UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20459
FORM 10-Q
(Mark One)
x | ||
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2009,
¨ | ||
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File No. 0-10587
FULTON FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
PENNSYLVANIA | 23-2195389 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
One Penn Square, P.O. Box 4887, Lancaster, Pennsylvania | 17604 | |
(Address of principal executive offices) | (Zip Code) |
(717) 291-2411
(Registrant’sRegistrant'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):
Large accelerated filer | x | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso¨ Noþx
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’sissuer's classes of common stock, as of the latest practicable date:
Common Stock, $2.50 Par Value – 176,264,000176,606,000 shares outstanding as of October 31, 2009.
2
Item 1. | Financial Statements |
Item 1. Financial Statements
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
3
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
4
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (UNAUDITED)
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 | ||||||||||||||||||||||
Shares Outstanding | Amount | |||||||||||||||||||||||||||
(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
5
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
6
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 periodsthree-month period ended September 30, 2009March 31, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009.
NOTE B – Net Income Per Common Share and Other Comprehensive Income
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 securitiescommon stock equivalents consist of outstanding stock options, restricted stock and common stock warrants.
7
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 | ||||
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) | ||
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. | ||
8
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 | ||||||||
9
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 | |||||
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 | ) | |||||
10
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 | |||||
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 institutionsinstitution stocks during the three and nine months ended September 30, 2009 wereMarch 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 FASBFinancial 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.
During the three and nine months ended September 30, 2009,March 31, 2010, the $1.8 million and $6.5Corporation recorded $4.2 million of other-than-temporary impairment losses for pooled trust preferred securities recognized in earnings were determined through the use ofbased on an expected cash flowflows model. The most significant input to the expected cash flows model
11
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 | ) | ||
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 | ) | ||||||||||
Less Than 12 months | 12 Months or Longer | Total | |||||||||||||||||||
Estimated Fair Value | Unrealized Losses | Estimated Fair Value | Unrealized Losses | Estimated Fair Value | Unrealized Losses | ||||||||||||||||
(in thousands) | |||||||||||||||||||||
U.S. Government sponsored agency securities | $ | 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, 2009March 31, 2010 to be other-than-temporarily impaired.
The unrealized holding losses on theseinvestments in student loan auction rate securities, also known as auction rate certificates (ARCs), are attributable to liquidity issues as a result ofresulting 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 CorporationARCs 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 securitiesARCs are rated below investment grade by at least one ratings agency. Of the $39 million of securities rated below investment
12
underlying the auction rate securitiesARCs have principal payments which are guaranteed by the Federal government. All auction rate securities currently held by the Corporation areAt March 31, 2010, all ARCs were current and making scheduled interest payments. Because the Corporation does not have the intentionintent 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”.
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 | ||||||||
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 ifdid 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 intentionintent to sell and does not believe it will more likely than not be required to sell any impaired corporate debtof these securities issued by financial institutions prior to a recovery of their fair value to amortized cost. Therefore, the Corporation doescost, 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, 2009considered to be other-than-temporarily impaired.
NOTE D – Goodwill
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’sCorporation grants equity awards consistto 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 itsthe Corporation’s Employee Stock Purchase Plan.
13
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, withand 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 12.9March 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 areis 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.
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.
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.
14
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 | ) | ||||||
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) |
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
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.
15
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 | ) | |||||||||||
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 | ) | |||||||
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 |
16
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
Auction Rate Securities
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 | $ | — | $ | — | ||||
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 predominatelypredominantly “prime” loans that conform to published standards of government sponsored agencies. Prior to 2008, the Corporation’s former Resource Bank affiliatesubsidiary 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
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 | |
(2) | Reserve balance included as a component of other liabilities on the consolidated balance sheets as of | |
(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 | |
(4) | OREO is written down to its estimated fair value upon transfer from loans receivable. |
Management believes that the reserves recorded as of September 30, 2009March 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
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 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 theChanges 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
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 | |||||||||
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. | |
NOTE JI – 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 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 | |||
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.
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 did2010-06 is not expected to materially impact the Corporation.
19Corporation’s fair value measurement disclosures.
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, 2009sheets 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 tabletables 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 | ||
• | Available for sale investment securities – Included within this asset category are both equity and debt |
• | Equity securities – Equity securities |
• | U.S. Government securities/U.S. Government sponsored agency securities/State and municipal securities/Collateralized mortgage obligations/Mortgage-backed securities | ||
• | Corporate debt securities – This category consists of subordinated debt issued by financial institutions ($34.1 million at March 31, 2010 and |
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 | ||
• | Other financial assets – Included within this asset category |
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representing the fair value of mortgage banking derivatives in the form of interest rate locks | |||
• | Other financial liabilities – Included within this category are: Level 1 employee deferred compensation liabilities which | ||
21
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) | ||
(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. | |
(3) | Pooled trust preferred securities, single-issuer trust preferred securities, and | |
(4) | Included as a component of net interest income on the |
(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.
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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 tabletables above are as follows:
• | Loans held for sale – This category consists of floating rate residential mortgage construction loans | ||
• | Net loans–This category | ||
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 | ||
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.
• | 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 | ||
FASB ASC Section 825-10-50 Fair Values of Financial Instruments
The following table details the book values and estimated fair values of the Corporation’sCorporation's financial instruments as of September 30, 2009March 31, 2010 and December 31, 2008. In addition, a2009. A general description of the methods and assumptions used to estimate such fair values is also provided below.
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
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 | ||
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, 2009March 31, 2010 and December 31, 20082009 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
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
Certain amounts in the 20082009 consolidated financial statements and notes have been reclassified to conform to the 20092010 presentation.
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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 corporationfinancial 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. ThisManagement’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 changesgrowth 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 theseDo 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. Becauseother 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 couldto differ materially from those expressed or forecasted in the forward-looking statements. The Corporation undertakes no obligationsobligation, other than as required by law, to update or revise any forward-looking statements.
RESULTS OF OPERATIONS
Overview
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
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) |
(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. |
(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 thirdfirst quarter of 2009 decreased $9.62010 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 wereincrease was primarily due to the following significant items:
DecreasesIncreases in income before income taxes:
• |
|
• | Decrease in the provision for loan losses of |
27
• |
|
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:
• |
|
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. |
Net Interest Income
The following table provides a comparative average balance sheet and net interest income analysis for the thirdfirst quarter of 20092010 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
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 todecrease 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 rateswhich was partially offset by a $9.0$1.7 million increase in interest income realized from growth in average interest-earning assets of $718.4attributable to a $202.6 million, or 4.9%.
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 | % | ||||||||
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 averageboth 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 loansthis 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 increasedecrease in home equity loans was due to an increase in consumer demand.
30
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.
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 thirdfirst quarter of 20092010 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 byInterest expense decreased an additional $4.1 million, attributable to a $4.0$161.0 million, increase in interest expense resulting from growthor 1.3%, decline in average interest-bearing liabilities of $65.0 million, or 0.5%.
The following table summarizes the increaseschanges 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
The increasedecrease 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 certificatebrokered 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 hadin 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 costdecline in accounts with original maturity terms less than time deposits. However, this shiftone year. The growth in funding sourceslonger-term certificates of deposit was consistent withdue to the Corporation’s continuing focus on building customer relationships, which has served to strengthenwhile at the Corporation’s overall liquidity profile.
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 costthe 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.
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 millionnet 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 FHLBFederal Home Loan Bank (FHLB) advances, which were generally not replaced with new advances.
32
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 tablethe summary of non-performing assets above were $33.1$51.4 million of loans whose terms were modified under a troubled debt restructuringrestructurings and were current under their modified terms at September 30, 2009.March 31, 2010. These troubled debt restructurings were predominantly adequately collateralizedincluded $27.0 million of residential mortgagemortgages, $16.7 million of commercial mortgages, $4.8 million of construction loans and $2.6 million of commercial loans.
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 assetsloans 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. The16.2%, increase in non-performing assetsloans in comparison to September 30, 2008March 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
The $47.4$27.9 million increase in non-performing constructioncommercial loans was relateda 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 $77.2increases 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’sPennsylvania 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.
The $13.9 million decrease in non-performing loans in the Corporation’s New Jersey market. The $21.7 million increase in non-performing commercialconstruction loans was caused by an increase in non-performing loans indue 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 $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 locateddue 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 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 andin general economic conditions havehas 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
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. DecreasesMarch 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, 2009March 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.
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.
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.
36
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 | % | ||||||||
37
38
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 | ||||||||||||||||||||
39
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 | ) | ||||
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 | % | ||||||||
40
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 | % | ||||||||
41
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 | %) | |||||||
42
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 | % | ||||
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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 | % | ||||||||
The $1.3 billion,$264,000, or 255.6%22.2%, increase in the volume of loans soldcredit 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.
Investment securities gainslosses of $3.0$2.2 million for the first nine monthsquarter of 20092010 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, theThe Corporation recorded $6.5$4.2 million of other-than-temporary impairment
44
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 inand employee benefits of $2.6decreasing $1.3 million, or 9.1%11.5%. The decrease in salaries was primarily due to a $2.7 millionan $841,000 decrease in bonusincentive compensation expense, andin addition to a $304,000 decrease in stock-based compensation, offset by an increaseaverage full-time equivalent employees from 3,640 in salariesthe first quarter of 2009 to 3,530 in the first quarter of 2010, largely due to the effectconsolidation of normal merit increases. Merit increases were suspended as of MarchThe 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 increasedecrease 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 increaseresult of higher deductibles in defined benefit pension plan expense due to a lower return on plan assets2010 and $808,000 in$749,000 of severance expense related torecorded in the first quarter of 2009 for the consolidation of The Columbia Bank’s back office functionsfunctions.
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 plannet occupancy expense was primarily due to a reduction in benefits covered.
45
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 2008costs associated with the Corporation’s sharerepossession of indemnification liabilities with Visa, Inc. (Visa), whichforeclosed assets and a $492,000 increase in student loan lender expense. These increases were no longer necessarypartially 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 contributingefforts 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.
Income Taxes
Income tax expense for the first nine monthsquarter of 20092010 was $9.8$9.3 million, a $26.0$7.7 million, or 72.6%489.1%, decreaseincrease from $35.8$1.6 million in 2008.2009. The decreaseincrease was primarily due to a decreasethe 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 monthsquarter of 20092010 is lowerhigher than the same period in 20082009 due to non-taxable income and tax credits having a largersmaller impact on the effective tax rate due to the $72.7 million decrease inhigher level of income before income taxes.
46
Total assets of the Corporation increased $341.6decreased $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.
Investment securities decreased $79.2$163.5 million, or 23.9%5.0%. Because of daily fluctuations that result inIn 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.
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 ninethree months of 2009. Home equity2010. 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 $84.4a $29.6 million, or 2.3%3.2%, increase in commercial loans.
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 increaseoffset 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 governmentalpersonal 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 increasedecrease in time deposits was due to a $672.5 million, or 14.1%, increasedecrease 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.
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 $22.5increased $25.6 million, or 13.3%17.7%, due to a $21.0an $11.6 million decreaseincrease in dividendsequity 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 $3.3moderate-income housing partnership investments, an $8.1 million increase in accrued FDIC insurance assessmentstaxes, due to an increase in income before taxes, and a $3.6$3.5 million increase in mortgage banking derivative liabilities.
Capital Resources
Total shareholders’ equity increased $64.1$33.4 million, or 3.4%1.7%, during the first ninethree 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 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 USTU.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’sCorporation'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:
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
49repayments exceeding a net increase in deposits.
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 consistconsisted 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.
Another source of equity market price risk is the carrying valueCorporation’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.
In addition to its equity portfolio, the Corporation’s investment portfolio, its investment management and trust services income has beenmay 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 beenwould be negatively impacted. TheIn 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 investmentssecurities 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
Auction Rate Certificates (ARCs)
The Corporation’s debt securities include ARCs purchased from customers. At September 30, 2009, ARCs held by the Corporation hadinvestments 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.
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 CorporationARCs 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 securitiesARCs 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 securitiesARCs 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 securitiesARCs have principal payments which are guaranteed by the Federal government. All auction rate securities held by the CorporationARCs 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 | ||||
The fair values |
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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, amendsof March 31, 2010. The Corporation did not record any other-than-temporary impairment guidancecharges for debtsingle-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 debtan 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.
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 statementsexpected 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 operationsthe 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 DecemberCorporation assumed an additional 12% expected weighted average deferral rate as of March 31, 2008.
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
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The following table provides information about the Corporation’s interest rate sensitive financial instruments. The table presents expected cash flows and weighted average rates for each significant interest rate sensitive financial instrument, by expected maturity period. 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, aredo not necessarily consistent with the periods that would realizereflect 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.
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 whichthat 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.
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Percent of Total | ||||
Adjustable Rate | ||||
Loans | ||||
One year | 29.7 | |||
Two years | 19.7 | |||
Three years | ||||
Four years | ||||
Five years | 10.1 | |||
Greater than five years |
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.
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 | % |
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. |
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Item 4. | Controls and Procedures |
The Corporation carried out an evaluation, under the supervision and with the participation of the Corporation’sCorporation's management, including the Corporation’sCorporation's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of ourthe Corporation’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Corporation’sCorporation's Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this quarterly report, the Corporation’sCorporation'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’sCommission's rules and forms.
There have been no changes in ourthe 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, ourthe Corporation’s internal control over financial reporting.
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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.
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 4. | Reserved |
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.
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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 | ||||||
Date: | May 7, 2010 | |||||
/s/ R. Scott Smith, Jr. | ||||||
R. Scott Smith, Jr. | ||||||
Chairman and Chief Executive Officer | ||||||
Date: | May 7, 2010 | ||||
/s/ Charles J. Nugent | |||||
Charles J. Nugent | |||||
Senior Executive Vice President and Chief Financial Officer |
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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. |
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