debt securities		1,923		(5	)		(4,153	)		(2,235	)

Total	$	2,759	$	(5	)	$	(4,977	)	$	(2,223	)


Three months ended March 31, 2009:
Equity securities	$	112	$	(216	)	$	(1,062	)	$	(1,166	)
Debt securities		6,171		(108	)		(1,978	)		4,085

Total	$	6,283	$	(324	)	$	(3,040	)	$	2,919

The following table presents a summary of other-than-temporary impairment charges recorded by the Corporation, by investment security type:

Three Months Ended Nine Months Ended
September 30 September 30
2009 2008 2009 2008
(in thousands)
Financial institution stocks $ 949 $ 2,020 $ 2,633 $ 30,250
Government sponsored agency stock — 356 — 356
Mutual funds — 460 106 820

Total equity securities charges 949 2,836 2,739 31,426

Bank-issued subordinated debt — 4,855 — 4,855
Debt securities — pooled trust preferred securities 1,846 2,990 6,475 2,990

Total debt securities charges 1,846 7,845 6,475 7,845

Total other-than-temporary impairment charges $ 2,795 $ 10,681 $ 9,214 $ 39,271


	Three Months Ended March 31
	2010		2009
	(in thousands)
Financial institution stocks	$	824	$	956
Mutual funds		0		106

Total equity securities charges		824		1,062

Debt securities - pooled trust preferred securities		4,153		1,978

Total other-than-temporary impairment charges	$	4,977	$	3,040

The ~~$949,000 and $2.6 million~~$824,000 of other-than-temporary impairment charges related to financial ~~institutions~~institution stocks during the three ~~and nine~~ months ended ~~September 30, 2009 were~~March 31, 2010 was due to the increasing severity and duration of the decline in fair values of certain bank stock holdings, in conjunction with management’s assessment of the near-term prospects of each specific issuer. As of ~~September 30, 2009,~~March 31, 2010, after other-than-temporary impairment charges, the financial institutions stock portfolio had a cost basis of ~~$35.9~~$31.4 million and a fair value of ~~$34.4~~$33.3 million.

In April 2009, the ~~FASB~~Financial Accounting Standards Board (FASB) issued Staff Position No. 115-2 and 124-2, “Recognition and Presentation of Other-than-Temporary Impairments” (FSP FAS 115-2)~~. FSP FAS 115-2,~~, codified within the FASB Accounting Standards Codification (FASB ASC) as FASB ASC paragraph 320-10-65-1, amends other-than-temporary impairment guidance for debt securities and expands disclosure requirements for other-than-temporarily impaired debt and equity securities. FSP FAS 115-2 requires companies to record other-than-temporary impairment charges, through earnings, if they have the intent to sell, or will more likely than not be required to sell, an impaired debt security before a recovery of its amortized cost basis. In addition, FSP FAS 115-2 requires companies to record other-than-temporary impairment charges through earnings for the amount of credit losses, regardless of the intent or the requirement to sell. Credit loss is measured as the difference between the present value of an impaired debt security’s expected cash flows and its amortized cost basis. Non-credit related write-downs to fair value must be recorded as decreases to accumulated other comprehensive income as long as a company has no intent or expected requirement to sell an impaired security before a recovery of amortized cost basis. Finally, FSP FAS 115-2 requires companies to record all previously recorded non-credit related other-than-temporary impairment charges for debt securities as cumulative effect adjustments to retained earnings as of the beginning of the period of adoption. FSP FAS 115-2 was effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for the period ending after March 15, 2009. The Corporation elected to early adopt FSP FAS 115-2, effective January 1, 2009.

Subtopic 320-10. During the year ended December 31, 2008, the Corporation recorded other-than-temporary impairment charges for pooled trust preferred securities of $15.8 million. Upon adoption of FSP FAS 115-2, the Corporation determined that $9.7 million of those other-than-temporary impairment charges were non-credit related. As such, a $6.3 million (net of $3.4 million of taxes) increase to retained earnings and a corresponding decrease to accumulated other comprehensive income was recorded as the cumulative effect of adopting FSP FAS 115-2 as of January 1, 2009.

During the three ~~and nine~~ months ended ~~September 30, 2009,~~March 31, 2010, the ~~$1.8 million and $6.5~~Corporation recorded $4.2 million of other-than-temporary impairment losses for pooled trust preferred securities ~~recognized in earnings were determined through the use of~~based on an expected cash ~~flow~~flows model. ~~The most significant input to the expected cash flows model~~

was the assumed default rate for each pooled trust preferred security. The Corporation evaluates the financial metrics, such as capital ratios and non-performing asset ratios, of each individual financial institution issuer that comprises each pooled trust preferred security to estimate its expected default rate. The weighted average default rate for pooled trust preferred securities held by the Corporation at September 30, 2009 was approximately 14%.

The following table presents a summary of the cumulative credit related other-than-temporary impairment charges, recognized as components of earnings, for securities still held by the Corporation ~~(in thousands):~~

Three Months Nine Months
Ended Ended
September 30, September 30,
2009 2009
Balance of cumulative credit losses on pooled trust preferred securities, beginning of period (1) $ (10,771 ) $ (6,142 )
Additions for credit losses recorded which were not previously recognized as components of earnings (1,846 ) (6,475 )

Ending balance of cumulative credit losses on pooled trust preferred securities, end of period $ (12,617 ) $ (12,617 )

at March 31:


	Three months ended March 31,
	2010			2009
	(in thousands)
Balance of cumulative credit losses on pooled trust preferred securities, beginning of period (1)	$	(15,612	)	$	(6,142	)
Additions for credit losses recorded which were not previously recognized as components of earnings		(4,153	)		(1,978	)

Ending balance of cumulative credit losses on pooled trust preferred securities, end of period	$	(19,765	)	$	(8,120	)


(1)		Cumulative credit losses of $6.1 million at January 1, 2009 represent the other-than-temporary impairment charges recorded during the year ended December 31, 2008 for pooled trust preferred securities, net of the Corporation’s cumulative effect adjustment upon adoption of FSP FAS 115-2.

The following table presents the gross unrealized losses and estimated fair values of investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at ~~September 30, 2009:~~

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 $ 20,230 $ (27 ) $ 478 $ (7 ) $ 20,708 $ (34 )
State and municipal securities 801 (15 ) — — 801 (15 )
Corporate debt securities 23,215 (16,312 ) 77,738 (26,732 ) 100,953 (43,044 )
Collateralized mortgage obligations 12,159 (3 ) 3,869 (212 ) 16,028 (215 )
Mortgage-backed securities 1,843 (4 ) — — 1,843 (4 )
Auction rate securities 81,426 (1,897 ) 135,809 (7,243 ) 217,235 (9,140 )

Total debt securities 139,674 (18,258 ) 217,894 (34,194 ) 357,568 (52,452 )
Equity securities 14,815 (3,825 ) 319 (161 ) 15,134 (3,986 )

$ 154,489 $ (22,083 ) $ 218,213 $ (34,355 ) $ 372,702 $ (56,438 )

March 31, 2010:


	Less Than 12 months					12 Months or Longer					Total
	Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses
	Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses
	(in thousands)
U.S. Government sponsored agency securities	$	0	$	0		$	529	$	(4	)	$	529	$	(4	)
State and municipal securities		4,025		(40	)		397		(8	)		4,422		(48	)
Corporate debt securities		5,558		(6,542	)		77,583		(21,619	)		83,141		(28,161	)
Collateralized mortgage obligations		44,577		(414	)		0		0			44,577		(414	)
Mortgage-backed securities		22,607		(87	)		0		0			22,607		(87	)
Auction rate securities		28,570		(741	)		171,512		(6,140	)		200,082		(6,881	)

Total debt securities		105,337		(7,824	)		250,021		(27,771	)		355,358		(35,595	)
Equity securities		8,653		(1,261	)		3,012		(575	)		11,665		(1,836	)

	$	113,990	$	(9,085	)	$	253,033	$	(28,346	)	$	367,023	$	(37,431	)

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 ~~September 30, 2009~~March 31, 2010 to be other-than-temporarily impaired.

~~With respect to the Corporation’s investments in auction rate securities, the current~~

The unrealized holding losses on ~~these~~investments in student loan auction rate securities, also known as auction rate certificates (ARCs), are attributable to liquidity issues ~~as a result of~~resulting from the failure of periodic auctions. Fulton Financial Advisors (FFA), the investment management and trust division of the Corporation’s Fulton Bank, N.A. subsidiary, held ARCs for some of its customers’ accounts. FFA had previously sold ARCs to customers as short-term investments with fair values that could be derived based on periodic auctions under normal market conditions. During 2008 and 2009, the Corporation purchased ARCs from customers due to the failure of these periodic auctions, which made these previously short-term investments illiquid.

As of ~~September 30, 2009,~~March 31, 2010, approximately ~~$247~~$260 million, or ~~86%~~90%, of the ~~auction rate securities held by the Corporation~~ARCs were rated above investment grade, with approximately ~~$184~~$187 million, or ~~64%~~65%, AAA rated by at least one ratings agency. Approximately ~~$39~~$30 million, or ~~14%~~10%, of ~~auction rate securities~~ARCs are rated below investment grade by at least one ratings agency. Of ~~the $39 million of securities rated below investment~~

~~grade,~~this amount, approximately ~~$22~~$17 million, or 57%, of the student loans underlying the ~~auction rate securities~~ARCs have principal payments which are guaranteed by the Federal government. In total, approximately ~~$254~~$255 million, or ~~89%~~88%, of the student loans

underlying the ~~auction rate securities~~ARCs have principal payments which are guaranteed by the Federal government. ~~All auction rate securities currently held by the Corporation are~~At March 31, 2010, all ARCs were current and making scheduled interest payments. Because the Corporation does not have the ~~intention~~intent to sell and does not believe it will more likely than not be required to sell any of these securities prior to a recovery of their fair value to amortized cost, the Corporation does not consider these investments to be other-than-temporarily impaired as of March 31, 2010.

The Corporation’s mortgage-backed securities and collateralized mortgage obligations have contractual terms that generally do not permit the issuer to settle the securities at a price less than the amortized cost of the investment. Because the decline in market value of these securities is attributable to changes in interest rates and not credit quality, and because the Corporation does not have the intent to sell and does not believe it will more likely than not be required to sell any of these securities prior to a recovery of their fair value to amortized cost, the Corporation does not consider those investments to be other-than-temporarily impaired as of ~~September 30, 2009. For additional information related to the Corporation’s investment in auction rate securities, see Note H, “Commitments and Contingencies”.~~

March 31, 2010.

The following table presents the amortized cost and estimated fair values of corporate debt securities:

September 30, 2009 December 31, 2008
Amortized Estimated fair Amortized Estimated fair
cost value cost value
(in thousands)
Single-issuer trust preferred securities (1) $ 97,925 $ 75,195 $ 97,887 $ 69,819
Subordinated debt 34,861 32,589 34,788 31,745
Pooled trust preferred securities 22,518 4,846 19,351 15,381

Corporate debt securities issued by financial institutions 155,304 112,630 152,026 116,945
Other corporate debt securities 2,736 2,736 2,950 2,949

Available for sale corporate debt securities $ 158,040 $ 115,366 $ 154,976 $ 119,894


~~(1)~~		Single-issuer trust preferred securities with estimated fair values totaling $8.1 million as of September 30, 2009 are classified as Level 3 assets under FASB ASC Topic 820. See Note J, “Fair Value Measurements” for additional details.


	March 31, 2010				December 31, 2009
	Amortized cost		Estimated fair value		Amortized cost		Estimated fair value
	(in thousands)
Single-issuer trust preferred securities	$	95,500	$	80,691	$	95,481	$	75,811
Subordinated debt		34,913		34,113		34,886		32,722
Pooled trust preferred securities		16,295		4,900		20,435		4,979

Corporate debt securities issued by financial institutions		146,708		119,704		150,802		113,512
Other corporate debt securities		3,227		3,227		3,227		3,227

Available for sale corporate debt securities	$	149,935	$	122,931	$	154,029	$	116,739

The Corporation’s investments in single-issuer trust preferred securities had an unrealized loss of $14.8 million as of March 31, 2010. The Corporation ~~has evaluated all corporate debt securities issued by financial institutions to determine if~~did not record any ~~unrealized holding losses represent credit losses, which would require an~~ other-than-temporary impairment ~~charge through earnings. In addition,~~charges for single-issuer trust preferred securities in the first quarter of 2010 or 2009. The Corporation holds 11 single-issuer trust preferred securities that are rated below investment grade by at least one ratings agency, with an amortized cost of $37.1 million and an estimated fair value of $33.2 million as of March 31, 2010. The majority of the single-issuer trust preferred securities rated below investment grade were rated BB or Baa. Single-issuer trust preferred securities with an amortized cost of $10.2 million and an estimated fair value of $7.1 million as of March 31, 2010, were not rated by any ratings agency and, due to inactive or limited trading activity, were classified as Level 3 assets under FASB ASC Topic 820. See Note I, “Fair Value Measurements”, for additional details.

The Corporation holds ten pooled trust preferred securities. Nine of these securities, with an amortized cost of $15.4 million and an estimated fair value of $4.3 million, are rated below investment grade by at least one ratings agency, with ratings ranging from C to Ca. For each of the nine pooled trust preferred securities rated below investment grade, the class of securities held by the Corporation is below the most senior tranche, with the Corporation’s interests being subordinate to other investors in the pool. The Corporation determines the fair value of pooled trust preferred securities based on quotes provided by third party brokers.

The amortized cost of pooled trust preferred securities is the purchase price of the securities, net of cumulative credit related other-than-temporary impairment charges, determined using an expected cash flows model. The most significant input to the expected cash flows model was the expected payment deferral rate for each pooled trust preferred security. The Corporation evaluates the financial metrics, such as capital ratios and non-performing asset ratios, of the individual financial institution issuers that comprise each pooled trust preferred security to estimate its expected deferral rate. The actual weighted average cumulative defaults and deferrals as a percentage of original collateral were approximately 27% as of March 31, 2010. The discounted cash flow modeling for pooled trust preferred securities held by the Corporation as of March 31, 2010 assumed an additional 12% expected deferral rate.

Based on management’s other-than-temporary impairment evaluations, and because the Corporation does not have the ~~intention~~intent to sell and does not believe it will more likely than not be required to sell any ~~impaired corporate debt~~of these securities ~~issued by financial institutions~~ prior to a recovery of their fair value to amortized ~~cost. Therefore, the Corporation does~~cost, which may be maturity, corporate debt securities with a fair value of $122.9 million were not ~~consider those investments with unrealized losses at September 30, 2009~~considered to be other-than-temporarily ~~impaired.~~

impaired as of March 31, 2010.

NOTE D – ~~Goodwill~~

Goodwill is not amortized to expense, but is tested for impairment at least annually. Write-downs of the balance, if necessary as a result of an impairment test, are 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. An interim goodwill impairment test is required if certain criteria are met. The Corporation evaluated whether any of the criteria for performing an interim impairment test were met during the third quarter of 2009 and concluded they were not met.

~~NOTE E –~~ Stock-Based Compensation

The fair value of equity awards granted to employees is recognized as compensation expense over the period during which employees are required to provide service in exchange for such awards. The ~~Corporation’s~~Corporation grants equity awards ~~consist~~to employees, consisting of stock options and restricted stock, ~~granted~~ under its Stock Option and Compensation Plans (Option Plans) ~~and shares purchased by~~. In addition, employees may purchase stock under ~~its~~the Corporation’s Employee Stock Purchase Plan.

The following table presents compensation expense and the related tax benefits for equity awards recognized in the consolidated statements of income:

Three months ended Nine months ended
September 30 September 30
2009 2008 2009 2008
(in thousands)
Stock-based compensation expense $ 542 $ 606 $ 1,369 $ 1,671
Tax benefit (111 ) (108 ) (186 ) (234 )

Stock-based compensation expense, net of tax $ 431 $ 498 $ 1,183 $ 1,437


	Three months ended March 31
	2010			2009
	(in thousands)

Stock-based compensation expense	$	293		$	380
Tax benefit		(62	)		(38	)

Stock-based compensation expense, net of tax	$	231		$	342

Under the Option Plans, stock options and restricted stock are granted to key employees. Stock option exercise prices are equal to the fair value of the Corporation’s stock on the date of grant, ~~with~~and carry terms of up to ten years. Restricted stock fair values are equal to the average trading price of the Corporation’s stock on the date of grant. Restricted stock awards earn dividends during the vesting period, which are forfeitable if the awards do not vest. Stock options and restricted stock are typically granted annually on July 1st and become fully vested over or after a three-year vesting period. Certain events as defined in the Option Plans result in the acceleration of the vesting of both stock options and restricted stock. ~~On July 1, 2009, the Corporation granted approximately 485,000 stock options and 214,000 shares of restricted stock under its Option Plans.~~ As of ~~September 30, 2009, there were 12.9~~March 31, 2010, the Option Plans had 13.2 million shares reserved for future grants through 2013.

In connection with the Corporation’s participation in the U.S. Treasury Department’s (UST) Capital Purchase Program (CPP) component of the Troubled Asset Relief Program, the 2009 restricted stock ~~shares~~ granted to certain key employees ~~are~~is subject to the requirements and limitations contained in the Emergency Economic Stabilization Act of 2008, as amended, and related regulations. Among other things, the 2009 restricted stock grants to these key employees provide that they may not fully vest until the Corporation’s participation in the CPP ends. None of the key employees who received 2009 restricted stock grants subject to the CPP vesting restrictions received 2009 stock option awards.

NOTE FE – Employee Benefit Plans

The Corporation maintains a defined benefit pension plan (Pension Plan) for certain employees. Contributions to the Pension Plan are actuarially determined and funded ~~annually.~~annually, if required. Pension Plan assets are invested in: money markets; fixed income securities, including corporate ~~bonds;~~bonds, U.S. Treasury securities and common trust funds; and equity securities, including common stocks and common stock mutual funds. ~~Effective January 1, 2008,~~In 2007, the Corporation curtailed the Pension Plan, discontinuing the accrual of benefits for all existing participants ~~was discontinued.~~

effective January 1, 2008.

The Corporation currently provides medical and life insurance benefits under a postretirement benefits plan (Postretirement Plan) to certain retired full-time employees who were employees of the Corporation prior to January 1, 1998. Certain full-time employees may become eligible for these discretionary benefits if they reach retirement age while working for the Corporation.

During 2009, the Corporation amended the Postretirement Plan to no longer pay benefits for early retirees from their retirement date to the date they attain age 65. As a result of this amendment, the Corporation recorded a $3.3 million ($2.1 million, net of tax) reduction to unrecognized prior service costs through an increase to other comprehensive income. The total amount of unrecognized prior service cost that is expected to be accreted as a reduction to periodic benefit cost for the remainder of 2009 is $111,000.

The Corporation recognizes the funded status of its Pension Plan and Postretirement Plan on the consolidated balance sheets and recognizes the changes in that funded status through other comprehensive income.

The net periodic benefit cost for the Corporation’s Pension Plan and Postretirement Plan, as determined by consulting actuaries, consisted of the following ~~components:~~

Pension Plan
Three months ended Nine months ended
September 30 September 30
2009 2008 2009 2008
(in thousands)
Service cost (1) $ 36 $ 36 $ 110 $ 110
Interest cost 818 816 2,455 2,448
Expected return on plan assets (722 ) (918 ) (2,166 ) (2,754 )
Net amortization and deferral 262 — 786 —

Net periodic benefit cost (income) $ 394 $ (66 ) $ 1,185 $ (196 )

components for the three months ended March 31:


	Pension Plan						Postretirement Plan
	2010			2009			2010			2009
	(in thousands)

Service cost (1)	$	26		$	37		$	50		$	106
Interest cost		842			819			110			166
Expected return on plan assets		(802	)		(722	)		(1	)		(1	)
Net amortization (accretion) and deferral		119			262			(91	)		0

Net periodic benefit cost	$	185		$	396		$	68		$	271


(1)		~~The~~ Pension Plan service cost ~~recorded~~ for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2010 and 2009 ~~and 2008~~ was related to administrative costs associated with the plan and was not due to the accrual of additional participant ~~benefits.~~benefits as the plan was curtailed in 2007.

Postretirement Plan
Three months ended Nine months ended
September 30 September 30
2009 2008 2009 2008
(in thousands)
Service cost $ 37 $ 132 $ 218 $ 390
Interest cost 73 184 390 538
Expected return on plan assets (1 ) (1 ) (3 ) (4 )
Net accretion and deferral (81 ) — (162 ) —

Net periodic benefit cost $ 28 $ 315 $ 443 $ 924

NOTE GF – Derivative Financial Instruments

Effective January 1, 2009, the Corporation adopted Statement of Financial Accounting Standards No. 161, “Disclosures about Derivative Instruments and Hedging Activities”, codified as FASB ASC Section 815-10-50. As required by FASB ASC Section 815-10-50, the Corporation has included disclosures for its derivative instruments and for its hedging activities.

In connection with its mortgage banking activities, the Corporation enters into commitments to originate 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 and mortgage loans held for sale.~~locks. Forward sales commitments may also be in the form of commitments to sell individual mortgage loans at a fixed price aton 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 ~~balance sheet date.~~end of the period. Gross derivative assets and liabilities are recorded within other assets and other liabilities on the consolidated balance sheets, with changes in fair value during the period recorded within gains on sales of mortgage loans on the consolidated statements of income.

The following table presents a summary of the ~~Corporation’s~~notional amounts and fair values of derivative financial instruments recorded on the consolidated balance sheets, none of which have been designated as hedging instruments:

September 30, 2009 December 31, 2008
Notional Notional
Amount Fair Value Amount Fair Value
(in thousands)
Interest Rate Locks with Customers:
Positive fair values $ 184,599 $ 1,958 $ 103,824 $ 506
Negative fair values 38,745 (57 ) 37,321 (81 )

Net Interest Rate Locks with Customers 1,901 425
Forward Commitments:
Positive fair values 39,694 445 219,142 954
Negative fair values 258,300 (3,495 ) 271,306 (2,399 )

Net Forward Commitments (3,050 ) (1,445 )

Interest rate swaps (1) — — 10,000 18

$ (1,149 ) $ (1,002 )


~~(1)~~		~~Interest rate swaps recorded as a component of other liabilities on the consolidated balance sheets. All swaps existing at December 31, 2008 were called in the first quarter of 2009.~~


	March 31, 2010					December 31, 2009
	Notional Amount		Asset (Liability) Fair Value			Notional Amount		Asset (Liability) Fair Value
	(in thousands)
Interest Rate Locks with Customers:
Positive fair values	$	120,285	$	975		$	58,165	$	534
Negative fair values		66,006		(364	)		106,921		(945	)

Net Interest Rate Locks with Customers				611					(411	)
Forward Commitments:
Positive fair values		194,486		101			232,310		1,819
Negative fair values		32,094		(115	)		59,432		(535	)

Net Forward Commitments				(14	)				1,284

			$	597				$	873

The following table presents a summary of the fair value gains and ~~losses:~~

Fair Value Gains (Losses) Statement of Income Classification
Three Months Ended Nine Months Ended
September 30, 2009 September 30, 2009
(in thousands)
Interest rate locks with customers $ 2,187 $ 1,476 Gains on sales of mortgage loans
Forward commitments (4,068 ) (1,605 ) Gains on sales of mortgage loans
Interest rate swaps — (18 ) Other expense

$ (1,881 ) $ (147 )

losses on derivative financial instruments for the three months ended March 31:
   Fair Value Gains (Losses)
   2010 2009
Statements of Income Classification
   (in thousands)
Interest rate locks with customers
   $ 1,022    $ 3,963    Gains on sales of mortgage loans
Forward commitments
   (1,298 ) (2,128 ) Gains on sales of mortgage loans
Interest rate swaps
   0    (18 ) Other expense

   $ (276 ) $ 1,817

NOTE HG – Commitments and Contingencies

Commitments

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. Those financial instruments include commitments to extend credit and letters of credit, which involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized on the Corporation’s consolidated balance sheets. Exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and letters of credit is represented by the outstanding amount of those instruments.

The outstanding amounts of commitments to extend credit and letters of credit were as follows:

September 30, December 31,
2009 2008
(in thousands)
Commitments to extend credit $ 3,926,396 $ 3,360,499
Standby letters of credit 635,646 789,804
Commercial letters of credit 34,005 37,620

      March 31,
2010    December 31,
2009

   (in thousands)
Commitments to extend credit
   $ 3,882,214    $ 4,479,546
Standby letters of credit
   541,620    551,064
Commercial letters of credit
   30,113    37,726
The Corporation records a reserve for unfunded lending commitments which represents management’s estimate of losses associated with unused commitments to extend credit on loans impaired under FASB
ASC Section 310-10-35. As of ~~September 30, 2009~~March 31, 2010 and December 31, ~~2008,~~2009, the reserve for unfunded lending commitments, included in other liabilities on the consolidated balance sheets, was ~~$7.2~~$4.3 million and ~~$6.2 million,~~$855,000, respectively.
~~Auction Rate Securities~~
The Corporation’s investment management and trust subsidiary, Fulton Financial Advisors, N.A. (FFA), previously held auction rate certificates (ARCs), for some of its customers’ accounts. Beginning in the second quarter of 2008, the Corporation offered to purchase illiquid ARCs from customers of FFA, upon notification that such customers had liquidity needs or otherwise desired to liquidate their holdings. A liability was established for this financial guarantee at estimated fair value through a pre-tax charge to earnings both upon the initial establishment of the guarantee and upon changes in its estimated fair value. The estimated fair value of the guarantee was determined based on the difference between the fair value of the underlying ARCs and their estimated purchase price.
During 2009, the Corporation completed the repurchase of all eligible ARCs and, as of September 30, 2009, there were no longer any ARCs still held by FFA’s customers which the Corporation was had agreed to purchase.
~~The following table presents the change in the ARC investment balances held by customers and the related financial guarantee liability for the nine months ended September 30, 2009:~~

ARCs Held by Financial
Customers, at Guarantee
Par Value Liability
(in thousands)
Balance, beginning of period $ 105,165 $ (8,653 )
Provision for financial guarantee — (6,237 )
Purchases of ARCs (104,415 ) 14,890
Redemptions of ARCs (750 ) —

Balance, end of period $ — $ —

~~Upon purchase from customers, the Corporation recorded ARCs as available for sale investment securities at their estimated fair value.~~
Residential Lending ~~Contingencies~~
Residential mortgages are originated and sold by the Corporation through Fulton Mortgage Company, which isoperates as a division of each of the Corporation’s subsidiary banks. The loans originated and sold ~~through these channels~~ are ~~predominately~~predominantly “prime” loans that conform to published standards of government sponsored agencies. Prior to 2008, the Corporation’s former Resource Bank ~~affiliate~~subsidiary operated a ~~significant~~ national wholesale mortgage lending operation which originated and sold significant volumes of non-prime loans from the time the Corporation acquired Resource Bank in 2004 through 2007.
17
Beginning in 2007, Resource Bank experienced an increase in requests from secondary market purchasers to repurchase non-prime loans sold to those investors. These repurchase requests resulted in the Corporation recording charges representing the write-downs that were necessary to reduce the loan balances to their estimated net realizable values, based on valuations of the underlying properties, as adjusted for market factors and other considerations. Many of the loans the Corporation repurchased were delinquent and were settled through foreclosure and sale of the underlying collateral.
The following table presents a summary of the approximate principal balances and related reserves/write-downs recognized on the Corporation’s consolidated balance ~~sheet,~~sheets, by general category:

September 30, 2009 December 31, 2008
Reserves/ Reserves/
Principal Write-downs Principal Write-downs
(in thousands)
Outstanding repurchase requests (1) (2) $ 5,580 $ (3,540 ) $ 6,290 $ (2,900 )
No repurchase request received – sold loans with identified potential misrepresentations of borrower information (1) (2) 3,650 (1,470 ) 7,990 (3,280 )
Repurchased loans (3) 6,990 (1,160 ) 10,000 (1,690 )
Foreclosed real estate (OREO) (4) 11,930 — 15,920 —

Total reserves/write-downs $ (6,170 ) $ (7,870 )

   March 31, 2010 December 31, 2009
   Principal    Reserves/
Write-downs Principal    Reserves/
Write-downs
   (in thousands)
Outstanding repurchase requests (1) (2)
   $ 7,800    $ (3,740 ) $ 6,130    $ (3,750 )
No repurchase request received – sold loans with identified potential misrepresentations of borrower information (1) (2)
   3,650    (1,260 ) 3,650    (1,260 )
Repurchased loans (3)
   5,120    (500 ) 5,580    (870 )
Foreclosed real estate (OREO) (4)
   7,830    0    9,140    0

Total reserves/write-downs
   $ (5,500 )    $ (5,880 )

(1) Principal balances had not been repurchased and, therefore, are not included on the consolidated balance sheets as of ~~September 30, 2009~~March 31, 2010 and December 31, ~~2008.~~2009.
(2) Reserve balance included as a component of other liabilities on the consolidated balance sheets as of ~~September 30, 2009~~March 31, 2010 and December 31, ~~2008.~~2009.
(3) Principal balances, net of write-downs, are included as a component of loans, net of unearned income on the consolidated balance sheets as of ~~September 30, 2009~~March 31, 2010 and December 31, ~~2008.~~2009.
(4) OREO is written down to its estimated fair value upon transfer from loans receivable.
During the nine months ended September 30, 2009, the Corporation recorded credits, included within operating risk loss on the consolidated statements of income, of $600,000, representing a reduction in required reserves associated with potential repurchase requests. During the three and nine months ended September 31, 2008, the Corporation recorded charges of $500,000 and $2.3 million, respectively, related to the potential and actual repurchase of previously sold residential mortgages.
Management believes that the reserves recorded as of ~~September 30, 2009~~March 31, 2010 are adequate for the known potential repurchases. However, continued declines in collateral values or the identification of additional loans to be repurchased could necessitate additional reserves in the future.

NOTE IH – ~~FAIR VALUE OPTION~~
Fair Value Option
FASB ASC Subtopic 825-10 permits entities to measure many financial instruments and certain other items at fair value and requires certain disclosures for amounts for which the fair value option is applied.
The Corporation elected to record mortgage loans held for sale which were originated after September 30, 2008 at fair value. Prior to October 1, 2008, mortgage loans held for sale were reported at the lower of aggregate cost or market.
The Corporation elected to measure mortgage loans held for sale at fair value 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, as noted within Note G,F, “Derivative Financial Instruments”. The Corporation determines fair value for its mortgage loans held for sale based on 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 income, which is separate from the~~Changes in fair value ~~adjustments on loans held for sale, which~~ during the period
are recorded as components of gains on sales of mortgage ~~loans.~~
18
loans on the consolidated statements of income. Interest income earned on mortgage loans held for sale is recorded within interest income on the consolidated statements of income.
The following table presents a summary of the Corporation’s fair value elections ~~and their impact on the Corporation’s consolidated balance sheets:~~

Cost – Fair Value –
Asset Asset Balance Sheet
(Liability) (Liability) Classification
(in thousands)
September 30, 2009:

Mortgage loans held for sale (1) (2) $ 75,543     $ 78,550 Loans held for sale

December 31, 2008:
Mortgage loans held for sale (1) $ 64,787 $ 66,567 Loans held for sale
Hedged certificates of deposit (3) (7,458 ) (7,517 ) Interest-bearing deposits

$ 57,329 $ 59,050

for mortgage loans held for sale:
   March 31,
2010    December 31,
2009
   (in thousands)
Cost (1)
   $ 52,649    $ 78,819
Fair value
   53,798    79,577

Fair value adjustment
   1,149    758

(1) Cost basis of mortgage loans held for sale represents the unpaid principal balance.
~~(2)~~ For the three and nine months ended September 30, 2009, the Corporation recorded income of $1.1 million and $1.2 million, respectively, included within gains on sales of mortgage loans on the consolidated statements of income, representing the changes in fair values of mortgage loans held for sale.
~~(3)~~ ~~All hedged certificates of deposit were called in the first quarter of 2009.~~
NOTE JI – ~~FAIR VALUE MEASUREMENTS~~
Fair Value Measurements
FASB ASC Topic 820 Fair Value Measurements
FASB ASC Topic 820 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 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.~~
~~Companies~~ are ~~required to categorize~~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.
The Corporation has categorized all assets and liabilities measured at fair value on both a recurring and nonrecurring basis into the above three levels.
In April 2009, the FASB issued Staff Position No. 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly”, codified as FASB ASC Sections 820-10-35 and 50, which provides additional guidance for estimating fair value in accordance with FASB ASC Topic 820 when the volume and level of activity for an asset or liability have declined significantly and includes guidance on identifying circumstances that indicate a transaction is not orderly. The Corporation elected to early adopt this staff position, effective March 31, 2009. The Corporation’s available for sale debt securities include ARCs and pooled trust preferred securities and certain single-issuer trust preferred securities issued by financial institutions which, prior to the adoption of this staff position, were valued through means other than quoted market prices due the Corporation’s conclusion that the market for the securities was not active. Therefore, the adoption of this staff position did not impact the Corporation’s consolidated financial statements.
~~In August 2009,~~January 2010, the FASB issued ASC Update No. ~~2009-05, “Measuring Liabilities at~~2010-06, “Improving Disclosures About Fair ~~Value”~~Value Measurements” (ASC Update ~~2009-05)~~2010-06). ASC Update ~~2009-05 amends ASC Topic 820 by allowing~~2010-06 requires companies to ~~determine~~disclose, and provide the reasons for, all transfers of assets and liabilities between the Level 1 and 2 fair value categories. ASC Update 2010-06 also clarifies that companies should disclose fair value measurement disclosures for classes of assets and liabilities which are subsets of line items within the balance sheet, if necessary. In addition, ASC Update 2010-06 provides additional clarification related to disclosures about the fair value oftechniques and inputs for assets and liabilities ~~using the perspective of an investor that holds the related obligation as an asset as opposed to measuring liabilities based on the price that would be paid to transfer a liability to a new obligor.~~classified within Level 2 or 3 categories. The disclosure requirements prescribed by ASC Update ~~2009-05 was~~No. 2010-06 were effective for the Corporation on ~~September 30, 2009.~~March 31, 2010. The Corporation did not record any transfers of assets or liabilities between the Level 1 and Level 2 fair value categories during the three months ended March 31, 2010.
ASC Update 2010-06 also requires companies to reconcile changes in Level 3 assets and liabilities by separately providing information about Level 3 purchases, sales, issuances and settlements on a gross basis. This provision of ASC Update 2010-06 is effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years, or March 31, 2011 for the Corporation. The adoption of this provision of ASC Update ~~2009-05 did~~2010-06 is not expected to materially impact the ~~Corporation.~~
19Corporation’s fair value measurement disclosures.
Items Measured at Fair Value on a Recurring Basis
The Corporation’s assets and liabilities measured at fair value on a recurring basis and reported on the consolidated balance ~~sheet as of September 30, 2009~~sheets were as follows:

Level 1 Level 2 Level 3 Total
(in thousands)
Mortgage loans held for sale $ — $ 78,550 $ — $ 78,550
Available for sale investment securities 36,709 2,844,340 298,497 3,179,546
Other financial assets 13,706 2,403 — 16,109

Total assets $ 50,415 $ 2,925,293 $ 298,497 $ 3,274,205

Other financial liabilities $ 13,706 $ 3,552 $ — $ 17,258

   March 31, 2010
      Level 1    Level 2    Level 3    Total
   (in thousands)
Mortgage loans held for sale
   $ 0    $ 53,798    $ 0    $ 53,798
Available for sale investment securities:

Equity securities
   42,061    0    0    42,061
U.S. Government securities
   0    1,325    0    1,325
U.S. Government sponsored agency securities
   0    72,161    0    72,161
State and municipal securities
   0    387,347    0    387,347
Corporate debt securities
   0    110,895    12,036    122,931
Collateralized mortgage obligations
   0    1,124,302    0    1,124,302
Mortgage-backed securities
   0    957,213    0    957,213
Auction rate securities
   0    0    288,133    288,133

Total available for sale investments
   42,061    2,653,243    300,169    2,995,473
Other financial assets
   13,842    1,076    0    14,918

Total assets
   $ 55,903    $ 2,708,117    $ 300,169    $ 3,064,189

Other financial liabilities
   $ 13,842    $ 479    $ 0    $ 14,321

   December 31, 2009
      Level 1    Level 2    Level 3    Total
   (in thousands)
Mortgage loans held for sale
   $ 0    $ 79,577    $ 0    $ 79,577
Available for sale investment securities:

Equity securities
   41,256    0    0    41,256
U.S. Government securities
   0    1,325    0    1,325
U.S. Government sponsored agency securities
   0    91,956    0    91,956
State and municipal securities
   0    415,773    0    415,773
Corporate debt securities
   0    104,779    11,960    116,739
Collateralized mortgage obligations
   0    1,122,996    0    1,122,996
Mortgage-backed securities
   0    1,080,024    0    1,080,024
Auction rate securities
   0    0    289,203    289,203

Total available for sale investments
   41,256    2,816,853    301,163    3,159,272
Other financial assets
   13,882    2,353    0    16,235

Total assets
   $ 55,138    $ 2,898,783    $ 301,163    $ 3,255,084

Other financial liabilities
   $ 13,882    $ 1,480    $ 0    $ 15,362

The valuation techniques used to measure fair value for the items in the ~~table~~tables above are as follows:
•
Mortgage loans held for sale – This category consists of mortgage loans held for sale that the Corporation has elected to measure at fair value. Fair ~~value~~values as of ~~September 30,~~March 31, 2010 and December 31, 2009 ~~was~~were measured as the price that secondary market investors were offering for loans with similar characteristics. ~~See Note I, “Fair Value Option” for details related to the Corporation’s election to measure assets and liabilities at fair value.~~
•
Available for sale investment securities – Included within this asset category are both equity and debt ~~securities.~~securities:
•
Equity securities – Equity securities ~~consisting~~consist of stocks of financial institutions ($33.3 million at March 31, 2010 and $32.3 million at December 31, 2009) and mutual ~~funds are listed as~~fund and other equity investments ($8.8 million at March 31, 2010 and $9.0 million at December 31, 2009). These Level 1 ~~assets,~~investments are measured at fair value based on quoted prices for identical securities in active markets. ~~Debt~~Restricted equity securities ~~excluding ARCs, pooled trust preferred~~issued by the Federal Home Loan Bank (FHLB) and Federal Reserve Bank ($100.0 million at March 31, 2010 and $99.1 million at December 31, 2009) have been excluded from the above table.
•
U.S. Government securities/U.S. Government sponsored agency securities/State and municipal securities/Collateralized mortgage obligations/Mortgage-backed securities ~~and certain single-issuer trust preferred securities, and other equity~~ – These debt securities are classified as Level 2 assets and consist of: U.S. government and U.S. government sponsored agency securities, state and municipal securities, corporate debt securities, collateralized mortgage obligations and mortgage-backed securities.investments. Fair values are determined by a third-party pricing service using both quoted prices for similar assets, when available, and model-based valuation techniques that derive fair value based on market-corroborated data, such as instruments with similar prepayment speeds and default interest rates. ~~See Note C, “Investment Securities”~~The pricing data and market quotes the Corporation obtains from outside sources are reviewed internally for ~~additional details related to the Corporation’s available for sale investment securities.~~reasonableness.
• ~~ARCs, as discussed in Note H, “Commitments~~
Corporate debt securities – This category consists of subordinated debt issued by financial institutions ($34.1 million at March 31, 2010 and ~~Contingencies”~~$32.7 million at December 31, 2009), single-issuer trust preferred securities issued by financial institutions ($80.7 million at March 31, 2010 and $75.8 million at December 31, 2009), pooled trust preferred securities issued by financial institutions ($4.9 million at March 31, 2010 and $5.0 million at December 31, 2009) and other corporate debt issued by non-financial institutions ($3.2 million at March 31, 2010 and December 31, 2009).
Classified as Level 2 investments are the subordinated debt, other corporate debt issued by non-financial institutions and $73.6 million and $68.8 million of single-issuer trust preferred securities held at March 31, 2010 and December 31, 2009, respectively. These corporate debt securities are measured at fair value by a third-party pricing service using both quoted prices for similar assets, when available, and model-based valuation techniques that derive fair value based on market-corroborated data, such as instruments with similar prepayment speeds and default interest rates. As with the debt securities described above, an active market presently exists for securities similar to these corporate debt security holdings.
Classified as Level 3 assets are the Corporation’s investments in pooled trust preferred securities and certain single-issuer trust preferred securities ($7.1 million at March 31, 2010 and $7.0 million at December 31, 2009). The fair values of these securities were determined based on quotes provided by third-party brokers who determined fair values based predominantly on internal valuation models which were not indicative prices or binding offers. The Corporation’s third-party pricing service cannot derive fair values for these securities primarily due to inactive market transactions for similar investments.
•
Auction rate securities – Due to their illiquidity, ARCs are classified as Level 3 ~~assets~~investments and ~~measured at fair value based on an independent third-party valuation. Due to their illiquidity, ARCs were~~are valued through the use of an expected cash flows ~~model.~~model prepared by a third-party valuation expert. The assumptions used in preparing the expected cash flows model include estimates offor coupon rates, time to maturity and market rates of return. The expected cash flows model the Corporation obtains from outside sources is reviewed internally for reasonableness.
Pooled trust preferred securities and certain single-issuer trust preferred securities are also classified as Level 3 assets. The fair values of pooled trust preferred securities and $6.9 million of single-issuer trust preferred securities were determined 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. The Corporation classified $67.1 million of other single-issuer trust preferred securities as Level 2 assets above.
~~Equity securities totaling $85.7 million, issued by the Federal Home Loan Bank and Federal Reserve Bank, have been excluded from the above table.~~
•
Other financial assets – Included within this asset category ~~are~~are: Level 1 assets, consisting of mutual funds that are held in trust for employee deferred compensation plans and measured at fair value based on quoted prices for identical securities in active ~~markets,~~markets; and Level 2 assets
20
representing the fair value of mortgage banking derivatives in the form of interest rate locks ~~with customers~~ and forward commitments with secondary market investors. The fair value of the Corporation’s interest rate locks and forward commitments are determined as the amount that would be required to settle each derivative financial instrument at the balance sheet date. See Note G,F, “Derivative Financial Instruments”, for additional information.
•
Other financial liabilities – Included within this category are: Level 1 employee deferred compensation liabilities which ~~are the~~represent amounts due to employees under the deferred compensation plans described under the heading “Other financial assets” ~~above;~~above and Level 2 mortgage banking derivatives, described under the heading “Other financial assets” ~~above; and Level 3 financial guarantees associated with the Corporation’s commitment to purchase ARCs held within customer accounts.~~
The fair value of the financial guarantee liability associated with ARCs held by the Corporation’s customers was determined using the same methods as the ARCs held by the Corporation and described under the heading “Available for sale investment securities” above. The Corporation purchased all remaining ARCs held in customer accounts during the three months ended June 30, 2009, therefore, there is no balance outstanding as of September 30, 2009. See Note H, “Commitments and Contingencies” for additional information.
21
The following tables present the changes in the Corporation’s assets and liabilities measured at fair value on a recurring basis using unobservable inputs (Level 3) for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2010 and 2009:

Three Months Ended September 30, 2009
Available for Sale Investment Securities Other Financial
Pooled Trust Single-issuer Liabilities –
Preferred Trust Preferred ARC ARC Financial
Securities Securities Investments Guarantee
(in thousands)
Balance, June 30, 2009 $ 4,915 $ 7,006 $ 289,575 $ —
Realized adjustment to fair value (2) (1,846 ) — — —
Unrealized adjustment to fair value (3) 1,781 1,054 4,650 —
Sales — — (3,086 ) —
Redemptions — — (6,135 ) —
(Premium amortization)/Discount accretion (4) (4 ) 1 586 —

Balance, September 30, 2009 $ 4,846 $ 8,061 $ 285,590 $ —

Nine Months Ended September 30, 2009
Available for Sale Investment Securities Other Financial
Pooled Trust Single-issuer Liabilities –
Preferred Trust Preferred ARC ARC Financial
Securities Securities Investments Guarantee
(in thousands)
Balance, December 31, 2008 $ 15,381 $ 7,544 $ 195,900 $ (8,653 )
Purchases (1) — — 89,383 14,890
Realized adjustment to fair value (2) (6,475 ) — — (6,237 )
Unrealized adjustment to fair value (3) (4,059 ) 514 7,797 —
Sales — — (3,086 ) —
Redemptions — — (6,852 ) —
(Premium amortization)/Discount accretion (4) (1 ) 3 2,448 —

Balance, September 30, 2009 $ 4,846 $ 8,061 $ 285,590 $ —

   Available for Sale Investment Securities Other Financial
Liabilities –
ARC Financial
Guarantee (1)
      Pooled Trust
Preferred
Securities Single-issuer
Trust Preferred
Securities ARC
Investments
   (in thousands)
Balance, December 31, 2009
   $ 4,979    $ 6,981    $ 289,203    $ 0
Realized adjustment to fair value (2)
   (4,153 ) 0    0    0
Unrealized adjustment to fair value (3)
   4,079    154    (1,266 ) 0
Redemptions
   0    0    (1,140 ) 0
(Premium amortization)/Discount accretion (4)
   (5 ) 1    1,336    0

Balance, March 31, 2010
   $ 4,900    $ 7,136    $ 288,133    $ 0

Balance, December 31, 2008
   $ 15,381    $ 7,544    $ 195,900    $ (8,653 )
Purchases (5)
   0    0    9,642    877
Realized adjustment to fair value (2)
   (1,978 ) 0    0    (6,158 )
Unrealized adjustment to fair value (3)
   (2,711 ) (1,252 ) (2,665 ) 0
Redemptions
   0    0    (89 ) 0
Discount accretion (4)
   0    2    790    0

Balance, March 31, 2009
   $ 10,692    $ 6,294    $ 203,578    $ (13,934 )

(1) ~~For ARC investments, amount represents~~In 2008, the Corporation offered to purchase illiquid ARCs ~~acquired~~ from ~~customers, less an adjustment to~~customers. The estimated fair value ~~upon purchase. For the ARC financial guarantee, amount represents the reversal~~ of the guarantee ~~liability due~~was determined based on the difference between the fair value of the underlying ARCs and their estimated purchase price. During 2009, the Corporation completed the repurchase of all eligible ARCs and, as of December 31, 2009, there were no longer any ARCs still held by customers that the Corporation had agreed to ~~the purchase of ARCs from customers.~~purchase.
(2) For pooled trust preferred securities, realized adjustments to fair value represent credit related other-than-temporary impairment charges that were recorded as a reduction to investment securities gains on the consolidated statements of income. ~~For the ARC financial guarantee, the realized adjustment to fair value has been included as a component of operating risk loss on the Corporation’s consolidated statements of income.~~
(3) Pooled trust preferred securities, single-issuer trust preferred securities, and ~~ARC investments~~ARCs are classified as available for sale investment securities; as such, the unrealized adjustment to fair value was recorded as an unrealized holding gain (loss) and included as a component of available for sale investment securities on the ~~Corporation’s~~ consolidated balance sheet.
(4) Included as a component of net interest income on the ~~Corporation’s~~ consolidated statements of income.
(5) For ARCs, amount represents investments acquired from customers, less an adjustment to fair value upon purchase. For the ARC financial guarantee, amount represents the reversal of the guarantee liability due to the purchase of ARCs from customers.
Items Measured at Fair Value on a Nonrecurring Basis
Certain financial assets and liabilities are not measured at fair value on an ongoing basis but are subject to fair value measurement in certain circumstances, such as upon their acquisition or when there is evidence of impairment.
22
The Corporation’s assets measured at fair value on a nonrecurring basis and reported on the Corporation’s consolidated balance ~~sheet as of September 30, 2009~~sheets were as follows:

Level 1 Level 2 Level 3 Total
(in thousands)
Loans held for sale $ — $ 6,216 $ — $ 6,216
Net loans — — 636,610 636,610
Other financial assets — 11,480 20,751 32,231

Total assets $ — $ 17,696 $ 657,361 $ 675,057

   March 31, 2010
   Level 1    Level 2    Level 3    Total
   (in thousands)
Net loans
   $ 0    $ 344    $ 669,033    $ 669,377
Other financial assets
   0    26,228    23,516    49,744

Total assets
   $ 0    $ 26,572    $ 692,549    $ 719,121

Reserve for unfunded commitments
   $ 0    $ 0    $ 4,339    $ 4,339

   December 31, 2009
   Level 1    Level 2    Level 3    Total
   (in thousands)
Loans held for sale
   $ 0    $ 5,807    $ 0    $ 5,807
Net loans
   0    0    642,853    642,853
Other financial assets
   0    23,309    22,498    45,807

Total assets
   $ 0    $ 29,116    $ 665,351    $ 694,467

Reserve for unfunded commitments
   $ 0    $ 0    $ 855    $ 855

The valuation techniques used to measure fair value for the items in the ~~table~~tables above are as follows:
•
Loans held for sale – This category consists of floating rate residential mortgage construction loans ~~held for sale that were~~which are measured at the lower of aggregate cost or fair value. Fair value was measured as the ~~price~~prices that secondary market investors were offering for loans with similar characteristics.
•
Net loans–This category ~~includes commercial~~consists of residential mortgage loans and ~~commercial mortgage~~home equity loans ~~which~~that were ~~considered to be impaired under FASB ASC Section 310-10-35~~previously sold and repurchased from secondary market investors during the first quarter of 2010 and have been classified as Level 32 assets. ~~Impaired~~Upon repurchase, these loans ~~are measured at fair value based on~~were written down to the ~~present~~appraised 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 its~~their underlying collateral, ~~if the loan is collateral dependent. An allowance~~less estimated selling costs. See Note G, “Commitments and Contingencies” for ~~loan losses is allocated to an impaired loan if its carrying value exceeds its estimated fair value. The amount shown is the balance of impaired loans, net of the related allowance for loan losses.~~additional information.
This category also consists of commercial loans, commercial mortgage loans and construction loans which were considered to be impaired under FASB ASC Section 310-10-35 and have been classified as Level 3 assets. Impaired loans are measured at fair value 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 its collateral, if the loan is collateral dependent. An allowance for loan losses is allocated to an impaired loan if its carrying value exceeds its estimated fair value. The amount shown is the balance of impaired loans, net of the related allowance for loan losses.
•
Other financial assets – This category includes ~~foreclosed assets that the Corporation obtained during the first nine months of 2009.~~other real estate owned. Fair values for these Level 2 assets were based on estimated selling prices less estimated selling costs for similar assets in active markets.
Classified as Level 3 assets above are mortgage servicing rights (MSRs), which are initially recorded at fair value upon the sale of residential mortgage loans, which the Corporation continues to service, to secondary market investors. 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 net servicing income, the discount rate and the expected life of the underlying loans.
• ~~Classified~~
Reserve for unfunded commitments – This liability represents the reserve associated with unused commitments to extend credit on loans which are impaired under FASB ASC Section 310-10-35, and included as Level 3 assets ~~above are mortgage servicing rights (MSRs), which are initially recorded at~~under the heading, “Net loans” above. The fair value ~~upon~~of the ~~sale~~reserve for unfunded commitments is determined based on the results of ~~residential mortgage loans, which~~ the ~~Corporation continues to service, to secondary market investors. MSRs are amortized~~measurement of impaired loans. As such, this liability is classified 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 net servicing income, the discount rate and the expected life of the underlying loans.Level 3 item.
FASB ASC Section 825-10-50 Fair Values of Financial Instruments
In April 2009, the FASB issued Staff Position No. 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments”, codified as FASB ASC Section 825-10-50. This staff position requires publicly traded companies to include all disclosures required by FASB ASC Section 825-10-50 in interim reporting periods as well as in annual financial statements. This staff position was effective for interim reporting periods ending after June 15, 2009, or June 30, 2009 for the Corporation.
The following table details the book values and estimated fair values of the ~~Corporation’s~~Corporation's financial instruments as of ~~September 30, 2009~~March 31, 2010 and December 31, ~~2008. In addition, a~~2009. A general description of the methods and assumptions used to estimate such fair values is also ~~provided below.~~
provided.
Fair values of financial instruments are significantly affected by assumptions used, principally the timing of future cash flows and discount rates. Because assumptions are inherently subjective in nature, the estimated fair values cannot be substantiated by comparison to independent market quotes and, in many cases, the estimated fair values could not necessarily be realized in an immediate sale or settlement of the
23
instrument. Further, certain financial instruments and all non-financial instruments not measured at fair value on the Corporation’s consolidated balance sheets are excluded. For financial instruments listed below which are not measured at fair value on the Corporation’s consolidated balance sheets, the aggregate fair value amounts presented do not necessarily represent ~~management’s~~management's estimate of the underlying value of the Corporation.

September 30, 2009 December 31, 2008
Estimated Estimated
Book Value Fair Value Book Value Fair Value
(in thousands)
FINANCIAL ASSETS

Cash and due from banks $ 252,004 $ 252,004 $ 331,164 $ 331,164
Interest-bearing deposits with other banks 24,048 24,048 16,791 16,791
Federal funds sold — — 4,919 4,919
Loans held for sale (1) 84,766 84,766 95,840 95,840
Securities held to maturity 9,145 9,248 9,636 9,765
Securities available for sale (1) 3,265,254 3,265,254 2,715,205 2,715,205

Loans, net of unearned income (1) 11,968,246 11,634,700 12,042,620 11,764,715
Accrued interest receivable 60,433 60,433 58,566 58,566
Other financial assets (1) 128,072 128,072 114,219 114,219

FINANCIAL LIABILITIES

Demand and savings deposits $ 6,587,314 $ 6,587,314 $ 5,453,799 $ 5,453,799
Time deposits (1) 5,445,366 5,473,370 5,098,117 5,137,078
Short-term borrowings 722,618 722,618 1,762,770 1,762,770
Accrued interest payable 49,962 49,962 53,678 53,678
Other financial liabilities (1) 51,401 51,401 73,203 73,203
Federal Home Loan Bank advances and long-term debt 1,650,870 1,611,403 1,787,797 1,765,815

   March 31, 2010    December 31, 2009
FINANCIAL ASSETS
   Book Value    Estimated
Fair Value    Book Value    Estimated
Fair Value

   (in thousands)
Cash and due from banks
   $ 276,200    $ 276,200    $ 284,508    $ 284,508
Interest-bearing depositswith other banks
   7,842    7,842    16,591    16,791
Loans held for sale (1)
   53,798    53,798    85,384    85,384
Securities held to maturity
   8,159    8,254    8,700    8,797
Securities available for sale (1)
   3,095,469    3,095,469    3,258,386    3,258,386
Loans, net of unearned income (1)
   11,964,840    11,953,559    11,972,424    11,972,109
Accrued interest receivable
   58,689    58,689    58,515    58,515
Other financial assets (1)
   129,085    129,085    128,374    128,374
FINANCIAL LIABILITIES

Demand and savings deposits
   $ 6,998,611    $ 6,998,611    $ 6,784,050    $ 6,784,050
Time deposits (1)
   5,157,844    5,200,366    5,313,864    5,349,237
Short-term borrowings
   624,650    624,650    868,940    868,940
Accrued interest payable
   49,247    49,247    46,596    46,596
Other financial liabilities (1)
   56,293    56,293    53,267    53,267
Federal Home Loan Bank advances and long-term debt
   1,440,755    1,377,153    1,540,773    1,474,082
(1) Description of fair value determinations for these financial instruments, or certain financial instruments within these categories, measured at fair value on the Corporation’s consolidated balance sheets, are detailed under the heading, “FASB ASC Topic 820 Fair Value Measurements” above.
For short-term financial instruments, defined as those with remaining maturities of 90 days or less and excluding those recorded at fair value and reported above under the heading, “FASB ASC Topic 820 Fair Value Measurements”, the carrying amount was considered to be a reasonable estimate of fair value. The following instruments are predominantly short-term:
Assets

~~Assets~~
Liabilities
Cash and due from banks    Demand and savings deposits
Interest bearing deposits    Short-term borrowings
Federal funds sold    Accrued interest payable
Accrued interest receivable    Other financial liabilities
For those components of the above-listed financial instruments with remaining maturities greater than 90 days, fair values were determined by discounting contractual cash flows using rates which could be earned for assets with similar remaining maturities and, in the case of liabilities, rates at which the liabilities with similar remaining maturities could be issued as of the balance sheet date.
The estimated fair values of securities held to maturity as of ~~September 30, 2009~~March 31, 2010 and December 31, ~~2008~~2009 were based on quoted market prices, broker quotes or dealer quotes.
For short-term loans and variable rate loans that reprice within 90 days, the carrying value was considered to be a reasonable estimate of fair value. For other types of loans and time deposits, fair value was estimated by discounting future
24
cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.
The fair value of FHLB advances and long-term debt was estimated by discounting the remaining contractual cash flows using a rate at which the Corporation could issue debt with a similar remaining maturity as of the balance sheet date. The fair values of commitments to extend credit and standby letters of credit, included within other financial liabilities above, are estimated to equal their carrying amounts.

NOTE ~~K – Subsequent Events~~
In May 2009, the FASB issued Statement of Financial Accounting Standards No. 165, “Subsequent Events”, codified as FASB ASC Section 855-10-50, which establishes the general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued and was effective for the Corporation on June 30, 2009. The Corporation has evaluated subsequent events through November 9, 2009, the date these financial statements were issued.
~~NOTE L – New Accounting Standards~~
In June 2009, the FASB issued Statement of Financial Accounting Standards No. 166, “Accounting for Transfers of Financial Assets – an amendment of FASB Statement No. 140” (Statement 166). Statement 166 amends the accounting for transfers of financial assets. Among its amendments to FASB Statement 140, it eliminates the concept of qualifying special-purpose entities, requires additional criteria to be met in order for the transfer of portions of financial assets to qualify for sale treatment, and expands the legal isolation criteria. Statement 166 is effective for a reporting entity’s first annual reporting period that begins after November 15, 2009, or January 1, 2010 for the Corporation. The Corporation does not believe the adoption of Statement 166 will have a material impact on its consolidated financial statements.
In June 2009, the FASB issued Statement of Financial Accounting Standards No. 167, “Amendments to FASB Interpretation No. 46(R)” (Statement 167). Statement 167 amends the accounting for variable interest entities. Statement 167 amends the criteria for determining the primary beneficiary of, and the entity required to consolidate, a variable interest entity. Statement 167 is effective for a reporting entity’s first annual reporting period that begins after November 15, 2009, or January 1, 2010 for the Corporation. The Corporation does not believe the adoption of Statement 167 will have a material impact on its consolidated financial statements.
~~NOTE M~~J – Reclassifications
Certain amounts in the ~~2008~~2009 consolidated financial statements and notes have been reclassified to conform to the ~~2009~~2010 presentation.
25
NOTE K – Subsequent Event
On May 5, 2010, the Corporation issued 21.8 million shares of its common stock, in an underwritten public offering, for total proceeds of $226.7 million, net of underwriting discounts and commissions. The underwriter has a 30-day option to purchase up to an additional 3.3 million shares at $10.40 per share.
The Corporation intends to use the net proceeds from this offering, together with other funds, to redeem all of the Series A Preferred Stock that it issued to the UST as part of the Troubled Asset Relief Program at such time as its banking regulators authorize and the UST formally approves.
~~Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations~~
Item 2. 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 ~~corporation~~financial holding company registered under the Bank Holding Company Act and incorporated under the laws of the Commonwealth of Pennsylvania in 1982, ~~which is a financial holding company,~~ and its wholly owned subsidiaries. ~~This~~Management’s discussion ~~and analysis~~ should be read in conjunction with the consolidated financial statements and notes presented in this report.
FORWARD-LOOKING STATEMENTS
The Corporation has made, and may continue to make, certain forward-looking statements with respect ~~to:~~to its financial conditions and results of operations. Many factors could affect future financial results, including without limitation: asset quality and the impact of adverse changes in the economy and in credit or other markets and resulting effects on credit risk and asset values; 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; changes in the levels of Federal Deposit Insurance Corporation deposit insurance premiums and assessments; the effect of competition and interest rates on net interest margin and net interest income; investment strategy and income growth; investment securities gains and losses; 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~~growth or a decline in ~~the economy and in credit or other markets and resulting effects on credit risk and asset values;~~loans originated; 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~~Do not unduly rely on forward-looking statements. Forward-looking statements can be identified by the use of words such as “may,” “should,” “will,” “could,” “estimates,” “predicts,” “potential,” “continue,” “anticipates,” “believes,” “plans,” “expects,” “future” and “intends” and similar expressions which are intended to identify forward-looking statements. These statements are not guarantees of future performance and are subject to ~~various assumptions,~~ risks, uncertainties and ~~uncertainties. Because~~other factors, some of which are beyond the ~~possibility of changes in these assumptions,~~Corporation’s control and difficult to predict and could cause actual results ~~could~~to differ materially from those expressed or forecasted in the forward-looking statements. The Corporation undertakes no ~~obligations~~obligation, other than as required by law, to update or revise any forward-looking ~~statements.~~
statements, whether as a result of new information, future events or otherwise.
RESULTS OF OPERATIONS
~~Overview~~
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, or FTE) 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.
26
The following table presents a summary of the Corporation’s earnings and selected performance ratios:

As of or for the As of or for the
Three months ended Nine months ended
September 30 September 30
2009 2008 2009 2008
Net income available to common shareholders (in thousands) $ 18,300 $ 29,076 $ 34,419 $ 96,250
Income before income taxes (in thousands) $ 29,171 $ 38,778 $ 59,344 $ 132,075
Diluted net income per share $ 0.10 $ 0.17 $ 0.20 $ 0.55
Return on average assets 0.56 % 0.73 % 0.40 % 0.81 %
Return on average common equity 4.78 % 7.25 % 3.06 % 8.02 %
Return on average tangible common equity (1) 7.91 % 12.72 % 5.24 % 14.00 %
Net interest margin (2) 3.55 % 3.77 % 3.48 % 3.71 %
Non-performing assets to total assets 1.82 % 1.15 % 1.82 % 1.15 %
Net charge-offs to average loans (annualized) 0.81 % 0.38 % 0.93 % 0.29 %

   As of or for the
Three months ended
March 31
   2010 2009
Net income available to common shareholders (in thousands)
   $ 22,415    $ 8,054
Income before income taxes (in thousands)
   $ 36,747    $ 14,658
Diluted net income per share (1)
   $ 0.13    $ 0.05
Return on average assets
   0.68 % 0.33 %
Return on average common equity (2)
   5.73 % 2.18 %
Return on average tangible common equity (3)
   9.13 % 3.88 %
Net interest margin (4)
   3.78 % 3.45 %
Non-performing assets to total assets
   1.90 % 1.63 %
Net charge-offs to average loans (annualized)
   0.95 % 1.00 %
(1) Net income available to common shareholders divided by diluted weighted average common shares outstanding.
(2) ~~Calculated as net~~Net income available to common shareholders, divided by average common shareholders’ equity.
(3) Net income available to common shareholders, adjusted for intangible asset amortization (net of tax), divided by average common shareholders’ equity, excluding goodwill and intangible assets.
~~(2)~~ (4) Presented on a fully taxable-equivalent basis, using a 35% Federal tax rate and statutory interest expense disallowances. See also the “Net Interest Income” section of Management’s Discussion.
The Corporation’s income before income taxes for the ~~third~~first quarter of ~~2009 decreased $9.6~~2010 increased $22.1 million, or ~~24.8%~~150.7%, from the same period in ~~2008. Income before income taxes for the first nine months of 2009 decreased $72.7 million, or 55.1%, in comparison to the first nine months of 2008.~~2009. The ~~decreases in income before income taxes for the three and nine months ended September 30, 2009 in comparison to the same periods in 2008 were~~increase was primarily due to the following significant items:
~~Decreases~~Increases in income before income taxes:
•
~~Increases~~Increase in net interest income of $14.4 million, or 11.6%.The increase in net interest income was due to a 33 basis point, or 9.6%, increase in the net interest margin, from 3.45% in the first quarter of 2009 to 3.78% in the first quarter of 2010. The increase in net interest margin was primarily due to a significant decline in funding costs, partially offset by a decrease in interest-earning asset yields.
•
Decrease in the provision for loan losses of ~~$18.3~~$10.0 million, ~~and $90.4 million for~~or 20.0%. During the ~~three and nine months ended September 30, 2009, respectively.The increases in provision for loan losses were due to increases in the levels~~first quarter of ~~non-performing assets and net charge-offs, resulting in additional allocations to the allowance for credit losses.~~
• ~~Increases in Federal Deposit Insurance Corporation (FDIC) insurance expense of $4.1 million and $19.1 million for the three and nine months ended September 30, 2009, respectively.~~~~The increases in FDIC insurance expense were primarily due to~~2010, the increase in ~~assessment rates in 2009 and a $7.7 million special assessment in~~ the ~~second quarter of 2009.~~
• ~~Decrease in other income of $13.9 million due to the pre-tax gain on the sale of the Corporation’s credit card portfolio in the second quarter of 2008.~~During the second quarter of 2008, the Corporation sold its approximately $87 million credit card portfolio to U.S. Bank National Association ND, d/b/a Elan Financial Services, and recorded a $13.9 million pre-tax gain on the transaction.
• ~~Decreases in net interest income of $1.2 million and $6.9 million~~allowance allocation needs for ~~the three and nine months ended September 30, 2009, respectively.~~~~The decreases in net interest income were due to declines in net interest margin, partially offset by increases in average interest-earning assets.~~
During 2008, interest rates declined significantly due to the Federal Reserve Board lowering the Federal funds rate from 4.25% at January 1, 2008 to 0-0.25% at December 31, 2008. The average prime rate decreased from 5.45% for the nine months ended September 30, 2008 to 3.25% for the nine months ended September 30, 2009. Asset yields declined further than rates paid on interest-
27
~~bearing liabilities. As a result, the Corporation’s net interest margin for the three and nine months ended September 30, 2009 decreased~~impaired loans slowed in comparison to the ~~same periods~~first quarter of 2009, primarily due to a stabilization in ~~2008.~~collateral values for impaired commercial mortgages and improved expected cash flow forecasts for commercial customers. These factors, in conjunction with a modest decrease in net charge-offs from $30.1 million in the first quarter of 2009 to $28.3 million in the first quarter of 2010, contributed to a decrease in the provision for loan losses.
~~Increases in income before income taxes:~~
•
~~Reductions in other-than-temporary impairment charges on investments of $7.9~~A $6.2 million ~~and $30.1 million for the three and nine months ended September 30, 2009, respectively.~~The decreases in other-than-temporary impairment charges were related to equity and debt securities issued by financial institutions. During the three and nine months ended September 30, 2009, the Corporation recorded other-than-temporary impairment charges for financial institutions stocks of $949,000 and $2.6 million, respectively. In addition, the Corporation recorded other-than-temporary impairment charges for pooled trust preferred securities issued by financial institutions of $1.8 million and $6.5 million, respectively. In comparison, during the three and nine months ended September 30, 2008, other-than-temporary impairment charges for financial institutions stocks were $2.0 million and $30.3 million, respectively. In addition, other-than-temporary impairment charges for debt securities issued by financial institutions during the three and nine months ended September 30, 2008 were $7.8 million.
• ~~Reductions~~decrease in contingent losses associated with the Corporation’s guarantee to purchase illiquid student loan auction rate securities, also known as auction rate certificates (ARCs) ~~from customers of $2.7 million and $9.6 million for~~. Fulton Financial Advisors (FFA), the ~~three and nine months ended September 30, 2009, respectively.Beginning in the second quarter of 2008, the Corporation offered to purchase illiquid ARCs held by customers of its~~ investment management and trust division of the Corporation’s Fulton Bank, N.A. subsidiary, ~~Fulton Financial Advisors, N.A. (FFA). During the second quarter~~held ARCs for some of ~~2009, the Corporation purchased all remaining~~its customers’ accounts. FFA had previously sold ARCs ~~held by~~to customers ~~and, therefore, no contingent loss was required in the third quarter of 2009.~~as short-term investments with fair values that could be derived based on periodic auctions under normal market conditions.
During 2008 and 2009, the Corporation purchased ARCs from customers due to the failure of these periodic auctions, making these previously short-term investments illiquid. During the first quarter of 2009, the Corporation recorded a pre-tax charge, recorded as a component of operating risk loss on the consolidated statement of income, of $6.2 million, which represented contingent losses related to guarantees to purchase ARCs held by customers. As of December 31, 2009, the Corporation had purchased all remaining ARCs held by customers, and therefore, recorded no such charges in the first quarter of 2010.
Decreases in income before income taxes:
•
~~Increases~~A $5.2 million decrease in gains on sales of mortgage ~~loans~~loans.During the first quarter of ~~$512,000 and $11.5 million for the three and nine months ended September 30, 2009, respectively.During~~ 2009, low interest rates on residential mortgages resulted in a significant increase in residential mortgage ~~refinances. As a result,~~refinances and an increase in the Corporation’s volumes of residential mortgage ~~sales and~~sales. The decrease in gains on ~~such~~ sales ~~increased.~~of mortgage loans in the first quarter of 2010 was a result of a decrease in refinance volumes.
28
•
A $5.1 million decrease in net gains on sales of investment securities, from a gain of $2.9 million in the first quarter of 2009 to a net loss of $2.2 million in the first quarter of 2010. The decrease in gains on sales of investment securities was primarily due to a $4.1 million decrease in net gains on sales of debt securities and a $2.2 million increase in other-than-temporary impairment charges related to pooled trust preferred securities issued by financial institutions. During the first quarter of 2009, the Corporation recorded $6.0 million of net gains on sales of debt securities, primarily collateralized mortgage obligations, compared to $1.9 million of net gains on sales of debt securities in the first quarter of 2010.
Quarter Ended ~~September 30, 2009~~March 31, 2010 compared to the Quarter Ended ~~September 30, 2008~~March 31, 2009
Net Interest Income
The following table provides a comparative average balance sheet and net interest income analysis for the ~~third~~first quarter of ~~2009~~2010 as compared to the same period in ~~2008.~~2009. Interest income and yields are presented on an FTE basis, using a 35% Federal tax rate and statutory interest expense disallowances. The discussion following this table is based on these FTE amounts. All dollar amounts are in thousands.

Three months ended September 30
2009 2008
Average Yield/ Average Yield/
Balance Interest (1) Rate Balance Interest (1) Rate
ASSETS

Interest-earning assets:
Loans, net of unearned income (2) $ 11,913,581 $ 163,915 5.46 % $ 11,696,841 $ 181,562 6.18 %
Taxable investment securities (3) 2,722,751 29,376 4.31 2,117,207 26,025 4.92
Tax-exempt investment securities (3) 436,209 6,101 5.59 509,994 6,944 5.45
Equity securities (1) (3) 132,176 632 1.90 168,690 1,614 3.82

Total investment securities 3,291,136 36,109 4.39 2,795,891 34,583 4.95
Loans held for sale 102,367 1,550 6.06 101,319 1,539 6.08
Other interest-earning assets 24,348 51 0.83 19,013 142 2.94

Total interest-earning assets 15,331,432 201,625 5.23 % 14,613,064 217,826 5.94 %
Noninterest-earning assets:
Cash and due from banks 301,875 322,550
Premises and equipment 204,416 197,895
Other assets 959,628 933,303
Less: Allowance for loan losses (234,446 ) (123,865 )

Total Assets
$ 16,562,905 $ 15,942,947

LIABILITIES AND EQUITY

Interest-bearing liabilities:
Demand deposits $ 1,883,087 $ 2,119 0.45 % $ 1,734,198 $ 3,166 0.73 %
Savings deposits 2,556,717 5,187 0.80 2,192,747 6,633 1.20
Time deposits 5,554,349 36,519 2.61 4,308,903 37,393 3.45

Total interest-bearing deposits 9,994,153 43,825 1.74 8,235,848 47,192 2.28
Short-term borrowings 863,281 835 0.38 2,432,109 12,877 2.08
FHLB advances and long-term debt 1,695,427 20,400 4.77 1,819,897 19,722 4.32

Total interest-bearing liabilities 12,552,861 65,060 2.06 % 12,487,854 79,791 2.54 %
Noninterest-bearing liabilities:
Demand deposits 1,922,460 1,669,908
Other 198,314 190,012

Total Liabilities
14,673,635 14,347,774
Shareholders’ equity 1,889,270 1,595,173

Total Liabilities and Shareholders’ Equity
$ 16,562,905 $ 15,942,947

Net interest income/net interest margin (FTE) 136,565 3.55 % 138,035 3.77 %

Tax equivalent adjustment (3,764 ) (4,017 )

Net interest income $ 132,801 $ 134,018

   Three months ended March 31
   2010 2009
ASSETS
   Average
Balance Interest
(1) Yield/
Rate Average
Balance Interest
(1) Yield/
Rate

Interest-earning assets:

Loans, net of unearned income (2)
   $ 11,971,786    $ 159,424    5.39 % $ 12,041,286    $ 163,753    5.51 %
Taxable investment securities (3)
   2,663,127    28,149    4.23    2,212,639    26,849    4.86
Tax-exempt investment securities (3)
   387,971    5,531    5.70    503,265    6,887    5.47
Equity securities (3)
   141,896    809    2.29    137,308    774    2.28

Total investment securities
   3,192,994    34,489    4.33    2,853,212    34,510    4.84
Loans held for sale
   42,938    556    5.18    104,467    1,261    4.83
Other interest-earning assets
   10,793    25    0.95    16,934    50    1.19

Total interest-earning assets
   15,218,511    194,494    5.17 % 15,015,899    199,574    5.38 %
Noninterest-earning assets:

Cash and due from banks
   263,147    317,928
Premises and equipment
   203,584    202,875
Other assets
   1,086,635    924,755
Less: Allowance for loan losses
   (273,426 ) (187,183 )

Total Assets
   $ 16,498,451    $ 16,274,274

LIABILITIES AND EQUITY

Interest-bearing liabilities:

Demand deposits
   $ 1,981,653    $ 1,840    0.38 % $ 1,754,003    $ 1,776    0.41 %
Savings deposits
   2,847,427    5,201    0.74    2,058,021    4,353    0.86
Time deposits
   5,202,975    26,697    2.08    5,432,676    43,767    3.27

Total interest-bearing deposits
   10,032,055    33,738    1.36    9,244,700    49,896    2.19
Short-term borrowings
   871,981    549    0.25    1,517,064    1,436    0.38
FHLB advances and long-term debt
   1,484,236    17,792    4.86    1,787,493    20,119    4.55

Total interest-bearing liabilities
   12,388,272    52,079    1.70 % 12,549,257    71,451    2.31 %
Noninterest-bearing liabilities:

Demand deposits
   1,973,146    1,657,658
Other
   180,528    201,449

Total Liabilities
   14,541,946    14,408,364
Shareholders' equity
   1,956,505    1,865,910

Total Liabilities andShareholders' Equity
   $ 16,498,451    $ 16,274,274


Net interest income/net interest margin (FTE)
   142,415    3.78 % 128,123    3.45 %

Tax equivalent adjustment
   (3,906 ) (4,007 )

Net interest income
   $ 138,509    $ 124,116

(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.
29
The following table summarizes the changes in FTE interest income and expense due to changes in average balances (volume) and changes in rates:

2009 vs. 2008
Increase (decrease) due
to change in
Volume Rate Net
(in thousands)
Interest income on:
Loans, net of unearned income $ 3,389 $ (21,036 ) $ (17,647 )
Taxable investment securities 6,879 (3,528 ) 3,351
Tax-exempt investment securities (1,024 ) 181 (843 )
Equity securities (295 ) (687 ) (982 )
Loans held for sale 18 (7 ) 11
Other interest-earning assets 31 (122 ) (91 )

Total interest income
$ 8,998 $ (25,199 ) $ (16,201 )

Interest expense on:
Demand deposits $ 255 $ (1,302 ) $ (1,047 )
Savings deposits 988 (2,434 ) (1,446 )
Time deposits 9,458 (10,332 ) (874 )
Short-term borrowings (5,319 ) (6,723 ) (12,042 )
FHLB advances and long-term debt (1,373 ) 2,051 678

Total interest expense
$ 4,009 $ (18,740 ) $ (14,731 )

   2010 vs. 2009
Increase (decrease) due
to change in
   Volume Rate Net
   (in thousands)
Interest income on:

Loans, net of unearned income
   $ (939 ) $ (3,390 ) $ (4,329 )
Taxable investment securities
   5,011    (3,711 ) 1,300
Tax-exempt investment securities
   (1,630 ) 274    (1,356 )
Equity securities
   29    6    35
Loans held for sale
   (790 ) 85    (705 )
Other interest-earning assets
   (16 ) (9 ) (25 )

Total interest income
   $ 1,665    $ (6,745 ) $ (5,080 )

Interest expense on:

Demand deposits
   $ 219    $ (155 ) $ 64
Savings deposits
   1,502    (654 ) 848
Time deposits
   (1,781 ) (15,289 ) (17,070 )
Short-term borrowings
   (480 ) (407 ) (887 )
FHLB advances and long-term debt
   (3,601 ) 1,274    (2,327 )

Total interest expense
   $ (4,141 ) $ (15,231 ) $ (19,372 )

Interest income decreased ~~$16.2~~$5.1 million, or ~~7.4%~~2.5%. A 21 basis point, or 3.9%, ~~due to~~decrease in average yields resulted in a ~~$25.2~~$6.7 million decrease as a result of changes in interest rates. During the third quarter of 2009, the average yield on interest-earning assets decreased 71 basis points, or 12.0%, in comparison to the third quarter of 2008. The decrease in interest income, ~~due to changes in rates~~which was partially offset by a ~~$9.0~~$1.7 million increase in interest income ~~realized from growth in average interest-earning assets of $718.4~~attributable to a $202.6 million, or ~~4.9%.~~
~~The~~1.3%, increase in average interest-earning ~~assets was due, in part, to loan growth, which is summarized,~~assets. Average investments increased $339.8 million, or 11.9%, while average loans decreased $69.5 million, or 0.6%.
Average loans, by type, are summarized in the following table:

Three months ended
September 30 Increase (decrease)
2009 2008 $ %
(dollars in thousands)
Real estate – commercial mortgage $ 4,158,802 $ 3,806,311 $ 352,491 9.3 %
Commercial – industrial, financial and agricultural 3,667,854 3,545,797 122,057 3.4
Real estate – home equity 1,651,400 1,619,687 31,713 2.0
Real estate – construction 1,050,359 1,324,085 (273,726 ) (20.7 )
Real estate – residential mortgage 933,943 947,510 (13,567 ) (1.4 )
Consumer 371,676 369,052 2,624 0.7
Leasing and other 79,547 84,399 (4,852 ) (5.7 )

Total
$ 11,913,581 $ 11,696,841 $ 216,740 1.9 %

~~The~~
      Three months ended
March 31    Increase (decrease)
   2010    2009    $ %
   (dollars in thousands)
Real estate – commercial mortgage
   $ 4,306,270    $ 4,048,847    $ 257,423    6.4 %
Commercial – industrial, financial and agricultural
   3,686,405    3,655,970    30,435    0.8
Real estate – home equity
   1,640,912    1,698,599    (57,687 ) (3.4 )
Real estate – construction
   962,175    1,229,841    (267,666 ) (21.8 )
Real estate – residential mortgage
   940,652    957,556    (16,904 ) (1.8 )
Consumer
   362,212    360,919    1,293    0.4
Leasing and other
   73,160    89,554    (16,394 ) (18.3 )

Total
   $ 11,971,786    $ 12,041,286    $ (69,500 ) (0.6 %)

Despite sluggish economic conditions, the Corporation experienced growth in ~~average~~both its commercial mortgage ($257.4 million, or 6.4%) and commercial loan ($30.4 million, or 0.8%) portfolios. Geographically, the growth in commercial mortgages was mainly attributable to the Corporation’s Pennsylvania ($176.2 million, or 8.5%, increase) and Maryland ($50.7 million, or 15.1%, increase) markets. The commercial loan growth was partially due to the lack of alternative funding sources, such as the secondary market or private placements. Commercial loan growth was primarily in the Pennsylvania ($85.8 million, or 3.6%) and New Jersey ($18.4 million, or 3.3%) markets, partially offset by declines in the Maryland ($49.3 million, or 11.8%) and Virginia ($25.3 million, or 8.3%) markets.
The $267.7 million, or 21.8%, decrease in construction loans was primarily due to efforts to decrease credit exposure in ~~commercial mortgages, commercial loans~~this portfolio. Geographically, the decline was throughout all of the Corporation’s markets, with decreases in Maryland ($95.2 million, or 28.2%), New Jersey ($64.4 million, or 27.0%), Virginia ($59.4 million, or 19.8%) and ~~home equity loans.~~Pennsylvania ($46.4 million, or 13.8%). The ~~increases in commercial mortgages and commercial loans were primarily in floating and adjustable rate products and largely resulted from market share opportunities. The increase~~decrease in home equity loans was due to ~~an increase in consumer demand.~~
30
higher residential mortgage refinances that were driven by low interest rates.
Geographically, the increase in commercial mortgage loans was mainly attributable to increases within the Corporation’s Pennsylvania ($173.0 million), Maryland ($92.0 million) and New Jersey ($75.4 million) banks, while the increase in commercial loans was due to increases in Pennsylvania ($129.3 million) and New Jersey ($23.8 million) banks, offset by a decrease in Maryland ($35.4 million).
Offsetting these increases was a decrease in construction loans, due to a slowdown in residential housing construction and the Corporation’s efforts to reduce its credit exposure in this sector. Geographically, the decrease was attributable to decreases in the Corporation’s Maryland ($129.2 million), Pennsylvania ($53.4 million), Virginia ($45.2 million) and New Jersey ($38.9 million) banks.
The average yield on loans decreased 7212 basis points, or ~~11.7%~~2.2%, from ~~6.18%~~5.51% in ~~2008~~2009 to ~~5.46%~~5.39% in ~~2009.~~2010. The ~~decrease in yield reflected a lower interest rate environment, as illustrated by a lower~~ average prime rate ~~during~~was 3.25% for the ~~third~~first quarter of ~~2009 (3.25%) as compared to the same period in 2008 (5.00%).~~2010 and 2009. The decrease in average yields on loans was ~~not as pronounced as the decrease in the~~attributable to declining average ~~prime rate as~~rates on fixed and adjustable rate loans which, unlike floating rate loans, have a lagged repricing ~~effect during periods of short-term rate declines.~~
effect.
Average investments increased ~~$495.2~~$339.8 million, or ~~17.7%~~11.9%, due ~~in large part,~~largely to increases in collateralized mortgage obligations and ARCs. In late 2009, the Corporation purchased high-quality U.S. government agency-backed collateralized mortgage obligations with funds generated from an increase in deposits combined with a decrease in loans. The increase in ARCs was related to purchases of those securities from customers increasing total average investments by $158.6 million. The increase in collateralized mortgage obligations was due to the allocation of proceeds from significant deposit growth and, to a lesser extent, to the use of funds received from the issuance of preferred stock to the U.S. Treasury Department (UST) in December 2008.
during 2009. The average yield on investments decreased 5651 basis points, or ~~11.3%~~10.5%, from ~~4.95% in 2008 to 4.39%~~4.84% in 2009 to 4.33% in 2010, as the reinvestment of cash flows and incremental purchases were at yields that were lower than the overall portfolio yield. In addition, investment yields were adversely impacted by the reduction, or in some cases the suspension of, dividends on equities, particularly financial institutions stocks and Federal Home Loan Bank (FHLB) stocks.
The ~~$16.2~~$5.1 million decrease in interest income was ~~partially~~ offset by a decrease in interest expense of ~~$14.7~~$19.4 million, or ~~18.5%~~27.1%, to ~~$65.1~~$52.1 million in the ~~third~~first quarter of ~~2009~~2010 from ~~$79.8~~$71.5 million in the same period in ~~2008.~~2009. Interest expense decreased ~~$18.7~~$15.2 million as a result of a 4861 basis point, or ~~18.9%~~26.4%, decrease in the average cost of interest-bearing liabilities. ~~This decrease was partially offset by~~Interest expense decreased an additional $4.1 million, attributable to a ~~$4.0~~$161.0 million, ~~increase in interest expense resulting from growth~~or 1.3%, decline in average interest-bearing ~~liabilities of $65.0 million, or 0.5%.~~
liabilities.
The following table summarizes the ~~increases~~changes in average deposits, by type:

Three months ended
September 30 Increase
2009 2008 $ %
(dollars in thousands)
Noninterest-bearing demand $ 1,922,460 $ 1,669,908 $ 252,552 15.1 %
Interest-bearing demand 1,883,087 1,734,198 148,889 8.6
Savings 2,556,717 2,192,747 363,970 16.6

Total, excluding time deposits
6,362,264 5,596,853 765,411 13.7
Time deposits 5,554,349 4,308,903 1,245,446 28.9

Total
$ 11,916,613 $ 9,905,756 $ 2,010,857 20.3 %

      Three months ended
March 31    Increase (decrease)
   2010    2009    $ %
   (dollars in thousands)
Noninterest-bearing demand
   $ 1,973,146    $ 1,657,658    $ 315,488    19.0 %
Interest-bearing demand
   1,981,653    1,754,003    227,650    13.0
Savings
   2,847,427    2,058,021    789,406    38.4

Total demand and savings
   6,802,226    5,469,682    1,332,544    24.4
Time deposits
   5,202,975    5,432,676    (229,701 ) (4.2 )

Total deposits
   $ 12,005,201    $ 10,902,358    $ 1,102,843    10.1 %

The Corporation experienced an increase in noninterest-bearing and interest-bearing demand and savings accounts of ~~$765.4 million,~~$1.3 billion, or ~~13.7%~~24.4%. The increase in noninterest-bearing demand accounts was primarily in business accounts, ~~while~~ the increase in interest-bearing demand accounts was primarily in personal accounts and the increase in savings accounts was in personal, business ~~personal~~ and governmental accounts. The growth in business accounts was due, in part, to businesses being
31
required to keep higher balances on hand to offset service fees, as well as a ~~movement~~migration from the Corporation’s cash management products due to ~~the current~~ low interest rates.
The ~~increase~~decrease in time deposits was due to a $322.9 million, or 95.8%, decrease in ~~large part, to active promotion during late 2008 and throughout the first quarter of 2009. In the short-term, this certificate~~brokered certificates of deposit, offset by a $93.2 million, or 1.8%, increase in customer certificates of deposit. The decrease in brokered certificates of deposit resulted from the significant growth ~~had~~in customer funding. The increase in customer certificates of deposits was in accounts with original maturity terms greater than one year and jumbo certificates of deposit, offset by a ~~negative impact on net interest income and net interest margin as alternative funding sources, such as short-term borrowings, currently carry a lower cost~~decline in accounts with original maturity terms less than ~~time deposits. However, this shift~~one year. The growth in ~~funding sources~~longer-term certificates of deposit was ~~consistent with~~due to the Corporation’s continuing focus on building customer relationships, ~~which has served to strengthen~~while at the ~~Corporation’s overall liquidity profile.~~
same time extending funding maturities at reasonable rates over a longer time horizon.
The average cost of interest-bearing deposits decreased 5483 basis points, or ~~23.7%~~37.9%, from ~~2.28% in 2008 to 1.74%~~2.19% in 2009 to 1.36% in 2010 primarily due to ~~a decrease in cost~~the maturities of higher-rate certificates of deposit. The average cost of certificates of deposit decreased 84119 basis points, or ~~24.3%, due to the maturity and renewal of certificates of deposits at lower rates in 2009.~~
36.4%.
As average deposits increased, short-term and long-term borrowings decreased, as summarized in the following table:

Three months ended
September 30 Increase (decrease)
2009 2008 $ %
(dollars in thousands)
Short-term borrowings:
Customer short-term promissory notes $ 259,534 $ 486,179 $ (226,645 ) (46.6 %)
Customer repurchase agreements 254,789 213,827 40,962 19.2

Total short-term customer funding
514,323 700,006 (185,683 ) (26.5 )
Federal funds purchased 348,444 1,399,130 (1,050,686 ) (75.1 )
FHLB overnight repurchase agreements — 290,761 (290,761 ) (100.0 )
Other short-term borrowings 514 42,212 (41,698 ) (98.8 )

Total other short-term borrowings
348,958 1,732,103 (1,383,145 ) (79.9 )

Total short-term borrowings
863,281 2,432,109 (1,568,828 ) (64.5 )

Long-term debt:
FHLB advances 1,312,304 1,436,741 (124,437 ) (8.7 )
Other long-term debt 383,123 383,156 (33 ) —

Total long-term debt
1,695,427 1,819,897 (124,470 ) (6.8 )

Total
$ 2,558,708 $ 4,252,006 $ (1,693,298 ) (39.8 %)

   Three months ended
March 31    Increase (decrease)
   2010    2009    $ %
   (dollars in thousands)
Short-term borrowings:

Customer short-term promissory notes
   $ 223,439    $ 337,069    $ (113,630 ) (33.7 )%
Customer repurchase agreements
   248,982    246,429    2,553    1.0

Total short-term customer funding
   472,421    583,498    (111,077 ) (19.0 )
Federal funds purchased
   399,560    792,001    (392,441 ) (49.6 )
Federal Reserve Bank borrowings
   0    138,222    (138,222 ) (100.0 )
Other short-term borrowings
   0    3,343    (3,343 ) (100.0 )

Total other short-term borrowings
   399,560    933,566    (534,006 ) (57.2 )

Total short-term borrowings
   871,981    1,517,064    (645,083 ) (42.5 )

Long-term debt:

FHLB advances
   1,100,893    1,404,275    (303,382 ) (21.6 )
Other long-term debt
   383,343    383,218    125    0.0

Total long-term debt
   1,484,236    1,787,493    (303,257 ) (17.0 )

Total
   $ 2,356,217    $ 3,304,557    $ (948,340 ) (28.7 )%

The ~~decrease in short-term borrowings was the result of a $1.1 billion decrease in Federal funds purchased and a $290.8~~$111.1 million ~~decrease in FHLB overnight repurchase agreements. Also contributing to the decrease was a $185.7 million~~net decrease in short-term customer funding was due to customers transferring funds from the cash management program to deposits due to the low interest rate environment. The decrease in long-term debt was due to maturities of ~~FHLB~~Federal Home Loan Bank (FHLB) advances, which were generally not replaced with new advances.
32
Provision for Loan Losses and Allowance for Credit Losses
The following table presents the activity in the ~~Corporation’s~~ allowance for credit losses:

Three months ended
September 30
2009 2008
(dollars in thousands)
Loans, net of unearned income outstanding at end of period $ 11,968,246 $ 11,823,529

Daily average balance of loans, net of unearned income $ 11,913,581 $ 11,696,841

Balance of allowance for credit losses at beginning of period
$ 220,954 $ 126,223
Loans charged off:
Real estate – construction 9,356 2,733
Commercial – industrial, agricultural and financial 7,787 4,684
Real estate – commercial mortgage 3,554 2,405
Real estate – residential mortgage and home equity 1,065 719
Consumer 2,527 991
Leasing and other 1,637 1,166

Total loans charged off
25,926 12,698

Recoveries of loans previously charged off:
Real estate – construction 26 17
Commercial – industrial, agricultural and financial 444 749
Real estate – commercial mortgage 493 88
Real estate – residential mortgage and home equity 1 133
Consumer 354 304
Leasing and other 375 313

Total recoveries
1,693 1,604

Net loans charged off 24,233 11,094
Provision for loan losses 45,000 26,700

Balance of allowance for credit losses at end of period
$ 241,721 $ 141,829

Components of Allowance for Credit Losses:

Allowance for loan losses $ 234,511 $ 136,988
Reserve for unfunded lending commitments 7,210 4,841

Allowance for credit losses $ 241,721 $ 141,829

Selected Ratios:

Net charge-offs to average loans (annualized) 0.81 % 0.38 %
Allowance for credit losses to loans outstanding 2.02 % 1.20 %
Allowance for loan losses to loans outstanding 1.96 % 1.16 %
33
   Three months ended
March 31
   2010 2009
   (dollars in thousands)
Loans, net of unearned income outstanding at end of period
   $ 11,964,840    $ 12,009,060

Daily average balance of loans, net of unearned income
   $ 11,971,786    $ 12,041,286

Balance of allowance for credit losses at beginning of period
   $ 257,553    $ 180,137
Loans charged off:

Real estate – construction
   20,553    12,242
Commercial – industrial, agricultural and financial
   2,981    10,622
Real estate – commercial mortgage
   2,344    3,960
Real estate – residential mortgage and home equity
   1,391    1,937
Consumer
   2,078    2,076
Leasing and other
   645    946

Total loans charged off
   29,992    31,783

Recoveries of loans previously charged off:

Real estate – construction
   315    112
Commercial – industrial, agricultural and financial
   436    904
Real estate – commercial mortgage
   128    10
Real estate – residential mortgage and home equity
   1    1
Consumer
   552    429
Leasing and other
   261    253

Total recoveries
   1,693    1,709

Net loans charged off
   28,299    30,074
Provision for loan losses
   40,000    50,000

Balance of allowance for credit losses at end of period
   $ 269,254    $ 200,063

Components of Allowance for Credit Losses:

Allowance for loan losses
   $ 264,915    $ 192,410
Reserve for unfunded lending commitments
   4,339    7,653

Allowance for credit losses
   $ 269,254    $ 200,063

Selected Ratios:

Net charge-offs to average loans (annualized)
   0.95 % 1.00 %
Allowance for credit losses to loans outstanding
   2.25 % 1.67 %
Allowance for loan losses to loans outstanding
   2.21 % 1.60 %
The provision for loan losses was $40.0 million for the first quarter of 2010, a decrease of $10.0 million, or 20.0%, over the same period in 2009. A decrease in net charge-offs, the stabilization of non-performing loans, and a slowing in the pace of specific loan loss allocations needed for impaired loans all contributed to the decrease in the provision for loan losses.
Net charge-offs decreased $1.8 million, or 5.9%, to $28.3 million for the first quarter of 2010 compared to $30.1 million for the first quarter of 2009. Annualized net charge-offs to average loans decreased 5 basis points, or 5.0%, to 95 basis points for the first quarter of 2010. The $1.8 million decrease in net charge-offs was primarily due to decreases in commercial loan net charge-offs ($7.2 million, or 73.8%), commercial mortgage net charge-offs ($1.7 million, or 43.9%) and residential mortgage and home equity net charge-offs ($546,000, or 28.2%), offset by an increase in construction loan net charge-offs ($8.1 million, or 66.8%).
Of the $28.3 million of net charge-offs recorded in the first quarter of 2010, 32.2% were in Virginia, 29.5% in Maryland, 19.1% in New Jersey, and 18.6% in Pennsylvania. During the first quarter of 2010, there were six individual charge-offs which exceeded $1.0 million, totaling $17.0 million, which were for businesses that were negatively impacted by the downturn in residential and commercial real estate.
The following table summarizes the Corporation’s non-performing assets as of the indicated dates:

September 30 September 30 December 31
2009 2008 2008
(dollars in thousands)
Non-accrual loans $ 228,961 $ 143,310 $ 161,962
Loans 90 days past due and accruing 52,797 21,354 35,177

Total non-performing loans
281,758 164,664 197,139
Other real estate owned (OREO) 19,151 21,706 21,855

Total non-performing assets
$ 300,909 $ 186,370 $ 218,994

Non-accrual loans to total loans 1.91 % 1.21 % 1.34 %
Non-performing assets to total assets 1.82 % 1.15 % 1.35 %
Allowance for credit losses to non-performing loans 85.79 % 86.13 % 91.38 %
Non-performing assets to tangible common shareholders’ equity and allowance for credit losses 24.24 % 17.00 % 19.68 %
   March 31
2010 March 31
2009 December 31
2009
   (dollars in thousands)
Non-accrual loans
   $ 242,423    $ 198,765    $ 238,360
Loans 90 days past due and accruing
   43,603    47,284    43,359

Total non-performing loans
   286,026    246,049    281,719
Other real estate owned (OREO)
   26,228    23,189    23,309

Total non-performing assets
   $ 312,254    $ 269,238    $ 305,028

Non-accrual loans to total loans
   2.03 % 1.66 % 1.99 %
Non-performing assets to total assets
   1.90 % 1.63 % 1.83 %
Allowance for credit losses to non-performing loans
   94.14 % 81.31 % 91.42 %
Non-performing assets to tangible common shareholders’ equity and allowance for credit losses
   23.71 % 23.71 % 24.00 %
Excluded from ~~preceding table~~the summary of non-performing assets above were ~~$33.1~~$51.4 million of loans whose terms were modified under a troubled debt ~~restructuring~~restructurings and were current under their modified terms at ~~September 30, 2009.~~March 31, 2010. These troubled debt restructurings ~~were predominantly adequately collateralized~~included $27.0 million of residential ~~mortgage~~mortgages, $16.7 million of commercial mortgages, $4.8 million of construction loans and $2.6 million of commercial loans.
~~The following table summarizes loan delinquency rates, by type, as of the indicated dates:~~

September 30, 2009 December 31, 2008
30-60 > 90 30-60 > 90
Days Days Total Days Days Total
Real estate – construction 1.25 % 10.12 % 11.37 % 2.06 % 6.15 % 8.21 %
Commercial – industrial, agricultural and financial 0.61 1.65 2.26 0.56 1.08 1.64
Real estate – commercial mortgage 0.53 1.31 1.84 0.74 1.03 1.77
Real estate – residential mortgage 4.14 5.14 9.28 4.14 2.97 7.11
Consumer, home equity, leasing and other 1.14 0.60 1.74 0.82 0.41 1.23

Total
1.00 % 2.34 % 3.34 % 1.11 % 1.64 % 2.75 %
The following table summarizes the Corporation’s non-performing loans, by type, as of the indicated dates:

September 30 September 30 December 31
2009 2008 2008
(in thousands)
Real estate – construction $ 104,789 $ 57,436 $ 80,083
Commercial – industrial, agricultural and financial 63,217 41,489 40,294
Real estate – commercial mortgage 54,930 32,642 41,745
Real estate – residential mortgage and home equity 46,192 26,274 26,304
Consumer 12,292 6,558 8,374
Leasing 338 265 339

Total non-performing loans
$ 281,758 $ 164,664 $ 197,139

   March 31
2010    March 31
2009    December 31
2009
   (in thousands)
Real estate – construction
   $ 79,527    $ 93,425    $ 92,841
Commercial – industrial, agricultural and financial
   78,365    50,493    69,604
Real estate – commercial mortgage
   70,565    59,899    61,052
Real estate – residential mortgage and home equity
   42,302    31,365    45,748
Consumer
   15,086    10,316    12,319
Leasing
   181    551    155

Total non-performing loans
   $ 286,026    $ 246,049    $ 281,719

Non-performing ~~assets~~loans increased to ~~$300.9~~$286.0 million at March 31, 2010, from $246.0 million at March 31, 2009. The $40.0 million, or ~~1.82% of total assets, at September 30, 2009, from $186.4 million, or 1.15% of total assets, at September 30, 2008. The~~16.2%, increase in non-performing ~~assets~~loans in comparison to ~~September 30, 2008~~March 31, 2009 was primarily due to a ~~$47.4~~$27.9 million, or ~~82.4%, increase in non-performing construction loans, a $22.3 million, or 68.3%, increase in non-performing commercial~~
34
~~mortgages, a $21.7 million, or 52.4%~~55.2%, increase in non-performing commercial loans, ~~and~~ a ~~$19.9~~$10.9 million, or ~~75.8%~~34.9%, increase in non-performing residential mortgage and home equity loans and a $10.7 million, or 17.8%, increase in non-performing commercial mortgages, offset by a $13.9 million, or 14.9%, decrease in non-performing construction loans.
The ~~$47.4~~$27.9 million increase in non-performing ~~construction~~commercial loans was ~~related~~a result of prolonged weak economic conditions continuing to put stress on business customers. Geographically, the ~~slowdown of residential housing activity and deteriorating real estate values, particularly within the Corporation’s Maryland and Virginia markets, which accounted for $77.2~~increases were as follows: $17.6 million, or ~~73.7%~~91.3%, ~~of the $104.8 million of non-performing construction loans at September 30, 2009. Remaining non-performing construction loans at September 30, 2009 of $18.9 million and $8.6 million were~~ in the ~~Corporation’s~~Pennsylvania market, $4.2 million, or 98.0%, in the Maryland market, $3.1 million, or 28.0%, in the Virginia market and $2.6 million, or 16.7%, in the New Jersey market.
The $10.9 million increase in non-performing residential mortgage and home equity loans was primarily due to increases in the New Jersey ($4.7 million, or 110.7%) and Pennsylvania ~~markets, respectively.~~
($4.3 million, or 73.6%) markets. The ~~$22.3~~$10.7 million increase in non-performing commercial mortgages was due ~~primarily~~ to ~~an increase~~increases in the New Jersey ($13.8 million, or 58.7%) and Pennsylvania ($3.9 million, or 18.3%) markets, offset by a decrease in the Maryland ($8.1 million, or 82.0%) market.
The $13.9 million decrease in non-performing ~~loans in the Corporation’s New Jersey market. The $21.7 million increase in non-performing commercial~~construction loans was ~~caused by an increase in non-performing loans in~~due to the ~~Corporation’s Pennsylvania market. The $19.9 million increase in non-performing residential housing and home equity loans was spread across most of the Corporation’s geographical markets.~~
The $19.2 million balance of OREO as of September 30, 2009 included $11.9 million of foreclosures on repurchased residential mortgage loans and $4.4 million of foreclosed commercial loan properties.
Net charge-offs increased $13.1 million, or 118.4%, to $24.2 million for the third quarter of 2009 compared to $11.1 million for the third quarter of 2008. Annualized net charge-offs to average loans increased 43 basis points, or 113.2%, to 81 basis points for the third quarter of 2009. Of the $24.2$20.2 million of net charge-offs recorded ~~for~~during the ~~third~~first quarter of 2010, partially offset by increases to non-performing construction loans, primarily in the Pennsylvania market.
The $26.2 million of OREO at March 31, 2010 included $19.4 million of residential properties and $6.8 million of commercial properties. The residential properties included $7.8 million of foreclosed repurchased residential mortgage loans, as discussed in Note G, “Commitments and Contingencies” in the Notes to Consolidated Financial Statements.
The following table summarizes loan delinquency rates, by type, as of March 31:
   2010 2009
   30-60
Days > 90 Days Total 30-60
Days > 90 Days Total
Real estate – construction
   2.19 % 8.49 % 10.68 % 1.12 % 7.65 % 8.77 %
Commercial – industrial, agricultural and financial
   0.71    2.13    2.84    0.67    1.59    2.26
Real estate – commercial mortgage
   1.36    1.62    2.98    0.61    1.27    1.88
Real estate – residential mortgage
   3.58    4.51    8.09    4.08    3.56    7.64
Consumer, home equity, leasing and other
   0.95    0.74    1.69    0.77    0.51    1.28

Total
   1.33 % 2.39 % 3.72 % 0.98 % 2.05 % 3.03 %

Total dollars (in thousands)
   $ 159,632    $ 286,528    $ 446,160    $ 117,715    $ 247,755    $ 365,470

In comparison to the first quarter of 2009, ~~35.1%~~the Corporation experienced an increase in delinquency rates across all loan categories. Delinquency rates at December 31, 2009 were 1.09% in the 30 to 60 days past due category and 2.36% in the greater than 90 days category.
The increase in construction loan delinquency percentages was ~~for banks located~~due to a decrease in ~~New Jersey, 24.4%~~the construction loan portfolio as total delinquency slightly decreased in ~~Virginia, 20.8% in Pennsylvania, 16.7% in Maryland and 3.0% in Delaware.~~dollars. During the third quarter of 2009, there were four individual charge-offs which exceeded $1.0 million, with an aggregate amount of $5.9 million, of which $4.7 million were loans to customers whose businesses were negatively impacted bypast year, the ~~downturn in residential real estate.~~
The provision for loan losses totaled $45.0 million for the third quarter of 2009, an increase of $18.3 million, or 68.5%, over the same period in 2008. This significant increase in the provision for loan losses was related to the increase in non-performingdelinquencies on commercial loans and ~~net charge-offs, and the resulting need for additional allocations~~commercial mortgages have increased, a by-product of slow consumer demand that continues to ~~the allowance for credit losses.~~
place stress on businesses.
The following table presents ending balances of loans outstanding, net of unearned income:

September 30 September 30 December 31
2009 2008 2008
(in thousands)
Real-estate – commercial mortgage $ 4,186,654 $ 3,873,802 $ 4,016,700
Commercial – industrial, agricultural and financial 3,719,966 3,554,615 3,635,544
Real-estate – home equity 1,651,711 1,647,063 1,695,398
Real-estate – construction 1,029,079 1,308,008 1,269,330
Real-estate – residential mortgage 930,207 972,930 972,797
Consumer 375,685 388,032 365,692
Leasing and other 74,944 79,079 87,159

Loans, net of unearned income
$ 11,968,246 $ 11,823,529 $ 12,042,620

   March 31
2010    March 31
2009    December 31
2009
   (in thousands)
Real-estate – commercial mortgage
   $ 4,322,774    $ 4,068,342    $ 4,292,300
Commercial – industrial, agricultural and financial
   3,684,903    3,653,503    3,699,198
Real-estate – home equity
   1,638,179    1,673,613    1,644,260
Real-estate – residential mortgage
   951,381    947,837    921,741
Real-estate – construction
   937,279    1,205,256    978,267
Consumer
   361,681    378,851    360,698
Leasing and other
   68,643    81,658    75,960

Loans, net of unearned income
   $ 11,964,840    $ 12,009,060    $ 11,972,424

Approximately ~~$5.2~~$5.3 billion, or ~~43.6%~~44.0%, of the Corporation’s loan portfolio was in commercial mortgage and construction loans at ~~September 30, 2009.~~March 31, 2010. The Corporation does not have a concentration of credit risk with any single borrower, industry or geographical location. However, the performance of real estate markets ~~and~~in general ~~economic conditions have~~has adversely impacted the performance of these loans, most significantly construction loans to residential housing developers by the Corporation’s Maryland and Virginia banks. Construction loans outstanding for the Corporation’s Virginia and Maryland banks at September 30, 2009 were $266.2 million and $260.4 million, respectively.
35
loans.
Commercial loans comprise ~~31.1%~~30.8% of the total loan portfolio. The credit quality of these loans has been impacted by generally poor economic conditions as ~~evidenced by an increasing level~~businesses continue to struggle for growth as a result of non-performing loans in this portfolio since December 31, 2008. In particular, the credit quality of loans to commercial borrowers whose businesses are related to the residential housing industry continued to deteriorate during the third quarter of 2009.
reduced consumer spending.
Approximately $2.6 billion, or 21.6%, of the Corporation’s loan portfolio was in residential mortgage and home equity loans at ~~September 30, 2009. Decreases~~March 31, 2010. Recent years deterioration in residential real estate values in some ~~of the Corporation’s~~ geographic areas, most notably in portions of Maryland, New Jersey and Virginia, and generally poor economic conditions have resulted in increases in non-performing loans and negatively impacted the overall credit quality of the portfolio.
Management believes that the allowance for credit losses of ~~$241.7~~$269.3 million at ~~September 30, 2009~~March 31, 2010 is sufficient to cover losses inherent in both the loan portfolio and the unfunded lending commitments as of that date and is appropriate based on applicable accounting standards.
Other Income
The following table presents the components of other income:

Three months ended
September 30 Increase (decrease)
2009 2008 $ %
(dollars in thousands)
Service charges on deposit accounts $ 15,321 $ 16,177 $ (856 ) (5.3 %)
Other service charges and fees 10,003 9,598 405 4.2
Investment management and trust services 8,191 8,045 146 1.8
Gains on sales of mortgage loans 2,778 2,266 512 22.6
Credit card income 1,520 1,356 164 12.1
Gains on sales of OREO 521 164 357 217.7
Other 2,891 2,710 181 6.7

Total, excluding investment securities losses
41,225 40,316 909 2.3
Investment securities losses (45 ) (9,501 ) 9,456 99.5

Total
$ 41,180 $ 30,815 $ 10,365 33.6 %

   Three months ended
March 31    Increase (decrease)
   2010 2009    $ %
   (dollars in thousands)
Overdraft fees
   $ 8,884    $ 8,442    $ 442    5.2 %
Cash management fees
   2,277    3,203    (926 ) (28.9 )
Other
   3,106    3,249    (143 ) (4.4 )

Service charges on deposit accounts
   14,267    14,894    (627 ) (4.2 )
Debit card income
   2,953    2,440    513    21.0
Merchant fees
   1,824    1,626    198    12.2
Foreign exchange income
   1,938    1,283    655    51.1
Letter of credit fees
   1,239    1,534    (295 ) (19.2 )
Other
   1,418    1,471    (53 ) (3.6 )

Other service charges and fees
   9,372    8,354    1,018    12.2
Investment management and trust services
   8,088    7,903    185    2.3
Gains on sales of mortgage loans
   3,364    8,591    (5,227 ) (60.8 )
Credit card income
   1,451    1,187    264    22.2
Gains on sales of OREO
   464    161    303    188.2
Other
   2,684    2,905    (221 ) (7.6 )

Total, excluding investment securities gains (losses)
   39,690    43,995    (4,305 ) (9.8 )
Investment securities gains (losses)
   (2,223 ) 2,919    (5,142 ) (176.2 )

Total
   $ 37,467    $ 46,914    $ (9,447 ) (20.1 )%

The ~~$856,000,~~$627,000, or ~~5.3%~~4.2%, decrease in service charges on deposit accounts was due primarily to a ~~$722,000,~~$926,000, or ~~21.4%~~28.9%, decrease in cash management fees, ~~and a $122,000, or 1.3%, decrease in overdraft fees. The decrease in cash management fees was~~ due to customers transferring funds from the cash management program to deposits due to the low interest rate ~~environment.~~
environment, offset by an increase of $442,000, or 5.2%, in overdraft fees due to an increase in volume.
The ~~$405,000,~~$1.0 million, or ~~4.2%~~12.2%, increase in other service charges was primarily due to a ~~$347,000,~~$513,000, or ~~13.8%~~21.0%, increase in debit card fees, as a result of increasing transaction volumes and a $655,000, or 51.1%, increase in foreign currency processing revenue, also due to an increase in transaction ~~volume increases.~~
volumes.
Gains on sales of mortgage loans increased $512,000, or 22.6%, due to an increase in the volume of loans sold. Total loans sold in the third quarter of 2009 were $579.6 million, compared to $172.7 million in the third quarter of 2008. The $406.8decreased $5.2 million, or ~~235.5%~~60.8%, increase in the volume of loans sold was mainly due to an increase in refinance activity, as rates remained relatively low in comparison to the prior year. For the three months ended September 30, 2009, 58% of loans originated for sale represented refinances, compared to 31% for the same period in 2008.
Investment securities losses of $45,000 for the third quarter of 2009 included $2.8 million of net gains on the sales of securities, offset by $2.8 million of other-than-temporary impairment charges. The
36
Corporation recorded $1.8 million of other-than-temporary impairment charges for pooled trust preferred securities issued by financial institutions and $949,000 of other-than-temporary impairment charges related to financial institutions stocks. The $9.5 million of investment securities losses for the third quarter of 2008 was due primarily to $7.8 million of other-than-temporary impairment charges for debt securities issued by financial institutions, $2.0 million of other-than-temporary impairment charges related to financial institutions stocks and $816,000 of other-than-temporary impairment charges for other equity securities, offset by $1.2 million of net gains on the sales of investment securities. See Note C, “Investment Securities” in the Notes to Consolidated Financial Statements for additional details.
~~Other Expenses~~
~~The following table presents the components of other expenses:~~

Three months ended
September 30 Increase (decrease)
2009 2008 $ %
(dollars in thousands)
Salaries and employee benefits $ 54,086 $ 55,310 $ (1,224 ) (2.2 %)
Net occupancy expense 10,165 10,237 (72 ) (0.7 )
FDIC insurance expense 5,244 1,147 4,097 357.2
Equipment expense 3,281 3,061 220 7.2
Data processing 3,121 3,242 (121 ) (3.7 )
Professional fees 2,386 1,575 811 51.5
Telecommunications 2,139 2,001 138 6.9
Marketing 1,982 3,097 (1,115 ) (36.0 )
Supplies 1,453 1,418 35 2.5
Intangible amortization 1,429 1,730 (301 ) (17.4 )
Postage 1,365 1,307 58 4.4
OREO expense 1,095 1,471 (376 ) (25.6 )
Operating risk loss 338 3,480 (3,142 ) (90.3 )
Other 11,726 10,279 1,447 14.1

Total
$ 99,810 $ 99,355 $ 455 0.5 %

Salaries and employee benefits decreased $1.2 million, or 2.2%, with salaries decreasing $1.6 million, or 3.5%, and employee benefits increasing $363,000, or 3.8%. The decrease in salaries was primarily due to a $1.0 million decrease in bonus expense, in addition to a decrease in average full-time equivalent employees from 3,670 in the third quarter of 2008 to 3,580 in the third quarter of 2009. The decrease in average full-time equivalent employees was primarily due to the consolidation of Columbia Bank’s back office functions in the third quarter of 2009.
The $363,000 increase in employee benefits was primarily due to a $460,000 increase in defined benefit pension plan expense due to lower returns on plan assets and a $438,000 increase in healthcare costs as claims costs increased, offset by a $287,000 reduction in postretirement plan expense due to a reduction in benefits covered and a $180,000 decrease in severance costs.
The $4.1 million increase in FDIC insurance expense was due to an increase in assessment rates, which were effective January 1, 2009, as well as the expiration of one-time credits, the remaining balance of which were utilized during the first quarter of 2009. In the third quarter of 2008, gross FDIC insurance premiums were $1.8 million and were reduced by $664,000 of one-time credits.
The $811,000 increase in professional fees was primarily due to increased legal costs associated with collection and workout efforts for non-performing loans. The $1.1 million decrease in marketing expenses was due to an effort to reduce discretionary spending and to the timing of promotional campaigns. The $301,000 decrease in intangible amortization was mainly due to a decrease ~~in core deposit intangible asset~~
37
~~amortization. The $376,000 decrease in OREO expense was due to a $618,000 decrease in loss provisions, offset by a $242,000 increase in carrying costs.~~
The $3.1 million decrease in operating risk loss was due to a $2.7 million reduction in charges related to the Corporation’s commitment to purchase ARCs from customer accounts and a $500,000 decrease in losses on the actual and potential repurchase of residential mortgage and home equity loans. See Note H, “Commitments and Contingencies” in the Notes to Consolidated Financial Statements for additional details.
The $1.4 million increase in other expenses was due to $1.1 million in costs associated with the consolidation of Columbia Bank’s back office functions in the third quarter of 2009 and an increase in loan collection and workout costs.
~~Income Taxes~~
Income tax expense for the third quarter of 2009 was $5.8 million, a $3.9 million, or 40.0%, decrease from $9.7 million in 2008. The decrease was primarily due to a decrease in income before income taxes.
The Corporation’s effective tax rate was 20.0% in 2009, as compared to 25.0% in 2008. The effective rate is generally lower than the Federal statutory rate of 35% due to investments in tax-free municipal securities and Federal tax credits earned from investments in low and moderate-income housing partnerships. The effective rate for the third quarter of 2009 is lower than the same period in 2008 due to non-taxable income and tax credits having a larger impact on the effective rate due to the $9.6 million decrease in income before income taxes.
38
~~Nine Months Ended September 30, 2009 Compared to the Nine Months Ended September 30, 2008~~
~~Net Interest Income~~
The following table provides a comparative average balance sheet and net interest income analysis for the first nine months of 2009 as compared to the same period in 2008. Interest income and yields are presented on an FTE basis, using a 35% Federal tax rate and statutory interest expense disallowances. The discussion following this table is based on these FTE amounts. All dollar amounts are in thousands.

Nine months ended September 30
2009 2008
Average Yield/ Average Yield/
Balance Interest (1) Rate Balance Interest (1) Rate
ASSETS

Interest-earning assets:
Loans, net of unearned income (2) $ 11,971,378 $ 491,412 5.49 % $ 11,472,748 $ 554,437 6.45 %
Taxable investment securities (3) 2,538,045 85,648 4.50 2,275,681 84,114 4.93
Tax-exempt investment securities (3) 467,242 19,413 5.54 511,871 20,831 5.43
Equity securities (1) (3) 134,710 2,066 2.05 192,803 5,723 3.96

Total investment securities 3,139,997 107,127 4.55 2,980,355 110,668 4.95
Loans held for sale 115,388 4,439 5.13 102,819 4,726 6.13
Other interest-earning assets 20,754 140 0.90 20,701 462 2.96

Total interest-earning assets 15,247,517 603,118 5.29 % 14,576,623 670,293 6.14 %
Noninterest-earning assets:
Cash and due from banks 301,009 318,844
Premises and equipment 203,919 196,977
Other assets 940,974 948,134
Less: Allowance for loan losses (211,105 ) (116,598 )

Total Assets
$ 16,482,314 $ 15,923,980

LIABILITIES AND EQUITY

Interest-bearing liabilities:
Demand deposits $ 1,819,135 $ 5,896 0.43 % $ 1,709,380 $ 10,538 0.82 %
Savings deposits 2,309,103 13,941 0.81 2,179,432 22,396 1.37
Time deposits 5,538,068 121,890 2.94 4,396,409 128,873 3.92

Total interest-bearing deposits 9,666,306 141,727 1.96 8,285,221 161,807 2.61
Short-term borrowings 1,186,568 3,193 0.36 2,365,052 44,093 2.46
FHLB advances and long-term debt 1,754,010 61,744 4.71 1,829,981 60,714 4.43

Total interest-bearing liabilities 12,606,884 206,664 2.19 % 12,480,254 266,614 2.85 %
Noninterest-bearing liabilities:
Demand deposits 1,798,522 1,649,560
Other 202,209 190,487

Total Liabilities
14,607,615 14,320,301
Shareholders’ equity 1,874,699 1,603,679

Total Liabilities and Shareholders’ Equity
$ 16,482,314 $ 15,923,980

Net interest income/net interest margin (FTE) 396,454 3.48 % 403,679 3.71 %

Tax equivalent adjustment (11,593 ) (11,872 )

Net interest income $ 384,861 $ 391,807

~~(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.~~
39
~~The following table summarizes the changes in FTE interest income and expense due to changes in average balances (volume) and changes in rates:~~

2009 vs. 2008
Increase (decrease) due
to change in
Volume Rate Net
(in thousands)
Interest income on:
Loans, net of unearned income $ 22,920 $ (85,945 ) $ (63,025 )
Taxable investment securities 9,158 (7,624 ) 1,534
Tax-exempt investment securities (1,861 ) 443 (1,418 )
Equity securities (1,405 ) (2,252 ) (3,657 )
Loans held for sale 534 (821 ) (287 )
Other interest-earning assets 1 (323 ) (322 )

Total interest income
$ 29,347 $ (96,522 ) $ (67,175 )

Interest expense on:
Demand deposits $ 637 $ (5,279 ) $ (4,642 )
Savings deposits 1,259 (9,714 ) (8,455 )
Time deposits 29,129 (36,112 ) (6,983 )
Short-term borrowings (15,073 ) (25,827 ) (40,900 )
FHLB advances and long-term debt (2,603 ) 3,633 1,030

Total interest expense
$ 13,349 $ (73,299 ) $ (59,950 )

Interest income decreased $67.2 million, or 10.0%, due to a $96.5 million decrease as a result of changes in interest rates. During the first nine months of 2009, the average yield on interest-earning assets decreased 85 basis points, or 13.8%, in comparison to the first nine months of 2008. The decrease in interest income due to changes in rates was partially offset by a $29.3 million increase in interest income realized from growth in average interest-earning assets of $670.9 million, or 4.6%.
~~The increase in average interest-earning assets was due mainly to loan growth, which is summarized, by type, in the following table:~~

Nine months ended
September 30 Increase (decrease)
2009 2008 $ %
(dollars in thousands)
Real estate – commercial mortgage $ 4,100,119 $ 3,673,874 $ 426,245 11.6 %
Commercial – industrial, financial and agricultural 3,660,083 3,504,467 155,616 4.4
Real estate – home equity 1,672,678 1,571,567 101,111 6.4
Real estate – construction 1,143,476 1,332,548 (189,072 ) (14.2 )
Real estate – residential mortgage 942,407 898,875 43,532 4.8
Consumer 368,109 406,196 (38,087 ) (9.4 )
Leasing and other 84,506 85,221 (715 ) (0.8 )

Total
$ 11,971,378 $ 11,472,748 $ 498,630 4.3 %

Loan growth in the first nine months of 2009 in comparison to the first nine months of 2008 was primarily in commercial mortgages, with growth also occurring in commercial loans, home equity loans and residential mortgages. The increases in commercial mortgages and commercial loans were primarily in floating and adjustable rate products. The increase in home equity loans was due to an increase in consumer demand.
40
Geographically, the increase in commercial mortgage loans was mainly attributable to increases within the Corporation’s Pennsylvania ($218.9 million), New Jersey ($91.0 million) and Maryland ($82.0 million) banks, while the increase in commercial loans was due to increases in Pennsylvania ($131.6 million), New Jersey ($25.9 million) and Virginia ($21.0 million) banks, offset by a decrease in Maryland ($22.0 million).
Offsetting these increases was a $189.1 million decrease in construction loans and a $38.1 million decrease in consumer loans. The decrease in construction loans was due to a slowdown in residential housing construction and the Corporation’s efforts to reduce its credit exposure in this sector, particularly within its Maryland and Virginia markets. The decrease in consumer loans was largely due to the sale of the Corporation’s credit card portfolio during the second quarter of 2008 and partially due to a decrease in the indirect automobile loan portfolio.
The average yield on loans decreased 96 basis points, or 14.9%, from 6.45% in 2008 to 5.49% in 2009. The decrease in yield reflected a lower interest rate environment, as illustrated by a lower average prime rate during the first nine months of 2009 (3.25%) as compared to the first nine months of 2008 (5.45%). The decrease in average loan yields was not as pronounced as the decrease in the average prime rate as fixed and adjustable rate loans, unlike floating rate loans, have a lagged repricing effect during periods of short-term rate declines.
Average investments increased $159.6 million, or 5.4%, due primarily to Corporation’s purchase of ARCs from customers, which increased average investments by $201.8 million. The average yield on investments decreased 40 basis points, or 8.1%, from 4.95% in 2008 to 4.55% in 2009 as reinvestment of portfolio cash flows and incremental purchases were at yields that were lower than the overall portfolio yield. Investment yields were also adversely impacted by the reduction, or in some cases the suspension of, dividends on equities, particularly financial institutions stocks and FHLB stocks. In addition, the $201.8 million increase in the average balances of ARCs resulted in an 8 basis point decrease in average yield.
The $67.2 million decrease in interest income was partially offset by a decrease in interest expense of $60.0 million, or 22.5%, to $206.7 million in the first nine months of 2009. Interest expense decreased $73.3 million as a result of a 66 basis point, or 23.2%, decrease in the average cost of interest-bearing liabilities. This decrease was slightly offset by a $13.3 million increase in interest expense caused by growth in average interest-bearing liabilities of $126.6 million, or 1.0%.
~~The following table summarizes the increases in average deposits, by type:~~

Nine months ended
September 30 Increase
2009 2008 $ %
(dollars in thousands)
Noninterest-bearing demand $ 1,798,522 $ 1,649,560 $ 148,962 9.0 %
Interest-bearing demand 1,819,135 1,709,380 109,755 6.4
Savings 2,309,103 2,179,432 129,671 5.9

Total, excluding time deposits
5,926,760 5,538,372 388,388 7.0
Time deposits 5,538,068 4,396,409 1,141,659 26.0

Total
$ 11,464,828 $ 9,934,781 $ 1,530,047 15.4 %

The Corporation experienced an increase in noninterest-bearing and interest-bearing demand and savings accounts of $388.4 million, or 7.0%. The increase in noninterest-bearing demand accounts was in business accounts, while the increase in interest-bearing demand and savings accounts was primarily in governmental accounts. The growth in business accounts due, in part, to businesses being required to keep
41
~~higher balances on hand to offset service fees, as well as a movement from the Corporation’s cash management products due to the current low rates.~~
The increase in time deposits was due to a $1.1 billion increase in customer certificates of deposit and a $55.0 million increase in brokered certificates of deposit. The increase in customer certificates of deposit was due to the promotion of a variable rate product during late 2008 and throughout the first quarter of 2009. These average deposit increases were used to reduce the Corporation’s short and long-term borrowings.
The average cost of interest-bearing deposits decreased 65 basis points, or 24.9%, from 2.61% in 2008 to 1.96% in 2009 due to a decrease in cost of certificates of deposit. The average cost of certificates of deposit decreased 98 basis points, or 25.0%, due to the maturity and renewal of certificates of deposits at lower rates in 2009.
~~The following table summarizes the changes in average borrowings, by type:~~

Nine months ended
September 30 Increase (decrease)
2009 2008 $ %
(dollars in thousands)
Short-term borrowings:
Customer short-term promissory notes $ 297,831 $ 475,523 $ (177,692 ) (37.4 %)
Customer repurchase agreements 252,539 221,253 31,286 14.1

Total short-term customer funding
550,370 696,776 (146,406 ) (21.0 )
Federal funds purchased 571,864 1,296,074 (724,210 ) (55.9 )
Federal Reserve Bank borrowings 61,685 — 61,685 N/A
FHLB overnight repurchase agreements — 346,770 (346,770 ) (100.0 )
Other short-term borrowings 2,649 25,432 (22,783 ) (89.6 )

Total other short-term borrowings
636,198 1,668,276 (1,032,078 ) (61.9 )

Total short-term borrowings
1,186,568 2,365,052 (1,178,484 ) (49.8 )

Long-term debt:
FHLB advances 1,370,860 1,447,161 (76,301 ) (5.3 )
Other long-term debt 383,150 382,820 330 0.1

Total long-term debt
1,754,010 1,829,981 (75,971 ) (4.2 )

Total
$ 2,940,578 $ 4,195,033 $ (1,254,455 ) (29.9 %)

~~N/A – Not applicable~~
The decrease in short-term borrowings was a result of a $724.2 million decrease in Federal funds purchased and a $346.8 million decrease in FHLB overnight repurchase agreements. Also contributing to the decrease was a $146.4 million decrease in short-term customer funding due to customers transferring funds from the cash management program to deposits due to the low interest rate environment. The $76.0 million decrease in long-term debt was due to maturities of FHLB advances.
42
~~Provision for Loan Losses and Allowance for Credit Losses~~
~~The following table presents the activity in the Corporation’s allowance for credit losses:~~

Nine months ended September 30
2009 2008
(dollars in thousands)
Loans, net of unearned income outstanding at end of period $ 11,968,246 $ 11,823,529

Daily average balance of loans, net of unearned income $ 11,971,378 $ 11,472,748

Balance of allowance for credit losses at beginning of period
$ 180,137 $ 112,209
Loans charged off:
Real estate – construction 32,892 3,014
Commercial – industrial, agricultural and financial 24,683 12,200
Real estate – commercial mortgage 13,475 2,828
Real estate – residential mortgage and home equity 4,832 2,969
Consumer 7,667 3,738
Leasing and other 4,682 3,771

Total loans charged off
88,231 28,520

Recoveries of loans previously charged off:
Real estate – construction 352 17
Commercial – industrial, agricultural and financial 1,654 1,025
Real estate – commercial mortgage 528 230
Real estate – residential mortgage and home equity 149 138
Consumer 1,294 1,022
Leasing and other 838 1,082

Total recoveries
4,815 3,514

Net loans charged off 83,416 25,006
Provision for loan losses 145,000 54,626

Balance of allowance for credit losses at end of period
$ 241,721 $ 141,829

Net charge-offs to average loans (annualized) 0.93 % 0.29 %

The provision for loan losses for the first nine months of 2009 totaled $145.0 million, an increase of $90.4 million, or 165.4%, from the first nine months of 2008. The significant increase in the provision for loan losses was related to the increase in non-performing loans and net charge-offs, which required additional allowance for credit loss balances to meet allocation needs.
The $58.4 million, or 233.6%, increase in net charge-offs for the first nine months of 2009 in comparison to the same period in 2008 was due to increases in construction loan net charge-offs ($29.5 million), commercial loan net charge-offs ($11.9 million) and commercial mortgage net charge-offs ($10.3 million). During the first nine months of 2009, there were 17 charge-offs of $1.0 million or greater, with an aggregate amount of $35.5 million, of which $28.1 million was for loans to customers whose businesses were negatively impacted by the downturn in residential real estate.
43
~~Other Income~~
~~The following table presents the components of other income:~~

Nine months ended
September 30 Increase (decrease)
2009 2008 $ %
(dollars in thousands)
Service charges on deposit accounts $ 45,276 $ 45,463 $ (187 ) (0.4 %)
Other service charges and fees 27,952 27,320 632 2.3
Investment management and trust services 23,970 25,193 (1,223 ) (4.9 )
Gains on sales of mortgage loans 18,764 7,247 11,517 158.9
Credit card income 4,071 2,442 1,629 66.7
Gains on sales of OREO 1,565 579 986 170.3
Other 8,922 8,393 529 6.3

Total, excluding gain on sale of credit card portfolio and investment securities gains (losses)
130,520 116,637 13,883 11.9
Gain on sale of credit card portfolio — 13,910 (13,910 ) (100.0 %)
Investment securities gains (losses) 2,951 (29,902 ) 32,853 N/M

Total
$ 133,471 $ 100,645 $ 32,826 32.6 %

~~N/M – Not meaningful~~
The $632,000, or 2.3%, increase in other service charges and fees was primarily due to a $722,000, or 9.8%, increase in debit card fees, due to increased transaction volumes, and a $778,000, or 18.1%, increase in letter of credit fees. These increases were offset by a $306,000 decrease in foreign currency processing revenue, a $211,000 decrease in merchant fees and an $186,000 decrease in automated teller machine fees.
The $1.2 million, or 4.9%, decrease in investment management and trust services income was due to a $2.6 million, or 13.3%, decrease in trust revenue, offset by a $1.3 million, or 21.6%, increase in brokerage revenue. The performance of equity markets negatively impacted both trust and brokerage revenues, however, brokerage revenue increased over the 2008 levels due to the Corporation’s transition of its brokerage business from a transaction-based model to a relationship model during 2008.
~~Gains on sales of mortgage loans increased $11.5 million, or 158.9%, due to an increase~~ in the volume of loans sold. Total loans sold in the first ~~nine months~~quarter of ~~2009~~2010 were ~~$1.8 billion,~~$199.6 million, compared to ~~$499.9~~$572.6 million in the first ~~nine~~quarter of 2009. The $373.0 million, or 65.1%, decrease in volume was mainly due to lower refinance activity as interest rates were higher in the first quarter of 2010. For the three months ended March 31, 2010, 55% of ~~2008.~~ loans originated for sale were refinances, compared to 84% for the same period in 2009.
The ~~$1.3 billion,~~$264,000, or ~~255.6%~~22.2%, increase in ~~the volume of loans sold~~credit card income was ~~mainly~~ due to an increase in refinance activity, as mortgage rates dropped to historic lows. For the nine months ended September 30, 2009, 74% of loans originated for sale represented refinances, compared to 44% for the same period in 2008.
~~Credit card income includes~~new relationships, which generate fees ~~earned for each new account opened and~~under a ~~percentage of revenue earned on both new accounts and accounts sold, under an~~joint marketing agreement with ~~the purchaser of the credit card portfolio.~~an independent third party. The increase was primarily due to nine months of income being earned in 2009 compared to less than six months of income earned during the first nine months of 2008, as the agreement was executed during the second quarter of 2008.
~~The $986,000,~~$303,000, or ~~170.3%~~188.2%, increase in gains on sales of OREO was due to an increase in the number of ~~sales during the first nine months of 2009 in comparison to the first nine months of 2008.~~
properties sold.
Investment securities ~~gains~~losses of ~~$3.0~~$2.2 million for the first ~~nine months~~quarter of ~~2009~~2010 included ~~$12.2~~$2.8 million of net gains on the sales of securities, offset by ~~$9.2~~$5.0 million of other-than-temporary impairment charges. ~~During the first nine months of 2009, the~~The Corporation recorded ~~$6.5~~$4.2 million of other-than-temporary impairment
44
charges for pooled trust preferred securities issued by financial institutions and $2.6 million of other-than-temporary impairment charges related to financial institutions stocks. The $29.9 million of investment securities losses for the first nine months of 2008 was due primarily to $30.3 million$824,000 of other-than-temporary impairment charges for certain financial institution ~~stocks and $7.8~~stocks. The $2.9 million of ~~other-than-temporary impairment charges~~investment securities gains for ~~debt securities issued by financial institutions, offset by $9.4~~the first quarter of 2009 was due primarily to $6.0 million of net gains on the sales of ~~investment~~securities, primarily collateralized mortgage obligations, partially offset by $2.0 million of other-than-temporary impairment charges for
debt securities issued by financial institution, $956,000 of other-than-temporary impairment charges for certain financial institutions stocks and $106,000 of other-than-temporary impairment charges for other equity securities. See Note C, “Investment Securities” in the Notes to Consolidated Financial Statements for additional details.
Other Expenses
The following table presents the components of other expenses:

Nine months ended
September 30 Increase (decrease)
2009 2008 $ %
(dollars in thousands)
Salaries and employee benefits $ 165,189 $ 164,786 $ 403 0.2 %
Net occupancy expense 31,428 30,999 429 1.4
FDIC insurance expense 21,738 2,684 19,054 709.9
Equipment expense 9,660 9,907 (247 ) (2.5 )
Data processing 9,100 9,604 (504 ) (5.2 )
Professional fees 6,702 5,717 985 17.2
Operating risk loss 6,683 19,108 (12,425 ) (65.0 )
Telecommunications 6,483 5,960 523 8.8
Marketing 6,277 9,521 (3,244 ) (34.1 )
Intangible amortization 4,326 5,386 (1,060 ) (19.7 )
OREO expense 4,278 3,138 1,140 36.3
Supplies 4,234 4,303 (69 ) (1.6 )
Postage 3,953 4,218 (265 ) (6.3 )
Other 33,937 30,420 3,517 11.6

Total
$ 313,988 $ 305,751 $ 8,237 2.7 %

   Three months ended
March 31    Increase (decrease)
   2010    2009    $ %
   (dollars in thousands)
Salaries and employee benefits
   $ 52,345    $ 55,304    $ (2,959 ) (5.4 )%
Net occupancy expense
   11,650    11,023    627    5.7
FDIC insurance expense
   4,954    4,288    666    15.5
Equipment expense
   3,091    3,079    12    0.4
Data processing
   2,624    3,072    (448 ) (14.6 )
Professional fees
   2,546    2,228    318    14.3
Telecommunications
   2,270    2,163    107    4.9
Marketing
   1,830    2,571    (741 ) (28.8 )
Supplies
   1,329    1,281    48    3.7
Intangible amortization
   1,314    1,463    (149 ) (10.2 )
Postage
   1,305    1,384    (79 ) (5.7 )
OREO expense
   1,661    1,316    345    26.2
Operating risk loss
   511    6,201    (5,690 ) (91.8 )
Other
   11,799    10,999    800    7.3

Total
   $ 99,229    $ 106,372    $ (7,143 ) (6.7 )%

Salaries and employee benefits ~~increased $403,000,~~decreased $3.0 million, or ~~0.2%~~5.4%, with salaries decreasing ~~$2.2~~$1.7 million, or ~~1.6%~~3.8%, ~~offset by an increase in~~and employee benefits ~~of $2.6~~decreasing $1.3 million, or ~~9.1%~~11.5%. The decrease in salaries was primarily due to ~~a $2.7 million~~an $841,000 decrease in ~~bonus~~incentive compensation expense, ~~and~~in addition to a ~~$304,000~~ decrease in ~~stock-based compensation, offset by an increase~~average full-time equivalent employees from 3,640 in ~~salaries~~the first quarter of 2009 to 3,530 in the first quarter of 2010, largely due to the ~~effect~~consolidation of ~~normal merit increases. Merit increases were suspended as of March~~The Columbia Bank’s back office functions in 2009. ~~Average full-time equivalent employees decreased from 3,670 in the first nine months of 2008 to 3,610 in the first nine months of 2009.~~
The ~~$2.6~~$1.3 million ~~increase~~decrease in employee benefits was primarily due to a ~~$2.0 million, or 13.3%, increase~~$792,000 decrease in healthcare costs as claims ~~costs increased,~~decreased as a ~~$1.4 million increase~~result of higher deductibles in ~~defined benefit pension plan expense due to a lower return on plan assets~~2010 and ~~$808,000 in~~$749,000 of severance expense ~~related to~~recorded in the first quarter of 2009 for the consolidation of The Columbia Bank’s back office ~~functions~~functions.
The $627,000, or 5.7%, increase in ~~the third quarter of 2009. These increases were offset by an $719,000 decrease in accruals for the cost of compensated absences and a $481,000 decrease in postretirement plan~~net occupancy expense was primarily due to ~~a reduction in benefits covered.~~
higher snow removal and utilities costs. The ~~$19.1 million~~$666,000, or 15.5%, increase in FDIC insurance expense was due to ~~a $7.7 million special assessment recorded in the second quarter of 2009, in addition to~~ an increase in assessment rates ~~which were effective January 1, 2009. Gross FDIC insurance premiums for the first nine months of 2009, excluding the special assessment, were $14.0 million~~ and ~~were reduced by $114,000 of one-time credits. For the first nine months of 2008, gross FDIC insurance premiums were $5.0 million and were reduced by $2.3 million of one-time credits.~~
growth in insured deposits. The ~~$12.4 million~~$448,000, or 14.6%, decrease in ~~operating risk loss~~data processing expense was primarily due to ~~a $9.6 million reduction in charges related to~~ the ~~Corporation’s commitment to purchase ARCs from customer accounts and a $2.6 million decrease in~~
45
~~losses on the actual and potential repurchase~~conversion of ~~residential mortgage and home equity loans. See Note H, “Commitments and Contingencies”~~The Columbia Bank’s back office systems in the ~~Notes to Consolidated Financial Statements for additional details.~~
third quarter of 2009. The ~~$985,000~~$318,000, or 14.3%, increase in professional fees was ~~primarily~~ due to ~~increased~~an increase in regulatory fees and an increase in legal ~~costs associated with~~fees related to collection and workout efforts for non-performing loans. The ~~$3.2 million~~$741,000, or 28.8%, decrease in marketing expenses was due to an effort to reduce discretionary spending and the timing of promotional campaigns. The ~~$1.1 million decrease in intangible amortization was mainly due to a decrease in core deposit intangible asset amortization. The $1.1 million~~$345,000, or 26.2%, increase in OREO expense was ~~mainly~~primarily due to ~~increases~~an increase in ~~carrying costs.~~
loss provisions and losses on disposition.
The ~~$3.5~~$5.7 million decrease in operating risk loss was a result of a $6.2 million charge recorded in the first quarter of 2009 related to the Corporation’s commitment to purchase illiquid ARCs from customer accounts. The Corporation did not record any charges related to this guarantee in 2010 as all remaining customer ARCs were purchased during 2009.
The $800,000, or 7.3%, increase in other expenses was primarily due a to ~~the reversal of $1.4 million of litigation reserves~~$754,000 increase in ~~the first quarter of 2008~~costs associated with the ~~Corporation’s share~~repossession of ~~indemnification liabilities with Visa, Inc. (Visa), which~~foreclosed assets and a $492,000 increase in student loan lender expense. These increases were ~~no longer necessary~~partially offset by a $166,000 decrease in outside services and a $164,000 decrease in travel, meals and entertainment expenses, all as a result of ~~Visa’s initial public offering. Also contributing~~efforts by the Corporation to ~~the increase was $1.1 million of costs associated with the consolidation of Columbia Bank’s back office functions in the third quarter of 2009 and an increase in loan collection and workout costs.~~
reduce discretionary spending.
Income Taxes
Income tax expense for the first ~~nine months~~quarter of ~~2009~~2010 was ~~$9.8~~$9.3 million, a ~~$26.0~~$7.7 million, or ~~72.6%~~489.1%, ~~decrease~~increase from ~~$35.8~~$1.6 million in ~~2008.~~2009. The ~~decrease~~increase was primarily due to ~~a decrease~~the increase in income before income taxes.
The Corporation’s effective tax rate was ~~16.5%~~25.2% in ~~2009,~~2010, as compared to ~~27.1%~~10.7% in ~~2008.~~2009. The effective rate is generally lower than the Federal statutory rate of 35% due to investments in tax-free municipal securities and Federal tax credits earned from investments in low and moderate-income housing partnerships. The effective rate for the first ~~nine months~~quarter of ~~2009~~2010 is ~~lower~~higher than the same period in ~~2008~~2009 due to non-taxable income and tax credits having a ~~larger~~smaller impact on the effective tax rate due to the ~~$72.7 million decrease in~~higher level of income before income taxes.
46
FINANCIAL CONDITION
Total assets ~~of the Corporation increased $341.6~~decreased $224.1 million, or ~~2.1%~~1.3%, to ~~$16.5~~$16.4 billion at ~~September 30, 2009,~~March 31, 2010, compared to ~~$16.2~~$16.6 billion at December 31, ~~2008.~~
~~Cash and due from banks~~2009.
Investment securities decreased ~~$79.2~~$163.5 million, or ~~23.9%~~5.0%. ~~Because of daily fluctuations that result in~~In late 2009, the normal course of business, cash is more appropriately analyzed in terms of average balances. On an average balance basis, cash and due from banks decreased $16.1 million, or 5.3%, from $290.0 million for the month of September 2009 to $306.1 million for the month of December 2008.
~~Investment securities increased $549.6 million, or 20.2%. During the first nine months of 2009, purchases of investments resulted~~Corporation purchased collateralized mortgage obligations with funds generated from an increase in deposits, combined with a decrease in ~~loans, as well as~~loans. During the ~~use~~first quarter of ~~funds received from~~2010, some of the ~~Corporation’s issuance~~proceeds from maturities of ~~preferred stock~~investment securities were used to ~~the UST in December 2008. Also contributing to the increase in investments was the Corporation’s purchase of $104.4 million of ARCs from customers during the first nine months of 2009.~~
reduce Federal funds purchased and FHLB advances.
The Corporation experienced a ~~$74.4~~$7.6 million, or ~~0.6%~~0.1%, decrease in loans, net of unearned income. Construction loans decreased ~~$240.3~~$41.0 million, or ~~18.9%~~4.2%, due to paydowns on existing loans ~~a significant slowdown in residential housing construction~~ and ~~$32.5~~$20.2 million of net charge-offs recorded in the first ~~nine~~three months of ~~2009. Home equity~~2010. Commercial loans decreased ~~$43.7~~$14.3 million, or ~~2.6%~~0.4%, ~~and residential mortgages decreased $42.6 million, or 4.4%, both~~ due to ~~refinance activity generated by low interest rates.~~continued weak economic conditions. Offsetting these decreases was a ~~$170.0~~$30.5 million, or ~~4.2%~~0.7%, increase in commercial mortgages and ~~an $84.4~~a $29.6 million, or ~~2.3%~~3.2%, increase in ~~commercial loans.~~
~~Deposits~~residential mortgages. Residential mortgages increased ~~$1.5 billion,~~as certain 10 and 15 year mortgages originated in the first quarter of 2010 were held in portfolio rather than being sold in the secondary market.
Loans held for sale decreased $31.6 million, or ~~14.0%~~37.0%, due to a decrease in the volume of loans originated for sale. The decrease in originations was primarily due to an increase in residential mortgage interest rates during the first quarter of 2010.
Deposits increased $58.5 million, or 0.5%, due an increase in demand and savings deposits of ~~$1.1 billion,~~$214.6 million, or ~~20.8%~~3.2%, ~~and an increase~~offset by a decrease in time deposits of ~~$347.2~~$156.0 million, or ~~6.8%~~2.9%. The increase in demand and savings accounts was in ~~personal,~~ business and ~~governmental~~personal accounts. The growth in business accounts was due, in part, to businesses being required to keep higher balances on hand to offset service fees, as well as a movement from the Corporation’s cash management products due to the current low rates. The ~~increase in municipal accounts reflected these same factors, along with the seasonal impact related to the tax collection process. The increase~~decrease in time deposits was due to a ~~$672.5 million, or 14.1%, increase~~decrease in customer certificates of deposit, offset by a $325.3 million, or 95.0%, decrease in brokered certificates of deposit. The increase in customer certificates of deposit was due to active promotion during late 2008 and throughout the first quarter of 2009.
demand for time deposits.
Short-term borrowings decreased ~~$1.0 billion,~~$244.3 million, or ~~59.0%~~28.1%, due to a ~~$936.8~~$216.0 million, or ~~81.6%~~57.1%, decrease in Federal funds purchased and a $100.8 million, or 16.5%, decrease in short-term customer funding due to customers transferring funds from the cash management program to deposits due to the low interest rate environment.purchased. The decrease in short-term borrowings largely resulted from ~~the increase in deposits.~~proceeds received from maturing investment securities which were not reinvested. Long-term borrowings decreased ~~$136.9~~$100.0 million, or ~~7.7%~~6.5%, due ~~primarily~~ to a ~~$136.8~~$100.1 million, or ~~9.7%~~8.6%, decrease in FHLB advances.
Other liabilities ~~decreased $22.5~~increased $25.6 million, or ~~13.3%~~17.7%, due to ~~a $21.0~~an $11.6 million ~~decrease~~increase in ~~dividends~~equity commitments payable ~~to common shareholders, as the quarterly dividend rate was reduced from $0.15 per share to $0.03 per share,~~on low and ~~a $12.9 million reduction in financial guarantee liabilities related to commitments to purchase ARCs from customers. These decreases were offset by a $3.3~~moderate-income housing partnership investments, an $8.1 million increase in accrued ~~FDIC insurance assessments~~taxes, due to an increase in income before taxes, and a ~~$3.6~~$3.5 million increase in ~~mortgage banking derivative liabilities.~~
the reserve for unfunded loan commitments.
Capital Resources
Total shareholders’ equity increased ~~$64.1~~$33.4 million, or ~~3.4%~~1.7%, during the first ~~nine~~three months of ~~2009.~~2010. The increase was due to ~~$49.5~~$27.5 million of net income and a ~~$38.4~~$12.8 million increase in net holding gains on investment securities, ~~and $5.9 million in stock issuances,~~ offset by ~~$27.9~~$10.0 million in dividends on common and preferred shares outstanding.
47
The Corporation and its subsidiary banks are subject to various regulatory capital requirements administered by banking regulators. Failure to meet minimum capital requirements can initiate certain actions by regulators that could have a material effect on the Corporation’s consolidated 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 ~~September 30, 2009,~~March 31, 2010, the Corporation and each of its bank subsidiaries met the minimum requirements. In addition, each of the Corporation’s bank subsidiaries’ capital ratios exceeded the amounts required to be considered “well capitalized” as defined in the regulations.
The following table summarizes the Corporation’s capital ratios in comparison to regulatory requirements:

Regulatory
Minimum
September 30 December 31 Capital
2009 2008 Adequacy
Total Capital (to Risk Weighted Assets) 14.4 % 14.3 % 8.0 %
Tier I Capital (to Risk Weighted Assets) 11.6 % 11.5 % 4.0 %
Tier I Capital (to Average Assets) 9.5 % 9.6 % 3.0 %

   March 31
2010 December 31
2009 Regulatory
Minimum
Capital
Adequacy
Total Capital (to Risk Weighted Assets)
   15.1 % 14.7 % 8.0 %
Tier I Capital (to Risk Weighted Assets)
   12.2 % 11.9 % 4.0 %
Tier I Capital (to Average Assets)
   9.8 % 9.7 % 3.0 %
Tangible common equity to tangible assets (1)
   6.6 % 6.3 %
Tangible common equity to risk weighted assets (2)
   8.2 % 7.8 %
(1) Ending common shareholders’ equity, excluding goodwill and intangible assets, divided by ending assets, excluding goodwill and intangible assets.
(2) Ending common shareholders’ equity, excluding goodwill and intangible assets, divided by risk-weighted assets.
In connection with the Emergency Economic Stabilization Act of 2008 (EESA), the ~~UST~~U.S. Treasury Department (UST) initiated a Capital Purchase Program (CPP) which allowed for qualifying financial institutions to issue preferred stock to the UST, subject to certain terms and conditions. The EESA was initially 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 participated in the CPP by issuing $376.5 million of fixed rate cumulative perpetual preferred stock, and warrants to purchase 5.5 million of the ~~Corporation’s~~Corporation's common stock, to the UST. The preferred stock pays a compounding cumulative dividend at a rate of 5.0% for the first five years and 9.0% thereafter.
The $376.5 million par value of the preferred stock is included in regulatory capital. Pro-forma regulatory capital ratios, excluding this amount ~~at September 30, 2009~~ would be as follows:
~~Total Capital (to Risk Weighted Assets)~~ ~~11.5~~ %
~~Tier I Capital (to Risk Weighted Assets)~~ ~~8.7~~ %
~~Tier I Capital (to Average Assets)~~ ~~7.1~~ %

   March 31
2010 December 31
2009 Regulatory
Minimum
Capital
Adequacy
Total Capital (to Risk Weighted Assets)
   12.1 % �� 11.8 % 8.0 %
Tier I Capital (to Risk Weighted Assets)
   9.3 % 9.0 % 4.0 %
Tier I Capital (to Average Assets)
   7.4 % 7.3 % 3.0 %
On May 5, 2010, the Corporation issued 21.8 million shares of its common stock, in an underwritten public offering, for total proceeds of $226.7 million, net of underwriting discounts and commissions. The underwriter has a 30-day option to purchase up to an additional 3.3 million shares at $10.40 per share.
The Corporation intends to use the net proceeds from this offering, together with other funds, to redeem all of the Series A Preferred Stock that it issued to the UST as part of the Troubled Asset Relief Program at such time as its banking regulators authorize and the UST formally approves.
Liquidity
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. 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. Management continues to monitor the liquidity and capital needs of the parent company and will implement appropriate strategies, as necessary, to remain adequately capitalized and to meet its cash needs.
48
The Corporation’s sources and uses of cash were discussed in general terms in the net interest income section of Management’s Discussion. The consolidated statements of cash flows provide additional information. The Corporation’s operating activities during the first ~~nine months~~quarter of ~~2009~~2010 generated ~~$206.4~~$121.9 million of cash, mainly due to net income, as adjusted for non-cash expenses, most notably the provision for loan ~~losses. Investing~~losses and the net decrease in loans held for sale. Cash flows provided by investing activities ~~resulted in a net cash outflow of $546.3~~were $164.3 million, due to ~~purchases of available for sale securities exceeding the~~ proceeds from the sales and maturities of available for sale securities exceeding purchases of available for sale securities. ~~Cash flows provided by~~Net cash outflows from financing activities were ~~$260.7~~$294.5 million, primarily due to a net ~~increases in deposits exceeding net decreases~~decrease in short-term borrowings ~~dividend payments~~ and long-term debt ~~repayments.~~
49repayments exceeding a net increase in deposits.
~~Item 3. Quantitative and Qualitative Disclosures About Market Risk~~
Item 3. 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 market price risk, debt security 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. The Corporation’s equity investments ~~consist~~consisted of ~~$34.4~~$100.0 million of Federal Home Loan Bank (FHLB) and Federal Reserve Bank stock, $33.3 million of stocks of publicly traded financial institutions, ~~$85.7 million of FHLB~~ and ~~Federal Reserve Bank stock and $9.3~~$8.8 million of money market mutual funds and other equity investments. The equity investments most susceptible to equity market price risk are the financial institutions stocks, which had a cost basis of approximately ~~$35.9~~$31.4 million and fair value of ~~$34.4~~$33.3 million at ~~September 30, 2009.~~March 31, 2010. Gross unrealized gains in this portfolio were ~~$2.5~~$3.7 million, and gross unrealized losses were ~~$4.0~~$1.8 million.
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 $824,000 for specific financial institution stocks that were deemed to exhibit other-than-temporary impairment in value during the three months ended March 31, 2010. Additional impairment charges may be necessary in the future depending upon the performance of the equity markets in general and the performance of the individual investments held by the Corporation. See Note C, “Investment Securities”, in the Notes to Consolidated Financial Statements for additional details.
Management continuously monitors the fair value of its equity investments and evaluates current market conditions and operating results of the issuers. 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 5343 as such investments do not have maturity dates.
~~Although~~
Another source of equity market price risk is the ~~carrying value~~Corporation’s investment in FHLB stock, which the Corporation is required to own in order to borrow funds from the FHLB. FHLBs obtain funding primarily through the issuance of ~~financial institution stocks accounted for 0.2%~~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. 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 Corporation’s total assets at September 30, 2009, the Corporation has a history of realizing gains from this portfolio. However, significant declines in the values of financial institutions stocks held in this portfolio have not only impacted the Corporation’sFHLB stock and its ability to ~~realize gains, but have also resulted in significant other-than-temporary impairment charges in 2008 and 2009.~~
The Corporation 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 onobtain FHLB funds could be adversely impacted if the ~~results of such evaluations, the Corporation recorded write-downs of $949,000 and $2.6 million for specific~~ financial institutions stocks that were deemed to exhibit other-than-temporary impairment in value during the three and nine months ended September 30, 2009, respectively. Additional impairment charges may be necessary in the future depending upon the performancehealth of the equity markets in general and the performance of the individual investments held by the Corporation. See Note C, “Investment Securities” in the Notes to Consolidated Financial Statements for additional details.
FHLB system worsens.
In addition to its equity portfolio, the Corporation’s ~~investment portfolio, its~~ investment management and trust services income ~~has been~~may be impacted by fluctuations in the securities markets. A portion of this revenue is based on the value of the underlying investment portfolios. AsIf the values of those investment portfolios decrease, whether due to factors influencing U.S. securities markets in general or otherwise, the Corporation’s revenue ~~has been~~would be negatively impacted. ~~The~~In addition, the Corporation’s ability to sell its brokerage services in the future will be dependent, in part, upon consumers’ level of confidence in the outlook for rising securities prices.
Debt Security Market Price Risk
Debt security market price risk is the risk that changes in the values of debt ~~security investments~~securities 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
50
securities, auction rate certificates and corporate debt securities. The Corporation’s investments in auction rate certificates and corporate debt securities are susceptible to market price risk.
Auction Rate Certificates ~~(ARCs)~~
The Corporation’s debt securities include ~~ARCs purchased from customers. At September 30, 2009, ARCs held by the Corporation had~~investments in student loan auction rate securities, also known as auction rate certificates (ARCs) with a cost basis of $292.3 million and fair value of ~~$285.6~~$288.1 million, or ~~1.7%~~1.8% of total ~~assets.~~
assets at March 31, 2010.
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.~~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, at ~~September 30, 2009,~~March 31, 2010, the fair value of ~~the~~ ARCs ~~held by the Corporation~~ were derived using significant unobservable inputs based on an expected cash flow model which produced fair values that 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 ARCs is also a factor in the determination of their estimated fair ~~values.~~value. As of ~~September 30, 2009,~~March 31, 2010, approximately ~~$247~~$260 million, or ~~86%~~90%, of the ~~auction rate securities held by the Corporation~~ARCs were rated above investment grade, with approximately ~~$184~~$187 million, or ~~64%~~65%, AAA rated by at least one ratings agency. Approximately ~~$39~~$30 million, or ~~14%~~10%, of ~~auction rate securities~~ARCs are rated below investment grade by at least one ratings agency. Of ~~the $39 million of securities rated below investment grade,~~this amount, approximately ~~$22~~$17 million, or 57%, of the student loans underlying the ~~auction rate securities~~ARCs have principal payments which are guaranteed by the Federal government. In total, approximately ~~$254~~$255 million, or ~~89%~~88%, of the student loans underlying the ~~auction rate securities~~ARCs have principal payments which are guaranteed by the Federal government. All ~~auction rate securities held by the Corporation~~ARCs were current and making scheduled interest payments. ~~Therefore, as of September 30, 2009,~~At March 31, 2010, the risk of changes in the estimated fair values of ARCs due to deterioration in the credit quality of their underlying debt instruments iswas 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:

September 30, 2009
Amortized Estimated fair
cost value
(in thousands)
Single-issuer trust preferred securities (1) $ 97,925 $ 75,195
Subordinated debt 34,861 32,589
Pooled trust preferred securities 22,518 4,846

Total corporate debt securities issued by financial institutions $ 155,304 $ 112,630

~~(1)~~ ~~Single-issuer trust preferred securities with estimated~~
   March 31, 2010
   Amortized
cost    Estimated fair
value
   (in thousands)
Single-issuer trust preferred securities
   $ 95,500    $ 80,691
Subordinated debt
   34,913    34,113
Pooled trust preferred securities
   16,295    4,900

Total corporate debt securities issued by financial institutions
   $ 146,708    $ 119,704

The fair values ~~totaling $8.1 million as of September 30, 2009 are classified as Level 3 assets. See Note J, “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,
51
~~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.~~
~~Due to distressed market prices that currently exist for these securities, the Corporation determined that the market~~ for pooled trust preferred securities and certain single-issuer trust preferred securities ~~held by the Corporation was not active. The Corporation determined the fair value of its investments in pooled trust preferred securities and for certain single-issuer trust preferred securities~~were based on quotes provided by third-party brokers who determined fair values based predominantly on internal valuation models ~~and~~which were not indicative prices or binding offers.
~~In April 2009, the Financial Accounting Standards Board (FASB) issued Staff Position No. 115-2 and 124-2, “Recognition and Presentation~~
The Corporation’s investments in single-issuer trust preferred securities had an unrealized loss of ~~Other-than-Temporary Impairments” (FSP FAS 115-2). FSP FAS 115-2, codified~~$14.8 million as ~~FASB Accounting Standards Codification (ASC) paragraph 320-10-65-1, amends~~of March 31, 2010. The Corporation did not record any other-than-temporary impairment ~~guidance~~charges for ~~debt~~single-issuer trust preferred securities during the three months ended March 31, 2010. The Corporation holds 11 single-issuer trust preferred securities that are rated below investment grade by at least one ratings agency, with an amortized cost of $37.1 million and ~~expands disclosure requirements for other-than-temporarily impaired debt~~an estimated fair value of $33.2 million as of March 31, 2010. The majority of the single-issuer trust preferred securities rated below investment grade were rated BB or Baa. Single-issuer trust preferred securities with an amortized cost of $10.2 million and ~~equity securities.~~an estimated fair value of $7.1 million as of March 31, 2010, were not rated by any ratings agency and, due to inactive or limited trading activity, were classified as Level 3 assets under FASB ASC Topic 820. See Note ~~C, “Investment Securities”~~I, “Fair Value Measurements”, in the Notes to Consolidated Financial Statements for additional details.
During the three ~~and nine~~ months ended ~~September 30, 2009,~~March 31, 2010, the Corporation recorded ~~$1.8~~$4.2 million ~~and $6.5 million, respectively,~~ of other-than-temporary impairment charges as reductions to investment securities gains on the consolidated statements of income, related to investments in pooled trust preferred securities issued by financial institutions. These other-than-temporary impairment charges were based on the credit losses determined through present value modeling of expected cash flows. In addition, during the first nine months of 2009, the Corporation recorded $6.0 million ($3.9 million, net of tax) of non-credit related write-downs to fair value as a component of other comprehensive loss.
~~During 2008, the Corporation recorded other-than-temporary impairment charges~~ for pooled trust preferred securities, based on an expected cash flows model. The Corporation holds ten pooled trust preferred securities. Nine of ~~$15.8 million. Upon adoption~~these securities, with an amortized cost of ~~FSP FAS 115-2, the Corporation determined that $9.7~~$15.4 million and an estimated fair value of ~~those other-than-temporary impairment charges were non-credit related. As such, a $6.3~~$4.3 million, ~~(net of $3.4 million of taxes) increase~~are rated below investment grade by at least one ratings agency, with ratings ranging from C to retained earnings and a corresponding decrease to accumulated other comprehensive income was recorded as the cumulative effect of adopting FSP FAS 115-2 as of January 1, 2009. Because previously recognized other-than-temporary impairment charges were reversed through equity rather than earnings, $6.1 millionCa. For each of the ~~$6.5 million other-than-temporary impairment charges for certain~~nine pooled trust preferred securities ~~recorded during~~rated below investment grade, the ~~first nine months~~class of ~~2009 were also presented as~~securities held by the Corporation is below the most senior tranche, with the Corporation’s interests being subordinate to other investors in the pool.
The amortized cost of pooled trust preferred securities is the purchase price of the securities, net of cumulative credit related other-than-temporary impairment charges, ondetermined using an expected cash flows model. The most significant input to the ~~Corporation’s statements~~expected cash flows model was the expected payment deferral rate for each pooled trust preferred security. The Corporation evaluates the financial metrics, such as capital ratios and non-performing asset ratios, of ~~operations~~the individual financial institution issuers that comprise each pooled trust preferred security to estimate its expected deferral rate. The actual weighted average cumulative defaults and deferrals as a percentage of original collateral were approximately 27% as of March 31, 2010. The discounted cash flow modeling for pooled trust preferred securities held by the ~~year ended December~~Corporation assumed an additional 12% expected weighted average deferral rate as of March 31, ~~2008.~~
2010.
Additional impairment charges for debt securities may be necessary in the future depending upon the performance of the individual investments held by the Corporation.
See Note C, “Investment Securities”, in the Notes to Consolidated Financial Statements for further discussion related to the Corporation’s other-than-temporary impairment evaluations for debt securities and Note J,I, “Fair Value Measurements”, in the Notes to Consolidated Financial Statements for further discussion related to debt securities’ fair values.
Interest Rate Risk
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 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 periodic basis. The ALCO is responsible for reviewing the interest rate sensitivity
52
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 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. None of the Corporation’s financial instruments are classified as trading. All dollar amounts are in thousands.

Expected Maturity Period Estimated
Year 1 Year 2 Year 3 Year 4 Year 5 Beyond Total Fair Value
Fixed rate loans (1) $ 1,097,557 $ 537,977 $ 420,095 $ 357,031 $ 278,242 $ 608,693 $ 3,299,595 $ 3,309,995
Average rate
4.85 % 6.54 % 6.55 % 6.39 % 6.44 % 6.22 % 5.89 %
Floating rate loans (1) (2) 2,263,079 1,133,438 864,745 747,904 1,694,650 1,955,363 8,659,179 8,315,233
Average rate
4.88 % 5.12 % 5.18 % 5.04 % 4.40 % 5.68 % 5.04 %
Fixed rate investments (3) 689,372 468,281 396,795 267,498 203,115 701,852 2,726,913 2,799,869
Average rate
4.36 % 4.69 % 4.73 % 4.78 % 4.56 % 4.25 % 4.50 %
Floating rate investments (3) — 500 292,256 116 — 88,176 381,048 346,105
Average rate
— 5.62 % 2.69 % 1.18 % — 3.03 % 2.77 %
Other interest-earning assets 105,807 — — — — — 105,807 108,814
Average rate
3.33 % — — — — — 3.33 %

Total
$ 4,155,815 $ 2,140,196 $ 1,973,891 $ 1,372,549 $ 2,176,007 $ 3,354,084 $ 15,172,542 $ 14,880,016
Average rate
4.75 % 5.38 % 5.01 % 5.34 % 4.68 % 5.41 % 5.06 %

Fixed rate deposits (4) $ 4,117,008 $ 837,402 $ 238,995 $ 154,506 $ 50,015 $ 9,803 $ 5,407,729 $ 5,435,772
Average rate
2.25 % 2.70 % 3.25 % 4.18 % 3.22 % 3.49 % 2.43 %
Floating rate deposits (5) 2,174,808 199,106 196,958 186,133 153,944 1,781,620 4,692,569 4,692,530
Average rate
0.89 % 0.68 % 0.68 % 0.64 % 0.50 % 0.46 % 0.68 %
Fixed rate borrowings (6) 497,546 179,823 102,775 5,815 5,794 838,808 1,630,561 1,606,294
Average rate
4.88 % 3.74 % 4.01 % 2.89 % 5.52 % 4.96 % 4.74 %
Floating rate borrowings (7) 722,927 — — — — 20,000 742,927 727,727
Average rate
0.36 % — — — — 2.69 % 0.43 %

Total
$ 7,512,289 $ 1,216,331 $ 538,728 $ 346,454 $ 209,753 $ 2,650,231 $ 12,473,786 $ 12,462,323
Average rate
1.85 % 2.52 % 2.46 % 2.26 % 1.29 % 1.91 % 1.95 %

Expected Maturity Period Estimated
Fair Value
Year 1 Year 2 Year 3 Year 4 Year 5 Beyond Total
Fixed rate loans (1)
$ 1,050,395    $ 512,322    $ 411,700    $ 342,260    $ 273,378    $ 633,853    $ 3,223,908    $ 3,252,832
Average rate
4.81 % 6.50 % 6.45 % 6.37 % 6.53 % 5.96 % 5.83 %
Floating rate loans (1) (2)
2,156,549    1,108,156    891,937    817,354    1,723,117    2,034,845    8,731,958    8,691,753
Average rate
4.81 % 5.12 % 5.13 % 4.96 % 4.47 % 5.60 % 5.01 %
Fixed rate investments (3)
582,362    477,723    333,999    254,471    173,615    727,093    2,549,263    2,617,311
Average rate
4.41 % 4.62 % 4.66 % 4.69 % 4.65 % 4.31 % 4.50 %
Floating rate investments (3)
0    500    292,341    101    207    73,563    366,712    344,260
Average rate
0 % 4.11 % 4.34 % 1.18 % 1.65 % 2.52 % 3.98 %
Other interest-earning assets
61,640    0    0    0    0    0    61,640    61,640
Average rate
3.71 % 0 % 0 % 0 % 0 % 0 % 3.71 %

Total
$ 3,850,946    $ 2,098,701    $ 1,929,977    $ 1,414,186    $ 2,170,317    $ 3,469,354    $ 14,933,481    $ 14,967,796
Average rate
4.73 % 5.34 % 5.21 % 5.26 % 4.74 % 5.33 % 5.07 %

Fixed rate deposits (4)
$ 3,207,407    $ 793,347    $ 378,381    $ 126,148    $ 54,037    $ 12,381    $ 4,571,701    $ 4,614,223
Average rate
1.78 % 2.48 % 3.26 % 3.36 % 2.86 % 2.69 % 2.09 %
Floating rate deposits (5)
3,244,455    181,996    179,470    170,904    172,847    1,596,883    5,546,555    5,546,555
Average rate
0.84 % 0.55 % 0.55 % 0.52 % 0.53 % 0.34 % 0.66 %
Fixed rate borrowings (6)
411,750    87,824    30,815    857    56,145    833,063    1,420,454    1,372,247
Average rate
4.45 % 3.89 % 4.46 % 5.08 % 3.28 % 4.97 % 4.68 %
Floating rate borrowings (7)
624,950    0    0    0    0    20,000    644,950    629,556
Average rate
0.24 % 0 % 0 % 0 % 0 % 2.65 % 0.31 %

Total
$ 7,488,562    $ 1,063,167    $ 588,666    $ 297,909    $ 283,029    $ 2,462,327    $ 12,183,660    $ 12,162,581
Average rate
1.39 % 2.26 % 2.50 % 1.74 % 1.52 % 1.94 % 1.65 %

(1) Amounts are based on contractual payments and maturities, adjusted for expected prepayments. Excludes overdraft deposit balances.
(2) Line of credit amounts are based on historical cash flow assumptions, with an average life of approximately 5 years.
(3) Amounts are based on contractual maturities; adjusted for expected prepayments on mortgage-backed securities and collateralized mortgage obligations and expected calls on agency and municipal securities.
(4) Amounts are based on contractual maturities of time deposits.
(5) Estimated based on history of deposit flows.
(6) Amounts are based on contractual maturities of debt instruments, adjusted for possible calls. Amounts also include junior subordinated deferrable interest debentures.
(7) Amounts include Federal Funds purchased, short-term promissory notes and securities sold under agreements to repurchase, which mature in less than 90 days, in addition to junior subordinated deferrable interest debentures.
The preceding table and discussion addressed the liquidity implications of interest rate risk and focused on expected cash flows from financial instruments. ~~The periods of these expected principal cash flows,~~Expected maturities, however, ~~are~~do not necessarily ~~consistent with the periods that would realize~~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 periods.
Fair value adjustments related to acquisitions are not included in the preceding table.
Included within the $8.7 billion of floating rate loans above are $3.6 billion of loans, or ~~41.4%~~41.7% of the total, that float with the prime interest rate, $1.2 billion, or ~~13.4%~~13.6%, of loans ~~which~~that float with other interest rates, primarily LIBOR, and $3.9 billion, or ~~45.2%~~44.7%, of adjustable rate loans. The $3.9 billion of adjustable rate loans include loans that are fixed rate instruments for a certain period of time, and then convert to floating rates.
53
The following table presents the percentage of adjustable rate loans, at March 31, 2010, stratified by the period until their ~~remaining fixed term at September 30, 2009:~~
next repricing:
   Percent of Total

Adjustable Rate
~~Fixed Rate Term~~
Loans
~~One year~~ ~~18.3~~ %
~~Two years~~ ~~1.0~~
~~Three years~~
One year
   29.7 ~~1.8~~%
Two years
19.7
~~Four~~
Three years
   ~~1.4~~18.5
~~Five~~
Four years
   ~~59.6~~17.2
Five years
10.1
Greater than five years
   ~~17.9~~4.8
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 cash flows. Estimated prepayment effects are applied to these balances 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 ~~September 30, 2009,~~March 31, 2010, the cumulative six-month ratio of RSA/RSL was ~~1.11.~~
1.10.
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.~~curve. 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 scenario is not shown):

Rate Shock
   Annual change
in net interest
income    % Change
+300 bp
   + $ 47.3 million    + 8.0 %
+200 bp
   + $ 27.8 million    + 4.7 %
+100 bp
   + $ 9.4 million    + 1.6 %
- 100 bp (1)
   - $ 658,000    - 0.1 %
~~Annual change~~
~~in net interest~~
~~Rate Shock~~ ~~income~~ ~~% Change~~
~~+300 bp~~ ~~+ $63.5 million~~ ~~+11.5~~ %
~~+200 bp~~ ~~+ $38.7 million~~ ~~+  7.0~~ %
~~+100 bp~~ ~~+ $17.5 million~~ ~~+  3.2~~ %
~~- 100 bp~~ (1) ~~-  $  6.6 million~~ ~~-  1.2~~ %
~~(1)~~ Because certain current short-term interest rates are at or below 1.00%, the 100 basis point downward shock assumes that corresponding short-term interest rates approach an implied floor that, in effect, reflects a decrease of less than the full 100 basis points downward shock.
54
Economic value of equity estimates the discounted present value of asset cash flows 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 ~~September 30, 2009,~~March 31, 2010, the Corporation was within policy limits for every 100 basis point shock movement in interest rates.
55
~~Item 4. Controls and Procedures~~
Item 4. Controls and Procedures
The Corporation carried out an evaluation, under the supervision and with the participation of the ~~Corporation’s~~Corporation's management, including the ~~Corporation’s~~Corporation's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of ~~our~~the Corporation’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the ~~Corporation’s~~Corporation's Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this quarterly report, the ~~Corporation’s~~Corporation's disclosure controls and procedures are effective. Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in Corporation reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange ~~Commission’s~~Commission's rules and forms.
There have been no changes in ~~our~~the Corporation’s internal control over financial reporting during the fiscal quarter covered by this quarterly report that has materially affected, or is reasonably likely to materially affect, ~~our~~the Corporation’s internal control over financial reporting.
56
PART II —– OTHER INFORMATION
~~Item 1. Legal Proceedings~~
Item 1. Legal Proceedings
Not applicable.
~~Item 1A. Risk Factors~~
~~There were no material changes from~~
Item 1A. Risk Factors
Information responsive to this item as of March 31, 2010 appears under the ~~risk factors set forth under Part I, Item 1A.~~heading, “Risk Factors” onwithin the Corporation’s Form 10-K for the year ended December 31, ~~2008.~~
2009, except for the following additional risk factors.
Increases in FDIC insurance premiums may adversely affect the Corporation’s earnings.
In response to the impact of economic conditions since 2008 on banks generally and on the FDIC deposit insurance fund, the FDIC changed its risk-based assessment system and increased base assessment rates. In addition, on November 12, 2009, the FDIC adopted a rule requiring banks to prepay three years’ worth of premiums to replenish the depleted insurance fund. A change in the risk categories applicable to the Corporation’s bank subsidiaries, further adjustments to base assessment rates and any special assessments could have a material adverse effect on the Corporation’s earnings, financial condition and results of operation and may adversely affect the market price of the Corporation’s common stock.
Proposed legislative and regulatory reforms may, if enacted or adopted, have a significant impact on the Corporation’s business and results of operations.
Recent events in the financial services industry and, more generally, in the financial markets and the economy, have led to various proposals for changes in the regulation of the financial services industry. In 2009, separate comprehensive financial reform bills were introduced in both houses of Congress. On December 11, 2009, the U.S. House of Representatives passed the Wall Street Reform and Consumer Protection Act of 2009, and similarly comprehensive legislation is pending in the U.S. Senate. It remains uncertain whether, and in what form, any legislation passed by Congress may ultimately be implemented, and enactment of any legislation could have an adverse effect on the Corporation’s business and results of operations and may adversely affect the market price of the Corporation’s common stock.
~~Item 2. Unregistered Sales of Equity Securities and Use of Proceeds~~
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
~~Item 3. Defaults Upon Senior Securities and Use of Proceeds~~
Item 3. Defaults Upon Senior Securities and Use of Proceeds
Not applicable.
~~Item 4. Submission of Matters to a Vote of Security Holders~~
~~Not applicable.~~
Item 4. Reserved
~~Item 5. Other Information~~
Item 5. Other Information
Not applicable.
~~Item 6.~~~~Exhibits~~
Item 6. Exhibits
See Exhibit Index for a list of the exhibits required by Item 601 of Regulation S-K and filed as part of this report.
57
FULTON FINANCIAL CORPORATION AND SUBSIDIARIES

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
~~FULTON FINANCIAL CORPORATION~~
FULTON FINANCIAL CORPORATION
Date: May 7, 2010

~~Date: November 9, 2009~~
/s/ R. Scott Smith, Jr.

R. Scott Smith, Jr.

Chairman and Chief Executive Officer
Date: May 7, 2010

~~Date: November 9, 2009~~
/s/ Charles J. Nugent

Charles J. Nugent
Senior Executive Vice President and
Chief Financial Officer
58
EXHIBIT INDEX

Exhibits Required Pursuant
to Item 601 of Regulation S-K
3.1    Articles of Incorporation, as amended and restated, of Fulton Financial Corporation as amended – Incorporated by reference to Exhibit 3.1 of the Fulton Financial Corporation Form S-4 Registration Statement filed on October 7, 2005.
3.2    Bylaws of Fulton Financial Corporation as amended – Incorporated by reference to Exhibit 3.1 of the Fulton Financial Corporation Current Report on Form 8-K dated September 18, 2008.
3.3    Certificate of Designations of Fixed Rate Cumulative Preferred Stock, Series A of Fulton Financial Corporation – Incorporated by reference to Exhibit 3.1 of the Fulton Financial Corporation Current Report on Form 8-K dated December 23, 2008.
31.1    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1    Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2    Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
59
49


	September 30
	2009			December 31
	(unaudited)			2008
ASSETS
Cash and due from banks	$	252,004		$	331,164
Interest-bearing deposits with other banks		24,048			16,791
Federal funds sold		—			4,919
Loans held for sale		84,766			95,840
Investment securities:
Held to maturity (estimated fair value of $9,248 in 2009 and $9,765 in 2008)		9,145			9,636
Available for sale		3,265,254			2,715,205

Loans, net of unearned income		11,968,246			12,042,620
Less: Allowance for loan losses		(234,511	)		(173,946	)

Net Loans		11,733,735			11,868,674


Premises and equipment		204,520			202,657
Accrued interest receivable		60,433			58,566
Goodwill		534,919			534,385
Intangible assets		19,122			23,448
Other assets		338,763			323,821


Total Assets	$	16,526,709		$	16,185,106


LIABILITIES
Deposits:
Noninterest-bearing	$	1,932,382		$	1,653,440
Interest-bearing		10,100,298			8,898,476

Total Deposits		12,032,680			10,551,916


Short-term borrowings:
Federal funds purchased		210,865			1,147,673
Other short-term borrowings		511,753			615,097

Total Short-Term Borrowings		722,618			1,762,770


Accrued interest payable		49,962			53,678
Other liabilities		146,816			169,298
Federal Home Loan Bank advances and long-term debt		1,650,870			1,787,797

Total Liabilities		14,602,946			14,325,459


SHAREHOLDERS’ EQUITY
Preferred stock, $1,000 par value, 376,500 shares authorized and outstanding		369,950			368,944
Common stock, $2.50 par value, 600 million shares authorized, 192.9 million shares issued in 2009 and 192.4 million shares issued in 2008		482,195			480,978
Additional paid-in capital		1,257,608			1,260,947
Retained earnings		57,962			31,075
Accumulated other comprehensive income (loss)		11,006			(17,907	)
Treasury stock, 16.7 million shares in 2009 and 17.3 million shares in 2008, at cost		(254,958	)		(264,390	)

Total Shareholders’ Equity		1,923,763			1,859,647


Total Liabilities and Shareholders’ Equity	$	16,526,709		$	16,185,106


	Three Months Ended						Nine Months Ended
	September 30						September 30
	2009			2008			2009			2008
INTEREST INCOME
Loans, including fees	$	162,375		$	180,170		$	486,965		$	550,477
Investment securities:
Taxable		29,376			26,025			85,648			84,114
Tax-exempt		3,966			4,513			12,618			13,540
Dividends		543			1,421			1,715			5,103
Loans held for sale		1,550			1,539			4,439			4,727
Other interest income		51			141			140			460

Total Interest Income		197,861			213,809			591,525			658,421

INTEREST EXPENSE
Deposits		43,825			47,192			141,727			161,807
Short-term borrowings		835			12,877			3,193			44,093
Long-term debt		20,400			19,722			61,744			60,714

Total Interest Expense		65,060			79,791			206,664			266,614


Net Interest Income		132,801			134,018			384,861			391,807
Provision for loan losses		45,000			26,700			145,000			54,626


Net Interest Income After Provision for Loan Losses		87,801			107,318			239,861			337,181

OTHER INCOME
Service charges on deposit accounts		15,321			16,177			45,276			45,463
Other service charges and fees		10,003			9,598			27,952			27,320
Investment management and trust services		8,191			8,045			23,970			25,193
Gains on sales of mortgage loans		2,778			2,266			18,764			7,247
Gain on sale of credit card portfolio		—			—			—			13,910
Other		4,932			4,230			14,558			11,414

Total other-than-temporary impairment losses		(1,211	)		(10,681	)		(15,235	)		(39,271	)
Less: Portion of (gain) loss recognized in other comprehensive income (before taxes)		(1,584	)		—			6,021			—

Net other-than-temporary impairment losses		(2,795	)		(10,681	)		(9,214	)		(39,271	)
Net gains on sale of investment securities		2,750			1,180			12,165			9,369

Net investment securities gains (losses)		(45	)		(9,501	)		2,951			(29,902	)


Total Other Income		41,180			30,815			133,471			100,645

OTHER EXPENSES
Salaries and employee benefits		54,086			55,310			165,189			164,786
Net occupancy expense		10,165			10,237			31,428			30,999
FDIC insurance expense		5,244			1,147			21,738			2,684
Equipment expense		3,281			3,061			9,660			9,907
Data processing		3,121			3,242			9,100			9,604
Marketing		1,982			3,097			6,277			9,521
Intangible amortization		1,429			1,730			4,326			5,386
Operating risk loss		338			3,480			6,683			19,108
Other		20,164			18,051			59,587			53,756

Total Other Expenses		99,810			99,355			313,988			305,751


Income Before Income Taxes		29,171			38,778			59,344			132,075
Income taxes		5,825			9,702			9,802			35,825


Net Income		23,346			29,076			49,542			96,250
Preferred stock dividends and discount accretion		(5,046	)		—			(15,123	)		—

Net Income Available to Common Shareholders	$	18,300		$	29,076		$	34,419		$	96,250


PER COMMON SHARE:
Net income (basic)	$	0.10		$	0.17		$	0.20		$	0.55
Net income (diluted)		0.10			0.17			0.20			0.55
Cash dividends		0.03			0.15			0.09			0.45


													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 December 31, 2008	$	368,944		175,044	$	480,978	$	1,260,947		$	31,075		$	(17,907	)	$	(264,390	)	$	1,859,647
Cumulative effect of FSP FAS 115-2 and FAS 124-2 adoption (net of $3.4 million tax effect)											6,298			(6,298	)					—
Comprehensive income:
Net income											49,542									49,542
Other comprehensive income														35,211						35,211

Total comprehensive income																				84,753

Stock issued, including related tax benefits				1,105		1,217		(4,708	)								9,432			5,941
Stock-based compensation awards								1,369												1,369
Preferred stock discount accretion		1,006									(1,006	)								—
Preferred stock cash dividends											(12,130	)								(12,130	)
Common stock cash dividends — $0.09 per share											(15,817	)								(15,817	)


Balance at September 30, 2009	$	369,950		176,149	$	482,195	$	1,257,608		$	57,962		$	11,006		$	(254,958	)	$	1,923,763

Balance at December 31, 2007	$	—		173,503	$	479,559	$	1,254,369		$	141,993		$	(21,773	)	$	(279,228	)	$	1,574,920
Cumulative effect of initial recognition of endorsement split-dollar life insurance liability											(677	)								(677	)
Impact of pension plan measurement date change (net of $23,000 tax effect)											43									43
Comprehensive income:
Net income											96,250									96,250
Other comprehensive income														511						511

Total comprehensive income																				96,761

Stock issued, including related tax benefits				1,184		1,251		(2,189	)								10,419			9,481
Stock-based compensation awards								1,671												1,671
Common stock cash dividends — $0.45 per share											(78,289	)								(78,289	)


Balance at September 30, 2008	$	—		174,687	$	480,810	$	1,253,851		$	159,320		$	(21,262	)	$	(268,809	)	$	1,603,910


			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
			(in thousands)
Held to Maturity at September 30, 2009
U.S. Government sponsored agency securities	$	6,763	$	14	$	—		$	6,777
State and municipal securities		765		1		—			766
Mortgage-backed securities		1,617		88		—			1,705

	$	9,145	$	103	$	—		$	9,248


Available for Sale at September 30, 2009

Equity securities	$	130,804	$	2,563	$	(3,986	)	$	129,381
U.S. Government securities		13,999		1		—			14,000
U.S. Government sponsored agency securities		126,146		1,260		(34	)		127,372
State and municipal securities		421,639		16,373		(15	)		437,997
Corporate debt securities		158,040		370		(43,044	)		115,366
Collateralized mortgage obligations		975,384		25,238		(215	)		1,000,407
Mortgage-backed securities		1,110,423		44,722		(4	)		1,155,141
Auction rate securities (1)		292,256		2,474		(9,140	)		285,590

	$	3,228,691	$	93,001	$	(56,438	)	$	3,265,254


						Other-than-
	Gross		Gross			temporary
	Realized		Realized			Impairment			Net Gains
	Gains		Losses			Losses			(Losses)
			(in thousands)
Three months ended Sept. 30, 2009:
Equity securities	$	49	$	(408	)	$	(949	)	$	(1,308	)
Debt securities		3,130		(21	)		(1,846	)		1,263

Total	$	3,179	$	(429	)	$	(2,795	)	$	(45	)


Three months ended Sept. 30, 2008:
Equity securities	$	1,276	$	—		$	(2,836	)	$	(1,560	)
Debt securities		418		(514	)		(7,845	)		(7,941	)

Total	$	1,694	$	(514	)	$	(10,681	)	$	(9,501	)


Nine months ended Sept. 30, 2009:
Equity securities	$	640	$	(689	)	$	(2,739	)	$	(2,788	)
Debt securities		12,343		(129	)		(6,475	)		5,739

Total	$	12,983	$	(818	)	$	(9,214	)	$	2,951


Nine months ended Sept. 30, 2008:
Equity securities	$	6,884	$	—		$	(31,426	)	$	(24,542	)
Debt securities		3,504		(1,019	)		(7,845	)		(5,360	)

Total	$	10,388	$	(1,019	)	$	(39,271	)	$	(29,902	)


	Three Months			Nine Months
	Ended			Ended
	September 30,			September 30,
	2009			2009
Balance of cumulative credit losses on pooled trust preferred securities, beginning of period (1)	$	(10,771	)	$	(6,142	)
Additions for credit losses recorded which were not previously recognized as components of earnings		(1,846	)		(6,475	)

Ending balance of cumulative credit losses on pooled trust preferred securities, end of period	$	(12,617	)	$	(12,617	)


	September 30, 2009				December 31, 2008
	Amortized		Estimated fair		Amortized		Estimated fair
	cost		value		cost		value
			(in thousands)
Single-issuer trust preferred securities (1)	$	97,925	$	75,195	$	97,887	$	69,819
Subordinated debt		34,861		32,589		34,788		31,745
Pooled trust preferred securities		22,518		4,846		19,351		15,381

Corporate debt securities issued by financial institutions		155,304		112,630		152,026		116,945
Other corporate debt securities		2,736		2,736		2,950		2,949

Available for sale corporate debt securities	$	158,040	$	115,366	$	154,976	$	119,894


	September 30, 2009					December 31, 2008
	Notional					Notional
	Amount		Fair Value			Amount		Fair Value
			(in thousands)
Interest Rate Locks with Customers:
Positive fair values	$	184,599	$	1,958		$	103,824	$	506
Negative fair values		38,745		(57	)		37,321		(81	)

Net Interest Rate Locks with Customers				1,901					425
Forward Commitments:
Positive fair values		39,694		445			219,142		954
Negative fair values		258,300		(3,495	)		271,306		(2,399	)

Net Forward Commitments				(3,050	)				(1,445	)

Interest rate swaps (1)		—		—			10,000		18

			$	(1,149	)			$	(1,002	)


	Fair Value Gains (Losses)						Statement of Income Classification
	Three Months Ended			Nine Months Ended
	September 30, 2009			September 30, 2009
	(in thousands)
Interest rate locks with customers	$	2,187		$	1,476		Gains on sales of mortgage loans
Forward commitments		(4,068	)		(1,605	)	Gains on sales of mortgage loans
Interest rate swaps		—			(18	)	Other expense

	$	(1,881	)	$	(147	)


	September 30,		December 31,
	2009		2008
	(in thousands)
Commitments to extend credit	$	3,926,396	$	3,360,499
Standby letters of credit		635,646		789,804
Commercial letters of credit		34,005		37,620


	March 31, 2010		December 31, 2009
	March 31, 2010		December 31, 2009
	(in thousands)

Commitments to extend credit	$	3,882,214	$	4,479,546
Standby letters of credit		541,620		551,064
Commercial letters of credit		30,113		37,726


	ARCs Held by			Financial
	Customers, at			Guarantee
	Par Value			Liability
	(in thousands)
Balance, beginning of period	$	105,165		$	(8,653	)
Provision for financial guarantee		—			(6,237	)
Purchases of ARCs		(104,415	)		14,890
Redemptions of ARCs		(750	)		—

Balance, end of period	$	—		$	—


	September 30, 2009					December 31, 2008
			Reserves/					Reserves/
	Principal		Write-downs			Principal		Write-downs
			(in thousands)
Outstanding repurchase requests (1) (2)	$	5,580	$	(3,540	)	$	6,290	$	(2,900	)
No repurchase request received – sold loans with identified potential misrepresentations of borrower information (1) (2)		3,650		(1,470	)		7,990		(3,280	)
Repurchased loans (3)		6,990		(1,160	)		10,000		(1,690	)
Foreclosed real estate (OREO) (4)		11,930		—			15,920		—

Total reserves/write-downs			$	(6,170	)			$	(7,870	)


(1)		Principal balances had not been repurchased and, therefore, are not included on the consolidated balance sheets as of ~~September 30, 2009~~March 31, 2010 and December 31, ~~2008.~~2009.

(2)		Reserve balance included as a component of other liabilities on the consolidated balance sheets as of ~~September 30, 2009~~March 31, 2010 and December 31, ~~2008.~~2009.

(3)		Principal balances, net of write-downs, are included as a component of loans, net of unearned income on the consolidated balance sheets as of ~~September 30, 2009~~March 31, 2010 and December 31, ~~2008.~~2009.


	Cost –			Fair Value –
	Asset			Asset			Balance Sheet
	(Liability)			(Liability)			Classification
	(in thousands)
September 30, 2009:
Mortgage loans held for sale (1) (2)	$	75,543		$	78,550		Loans held for sale

December 31, 2008:
Mortgage loans held for sale (1)	$	64,787		$	66,567		Loans held for sale
Hedged certificates of deposit (3)		(7,458	)		(7,517	)	Interest-bearing deposits

	$	57,329		$	59,050


(1)		Cost basis of mortgage loans held for sale represents the unpaid principal balance.

~~(2)~~		For the three and nine months ended September 30, 2009, the Corporation recorded income of $1.1 million and $1.2 million, respectively, included within gains on sales of mortgage loans on the consolidated statements of income, representing the changes in fair values of mortgage loans held for sale.

~~(3)~~		~~All hedged certificates of deposit were called in the first quarter of 2009.~~

	•		~~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.~~


	Level 1		Level 2		Level 3		Total
			(in thousands)
Mortgage loans held for sale	$	—	$	78,550	$	—	$	78,550
Available for sale investment securities		36,709		2,844,340		298,497		3,179,546
Other financial assets		13,706		2,403		—		16,109

Total assets	$	50,415	$	2,925,293	$	298,497	$	3,274,205


Other financial liabilities	$	13,706	$	3,552	$	—	$	17,258

	•		Mortgage loans held for sale – This category consists of mortgage loans held for sale that the Corporation has elected to measure at fair value. Fair ~~value~~values as of ~~September 30,~~March 31, 2010 and December 31, 2009 ~~was~~were measured as the price that secondary market investors were offering for loans with similar characteristics. ~~See Note I, “Fair Value Option” for details related to the Corporation’s election to measure assets and liabilities at fair value.~~

	•		U.S. Government securities/U.S. Government sponsored agency securities/State and municipal securities/Collateralized mortgage obligations/Mortgage-backed securities ~~and certain single-issuer trust preferred securities, and other equity~~ – These debt securities are classified as Level 2 assets and consist of: U.S. government and U.S. government sponsored agency securities, state and municipal securities, corporate debt securities, collateralized mortgage obligations and mortgage-backed securities.investments. Fair values are determined by a third-party pricing service using both quoted prices for similar assets, when available, and model-based valuation techniques that derive fair value based on market-corroborated data, such as instruments with similar prepayment speeds and default interest rates. ~~See Note C, “Investment Securities”~~The pricing data and market quotes the Corporation obtains from outside sources are reviewed internally for ~~additional details related to the Corporation’s available for sale investment securities.~~reasonableness.

	•		Auction rate securities – Due to their illiquidity, ARCs are classified as Level 3 ~~assets~~investments and ~~measured at fair value based on an independent third-party valuation. Due to their illiquidity, ARCs were~~are valued through the use of an expected cash flows ~~model.~~model prepared by a third-party valuation expert. The assumptions used in preparing the expected cash flows model include estimates offor coupon rates, time to maturity and market rates of return. The expected cash flows model the Corporation obtains from outside sources is reviewed internally for reasonableness.

			Pooled trust preferred securities and certain single-issuer trust preferred securities are also classified as Level 3 assets. The fair values of pooled trust preferred securities and $6.9 million of single-issuer trust preferred securities were determined 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. The Corporation classified $67.1 million of other single-issuer trust preferred securities as Level 2 assets above.

			~~Equity securities totaling $85.7 million, issued by the Federal Home Loan Bank and Federal Reserve Bank, have been excluded from the above table.~~

			representing the fair value of mortgage banking derivatives in the form of interest rate locks ~~with customers~~ and forward commitments with secondary market investors. The fair value of the Corporation’s interest rate locks and forward commitments are determined as the amount that would be required to settle each derivative financial instrument at the balance sheet date. See Note G,F, “Derivative Financial Instruments”, for additional information.

	•		Other financial liabilities – Included within this category are: Level 1 employee deferred compensation liabilities which ~~are the~~represent amounts due to employees under the deferred compensation plans described under the heading “Other financial assets” ~~above;~~above and Level 2 mortgage banking derivatives, described under the heading “Other financial assets” ~~above; and Level 3 financial guarantees associated with the Corporation’s commitment to purchase ARCs held within customer accounts.~~

			The fair value of the financial guarantee liability associated with ARCs held by the Corporation’s customers was determined using the same methods as the ARCs held by the Corporation and described under the heading “Available for sale investment securities” above. The Corporation purchased all remaining ARCs held in customer accounts during the three months ended June 30, 2009, therefore, there is no balance outstanding as of September 30, 2009. See Note H, “Commitments and Contingencies” for additional information.


Three Months Ended September 30, 2009
	Available for Sale Investment Securities								Other Financial
	Pooled Trust			Single-issuer					Liabilities –
	Preferred			Trust Preferred		ARC			ARC Financial
	Securities			Securities		Investments			Guarantee
				(in thousands)
Balance, June 30, 2009	$	4,915		$	7,006	$	289,575		$	—
Realized adjustment to fair value (2)		(1,846	)		—		—			—
Unrealized adjustment to fair value (3)		1,781			1,054		4,650			—
Sales		—			—		(3,086	)		—
Redemptions		—			—		(6,135	)		—
(Premium amortization)/Discount accretion (4)		(4	)		1		586			—

Balance, September 30, 2009	$	4,846		$	8,061	$	285,590		$	—


Nine Months Ended September 30, 2009
	Available for Sale Investment Securities								Other Financial
	Pooled Trust			Single-issuer					Liabilities –
	Preferred			Trust Preferred		ARC			ARC Financial
	Securities			Securities		Investments			Guarantee
				(in thousands)
Balance, December 31, 2008	$	15,381		$	7,544	$	195,900		$	(8,653	)
Purchases (1)		—			—		89,383			14,890
Realized adjustment to fair value (2)		(6,475	)		—		—			(6,237	)
Unrealized adjustment to fair value (3)		(4,059	)		514		7,797			—
Sales		—			—		(3,086	)		—
Redemptions		—			—		(6,852	)		—
(Premium amortization)/Discount accretion (4)		(1	)		3		2,448			—

Balance, September 30, 2009	$	4,846		$	8,061	$	285,590		$	—


	Available for Sale Investment Securities									Other Financial Liabilities – ARC Financial Guarantee (1)
	Pooled Trust Preferred Securities			Single-issuer Trust Preferred Securities			ARC Investments			Other Financial Liabilities – ARC Financial Guarantee (1)
	(in thousands)

Balance, December 31, 2009	$	4,979		$	6,981		$	289,203		$	0
Realized adjustment to fair value (2)		(4,153	)		0			0			0
Unrealized adjustment to fair value (3)		4,079			154			(1,266	)		0
Redemptions		0			0			(1,140	)		0
(Premium amortization)/Discount accretion (4)		(5	)		1			1,336			0

Balance, March 31, 2010	$	4,900		$	7,136		$	288,133		$	0


Balance, December 31, 2008	$	15,381		$	7,544		$	195,900		$	(8,653	)
Purchases (5)		0			0			9,642			877
Realized adjustment to fair value (2)		(1,978	)		0			0			(6,158	)
Unrealized adjustment to fair value (3)		(2,711	)		(1,252	)		(2,665	)		0
Redemptions		0			0			(89	)		0
Discount accretion (4)		0			2			790			0

Balance, March 31, 2009	$	10,692		$	6,294		$	203,578		$	(13,934	)


(1)		~~For ARC investments, amount represents~~In 2008, the Corporation offered to purchase illiquid ARCs ~~acquired~~ from ~~customers, less an adjustment to~~customers. The estimated fair value ~~upon purchase. For the ARC financial guarantee, amount represents the reversal~~ of the guarantee ~~liability due~~was determined based on the difference between the fair value of the underlying ARCs and their estimated purchase price. During 2009, the Corporation completed the repurchase of all eligible ARCs and, as of December 31, 2009, there were no longer any ARCs still held by customers that the Corporation had agreed to ~~the purchase of ARCs from customers.~~purchase.

(2)		For pooled trust preferred securities, realized adjustments to fair value represent credit related other-than-temporary impairment charges that were recorded as a reduction to investment securities gains on the consolidated statements of income. ~~For the ARC financial guarantee, the realized adjustment to fair value has been included as a component of operating risk loss on the Corporation’s consolidated statements of income.~~

Large accelerated filerþ

Accelerated filero

Non-accelerated filero
~~(Do not check if a smaller reporting company)~~

Smaller reporting companyo