e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20459
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2009,
or
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o |
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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)
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PENNSYLVANIA
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23-2195389 |
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.) |
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One Penn Square, P.O. Box 4887 Lancaster, Pennsylvania
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17604 |
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(Address of principal executive offices)
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(Zip Code) |
(717) 291-2411
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Date File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a
smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule
12b-2 of the Exchange Act. (Check one):
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act). Yes o No þ
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuers classes of common stock,
as of the latest practicable date:
Common Stock, $2.50 Par Value 175,598,000 shares outstanding as of April 30, 2009.
FULTON FINANCIAL CORPORATION
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2009
INDEX
2
Item 1. Financial Statements
FULTON FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except per-share data)
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March 31 |
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2009 |
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December 31 |
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(unaudited) |
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2008 |
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ASSETS |
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Cash and due from banks |
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$ |
265,431 |
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$ |
331,164 |
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Interest-bearing deposits with other banks |
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14,070 |
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16,791 |
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Federal funds sold |
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259 |
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4,919 |
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Loans held for sale |
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102,033 |
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95,840 |
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Investment securities: |
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Held to maturity (estimated fair value of $9,642 in 2009 and $9,765 in 2008) |
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9,519 |
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9,636 |
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Available for sale |
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3,114,168 |
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2,715,205 |
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Loans, net of unearned income |
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12,009,060 |
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12,042,620 |
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Less: Allowance for loan losses |
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(192,410 |
) |
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(173,946 |
) |
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Net Loans |
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11,816,650 |
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11,868,674 |
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Premises and equipment |
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205,495 |
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202,657 |
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Accrued interest receivable |
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59,369 |
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58,566 |
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Goodwill |
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534,511 |
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534,385 |
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Intangible assets |
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21,985 |
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23,448 |
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Other assets |
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350,032 |
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323,821 |
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Total Assets |
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$ |
16,493,522 |
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$ |
16,185,106 |
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LIABILITIES |
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Deposits: |
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Noninterest-bearing |
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$ |
1,776,169 |
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$ |
1,653,440 |
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Interest-bearing |
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9,637,813 |
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8,898,476 |
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Total Deposits |
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11,413,982 |
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10,551,916 |
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Short-term borrowings: |
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Federal funds purchased |
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397,158 |
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1,147,673 |
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Other short-term borrowings |
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798,316 |
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615,097 |
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Total Short-Term Borrowings |
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1,195,474 |
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1,762,770 |
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Accrued interest payable |
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66,691 |
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53,678 |
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Other liabilities |
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169,456 |
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169,298 |
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Federal Home Loan Bank advances and long-term debt |
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1,786,598 |
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1,787,797 |
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Total Liabilities |
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14,632,201 |
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14,325,459 |
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SHAREHOLDERS EQUITY |
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Preferred stock, $1,000 par value, 376,500 shares authorized and outstanding |
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369,270 |
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368,944 |
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Common stock, $2.50 par value, 600 million shares authorized, 192.5 million shares issued
in 2009 and 192.4 million shares issued in 2008 |
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481,212 |
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480,978 |
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Additional paid-in capital |
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1,258,979 |
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1,260,947 |
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Retained earnings |
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42,143 |
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31,075 |
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Accumulated other comprehensive loss |
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(31,518 |
) |
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(17,907 |
) |
Treasury stock, 17.0 million shares in 2009 and 17.3 million shares in 2008, at cost |
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(258,765 |
) |
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(264,390 |
) |
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Total Shareholders Equity |
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1,861,321 |
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1,859,647 |
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Total Liabilities and Shareholders Equity |
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$ |
16,493,522 |
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$ |
16,185,106 |
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See Notes to Consolidated Financial Statements
3
FULTON FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except per-share data)
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Three Months Ended March 31 |
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2009 |
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2008 |
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INTEREST INCOME |
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Loans, including fees |
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$ |
162,314 |
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$ |
191,166 |
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Investment securities: |
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Taxable |
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26,849 |
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29,561 |
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Tax-exempt |
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4,477 |
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4,535 |
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Dividends |
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617 |
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2,163 |
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Loans held for sale |
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1,261 |
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1,577 |
|
Other interest income |
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49 |
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218 |
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Total Interest Income |
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195,567 |
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|
229,220 |
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INTEREST EXPENSE |
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Deposits |
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49,895 |
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|
63,485 |
|
Short-term borrowings |
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|
1,437 |
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|
18,829 |
|
Long-term debt |
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20,119 |
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|
21,007 |
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Total Interest Expense |
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71,451 |
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|
103,321 |
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Net Interest Income |
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124,116 |
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|
125,899 |
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Provision for loan losses |
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50,000 |
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|
11,220 |
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Net Interest Income After Provision for Loan Losses |
|
|
74,116 |
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|
114,679 |
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OTHER INCOME |
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|
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Service charges on deposit accounts |
|
|
14,894 |
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|
13,967 |
|
Gains on sale of mortgage loans |
|
|
8,591 |
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|
2,311 |
|
Other service charges and fees |
|
|
8,354 |
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|
|
8,591 |
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Investment management and trust services |
|
|
7,903 |
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|
|
8,759 |
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Other |
|
|
4,253 |
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|
2,806 |
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|
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Total other-than-temporary impairment losses |
|
|
(5,856 |
) |
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|
(3,575 |
) |
Less: Portion of loss recognized in other comprehensive income (before taxes) |
|
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2,816 |
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|
|
|
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Net other-than-temporary impairment losses |
|
|
(3,040 |
) |
|
|
(3,575 |
) |
Net gains on sale of investment securities |
|
|
5,959 |
|
|
|
4,821 |
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|
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Net investment securities gains |
|
|
2,919 |
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|
|
1,246 |
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|
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Total Other Income |
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|
46,914 |
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|
37,680 |
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OTHER EXPENSES |
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Salaries and employee benefits |
|
|
55,304 |
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|
55,195 |
|
Net occupancy expense |
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|
11,023 |
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|
10,524 |
|
Operating risk loss |
|
|
6,201 |
|
|
|
1,243 |
|
FDIC insurance premiums |
|
|
4,288 |
|
|
|
862 |
|
Equipment expense |
|
|
3,079 |
|
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|
3,448 |
|
Data processing |
|
|
3,072 |
|
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|
3,246 |
|
Marketing |
|
|
2,571 |
|
|
|
2,905 |
|
Intangible amortization |
|
|
1,463 |
|
|
|
1,857 |
|
Other |
|
|
19,371 |
|
|
|
17,380 |
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|
|
|
|
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Total Other Expenses |
|
|
106,372 |
|
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|
96,660 |
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|
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|
|
|
|
|
|
Income Before Income Taxes |
|
|
14,658 |
|
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|
55,699 |
|
Income taxes |
|
|
1,573 |
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|
14,203 |
|
|
|
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|
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|
|
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Net Income |
|
|
13,085 |
|
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|
41,496 |
|
Preferred stock dividends and discount accretion |
|
|
(5,031 |
) |
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|
|
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|
Net Income Available to Common Shareholders |
|
$ |
8,054 |
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|
$ |
41,496 |
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PER COMMON SHARE: |
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Net income (basic) |
|
$ |
0.05 |
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|
$ |
0.24 |
|
Net income (diluted) |
|
|
0.05 |
|
|
|
0.24 |
|
Cash dividends |
|
|
0.03 |
|
|
|
0.15 |
|
See Notes to Consolidated Financial Statements
4
FULTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS
OF SHAREHOLDERS EQUITY AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2009 AND 2008
(in thousands)
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Accumulated |
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Common Stock |
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Additional |
|
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Other |
|
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Preferred |
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|
Shares |
|
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Paid-in |
|
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Retained |
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Comprehensive |
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Treasury |
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Stock |
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Outstanding |
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Amount |
|
|
Capital |
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Earnings |
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|
Income (Loss) |
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|
Stock |
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|
Total |
|
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) |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,298 |
|
|
|
(6,298 |
) |
|
|
|
|
|
|
- |
|
Comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock cash dividends |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,719 |
) |
|
|
|
|
|
|
|
|
|
|
(2,719 |
) |
Common stock cash dividends $0.03 per
share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,270 |
) |
|
|
|
|
|
|
|
|
|
|
(5,270 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2009 |
|
$ |
369,270 |
|
|
|
175,507 |
|
|
$ |
481,212 |
|
|
$ |
1,258,979 |
|
|
$ |
42,143 |
|
|
$ |
(31,518 |
) |
|
$ |
(258,765 |
) |
|
$ |
1,861,321 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007 |
|
$ |
|
|
|
|
173,503 |
|
|
$ |
479,559 |
|
|
$ |
1,254,369 |
|
|
$ |
141,993 |
|
|
$ |
(21,773 |
) |
|
$ |
(279,228 |
) |
|
$ |
1,574,920 |
|
Cumulative effect of EITF 06-4 adoption |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(677 |
) |
|
|
|
|
|
|
|
|
|
|
(677 |
) |
Impact of
pension plan
measurement date
change
(net of $23,000 tax effect) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43 |
|
|
|
|
|
|
|
|
|
|
|
43 |
|
Comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41,496 |
|
|
|
|
|
|
|
|
|
|
|
41,496 |
|
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,010 |
|
|
|
|
|
|
|
20,010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61,506 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock issued, including related tax benefits |
|
|
|
|
|
|
219 |
|
|
|
547 |
|
|
|
941 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,488 |
|
Stock-based compensation awards |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
587 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
587 |
|
Common stock cash dividends $0.15 per
share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(26,147 |
) |
|
|
|
|
|
|
|
|
|
|
(26,147 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2008 |
|
$ |
|
|
|
|
173,722 |
|
|
$ |
480,106 |
|
|
$ |
1,255,897 |
|
|
$ |
156,708 |
|
|
$ |
(1,763 |
) |
|
$ |
(279,228 |
) |
|
$ |
1,611,720 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
5
FULTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31 |
|
|
|
2009 |
|
|
2008 |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
Net Income |
|
$ |
13,085 |
|
|
$ |
41,496 |
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net income to net cash provided
by operating activities: |
|
|
|
|
|
|
|
|
Provision for loan losses |
|
|
50,000 |
|
|
|
11,220 |
|
Depreciation and amortization of premises and equipment |
|
|
4,912 |
|
|
|
4,904 |
|
Net amortization of investment security premiums |
|
|
116 |
|
|
|
370 |
|
Investment securities gains |
|
|
(2,919 |
) |
|
|
(1,246 |
) |
Net (increase) decrease in loans held for sale |
|
|
(6,193 |
) |
|
|
8,840 |
|
Amortization of intangible assets |
|
|
1,463 |
|
|
|
1,857 |
|
Stock-based compensation |
|
|
380 |
|
|
|
587 |
|
Excess tax benefits from stock-based compensation |
|
|
|
|
|
|
(2 |
) |
(Increase) decrease in accrued interest receivable |
|
|
(803 |
) |
|
|
7,570 |
|
Increase in other assets |
|
|
(12,926 |
) |
|
|
(8,550 |
) |
Increase (decrease) in accrued interest payable |
|
|
13,013 |
|
|
|
(2,601 |
) |
Increase in other liabilities |
|
|
19,041 |
|
|
|
17,098 |
|
|
|
|
|
|
|
|
Total adjustments |
|
|
66,084 |
|
|
|
40,047 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
79,169 |
|
|
|
81,543 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Proceeds from sales of securities available for sale |
|
|
162,363 |
|
|
|
194,571 |
|
Proceeds from maturities of securities held to maturity |
|
|
983 |
|
|
|
3,961 |
|
Proceeds from maturities of securities available for sale |
|
|
152,432 |
|
|
|
229,210 |
|
Purchase of securities held to maturity |
|
|
(922 |
) |
|
|
(3,884 |
) |
Purchase of securities available for sale |
|
|
(731,005 |
) |
|
|
(303,250 |
) |
Decrease in short-term investments |
|
|
7,381 |
|
|
|
7,913 |
|
Net decrease (increase) in loans |
|
|
3,510 |
|
|
|
(188,589 |
) |
Net purchases of premises and equipment |
|
|
(7,750 |
) |
|
|
(9,032 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(413,008 |
) |
|
|
(69,100 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Net increase in demand and savings deposits |
|
|
247,253 |
|
|
|
38,894 |
|
Net increase (decrease) in time deposits |
|
|
614,813 |
|
|
|
(95,411 |
) |
Additions to long-term debt |
|
|
|
|
|
|
343,990 |
|
Repayments of long-term debt |
|
|
(1,199 |
) |
|
|
(95,154 |
) |
Decrease in short-term borrowings |
|
|
(567,296 |
) |
|
|
(154,817 |
) |
Dividends paid |
|
|
(28,976 |
) |
|
|
(26,115 |
) |
Net proceeds from issuance of common stock |
|
|
3,511 |
|
|
|
1,486 |
|
Excess tax benefits from stock-based compensation expense |
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
268,106 |
|
|
|
12,875 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (Decrease) Increase in Cash and Due From Banks |
|
|
(65,733 |
) |
|
|
25,318 |
|
Cash and Due From Banks at Beginning of Year |
|
|
331,164 |
|
|
|
381,283 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Due From Banks at End of Year |
|
$ |
265,431 |
|
|
$ |
406,601 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures of Cash Flow Information |
|
|
|
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
|
|
|
|
Interest |
|
$ |
58,438 |
|
|
$ |
105,922 |
|
Income taxes |
|
|
54 |
|
|
|
5,000 |
|
See Notes to Consolidated Financial Statements
6
FULTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A Basis of Presentation
The accompanying unaudited consolidated financial statements of Fulton Financial Corporation (the
Corporation) have been prepared in accordance with U.S. generally accepted accounting principles
(U.S. GAAP) for interim financial information and with the instructions to Form 10-Q and Rule 10-01
of Regulation S-X. Accordingly, they do not include all of the information and notes required by
U.S. GAAP for complete financial statements. The preparation of financial statements in accordance
with U.S. GAAP requires management to make estimates and assumptions that affect the amounts of
assets and liabilities as of the date of the financial statements as well as revenues and expenses
during the period. Actual results could differ from those estimates. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three-month period ended March 31, 2009
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 (Loss)
The Corporations 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, calculated using the treasury stock method.
The Corporations dilutive securities consist of outstanding stock options, restricted stock and
common stock warrants.
A reconciliation of net income available to common shareholders and weighted average common shares
outstanding used to calculate basic net income per common share and diluted net income per common
share follows.
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
March 31 |
|
|
|
2009 |
|
|
2008 |
|
|
|
(in thousands) |
|
Net income |
|
$ |
13,085 |
|
|
$ |
41,496 |
|
Preferred stock dividends and discount accretion |
|
|
5,031 |
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders |
|
$ |
8,054 |
|
|
$ |
41,496 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding (basic) |
|
|
175,315 |
|
|
|
173,624 |
|
Effect of dilutive securities |
|
|
233 |
|
|
|
585 |
|
|
|
|
|
|
|
|
Weighted average common shares outstanding (diluted) |
|
|
175,548 |
|
|
|
174,209 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and common stock warrants excluded
from the earnings per share computation as
their
effect would have been anti-dilutive |
|
|
11,818 |
|
|
|
5,206 |
|
|
|
|
|
|
|
|
7
The following table presents the components of other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
March 31 |
|
|
|
2009 |
|
|
2008 |
|
|
|
(in thousands) |
|
Unrealized (loss) gain on securities (net of $2.0 million and $9.6
million
tax effect in 2009 and 2008, respectively) |
|
$ |
(3,789 |
) |
|
$ |
17,773 |
|
Non-credit related unrealized loss on other-than-temporarily impaired
debt securities (net of $985,000 tax effect) (1) |
|
|
(1,831 |
) |
|
|
|
|
Unrealized gain on derivative financial instruments (net of
$18,000 tax effect in 2009 and 2008) (2) |
|
|
34 |
|
|
|
34 |
|
Amortization of unrecognized pension costs (net of
$92,000 tax effect) |
|
|
170 |
|
|
|
|
|
Reclassification adjustment for securities (gains) losses included in net
income (net of $1.0 million tax expense in 2009 and $1.2 million tax
benefit in 2008 ) |
|
|
(1,897 |
) |
|
|
2,203 |
|
|
|
|
|
|
|
|
Other comprehensive income (loss) |
|
$ |
(7,313 |
) |
|
$ |
20,010 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
See Note C, Investment Securities for additional details related to the
other-than-temporary impairment of debt securities. |
|
(2) |
|
Amounts represent the amortization of the effective portions of losses on forward-starting
interest rate swaps, designated as cash flow hedges and entered into in prior years in
connection with the issuance of fixed-rate debt. The total amount recorded as a reduction to
accumulated other comprehensive income upon settlement of these derivatives is being amortized
to interest expense over the life of the related securities using the effective interest
method. The amount of net losses in accumulated other comprehensive income that will be
reclassified into earnings during the next twelve months is expected to be approximately
$135,000. |
NOTE C INVESTMENT SECURITIES
The following tables present the amortized cost and estimated fair values of investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Estimated |
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
|
|
(in thousands) |
|
Held to Maturity at March 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government sponsored
agency securities |
|
$ |
6,805 |
|
|
$ |
41 |
|
|
$ |
|
|
|
$ |
6,846 |
|
State and municipal securities |
|
|
825 |
|
|
|
3 |
|
|
|
|
|
|
|
828 |
|
Mortgage-backed securities |
|
|
1,889 |
|
|
|
79 |
|
|
|
|
|
|
|
1,968 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
9,519 |
|
|
$ |
123 |
|
|
$ |
|
|
|
$ |
9,642 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for Sale at March 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
$ |
135,214 |
|
|
$ |
490 |
|
|
$ |
(8,534 |
) |
|
$ |
127,170 |
|
U.S. Government securities |
|
|
14,506 |
|
|
|
12 |
|
|
|
|
|
|
|
14,518 |
|
U.S. Government sponsored
agency securities |
|
|
78,767 |
|
|
|
2,018 |
|
|
|
(144 |
) |
|
|
80,641 |
|
State and municipal securities |
|
|
487,113 |
|
|
|
7,778 |
|
|
|
(674 |
) |
|
|
494,217 |
|
Corporate debt securities |
|
|
162,699 |
|
|
|
516 |
|
|
|
(64,828 |
) |
|
|
98,387 |
|
Collateralized mortgage obligations |
|
|
687,456 |
|
|
|
15,963 |
|
|
|
(204 |
) |
|
|
703,215 |
|
Mortgage-backed securities |
|
|
1,354,952 |
|
|
|
37,538 |
|
|
|
(48 |
) |
|
|
1,392,442 |
|
Auction rate securities (1) |
|
|
218,625 |
|
|
|
55 |
|
|
|
(15,102 |
) |
|
|
203,578 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,139,332 |
|
|
$ |
64,370 |
|
|
$ |
(89,534 |
) |
|
$ |
3,114,168 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
See Note G, Commitments and Contingencies for additional details related to auction
rate securities. |
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amortized cost and estimated fair value of debt securities as of March 31, 2009, by contractual
maturity, are shown in the following table. Actual maturities may differ from contractual
maturities because borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to Maturity |
|
|
Available for Sale |
|
|
|
Amortized |
|
|
Estimated |
|
|
Amortized |
|
|
Estimated |
|
|
|
Cost |
|
|
Fair Value |
|
|
Cost |
|
|
Fair Value |
|
|
|
(in thousands) |
|
Due in one year or less |
|
$ |
322 |
|
|
$ |
326 |
|
|
$ |
118,611 |
|
|
$ |
119,202 |
|
Due from one year to five years |
|
|
7,308 |
|
|
|
7,348 |
|
|
|
236,763 |
|
|
|
242,507 |
|
Due from five years to ten years |
|
|
|
|
|
|
|
|
|
|
102,514 |
|
|
|
98,224 |
|
Due after ten years |
|
|
|
|
|
|
|
|
|
|
503,822 |
|
|
|
431,408 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,630 |
|
|
|
7,674 |
|
|
|
961,710 |
|
|
|
891,341 |
|
Collateralized mortgage obligations |
|
|
|
|
|
|
|
|
|
|
687,456 |
|
|
|
703,215 |
|
Mortgage-backed securities |
|
|
1,889 |
|
|
|
1,968 |
|
|
|
1,354,952 |
|
|
|
1,392,442 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
9,519 |
|
|
$ |
9,642 |
|
|
$ |
3,004,118 |
|
|
$ |
2,986,998 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
The following table presents information related to the Corporations 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
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
March 31, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
$ |
4,756 |
|
|
$ |
(8 |
) |
|
$ |
(3,575 |
) |
|
$ |
1,173 |
|
Debt securities |
|
|
196 |
|
|
|
(123 |
) |
|
|
|
|
|
|
73 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
4,952 |
|
|
$ |
(131 |
) |
|
$ |
(3,575 |
) |
|
$ |
1,246 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents a summary of other-than-temporary impairment charges recorded by the
Corporation, by investment security type:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
March 31 |
|
|
|
2009 |
|
|
2008 |
|
|
|
(in thousands) |
|
Financial institution stocks |
|
$ |
956 |
|
|
$ |
3,575 |
|
Mutual funds |
|
|
106 |
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities charges |
|
|
1,062 |
|
|
|
3,575 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities Pooled trust preferred securities |
|
|
1,978 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other-than-temporary impairment charges |
|
$ |
3,040 |
|
|
$ |
3,575 |
|
|
|
|
|
|
|
|
During the first quarter of 2009, the values of financial institutions stocks, including those held
by the Corporation, declined significantly. The $956,000 other-than-temporary impairment charge
during the first quarter of 2009 was due to the increasing severity and duration of the decline in
fair values of such holdings. These factors, in conjunction with managements assessment of the
near-term prospects of each specific issuer, resulted in the charges recorded during the first
quarter of 2009. As of March 31, 2009, after other-than-temporary impairment charges, the financial
institution stock portfolio had a cost basis of $40.4 million and a fair value of $32.4 million.
In April 2009, the Financial Accounting Standards Board (FASB) issued Staff Position No. 115-2 and
124-2, Recognition and Presentation of Other-than-Temporary Impairments (FSP FAS 115-2). FSP FAS
115-2 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 requirement to sell. Credit loss is measured as the difference between
the present value of an impaired debt securitys 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 requirement to sell an impaired security
before
10
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 is 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.
The $2.0 million of other-than-temporary impairment losses recognized in earnings were determined
through the use of an expected cash flow model, consistent with the guidance in Emerging Issues
Task Force 99-20-1, Amendments to the Impairment Guidance in EITF Issue No. 99-20. The most
significant input to the expected cash flows model was the assumed default rate for each impaired
pooled trust preferred security. The Corporation evaluates the financial metrics, such as capital
ratios and non-performing asset ratios, of each individual financial institution issuer that
comprises the impaired pooled trust preferred securities to estimate the expected default rates for
each security. The weighted average default rate for pooled trust preferred securities which were
deemed to be other-than-temporarily impaired due to expected credit losses was approximately 20%.
During 2008, the Corporation recorded other-than-temporary impairment charges for pooled trust
preferred securities of $15.8 million. Upon adoption of FSP FAS 115-2, the Corporation determined
that $9.7 million of those other-than-temporary impairment charges were non-credit related. As
such, a $6.3 million (net of $3.4 million of taxes) increase to retained earnings and a
corresponding decrease to accumulated other comprehensive income was recorded as the cumulative
effect impact of adopting FSP FAS 115-2 as of January 1, 2009.
The following table presents a summary of the cumulative credit related other-than-temporary
impairment charges recognized as components of earnings for securities still held by the
Corporation at March 31, 2009 (in thousands):
|
|
|
|
|
Beginning balance of cumulative credit losses on pooled trust preferred securities,
January 1, 2009 (1) |
|
$ |
(6,142 |
) |
Additions for credit losses recorded during the first quarter of 2009 which
were not previously recognized as components of earnings |
|
|
(1,978 |
) |
|
|
|
|
Ending balance of cumulative credit losses on pooled trust preferred securities,
March 31, 2009 |
|
$ |
(8,120 |
) |
|
|
|
|
|
|
|
(1) |
|
Amount represents the other-than-temporary impairment charges recorded during the year ended December
31, 2008 for pooled trust preferred securities, net of the Corporations cumulative effect
adjustment upon adoption of FSP FAS 115-2, effective January 1, 2009. |
11
The following table presents the gross unrealized losses and estimated fair values of investments,
aggregated by investment category and length of time that individual securities have been in a
continuous unrealized loss position, at March 31, 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 |
|
$ |
20,222 |
|
|
$ |
(126 |
) |
|
$ |
502 |
|
|
$ |
(18 |
) |
|
$ |
20,724 |
|
|
$ |
(144 |
) |
State and municipal securities |
|
|
26,924 |
|
|
|
(404 |
) |
|
|
13,977 |
|
|
|
(270 |
) |
|
|
40,901 |
|
|
|
(674 |
) |
Corporate debt securities |
|
|
25,696 |
|
|
|
(19,183 |
) |
|
|
62,029 |
|
|
|
(45,645 |
) |
|
|
87,725 |
|
|
|
(64,828 |
) |
Collateralized mortgage obligations |
|
|
|
|
|
|
|
|
|
|
4,343 |
|
|
|
(204 |
) |
|
|
4,343 |
|
|
|
(204 |
) |
Mortgage-backed securities |
|
|
25,408 |
|
|
|
(47 |
) |
|
|
237 |
|
|
|
(1 |
) |
|
|
25,645 |
|
|
|
(48 |
) |
Auction rate securities |
|
|
197,481 |
|
|
|
(15,102 |
) |
|
|
|
|
|
|
|
|
|
|
197,481 |
|
|
|
(15,102 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities |
|
|
295,731 |
|
|
|
(34,862 |
) |
|
|
81,088 |
|
|
|
(46,138 |
) |
|
|
376,819 |
|
|
|
(81,000 |
) |
Equity securities |
|
|
25,761 |
|
|
|
(8,515 |
) |
|
|
8 |
|
|
|
(19 |
) |
|
|
25,769 |
|
|
|
(8,534 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
321,492 |
|
|
$ |
(43,377 |
) |
|
$ |
81,096 |
|
|
$ |
(46,157 |
) |
|
$ |
402,588 |
|
|
$ |
(89,534 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Corporations ability and
intent to hold those investments for a reasonable period of time sufficient for a recovery of fair
value, the Corporation does not consider those investments with unrealized holding losses as of
March 31, 2009 to be other-than-temporarily impaired.
In relation to the Corporations investments in auction rate securities, the current unrealized
holding losses on these securities is attributable to liquidity issues as a result of the failure
of periodic auctions. Because the Corporation does not intend to sell, nor does it believe that 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 March 31, 2009. For additional information related to the
Corporations investment in auction rate securities, see Note G, Commitments and Contingencies.
The following table presents the amortized cost and estimated fair values of corporate debt
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009 |
|
|
December 31, 2008 |
|
|
|
Amortized |
|
|
Estimated |
|
|
Amortized |
|
|
Estimated |
|
|
|
cost |
|
|
fair value |
|
|
cost |
|
|
fair value |
|
|
|
(in thousands) |
|
Single-issuer trust preferred securities (1) |
|
$ |
97,902 |
|
|
$ |
54,994 |
|
|
$ |
97,887 |
|
|
$ |
69,819 |
|
Subordinated debt |
|
|
34,812 |
|
|
|
29,756 |
|
|
|
34,788 |
|
|
|
31,745 |
|
Pooled trust preferred securities |
|
|
27,040 |
|
|
|
10,692 |
|
|
|
19,351 |
|
|
|
15,381 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities issued by
financial institutions |
|
|
159,754 |
|
|
|
95,442 |
|
|
|
152,026 |
|
|
|
116,945 |
|
Other corporate debt securities |
|
|
2,945 |
|
|
|
2,945 |
|
|
|
2,950 |
|
|
|
2,949 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale corporate debt
securities |
|
$ |
162,699 |
|
|
$ |
98,387 |
|
|
$ |
154,976 |
|
|
$ |
119,894 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Single-issuer trust preferred securities with estimated fair values totaling $6.3 million
as of March 31, 2009 are classified as Level 3 assets under Statement 157. See Note I,
Fair Value Measurements for additional details. |
As required by FSP FAS 115-2, the Corporation has evaluated all corporate debt securities issued by
financial institutions to determine if any unrealized holding losses represent credit losses, which
would require an
12
other-than-temporary impairment charge through earnings. In addition, the Corporation does not
intend to sell, nor does it believe that it will more likely than not be required to sell, any
impaired corporate debt securities issued by financial institutions prior to a recovery to
amortized cost. Therefore, the Corporation does not consider these investments to be
other-than-temporarily impaired at March 31, 2009.
NOTE D Stock-Based Compensation
As required by Statement of Financial Accounting Standards No. 123R, Share-Based Payment, the
fair value of equity awards to employees is recognized as compensation expense over the period
during which employees are required to provide service in exchange for such awards. The
Corporations equity awards consist of stock options and restricted stock granted under its Stock
Option and Compensation Plans (Option Plans) and shares purchased by employees under its Employee
Stock Purchase Plan.
The following table presents compensation expense and the related tax benefits for equity awards
recognized in the consolidated statements of income:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
March 31 |
|
|
|
2009 |
|
|
2008 |
|
|
|
(in thousands) |
|
Stock-based compensation expense |
|
$ |
380 |
|
|
$ |
587 |
|
Tax benefit |
|
|
(38 |
) |
|
|
(74 |
) |
|
|
|
|
|
|
|
Stock-based compensation expense,
net of tax |
|
$ |
342 |
|
|
$ |
513 |
|
|
|
|
|
|
|
|
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 Corporations stock on the date of grant,
with terms of up to ten years. Stock options and restricted stock are typically granted annually on
July 1st and become fully vested 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. As of March 31, 2009, there were 13.6 million shares reserved for future grants through
2013.
NOTE E 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. Pension Plan
assets are invested in: money markets; fixed income securities, including corporate bonds, U.S.
Treasury securities and common trust funds; and equity securities, including common stocks and
common stock mutual funds. Effective January 1, 2008, 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. Benefits are
based on a graduated scale for years of service after attaining the age of 40.
As required by Statement of Financial Accounting Standards No. 158, Employers Accounting for
Defined Benefit Pension and Postretirement Plans, 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.
13
The net periodic benefit cost for the Corporations Pension Plan and Postretirement Plan, as
determined by consulting actuaries, consisted of the following components for the three months
ended March 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plan |
|
|
Postretirement Plan |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
(in thousands) |
|
Service cost (1) |
|
$ |
37 |
|
|
$ |
37 |
|
|
$ |
106 |
|
|
$ |
127 |
|
Interest cost |
|
|
819 |
|
|
|
816 |
|
|
|
166 |
|
|
|
167 |
|
Expected return on plan assets |
|
|
(722 |
) |
|
|
(918 |
) |
|
|
(1 |
) |
|
|
(1 |
) |
Net amortization and deferral |
|
|
262 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost (income) |
|
$ |
396 |
|
|
$ |
(65 |
) |
|
$ |
271 |
|
|
$ |
293 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Service costs recorded for the Pension Plan for the three
months ended March 31, 2009 and 2008
were related to administrative costs associated with the plan and not due to the accrual of
additional participant benefits. |
NOTE F Derivative Financial Instruments
Effective January 1, 2009, the Corporation adopted Statement of Financial Accounting Standards No.
161, Disclosures about Derivative Instruments and Hedging Activities (Statement 161). As required
by Statement 161, the Corporation has included disclosures for its derivative instruments and for
its hedging activities.
In connection with its mortgage banking activities, the Corporation enters into commitments to
originate fixed-rate residential mortgage loans for customers, also referred to as interest rate
locks. In addition, the Corporation enters into forward commitments for the future sale or purchase
of mortgage-backed securities to or from third-party investors to hedge the effect of changes in
interest rates on the value of the interest rate locks and mortgage loans held for sale. Forward
sales commitments may also be in the form of commitments to sell individual mortgage loans at a
fixed price at a future date. Both the interest rate locks and the forward commitments are
accounted for as derivatives and carried at fair value, determined as the amount that would be
necessary to settle each derivative financial instrument at the end of the period. Gross derivative
assets and liabilities are recorded within other assets and other liabilities on the consolidated
balance sheets, with changes in fair value during the period recorded within gains on sale of
mortgage loans on the consolidated statements of income.
The following table presents a summary of the Corporations derivative financial instruments, none
of which have been designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009 |
|
|
December 31, 2008 |
|
|
|
Notional |
|
|
|
|
|
|
Notional |
|
|
|
|
|
|
Amount |
|
|
Fair Value |
|
|
Amount |
|
|
Fair Value |
|
|
|
(in thousands) |
|
Interest rate locks
with customers (1) |
|
$ |
465,227 |
|
|
$ |
4,388 |
|
|
$ |
141,145 |
|
|
$ |
425 |
|
Forward commitments (1) |
|
|
1,076,859 |
|
|
|
(3,573 |
) |
|
|
490,448 |
|
|
|
(1,445 |
) |
Interest rate swaps (2) |
|
|
|
|
|
|
|
|
|
|
10,000 |
|
|
|
18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
815 |
|
|
|
|
|
|
$ |
(1,002 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As of March 31, 2009, the Corporation recorded gross mortgage banking derivative assets
of $9.5 million and gross mortgage banking derivative liabilities of $8.7 million. As of
December 31, 2008, the Corporation recorded gross mortgage banking derivative assets of
$1.5 million and gross mortgage banking derivative liabilities of $2.5 million. |
|
(2) |
|
Interest rate swaps recorded as a component of other liabilities on the consolidated
balance sheets. All swaps existing at December 31, 2008 were called in the first quarter
of 2009. |
14
The following table presents a summary of the fair value gains and losses recorded by the
Corporation during the three months ended March 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
Fair Value Adj. - |
|
|
Statement of Income |
|
|
|
Gains/(Losses) |
|
|
Classification |
|
|
|
(in thousands) |
|
|
|
|
|
Interest rate locks with customers |
|
$ |
3,963 |
|
|
Gains on sale of mortgage loans |
Forward commitments |
|
|
(2,128 |
) |
|
Gains on sale of mortgage loans |
Interest rate swaps |
|
|
(18 |
) |
|
Other expense |
|
|
|
|
|
|
|
|
|
|
$ |
1,817 |
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE G 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 Corporations
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:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
December 31, |
|
|
2009 |
|
2008 |
|
|
(in thousands) |
Commitments to extend credit |
|
$ |
3,356,076 |
|
|
$ |
3,360,499 |
|
Standby letters of credit |
|
|
751,752 |
|
|
|
789,804 |
|
Commercial letters of credit |
|
|
36,730 |
|
|
|
37,620 |
|
As of March 31, 2009 and December 31, 2008, the reserve for unfunded lending commitments, included
in other liabilities on the consolidated balance sheets, was $7.7 million and $6.2 million,
respectively.
Auction Rate Securities
The Corporations investment management and trust subsidiary, Fulton Financial Advisors, N.A.
(FFA), holds auction rate securities, also known as auction rate certificates (ARCs) for some of
its customers accounts. ARCs are one of several types of securities that were previously utilized
by FFA as short-term investment vehicles for its customers. ARCs are long-term securities
structured to allow their sale in periodic auctions, giving the securities some of the
characteristics of short-term instruments in normal market conditions. However, in mid-February
2008, market auctions for ARCs began to fail due to an insufficient number of buyers; these market
failures were the first widespread and continuing failures in the over 20-year history of the
auction rate securities markets. As a result, although the credit quality of ARCs has not been
impacted, ARCs are currently not liquid investments for their holders, including FFAs customers.
It is unclear when liquidity will return to this market.
Beginning in the second quarter of 2008, the Corporation agreed to purchase illiquid student-loan
backed ARCs from customers of FFA, upon notification that they had liquidity needs or otherwise
desired to liquidate their holdings. The guarantee was recorded as a liability in accordance with
FIN 45, and carried at estimated fair value with a corresponding pre-tax charge to earnings both
upon the initial establishment of the guarantee and upon changes in its estimated fair value. The
estimated fair value of the guarantee was determined based on the difference between the fair value
of the underlying ARCs, assuming that all
15
ARCs held in customer accounts would be purchased, and their estimated purchase price. The
Corporation determined the fair value of the ARCs held by customers based on independent
third-party valuations. See Note I, Fair Value Measurements for additional details related to the
Corporations determination of fair value.
FFA had generally purchased ARCs from customers at par value with an interest adjustment which was
designed to position customers as if they had owned 90-day U.S. Treasury bills instead of ARCs. As
FFAs approach to purchasing customers ARCs evolved, however, interest adjustments were not made
on certain accounts due to various circumstances and restrictions. To provide similar treatment to
all of FFAs customers holding ARCs and in consideration of certain other market developments, in
the first quarter of 2009 the Corporation decided that all future ARC purchases from customer
accounts would be at par value, without an interest adjustment. Furthermore, the Corporation plans
to reimburse customers for the amount of the interest differential on ARCs previously sold to the
Corporation.
As a result, during the first quarter of 2009, the Corporation recorded a pre-tax charge of $6.2
million as a component of operating risk loss on the consolidated statements of income, of which
$5.7 million related to the interest adjustment.
The following table presents the change in the ARC investment balances held by customers and the
related financial guarantee liability, recorded within other liabilities on the Corporations
consolidated balance sheet for the three months ended March 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
ARCs Held by |
|
|
Financial |
|
|
|
Customers, at |
|
|
Guarantee |
|
|
|
Par Value |
|
|
Liability |
|
|
|
(in thousands) |
|
Balance at December 31, 2008 |
|
$ |
105,165 |
|
|
$ |
(8,653 |
) |
Provision for financial guarantee |
|
|
|
|
|
|
(6,158 |
) |
Purchases of ARCs |
|
|
(10,740 |
) |
|
|
877 |
|
Redemptions of ARCs |
|
|
(600 |
) |
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2009 |
|
$ |
93,825 |
|
|
$ |
(13,934 |
) |
|
|
|
|
|
|
|
Upon purchase from customers, the Corporation records ARCs as available for sale investment
securities at their estimated fair value. Since the financial guarantee was established in the
second quarter of 2008, the Corporation has purchased ARCs with a par value of $233.9 million. In
April 2009, FFA notified its remaining customers holding ARCs that it would purchase the ARCs at
par value if notice of their acceptance of this offer is received by May 15, 2009. After that date,
FFA will no longer have any obligation to purchase ARCs still held by customers.
Management believes that the financial guarantee liability recorded as of March 31, 2009 is
adequate.
Residential Lending Contingencies
Residential mortgages are originated and sold by the Corporation through Fulton Mortgage Company,
which is a division of each of the Corporations subsidiary banks, and The Columbia Bank, which
maintains its own mortgage lending operations. The loans originated and sold through these channels
are predominately prime loans that conform to published standards of government sponsored
agencies. Prior to 2008, the Corporations Resource Bank affiliate 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.
Beginning in 2007, Resource Mortgage experienced an increase in requests from secondary market
purchasers to repurchase non-prime loans sold to those investors. The Corporation reduced its
residential
16
mortgage lending risk by exiting from the national wholesale mortgage business during 2007 and, in
the first quarter of 2008, the Corporation merged Resource Bank into its Fulton Bank affiliate.
The following table presents a summary of the approximate principal balances and related
reserves/write-downs recognized on the Corporations consolidated balance sheet, by general
category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009 |
|
|
December 31, 2008 |
|
|
|
|
|
|
|
Reserves/ |
|
|
|
|
|
|
Reserves/ |
|
|
|
Principal |
|
|
Write-downs |
|
|
Principal |
|
|
Write-downs |
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
Outstanding repurchase requests (1) (2) |
|
$ |
5,970 |
|
|
$ |
(3,950 |
) |
|
$ |
6,290 |
|
|
$ |
(2,900 |
) |
No repurchase request received sold
loans with identified potential
misrepresentations of borrower
information (1) (2) |
|
|
4,140 |
|
|
|
(1,660 |
) |
|
|
7,990 |
|
|
|
(3,280 |
) |
Repurchased loans (3) |
|
|
9,000 |
|
|
|
(1,720 |
) |
|
|
10,000 |
|
|
|
(1,690 |
) |
Foreclosed real estate (OREO) (4) |
|
|
17,890 |
|
|
|
|
|
|
|
15,920 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reserves/write-downs |
|
|
|
|
|
$ |
(7,330 |
) |
|
|
|
|
|
$ |
(7,870 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Principal balances had not been repurchased and, therefore, are not included on the
consolidated balance sheets as of March 31, 2009 and December 31, 2008. |
|
(2) |
|
Reserve balance included as a component of other liabilities on the consolidated balance
sheets as of March 31, 2009 and December 31, 2008. |
|
(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 March 31, 2009 and December 31, 2008. |
|
(4) |
|
OREO is written down to its estimated fair value upon transfer from loans
receivable. |
The following presents the change in the reserve/write-down balances for the three months ended
March 31, 2009 (in thousands):
|
|
|
|
|
Total reserves/write-downs, January 1, 2009 |
|
$ |
7,870 |
|
Credits to expense |
|
|
(200 |
) |
Charge-offs |
|
|
(340 |
) |
|
|
|
|
Total reserves/write-downs, March 31, 2009 |
|
$ |
7,330 |
|
|
|
|
|
Management believes that the reserves recorded as of March 31, 2009 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 H FAIR VALUE OPTION
Statement 159 became effective for the Corporation on January 1, 2008. Statement 159 permits
entities to choose to measure many financial instruments and certain other items at fair value and
requires certain disclosures for amounts for which the fair value option is applied.
The Corporation elected to record mortgage loans held for sale which were originated after
September 30, 2008 at fair value under Statement 159. Prior to October 1, 2008, mortgage loans held
for sale were reported at the lower of aggregate cost or market. The Corporation elected to adopt
Statement 159 for mortgage loans held for sale to more accurately reflect the financial performance
of its entire mortgage banking activities in its consolidated financial statements. Derivative
financial instruments related to these activities are also recorded at fair value under Statement
133, as noted within Note F, Derivative Financial Instruments. The Corporation determines fair
value for its mortgage loans held for sale based on the price that secondary market investors would
pay for loans with similar characteristics, including interest rate and term, as of the date fair
value is measured. The Corporation classifies interest income earned on mortgage loans held for
sale within interest income on the consolidated statements of income, which is separate from the
fair value adjustments on loans held for sale, which are recorded as components of gains on sale of
mortgage loans.
17
The following table presents a summary of the Corporations fair value elections under Statement
159 and their impact on the Corporations consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost - |
|
|
Fair Value - |
|
|
|
|
|
|
Asset |
|
|
Asset |
|
|
Balance Sheet |
|
|
|
(Liability) |
|
|
(Liability) |
|
|
Classification |
|
|
|
(in thousands) |
|
|
|
|
March 31, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans held for sale (1) (2) |
|
$ |
83,799 |
|
|
$ |
86,348 |
|
|
Loans held for sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans held for sale (1) |
|
$ |
64,787 |
|
|
$ |
66,567 |
|
|
Loans held for sale |
Hedged certificates of deposit (3) |
|
|
(7,458 |
) |
|
|
(7,517 |
) |
|
Interest-bearing deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
57,329 |
|
|
$ |
59,050 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Cost basis of mortgage loans held for sale represents the unpaid principal balance. |
|
(2) |
|
For the three months ended March 31, 2009, the Corporation recorded income of
$769,000, included within gains on sale of mortgage loans on the consolidated
statements of income, representing the changes in fair values of mortgage loans held
for sale from December 31, 2008 to March 31, 2009. |
|
(3) |
|
All hedged certificates of deposit were called in the first quarter of 2009. |
NOTE I FAIR VALUE MEASUREMENTS
On January 1, 2008, the Corporation adopted the provisions of Statement of Financial Accounting
Standards No. 157, Fair Value Measurement (Statement 157) for all assets and liabilities required
to be measured at fair value on a recurring basis and all financial assets and liabilities required
to be measured at fair value on a nonrecurring basis.
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 (FSP FAS 157-4). This staff position provides additional
guidance for estimating fair value in accordance with Statement 157 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. This staff position is effective for
interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for
periods ending after March 15, 2009. The Corporation elected to early adopt FSP FAS 157-4,
effective March 31, 2009. The Corporations 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 Corporations conclusion that the market for the
securities was not active. Therefore, the adoption of this staff position did not impact the
Corporations consolidated financial statements as of March 31, 2009.
Statement 157 establishes a fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value into the following three categories (from highest to lowest
priority):
|
|
|
Level 1 Inputs that represent quoted prices for identical instruments in active
markets. |
|
|
|
|
Level 2 Inputs that represent quoted prices for similar instruments in active markets,
or quoted prices for identical instruments in non-active markets. Also includes valuation
techniques whose inputs are derived principally from observable market data other than
quoted prices, such as interest rates or other market-corroborated means. |
|
|
|
|
Level 3 Inputs that are largely unobservable, as little or no market data exists for
the instrument being valued. |
Companies are required to categorize all assets and liabilities measured at fair value on both a
recurring and nonrecurring basis into the above three levels.
18
Items Measured at Fair Value on a Recurring Basis
The Corporations assets and liabilities measured at fair value on a recurring basis and reported
on the consolidated balance sheet as of March 31, 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
Mortgage loans held for sale |
|
$ |
|
|
|
$ |
86,348 |
|
|
$ |
|
|
|
$ |
86,348 |
|
Available for sale investment securities |
|
|
35,096 |
|
|
|
2,773,400 |
|
|
|
220,564 |
|
|
|
3,029,060 |
|
Other financial assets |
|
|
9,076 |
|
|
|
9,516 |
|
|
|
|
|
|
|
18,592 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
44,172 |
|
|
$ |
2,869,264 |
|
|
$ |
220,564 |
|
|
$ |
3,134,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other financial liabilities |
|
$ |
9,076 |
|
|
$ |
8,701 |
|
|
$ |
13,934 |
|
|
$ |
31,711 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The valuation techniques used to measure fair value for the items in the table 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 under Statement 159. Fair
value as of March 31, 2009 was measured as the price that secondary market investors were
offering for loans with similar characteristics. See Note H, Fair Value Option for
details related to the Corporations election to measure assets and liabilities at fair
value under Statement 159. |
|
|
|
|
Available for sale investment securities Included within this asset category
are both equity and debt securities. Equity securities consisting of stocks of financial
institutions and mutual funds are listed as Level 1 assets, measured at fair value based on
quoted prices for identical securities in active markets. Debt securities, excluding ARCs,
pooled trust preferred securities and certain single-issuer trust preferred securities, are
classified as Level 2 assets and consist of: U.S. government and U.S. government sponsored
agency securities, state and municipal securities, corporate debt securities,
collateralized mortgage obligations and mortgage-backed securities. Fair values are
determined by a third-party pricing service using both quoted prices for similar assets,
when available, and model-based valuation techniques that derive fair value based on
market-corroborated data, such as instruments with similar prepayment speeds and default
interest rates. See Note C, Investment Securities for additional details related to the
Corporations available for sale investment securities. |
|
|
|
|
ARCs, as discussed in Note G, Commitments and Contingencies, are classified as Level 3
assets and measured at fair value based on an independent third-party valuation. Due to
their illiquidity, ARCs were valued through the use of an expected cash flows model. The
assumptions used in preparing the expected cash flows model include estimates for coupon
rates, time to maturity and market rates of return. |
|
|
|
|
Pooled trust preferred securities and certain single issuer trust preferred securities are
also classified as Level 3 assets. The fair values of pooled trust preferred securities were
determined through the use of discounted cash flow models which applied credit and liquidity
adjusted discount rates to expected cash flows for the securities. The fair values of $6.3
million of single-issuer trust preferred securities were determined based on quotes provided
by third-party brokers who determined fair values based predominantly on internal valuation
models and were not indicative prices or binding offers. The Corporation classified $48.7
million of other single-issuer trust preferred securities as Level 2 assets above. |
|
|
|
|
Restricted equity securities totaling $85.1 million, issued by the Federal Home Loan Bank
and Federal Reserve Bank, have been excluded from the above table. |
19
|
|
|
Other financial assets Included within this asset category are Level 1 assets,
consisting of mutual funds that are held in trust for employee deferred compensation plans
and measured at fair value based on quoted prices for identical securities in active
markets, and Level 2 assets representing the fair value of mortgage banking derivatives in
the form of interest rate locks with customers and forward commitments with secondary
market investors. The fair value of the Corporations interest rate locks and forward
commitments are determined as the amount that would be required to settle each derivative
financial instrument at the end of the period. See Note F, Derivative Financial
Instruments, for additional information. |
|
|
|
|
Other financial liabilities Included within this category are the following
liabilities: Level 1 employee deferred compensation liabilities which are the amounts due
to employees under the deferred compensation plans, described under the heading Other
financial assets above; Level 2 mortgage banking derivatives, described under the heading
Other financial assets above; and Level 3 financial guarantees associated with the
Corporations commitment to purchase ARCs held within customer accounts. |
|
|
|
|
The fair value of the financial guarantee liability associated with ARCs held by the
Corporations customers was determined using the same methods as the ARCs held by the
Corporation and described under the heading Available for sale investment securities
above. See Note G, Commitments and Contingencies for additional information. |
The following table presents reconciliations of the Corporations assets and liabilities measured
at fair value on a recurring basis using unobservable inputs (Level 3) for the three months ended
March 31, 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) |
|
|
|
|
|
|
|
|
|
|
9,642 |
|
|
|
877 |
|
Realized adjustment to fair value (2) |
|
|
(1,978 |
) |
|
|
|
|
|
|
|
|
|
|
(6,158 |
) |
Unrealized adjustment to fair value
(3) |
|
|
(2,711 |
) |
|
|
(1,252 |
) |
|
|
(2,665 |
) |
|
|
|
|
Redemptions |
|
|
|
|
|
|
|
|
|
|
(89 |
) |
|
|
|
|
Discount accretion (4) |
|
|
|
|
|
|
2 |
|
|
|
790 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2009 |
|
$ |
10,692 |
|
|
$ |
6,294 |
|
|
$ |
203,578 |
|
|
$ |
(13,934 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
For ARC investments, amount represents ARCs 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. |
|
(2) |
|
For pooled trust preferred securities, realized adjustments to fair value represent
credit related other-than-temporary impairment charges that were recorded within
investment securities gains on the consolidated statements of income. For the ARC
financial guarantee, the realized adjustment to fair value has been included as a
component of operating risk loss on the Corporations consolidated statements of income. |
|
(3) |
|
Pooled trust preferred securities, single-issuer trust preferred securities, and ARC
investments are classified as available for sale investment securities; as such, the
unrealized adjustment to fair value was recorded as an unrealized holding loss and
included as a component of available for sale investment securities on the Corporations
consolidated balance sheet. |
|
(4) |
|
Included as a component of net interest income on the Corporations consolidated
statements of income. |
Items Measured at Fair Value on a Nonrecurring Basis
Certain 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.
20
The Corporations assets measured at fair value on a nonrecurring basis and reported on the
Corporations consolidated balance sheet as of March 31, 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
|
|
(in thousands) |
|
Loans held for sale |
|
$ |
|
|
|
$ |
15,685 |
|
|
$ |
|
|
|
$ |
15,685 |
|
Net loans |
|
|
|
|
|
|
|
|
|
|
387,926 |
|
|
|
387,926 |
|
Other financial assets |
|
|
|
|
|
|
6,014 |
|
|
|
11,438 |
|
|
|
17,452 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
|
|
|
$ |
21,699 |
|
|
$ |
399,364 |
|
|
$ |
421,063 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The valuation techniques used to measure fair value for the items in the table above are as
follows:
|
|
|
Loans held for sale This category consists of loans held for sale that were
measured at the lower of aggregate cost or fair value. Fair value was measured as the price
that secondary market investors were offering for loans with similar characteristics. |
|
|
|
|
Net loans - This category includes commercial loans and commercial mortgage
loans which were considered to be impaired under Statement of Financial Accounting
Standards No. 114, Accounting by Creditors for Impairment of a Loan 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 loans effective interest
rate, or at the loans observable market price or fair value of its collateral, if the loan
is collateral dependent. An allowance for loan losses is allocated to an impaired loan if
its carrying value exceeds its estimated fair value. The amount shown is the balance of
impaired loans, net of the related allowance for loan losses. |
|
|
|
|
Other financial assets This category includes foreclosed assets that the
Corporation obtained during the first quarter of 2009. Fair values for these Level 2 assets
were based on estimated selling prices less estimated selling costs for similar assets in
active markets. |
|
|
|
|
Classified as Level 3 assets above are mortgage servicing rights (MSRs), which are initially
recorded at fair value upon the sale of residential mortgage loans, which the Corporation
continues to service, to secondary market investors. MSRs are amortized as a reduction to
servicing income over the estimated lives of the underlying loans. |
|
|
|
|
MSRs are evaluated quarterly for impairment, by comparing the carrying amount to estimated
fair value. Fair value is determined at the end of each quarter through a discounted cash
flows valuation. Significant inputs to the valuation include expected net servicing income,
the discount rate and the expected life of the underlying loans. |
NOTE J New Accounting Standards
In April 2009, the FASB issued Staff Position No. FAS 141(R)-1, Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise from Contingencies. This staff position
amends Statement of Financial Accounting Standards No. 141(R), Business Combinations in relation
to the initial recognition and measurement, subsequent measurement and accounting, and disclosure
of assets and liabilities arising from contingencies in a business combination. This staff position
is effective for business combinations for which the acquisition date is on or after the beginning
of the first annual reporting period beginning on or after December 15, 2008, or January 1, 2009
for the Corporation. This staff position does not impact acquisitions consummated prior to January
1, 2009.
In April 2009, the FASB issued Staff Position No. 107-1 and APB 28-1, Interim Disclosures about
Fair Value of Financial Instruments. This staff position requires publicly traded companies to
include all disclosures required by Statement of Financial Accounting Standards No. 107, Fair
Value
21
Measurements in interim reporting periods as well as in annual financial statements. This staff
position is effective for interim reporting periods ending after June 15, 2009, or June 30, 2009
for the Corporation. The adoption of this staff position will result in additional disclosures
about fair values of financial instruments with the Corporations June 30, 2009 quarterly report on
Form 10-Q, but will not result in a change in the reported values of any amounts on the
consolidated financial statements.
NOTE K Reclassifications
Certain amounts in the 2008 consolidated financial statements and notes have been reclassified to
conform to the 2009 presentation.
22
Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
Managements Discussion and Analysis of Financial Condition and Results of Operations (Managements
Discussion) concerns Fulton Financial Corporation (the Corporation), a financial holding company
incorporated under the laws of the Commonwealth of Pennsylvania in 1982, and its wholly owned
subsidiaries. This 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 its acquisition and growth strategies; market risk; changes or adverse developments in economic,
political, or regulatory conditions; a continuation or worsening of the current disruption in
credit and other markets, including the lack of or reduced access to, and the abnormal functioning
of markets for mortgages and other asset-backed securities and for commercial paper and other
short-term borrowings; the effect of competition and interest rates on net interest margin and net
interest income; investment strategy and income growth; investment securities gains; declines in
the value of securities which may result in charges to earnings; changes in rates of deposit and
loan growth; asset quality and the impact on assets from adverse changes in the economy and in
credit or other markets and resulting effects on credit risk and asset values; balances of
risk-sensitive assets to risk-sensitive liabilities; salaries and employee benefits and other
expenses; amortization of intangible assets; goodwill impairment; capital and liquidity strategies
and other financial and business matters for future periods. The Corporation cautions that these
forward-looking statements are subject to various assumptions, risks and uncertainties. Because of
the possibility of changes in these assumptions, actual results could differ materially from
forward-looking statements. The Corporation undertakes no obligations to update or revise any
forward-looking statements.
RESULTS OF OPERATIONS
Overview
Summary Financial Results
The Corporation generates the majority of its revenue through net interest income, or the
difference between interest earned on loans and investments and interest paid on deposits and
borrowings. Growth in net interest income is dependent upon balance sheet growth and/or maintaining
or increasing the net interest margin, which is net interest income (fully taxable-equivalent) 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.
23
The following table presents a summary of the Corporations earnings and selected performance
ratios:
|
|
|
|
|
|
|
|
|
|
|
As of or for the |
|
|
Three months ended |
|
|
March 31 |
|
|
2009 |
|
2008 |
Net income available to common shareholders (in thousands) |
|
$ |
8,054 |
|
|
$ |
41,496 |
|
Income before income taxes (in thousands) |
|
$ |
14,658 |
|
|
$ |
55,699 |
|
Diluted net income per share |
|
$ |
0.05 |
|
|
$ |
0.24 |
|
Return on average assets |
|
|
0.33 |
% |
|
|
1.05 |
% |
Return on average common equity |
|
|
2.84 |
% |
|
|
10.53 |
% |
Return on average tangible common equity (1) |
|
|
3.88 |
% |
|
|
18.45 |
% |
Net interest margin (2) |
|
|
3.45 |
% |
|
|
3.58 |
% |
Non-performing assets to total assets |
|
|
1.63 |
% |
|
|
0.90 |
% |
Net charge-offs to average loans (annualized) |
|
|
1.00 |
% |
|
|
0.15 |
% |
|
|
|
(1) |
|
Calculated as net income, adjusted for intangible asset amortization (net of tax), divided by
average common shareholders equity, excluding goodwill and intangible assets. |
|
(2) |
|
Presented on a fully taxable-equivalent (FTE) basis, using a 35% Federal tax rate and
statutory interest expense disallowances. See also Net Interest Income section of
Managements Discussion. |
The Corporations income before income taxes in the first quarter of 2009 decreased $41.0 million,
or 73.7%, compared to the first quarter of 2008. The decrease in income before income taxes in
comparison to the first quarter of 2008 was primarily due to the following significant items:
Decreases in income before income taxes:
|
|
Increase in the provision for loan losses of $38.8 million, or 345.6%, from the first
quarter of 2008. |
|
|
|
During the first quarter of 2009, the quality of the Corporations loan portfolio continued to
deteriorate due to weak economic conditions. The Corporations non-performing assets increased
from $144.7 million, or 0.90% of total assets, at March 31, 2008 to $269.2 million, or 1.63% of
total assets, at March 31, 2009, with significant increases in non-performing construction
loans, commercial mortgage loans and commercial loans. Annualized net charge-offs for the first
quarter of 2009 were $30.1 million, or 1.0% of average loans, compared to annualized net
charge-offs of $4.4 million, or 0.15% of average loans for the first quarter of 2008. |
|
|
|
As a result of the increases in non-performing assets and net charge-offs, the Corporation
increased the provision for loan losses. |
|
|
|
Contingent losses of $6.2 million, recorded as a component of operating risk loss on the
Corporations consolidated statements of income, associated with the Corporations guarantee
to purchase illiquid auction rate certificates (ARCs) from customers. |
|
|
|
Beginning in the second quarter of 2008, the Corporation agreed to purchase illiquid
student-loan backed ARCs from customers of its investment management and trust subsidiary,
Fulton Financial Advisors, N.A. (FFA), upon notification from customers that they had liquidity
needs or otherwise desired to liquidate their holdings. FFA had generally purchased ARCs from
customers at par value with an interest adjustment which was designed to position customers as
if they had owned 90-day U.S. Treasury bills instead of ARCs. As FFAs approach to purchasing
customers ARCs evolved, however, interest adjustments were not made on certain accounts due to
various circumstances and restrictions. To provide similar treatment to all of FFAs customers
holding ARCs and in consideration of certain other market developments, in the first quarter of
2009 the Corporation decided that all future ARC purchases from customer accounts would be at
par value, without an interest adjustment. Furthermore, the Corporation plans to reimburse
customers for the amount of the interest differential on ARCs previously sold to |
24
|
|
the Corporation. During the first quarter of 2009, the Corporation recorded a pre-tax charge of
$6.2 million, with $5.7 million representing the interest adjustment. |
|
|
|
In April 2009, FFA notified its remaining customers holding ARCs that it would purchase the ARCs
at par value if notice of their acceptance of this offer is received by May 15, 2009. After that
date, FFA will no longer have any obligation to purchase ARCs still held by customers. |
|
|
|
A $3.4 million, or 397.4%, increase in Federal Deposit Insurance Corporation (FDIC)
insurance premiums. |
|
|
|
The increase in FDIC insurance premiums in the first quarter of 2009 in comparison to the first
quarter of 2008 was primarily due to an increase in assessment rates, as recent bank failures
have reduced the FDICs bank insurance fund. The Corporations FDIC insurance premiums for the
remainder of 2009, excluding additional emergency FDIC assessments that could potentially be
imposed, are expected to be approximately $11 million. |
|
|
|
In March 2009, the FDIC proposed an interim rule that would impose an emergency special
assessment of 20 basis points on insured deposits in 2009. Such an assessment would result in
the Corporation incurring additional FDIC insurance premiums of approximately $20 million. The
terms of a potential special assessment are still being deliberated, and a final rule has not
been adopted as of the filing date of this report. |
Increase in income before income taxes:
|
|
A $6.3 million, or 271.7%, increase in gains on sale of mortgage loans. |
|
|
|
During the first quarter of 2009, low interest rates on residential mortgages resulted in a
significant increase in residential mortgage refinances. As a result, the Corporation
experienced a significant increase in volumes of residential mortgage loans sold to secondary
market investors, and a corresponding increase in gains on such sales. Total loans sold in the
first quarter of 2009 increased $395.1 million, or 241.5%, from $163.6 million in the first
quarter of 2008 to $558.7 million in the first quarter of 2009. Approximately 80% of the volume
in the first quarter of 2009 was from refinances, with the remaining 20% from purchases. |
Quarter Ended March 31, 2009 compared to the Quarter Ended March 31, 2008
Net Interest Income
Net interest income decreased $1.8 million, or 1.4%, to $124.1 million in 2009 from $125.9 million
in 2008 due to a decrease in the net interest margin, offset by an increase in interest-earning
assets.
During 2008, interest rates declined significantly due to the Federal Reserve Board lowering the
Federal funds rate from 4.25% at January 1, 2008 to 0-0.25% at December 31, 2008. During the first
quarter of 2009, however, the interest rates earned on interest-earning assets continued to decline
due to the repricing of assets to lower rates, while decreases in rates paid on interest-bearing
liabilities slowed. As a result, the Corporations net interest margin decreased from 3.58% for the
first quarter of 2008 to 3.45% for the first quarter of 2009.
The Corporation manages its risk associated with changes in interest rates through the techniques
described in the Market Risk section of Managements Discussion.
25
The following table provides a comparative average balance sheet and net interest income analysis
for the first quarter of 2009 as compared to the same period in 2008. Interest income and yields
are presented on a fully taxable-equivalent basis (FTE), 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 March 31 |
|
|
|
2009 |
|
|
2008 |
|
|
|
Average |
|
|
|
|
|
|
Yield/ |
|
|
Average |
|
|
|
|
|
|
Yield/ |
|
|
|
Balance |
|
|
Interest (1) |
|
|
Rate |
|
|
Balance |
|
|
Interest (1) |
|
|
Rate |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net of unearned income (2) |
|
$ |
12,041,286 |
|
|
$ |
163,753 |
|
|
|
5.51 |
% |
|
$ |
11,295,531 |
|
|
$ |
192,422 |
|
|
|
6.85 |
% |
Taxable investment securities (3) |
|
|
2,212,639 |
|
|
|
26,849 |
|
|
|
4.86 |
|
|
|
2,407,189 |
|
|
|
29,561 |
|
|
|
4.91 |
|
Tax-exempt investment securities (3) |
|
|
503,265 |
|
|
|
6,887 |
|
|
|
5.47 |
|
|
|
515,856 |
|
|
|
6,761 |
|
|
|
5.24 |
|
Equity securities (1) (3) |
|
|
137,308 |
|
|
|
774 |
|
|
|
2.28 |
|
|
|
213,004 |
|
|
|
2,380 |
|
|
|
4.48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities |
|
|
2,853,212 |
|
|
|
34,510 |
|
|
|
4.84 |
|
|
|
3,136,049 |
|
|
|
38,702 |
|
|
|
4.94 |
|
Loans held for sale |
|
|
104,467 |
|
|
|
1,261 |
|
|
|
4.83 |
|
|
|
98,676 |
|
|
|
1,577 |
|
|
|
6.39 |
|
Other interest-earning assets |
|
|
16,934 |
|
|
|
50 |
|
|
|
1.19 |
|
|
|
26,784 |
|
|
|
218 |
|
|
|
3.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
|
15,015,899 |
|
|
|
199,574 |
|
|
|
5.38 |
% |
|
|
14,557,040 |
|
|
|
232,919 |
|
|
|
6.43 |
% |
Noninterest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
|
317,928 |
|
|
|
|
|
|
|
|
|
|
|
310,719 |
|
|
|
|
|
|
|
|
|
Premises and equipment |
|
|
202,875 |
|
|
|
|
|
|
|
|
|
|
|
196,037 |
|
|
|
|
|
|
|
|
|
Other assets |
|
|
924,755 |
|
|
|
|
|
|
|
|
|
|
|
927,260 |
|
|
|
|
|
|
|
|
|
Less: Allowance for loan losses |
|
|
(187,183 |
) |
|
|
|
|
|
|
|
|
|
|
(109,914 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
16,274,274 |
|
|
|
|
|
|
|
|
|
|
$ |
15,881,142 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
$ |
1,754,003 |
|
|
$ |
1,776 |
|
|
|
0.41 |
% |
|
$ |
1,685,620 |
|
|
$ |
4,405 |
|
|
|
1.05 |
% |
Savings deposits |
|
|
2,058,021 |
|
|
|
4,353 |
|
|
|
0.86 |
|
|
|
2,137,704 |
|
|
|
9,163 |
|
|
|
1.72 |
|
Time deposits |
|
|
5,432,676 |
|
|
|
43,767 |
|
|
|
3.27 |
|
|
|
4,520,004 |
|
|
|
49,918 |
|
|
|
4.44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits |
|
|
9,244,700 |
|
|
|
49,896 |
|
|
|
2.19 |
|
|
|
8,343,328 |
|
|
|
63,486 |
|
|
|
3.06 |
|
Short-term borrowings |
|
|
1,517,064 |
|
|
|
1,436 |
|
|
|
0.38 |
|
|
|
2,347,463 |
|
|
|
18,828 |
|
|
|
3.19 |
|
FHLB advances and long-term debt |
|
|
1,787,493 |
|
|
|
20,119 |
|
|
|
4.55 |
|
|
|
1,798,508 |
|
|
|
21,007 |
|
|
|
4.69 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
12,549,257 |
|
|
|
71,451 |
|
|
|
2.31 |
% |
|
|
12,489,299 |
|
|
|
103,321 |
|
|
|
3.32 |
% |
Noninterest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
|
1,657,658 |
|
|
|
|
|
|
|
|
|
|
|
1,616,283 |
|
|
|
|
|
|
|
|
|
Other |
|
|
201,449 |
|
|
|
|
|
|
|
|
|
|
|
190,496 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
14,408,364 |
|
|
|
|
|
|
|
|
|
|
|
14,296,078 |
|
|
|
|
|
|
|
|
|
Shareholders equity |
|
|
1,865,910 |
|
|
|
|
|
|
|
|
|
|
|
1,585,064 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and
Shareholders Equity |
|
$ |
16,274,274 |
|
|
|
|
|
|
|
|
|
|
$ |
15,881,142 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income/net interest
margin (FTE) |
|
|
|
|
|
|
128,123 |
|
|
|
3.45 |
% |
|
|
|
|
|
|
129,598 |
|
|
|
3.58 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax equivalent adjustment |
|
|
|
|
|
|
(4,007 |
) |
|
|
|
|
|
|
|
|
|
|
(3,699 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
|
|
$ |
124,116 |
|
|
|
|
|
|
|
|
|
|
$ |
125,899 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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. |
26
The following table summarizes the changes in FTE interest income and expense due to changes in
average balances (volume) and changes in rates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 vs. 2008 |
|
|
|
Increase (decrease) due |
|
|
|
to change in |
|
|
|
Volume |
|
|
Rate |
|
|
Net |
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
Interest income on: |
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net of unearned income |
|
$ |
11,650 |
|
|
$ |
(40,319 |
) |
|
$ |
(28,669 |
) |
Taxable investment securities |
|
|
(1,337 |
) |
|
|
(1,375 |
) |
|
|
(2,712 |
) |
Tax-exempt investment securities |
|
|
(164 |
) |
|
|
290 |
|
|
|
126 |
|
Equity securities |
|
|
(673 |
) |
|
|
(933 |
) |
|
|
(1,606 |
) |
Loans held for sale |
|
|
86 |
|
|
|
(402 |
) |
|
|
(316 |
) |
Other interest-earning assets |
|
|
(62 |
) |
|
|
(106 |
) |
|
|
(168 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
$ |
9,500 |
|
|
$ |
(42,845 |
) |
|
$ |
(33,345 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense on: |
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
$ |
168 |
|
|
$ |
(2,797 |
) |
|
$ |
(2,629 |
) |
Savings deposits |
|
|
(332 |
) |
|
|
(4,478 |
) |
|
|
(4,810 |
) |
Time deposits |
|
|
8,672 |
|
|
|
(14,823 |
) |
|
|
(6,151 |
) |
Short-term borrowings |
|
|
(4,988 |
) |
|
|
(12,404 |
) |
|
|
(17,392 |
) |
FHLB advances and long-term debt |
|
|
(157 |
) |
|
|
(731 |
) |
|
|
(888 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
$ |
3,363 |
|
|
$ |
(35,233 |
) |
|
$ |
(31,870 |
) |
|
|
|
|
|
|
|
|
|
|
Interest income decreased $33.3 million, or 14.3%, due to a $42.8 million decrease caused by a 105
basis point decrease in the average yield on earning assets, offset by a $9.5 million increase in
interest income realized from growth in average balances of $458.9 million, or 3.2%.
The increase in average interest-earning assets was due to loan growth, which is summarized in the
following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
March 31 |
|
|
Increase (decrease) |
|
|
|
2009 |
|
|
2008 |
|
|
$ |
|
|
% |
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
|
|
|
Real estate commercial mortgage |
|
$ |
4,048,269 |
|
|
$ |
3,529,168 |
|
|
$ |
519,101 |
|
|
|
14.7 |
% |
Commercial industrial, financial and agricultural |
|
|
3,682,678 |
|
|
|
3,472,443 |
|
|
|
210,235 |
|
|
|
6.1 |
|
Real estate home equity |
|
|
1,698,599 |
|
|
|
1,526,473 |
|
|
|
172,126 |
|
|
|
11.3 |
|
Real estate construction |
|
|
1,203,328 |
|
|
|
1,349,924 |
|
|
|
(146,596 |
) |
|
|
(10.9 |
) |
Real estate residential mortgage |
|
|
957,939 |
|
|
|
858,187 |
|
|
|
99,752 |
|
|
|
11.6 |
|
Consumer |
|
|
360,919 |
|
|
|
473,247 |
|
|
|
(112,328 |
) |
|
|
(23.7 |
) |
Leasing and other |
|
|
89,554 |
|
|
|
86,089 |
|
|
|
3,465 |
|
|
|
4.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
12,041,286 |
|
|
$ |
11,295,531 |
|
|
$ |
745,755 |
|
|
|
6.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan growth was particularly strong in the commercial mortgage and commercial loan categories,
which together increased $729.3 million, or 10.4%, with increases in both categories across all of
the Corporations geographical areas. The growth in commercial mortgages was primarily in floating
and adjustable rate products while the increase in commercial loans was spread across fixed,
floating and adjustable rate products. The $172.1 million increase in home equity loans was due to
a significant increase in home equity lines of credit. The $99.8 million increase in residential
mortgages was mainly due to an increase in adjustable rate loans.
27
Offsetting these increases was a $146.6 million decrease in construction loans, primarily in
floating rate loan products, and a $112.3 million decrease in consumer loans. The decrease in
construction loans was due to a slowdown in residential housing construction and the Corporations
efforts to reduce its lending exposure in this sector. The decrease in consumer loans was largely
due to the sale of the Corporations credit card portfolio in the second quarter of 2008 and
partially due to a decrease in the indirect automobile loan portfolio.
The average yield on loans decreased 134 basis points, or 19.6%, from 6.85% in 2008 to 5.51% in
2009. The decrease in yield reflected a lower interest rate environment, as illustrated by a lower
average prime rate during the first quarter of 2009 (3.25%) as compared to the same period in 2008
(6.27%). The decrease in average yields was not as pronounced as the decrease in the average prime
rate as fixed and adjustable rate loans, unlike floating rate loans, do not immediately reprice
when short-term rates decline.
Average investments decreased $282.8 million, or 9.0%. During the first quarter of 2009, proceeds
from maturities and sales were not fully reinvested in the portfolio based on balance sheet
management considerations, such as the Corporations overall funding position and the current and
expected interest rate environment. In addition, in late 2007, the Corporation pre-purchased
approximately $180 million of investments, based on expected cash flows to be generated from
maturing securities over an approximate six-month period, resulting in an increase in average
investments for the first quarter of 2008. Partially offsetting the impact of these items was the
purchases of ARCs, which increased average investments by $214.0 million in the first quarter of
2009 compared to the same period in 2008.
The $33.3 million decrease in interest income was partially offset by a decrease in interest
expense of $31.9 million, or 30.8%, to $71.5 million in the first quarter of 2009 from $103.3
million in the same period in 2008. Interest expense decreased $35.2 million as a result of a 101
basis point, or 30.4%, decrease in the average cost of interest-bearing liabilities. The decrease
was slightly offset by a $3.4 million increase in interest expense caused by growth in average
interest-bearing liabilities of $60.0 million, or 0.5%.
The following table summarizes the changes in average deposits, by type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
March 31 |
|
|
Increase (decrease) |
|
|
|
2009 |
|
|
2008 |
|
|
|
$ |
|
|
|
% |
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
|
|
|
Noninterest-bearing demand |
|
$ |
1,657,658 |
|
|
$ |
1,616,283 |
|
|
$ |
41,375 |
|
|
|
2.6 |
% |
Interest-bearing demand |
|
|
1,754,003 |
|
|
|
1,685,620 |
|
|
|
68,383 |
|
|
|
4.1 |
|
Savings |
|
|
2,058,021 |
|
|
|
2,137,704 |
|
|
|
(79,683 |
) |
|
|
(3.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total, excluding time deposits |
|
|
5,469,682 |
|
|
|
5,439,607 |
|
|
|
30,075 |
|
|
|
0.6 |
|
Time deposits |
|
|
5,432,676 |
|
|
|
4,520,004 |
|
|
|
912,672 |
|
|
|
20.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
10,902,358 |
|
|
$ |
9,959,611 |
|
|
$ |
942,747 |
|
|
|
9.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The Corporation experienced a net increase in noninterest-bearing and interest-bearing demand and
savings accounts of $30.1 million, or 0.6%. The increase in noninterest-bearing and
interest-bearing demand and savings accounts was in business and governmental accounts, offset by a
decrease in personal accounts. During late 2008 and throughout the first quarter of 2009, the
Corporation promoted certificates of deposit in order to decrease its reliance on wholesale
funding. The result was an $826.6 million, or 19.4%, increase in customer certificates of deposit.
In the short-term, this certificate of deposit growth had a negative impact on net interest income
and net interest margin as short-term borrowings carry a lower cost than time deposits. However,
this shift in funding sources reduces interest rate risk and increases more desirable customer
funding.
28
As average deposits increased, the Corporations short and long-term borrowings decreased. The
following table summarizes the changes in average borrowings, by type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
March 31 |
|
|
Increase (decrease) |
|
|
|
2009 |
|
|
2008 |
|
|
$ |
|
|
% |
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
|
|
|
Short-term borrowings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer short-term promissory notes |
|
$ |
337,069 |
|
|
$ |
471,470 |
|
|
$ |
(134,401 |
) |
|
|
(28.5 |
%) |
Customer repurchase agreements |
|
|
246,429 |
|
|
|
226,921 |
|
|
|
19,508 |
|
|
|
8.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term customer funding |
|
|
583,498 |
|
|
|
698,391 |
|
|
|
(114,893 |
) |
|
|
(16.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds purchased |
|
|
792,001 |
|
|
|
1,184,370 |
|
|
|
(392,369 |
) |
|
|
(33.1 |
) |
Federal Reserve Bank borrowings |
|
|
138,222 |
|
|
|
|
|
|
|
138,222 |
|
|
|
N/A |
|
FHLB overnight repurchase agreements |
|
|
|
|
|
|
449,615 |
|
|
|
(449,615 |
) |
|
|
|
|
Other short-term borrowings |
|
|
3,343 |
|
|
|
15,087 |
|
|
|
(11,744 |
) |
|
|
(77.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other short-term borrowings |
|
|
933,566 |
|
|
|
1,649,072 |
|
|
|
(715,506 |
) |
|
|
(43.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term borrowings |
|
|
1,517,064 |
|
|
|
2,347,463 |
|
|
|
(830,399 |
) |
|
|
35.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB advances |
|
|
1,404,275 |
|
|
|
1,415,840 |
|
|
|
(11,565 |
) |
|
|
(0.8 |
) |
Other long-term debt |
|
|
383,218 |
|
|
|
382,668 |
|
|
|
549 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt |
|
|
1,787,493 |
|
|
|
1,798,508 |
|
|
|
(11,016 |
) |
|
|
(0.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
3,304,557 |
|
|
$ |
4,145,972 |
|
|
$ |
(841,415 |
) |
|
|
(20.3 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
N/A Not applicable
During the fourth quarter of 2008, the Corporation pledged a combination of commercial real estate
loans, commercial loans and securities to the Federal Reserve Bank of Philadelphia to provide
access to overnight borrowings under the Federal Reserve Banks discount window and term borrowings
under the Federal Reserve Banks term auction facility. As of March 31, 2009, the Corporation had
$1.5 billion of collateralized borrowing availability. The $138.2 million of outstanding borrowings
for the first quarter of 2009 were made under the Federal Reserve Banks discount window.
Provision for Loan Losses and Allowance for Credit Losses
The following table presents ending balances of loans outstanding, net of unearned income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31 |
|
|
December 31 |
|
|
March 31 |
|
|
|
2009 |
|
|
2008 |
|
|
2008 |
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
Real-estate commercial mortgage |
|
$ |
4,068,342 |
|
|
$ |
4,016,700 |
|
|
$ |
3,597,307 |
|
Commercial industrial, agricultural and financial |
|
|
3,653,503 |
|
|
|
3,635,544 |
|
|
|
3,493,352 |
|
Real-estate home equity |
|
|
1,673,613 |
|
|
|
1,695,398 |
|
|
|
1,547,323 |
|
Real-estate construction |
|
|
1,205,256 |
|
|
|
1,269,330 |
|
|
|
1,328,802 |
|
Real-estate residential mortgage |
|
|
947,837 |
|
|
|
972,797 |
|
|
|
879,491 |
|
Consumer |
|
|
378,851 |
|
|
|
365,692 |
|
|
|
451,037 |
|
Leasing and other |
|
|
81,658 |
|
|
|
87,159 |
|
|
|
91,341 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
12,009,060 |
|
|
$ |
12,042,620 |
|
|
$ |
11,388,653 |
|
|
|
|
|
|
|
|
|
|
|
Approximately $5.3 billion, or 43.9%, of the Corporations loan portfolio was in commercial
mortgage and construction loans at March 31, 2009. While the Corporation does not have a
concentration of credit risk with any single borrower or industry, the performance of real estate
markets and general economic
29
conditions have adversely impacted the performance of these loans, most significantly construction
loans to residential housing developers in the Corporations Maryland and Virginia markets.
The credit quality of the Corporations commercial loans, comprising 30.4% of the total loan
portfolio, has been impacted generally by poor economic conditions as evidenced by an increasing
level of non-performing loans. The performance of commercial loans to businesses related to the
residential housing industry continued to deteriorate during the first quarter of 2009.
Approximately $2.6 billion, or 21.8%, of the Corporations loan portfolio was in residential
mortgage and home equity loans at March 31, 2009. Significant decreases in residential real estate
values in some of the Corporations geographic areas, most notably in portions of Maryland, New
Jersey and Virginia, have negatively impacted this portfolio.
The following table presents the activity in the Corporations allowance for credit losses:
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31 |
|
|
|
2009 |
|
|
2008 |
|
|
|
(dollars in thousands) |
|
Loans, net
of unearned income outstanding at end of period |
|
$ |
12,009,060 |
|
|
$ |
11,388,653 |
|
|
|
|
|
|
|
|
Daily average balance of loans, net of unearned income |
|
$ |
12,041,286 |
|
|
$ |
11,295,531 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
$ |
180,137 |
|
|
$ |
112,209 |
|
Loans charged off: |
|
|
|
|
|
|
|
|
Real estate construction |
|
|
12,242 |
|
|
|
|
|
Commercial industrial, agricultural and financial |
|
|
10,622 |
|
|
|
2,764 |
|
Real estate commercial mortgage |
|
|
3,960 |
|
|
|
318 |
|
Real estate residential mortgage and home equity |
|
|
1,937 |
|
|
|
531 |
|
Consumer |
|
|
2,076 |
|
|
|
1,381 |
|
Leasing and other |
|
|
946 |
|
|
|
632 |
|
|
|
|
|
|
|
|
Total loans charged off |
|
|
31,783 |
|
|
|
5,626 |
|
|
|
|
|
|
|
|
Recoveries of loans previously charged off: |
|
|
|
|
|
|
|
|
Real estate construction |
|
|
112 |
|
|
|
|
|
Commercial industrial, agricultural and financial |
|
|
904 |
|
|
|
276 |
|
Real estate commercial mortgage |
|
|
10 |
|
|
|
77 |
|
Real estate residential mortgage and home equity |
|
|
1 |
|
|
|
3 |
|
Consumer |
|
|
429 |
|
|
|
418 |
|
Leasing and other |
|
|
253 |
|
|
|
492 |
|
|
|
|
|
|
|
|
Total recoveries |
|
|
1,709 |
|
|
|
1,266 |
|
|
|
|
|
|
|
|
Net loans charged off |
|
|
30,074 |
|
|
|
4,360 |
|
Provision for loan losses |
|
|
50,000 |
|
|
|
11,220 |
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
200,063 |
|
|
$ |
119,069 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of Allowance for Credit Losses: |
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
$ |
192,410 |
|
|
$ |
115,257 |
|
Reserve for unfunded lending commitments |
|
|
7,653 |
|
|
|
3,812 |
|
|
|
|
|
|
|
|
Allowance for credit losses |
|
$ |
200,063 |
|
|
$ |
119,069 |
|
|
|
|
|
|
|
|
Selected Ratios: |
|
|
|
|
|
|
|
|
Net charge-offs to average loans (annualized) |
|
|
1.00 |
% |
|
|
0.15 |
% |
Allowance for credit losses to loans outstanding |
|
|
1.67 |
% |
|
|
1.05 |
% |
Allowance for loan losses to loans outstanding |
|
|
1.60 |
% |
|
|
1.01 |
% |
30
The following table summarizes the Corporations non-performing assets as of the indicated dates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31 |
|
|
March 31 |
|
|
December 31 |
|
|
|
2009 |
|
|
2008 |
|
|
2008 |
|
|
|
(dollars in thousands) |
|
Non-accrual loans |
|
$ |
198,765 |
|
|
$ |
96,588 |
|
|
$ |
161,962 |
|
Loans 90 days past due and accruing |
|
|
47,284 |
|
|
|
29,733 |
|
|
|
35,177 |
|
|
|
|
|
|
|
|
|
|
|
Total non-performing loans |
|
|
246,049 |
|
|
|
126,321 |
|
|
|
197,139 |
|
Other real estate owned |
|
|
23,189 |
|
|
|
18,333 |
|
|
|
21,855 |
|
|
|
|
|
|
|
|
|
|
|
Total non-performing assets |
|
$ |
269,238 |
|
|
$ |
144,654 |
|
|
$ |
218,994 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-accrual loans to total loans |
|
|
1.66 |
% |
|
|
0.85 |
% |
|
|
1.34 |
% |
Non-performing assets to total assets |
|
|
1.63 |
% |
|
|
0.90 |
% |
|
|
1.35 |
% |
Allowance for credit losses to non-performing loans |
|
|
81 |
% |
|
|
94 |
% |
|
|
91 |
% |
Non-performing assets to tangible common
shareholders equity and allowance for credit losses |
|
|
23.7 |
% |
|
|
13.4 |
% |
|
|
19.7 |
% |
The following table summarizes the Corporations non-performing loans, by type, as of the indicated
dates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31 |
|
|
March 31 |
|
|
December 31 |
|
|
|
2009 |
|
|
2008 |
|
|
2008 |
|
|
|
(in thousands) |
|
Real estate construction |
|
$ |
93,425 |
|
|
$ |
28,160 |
|
|
$ |
80,083 |
|
Commercial industrial, agricultural and financial |
|
|
50,493 |
|
|
|
35,462 |
|
|
|
40,294 |
|
Real estate commercial mortgage |
|
|
59,899 |
|
|
|
30,162 |
|
|
|
41,745 |
|
Real estate residential mortgage and home equity |
|
|
31,365 |
|
|
|
24,586 |
|
|
|
26,304 |
|
Consumer |
|
|
10,316 |
|
|
|
5,858 |
|
|
|
8,374 |
|
Leasing |
|
|
551 |
|
|
|
2,093 |
|
|
|
339 |
|
|
|
|
|
|
|
|
|
|
|
Total non-performing loans |
|
$ |
246,049 |
|
|
$ |
126,321 |
|
|
$ |
197,139 |
|
|
|
|
|
|
|
|
|
|
|
Non-performing assets increased to $269.2 million, or 1.63% of total assets, at March 31, 2009,
from $144.7 million, or 0.90% of total assets, at March 31, 2008. The increase in non-performing
assets in comparison to March 31, 2008 was primarily due to a $65.3 million, or 231.8%, increase in
non-performing construction loans, a $29.7 million, or 98.6%, increase in non-performing commercial
mortgage loans and a $15.0 million, or 42.4%, increase in non-performing commercial loans.
The $65.3 million increase in non-performing construction loans was related to the slowdown of
residential housing activity and deteriorating real estate values, particularly within the
Corporations Maryland and Virginia markets, which accounted for $69.3 million, or 74.2%, of the
$93.4 million of non-performing construction loans at March 31, 2009.
The $29.7 million increase in non-performing commercial mortgage loans was generally due to poor
economic conditions and not attributable to any specific industry or geographical area. The $15.0
million increase in non-performing commercial loans was caused by both poor economic conditions and
borrowers whose businesses are tied to the to the residential construction sector.
The $23.2 million balance of other real estate owned as of March 31, 2009 was primarily due to
foreclosures on repurchased residential mortgage loans, which contributed $17.9 million to the
balance of other real estate owned.
31
Net charge-offs increased $25.7 million, or 589.8%, to $30.1 million for the first quarter of 2009
compared to $4.4 million for the first quarter of 2008. Annualized net charge-offs to average loans
increased 85 basis points, or 566.7%, to 100 basis points for the first quarter of 2009, compared
to 15 basis points for the first quarter of 2008. Of the $30.1 million of net charge-offs recorded
for the first quarter of 2009, 33% was for borrowers located in Maryland, 29% in Virginia, 19% in
Pennsylvania and 15% in New Jersey. During the first quarter of 2009, there were seven individual
charge-offs which exceeded $1.0 million, with an aggregate amount of $15.8 million, almost all of
which were related to residential construction.
The provision for loan losses totaled $50.0 million for the first quarter of 2009, an increase of
$38.8 million, or 345.6%, over the same period in 2008. This significant increase in the provision
for loan losses was primarily related to the increase in non-performing loans and net charge-offs.
Management believes that the allowance for credit losses balance of $200.1 million at March 31,
2009 is sufficient to cover losses inherent in both the loan portfolio and the unfunded lending
commitments on that date and is appropriate based on applicable accounting standards.
Other Income
The following table presents the components of other income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
March 31 |
|
|
Increase (decrease) |
|
|
|
2009 |
|
|
2008 |
|
|
$ |
|
|
% |
|
|
|
(dollars in thousands) |
|
Service charges on deposit accounts |
|
$ |
14,894 |
|
|
$ |
13,967 |
|
|
$ |
927 |
|
|
|
6.6 |
% |
Gains on sale of mortgage loans |
|
|
8,591 |
|
|
|
2,311 |
|
|
|
6,280 |
|
|
|
271.7 |
|
Other service charges and fees |
|
|
8,354 |
|
|
|
8,591 |
|
|
|
(237 |
) |
|
|
(2.8 |
) |
Investment management and trust services |
|
|
7,903 |
|
|
|
8,759 |
|
|
|
(856 |
) |
|
|
(9.8 |
) |
Credit card servicing income |
|
|
1,187 |
|
|
|
|
|
|
|
1,187 |
|
|
|
N/A |
|
Other |
|
|
3,066 |
|
|
|
2,806 |
|
|
|
260 |
|
|
|
9.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total, excluding investment securities gains |
|
|
43,995 |
|
|
|
36,434 |
|
|
|
7,561 |
|
|
|
20.8 |
|
Investment securities gains |
|
|
2,919 |
|
|
|
1,246 |
|
|
|
1,673 |
|
|
|
134.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
46,914 |
|
|
$ |
37,680 |
|
|
$ |
9,234 |
|
|
|
24.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The $927,000, or 6.6%, increase in service charges on deposit accounts was due to an increase of
$752,000, or 9.8%, in overdraft fees and a $207,000 increase in other service charges on deposit
accounts. The increase in overdraft fees was a result of the rollout of a matrix-based overdraft
program in the fall of 2007, as well as the impact of current economic conditions on our customers.
The increase in other service charges was due to the decline in interest rates, which reduced the
earnings credits against commercial customers fees.
Gains on sale of mortgage loans increased $6.3 million, or 271.7%, due to an increase in the volume
of loans sold. Total loans sold in the first quarter of 2009 were $558.7 million, compared to
$163.6 million in the first quarter of 2008. The $395.1 million, or 241.5%, increase in the volume
of loans sold was mainly due to an increase in refinance activity as rates remained low.
The $856,000, or 9.8%, decrease in investment management and trust services income was due to a
$665,000, or 10.4%, decrease in trust revenue and a $191,000, or 8.0%, decrease in brokerage
revenue. The negative performance of equity markets contributed to the decreases in both trust and
brokerage revenues.
32
The $1.2 million of credit card servicing income was related to income earned subsequent to the
Corporations sale of its credit card portfolio in April 2008. Under a separate agreement entered
into with the purchaser of the portfolio, the Corporation receives fees for each new account
originated and a percentage of the revenue earned on both new accounts and accounts sold.
Investment securities gains of $2.9 million for the first quarter of 2009 included $6.0 million of
net gains on the sale of securities, primarily collateralized mortgage obligations, offset by $3.0
million of other-than-temporary impairment charges. The Corporation recorded $2.0 million of
other-than-temporary impairment charges for pooled trust preferred securities issued by financial
institutions and $956,000 of other-than-temporary impairment charges related to financial
institution stocks. See Note C, Investment Securities in the Notes to Consolidated Financial
Statements for additional details.
The $1.2 million of investment securities gains for the first quarter of 2008 included $4.6 million
in gains from the redemption of Class B shares in connection with Visa, Inc.s (Visa) initial
public offering and gains on the sale of MasterCard, Incorporated shares, offset by $3.6 million of
other-than-temporary impairment charges related to financial institution stocks.
Other Expenses
The following table presents the components of other expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
March 31 |
|
|
Increase (decrease) |
|
|
|
2009 |
|
|
2008 |
|
|
$ |
|
|
% |
|
|
|
(dollars in thousands) |
|
Salaries and employee benefits |
|
$ |
55,304 |
|
|
$ |
55,195 |
|
|
$ |
109 |
|
|
|
0.2 |
% |
Net occupancy expense |
|
|
11,023 |
|
|
|
10,524 |
|
|
|
499 |
|
|
|
4.7 |
|
Operating risk loss |
|
|
6,201 |
|
|
|
1,243 |
|
|
|
4,958 |
|
|
|
398.9 |
|
FDIC insurance premiums |
|
|
4,288 |
|
|
|
862 |
|
|
|
3,426 |
|
|
|
397.4 |
|
Equipment expense |
|
|
3,079 |
|
|
|
3,448 |
|
|
|
(369 |
) |
|
|
(10.7 |
) |
Data processing |
|
|
3,072 |
|
|
|
3,246 |
|
|
|
(174 |
) |
|
|
(5.4 |
) |
Marketing |
|
|
2,571 |
|
|
|
2,905 |
|
|
|
(334 |
) |
|
|
(11.5 |
) |
Professional fees |
|
|
2,228 |
|
|
|
2,347 |
|
|
|
(119 |
) |
|
|
(5.1 |
) |
Telecommunications |
|
|
2,163 |
|
|
|
1,968 |
|
|
|
195 |
|
|
|
9.9 |
|
Intangible amortization |
|
|
1,463 |
|
|
|
1,857 |
|
|
|
(394 |
) |
|
|
(21.2 |
) |
Postage |
|
|
1,384 |
|
|
|
1,457 |
|
|
|
(73 |
) |
|
|
(5.0 |
) |
Supplies |
|
|
1,281 |
|
|
|
1,358 |
|
|
|
(77 |
) |
|
|
(5.7 |
) |
Other |
|
|
12,315 |
|
|
|
10,250 |
|
|
|
2,065 |
|
|
|
20.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
106,372 |
|
|
$ |
96,660 |
|
|
$ |
9,712 |
|
|
|
10.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits increased $109,000, or 0.2%, with salaries decreasing $1.2 million,
or 2.7%, offset by an increase in employee benefits of $1.3 million, or 14.1%. The decrease in
salaries was primarily due to a $1.3 million decrease in employee bonuses and a $208,000 decrease
in stock-based compensation, offset by a $325,000 increase in salaries due to normal merit
increases. Average full-time equivalent employees decreased from 3,660 in the first quarter of 2008
to 3,640 in the first quarter of 2009.
The $1.3 million increase in employee benefits was primarily due to a $973,000 increase in
healthcare costs as claims increased and $749,000 of severance expense associated with the
Corporations Columbia Bank subsidiary in anticipation of consolidating back office functions in
the third quarter of 2009. These increases were offset by a $500,000 decrease in accruals for the
cost of compensated absences.
The $5.0 million increase in operating risk loss was due to $6.2 million of charges increasing the
financial guarantee liability associated with the Corporations commitment to purchase ARCs from
customer
33
accounts, offset by a $1.0 million decrease in losses on the actual and potential
repurchase of residential mortgage and home equity loans. See Note G, Commitments and
Contingencies in the Notes to Consolidated Financial Statements for additional details.
The $3.4 million increase in FDIC insurance premiums was due to an increase in assessment rates
effective January 1, 2009. In the first quarter of 2009, gross FDIC insurance premiums were $4.4
million, reduced by $114,000 of one-time credits. In the first quarter of 2008, gross FDIC
insurance premiums were $1.8 million, reduced by $890,000 of one-time credits.
The $369,000 decrease in equipment expense was due to a decrease in branch maintenance costs and a
decrease in depreciation expense. The $334,000 decrease in marketing expense was due to deposit
promotional campaigns and customer service initiatives which began during the first quarter of
2008. The $394,000 decrease in intangible amortization was mainly in core deposit intangibles.
The $2.1 million increase in other expenses was caused by the impact of the reversal $1.4 million
of litigation reserves in the first quarter of 2008 associated with the Corporations share of
indemnification liabilities with Visa, which were no longer necessary as a result of Visas initial
public offering. Also contributing to the increase in other expenses was a $1.1 million increase in
costs related to the maintenance and disposition of foreclosed real estate.
Income Taxes
Income tax expense for the first quarter of 2009 was $1.6 million, a $12.6 million, or 88.9%,
decrease from $14.2 million in 2008. The decrease was primarily due to a decrease in income before
taxes.
The Corporations effective tax rate was 10.7% in 2009, as compared to 25.5% in 2008. The effective
rate is generally lower than the Federal statutory rate of 35% due to investments in tax-free
municipal securities and Federal tax credits from investments in low and moderate-income housing
partnerships. The effective rate for the first quarter of 2009 is lower than the same period in
2008 due to non-taxable income and tax credits having a larger impact on the effective rate due to
the $41.0 million decrease in income before taxes.
34
FINANCIAL CONDITION
Total assets of the Corporation increased $308.4 million, or 1.9%, to $16.5 billion at March 31,
2009, compared to $16.2 billion at December 31, 2008.
The Corporation experienced a $33.6 million, or 0.3%, decrease in loans, net of unearned income.
Construction loans decreased $64.1 million, or 5.0%, due to a significant slowdown in residential
housing construction and $12.1 million of net charge-offs recorded in the first quarter of 2009.
Residential mortgages decreased $25.0 million, or 2.6%, due to refinance activity generated by low
interest rates. Offsetting these decreases was a $51.6 million, or 1.3%, increase in commercial
mortgages and an $18.0 million, or 0.5%, increase in commercial loans, with increases in both
categories primarily in floating rate products.
Investment securities increased $398.8 million, or 14.6%, funded primarily by increases in
deposits. The increase was primarily in anticipation of higher mortgage prepayments resulting from
the Federal governments mortgage-backed security repurchase program and other efforts to stabilize
the housing sector through lower residential mortgage rates.
Other assets increased $26.2 million, or 8.1%, primarily due to a $8.1 million increase in the fair
value of gross mortgage banking derivative assets, a $9.0 million increase in low-income housing
investments, and a $3.9 million increase in mortgage servicing rights, as residential mortgage
loans sold with servicing retained increased.
Deposits increased $862.1 million, or 8.2%, due to an increase in time deposits of $614.8 million,
or 12.1%, and an increase in demand and savings deposits of $247.3 million, or 4.5%. The increase
in time deposits was due to a $622.1 million increase in customer certificates of deposit, offset
by a $7.3 million decrease in brokered certificates of deposit. The increase in customer
certificates of deposit was due to the continued promotion of a variable rate product in the first
quarter of 2009. The increase in demand and savings accounts was in both personal and commercial
accounts.
Short-term borrowings decreased $567.3 million, or 32.2%, due to a $750.5 million decrease in
Federal funds purchased, offset by $200.0 million of borrowings under the Federal Reserve Banks
discount window. The decrease in short-term borrowings largely resulted from the increase in
deposits.
Capital Resources
Total shareholders equity increased $1.7 million, or 0.1%, during the first quarter of 2009. The
increase was due to $13.1 million of net income and $3.5 million in stock issuances, offset by $8.0
million in dividends on common and preferred shares outstanding and $7.3 million of other
comprehensive losses.
The Corporation and its subsidiary banks are subject to various regulatory capital requirements
administered by banking regulators. Failure to meet minimum capital requirements can initiate
certain actions by regulators that could have a material effect on the Corporations consolidated
financial statements. The regulations require that banks maintain minimum amounts and ratios of
total and Tier I capital (as defined in the regulations) to risk weighted assets (as defined), and
Tier I capital to average assets (as defined). As of March 31, 2009, the Corporation and each of
its bank subsidiaries met the minimum requirements. In addition, each of the Corporations bank
subsidiaries capital ratios exceeded the amounts required to be considered well capitalized as
defined in the regulations.
35
The following table summarizes the Corporations capital ratios in comparison to regulatory
requirements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulatory |
|
|
|
|
|
|
|
|
|
|
|
Minimum |
|
|
|
March 31 |
|
|
December 31 |
|
|
Capital |
|
|
|
2009 |
|
|
2008 |
|
|
Adequacy |
|
Total Capital (to Risk Weighted Assets) |
|
|
14.0 |
% |
|
|
14.3 |
% |
|
|
8.0 |
% |
Tier I Capital (to Risk Weighted Assets) |
|
|
11.2 |
% |
|
|
11.5 |
% |
|
|
4.0 |
% |
Tier I Capital (to Average Assets) |
|
|
9.5 |
% |
|
|
9.6 |
% |
|
|
3.0 |
% |
In connection with the Emergency Economic Stabilization Act of 2008 (EESA), the U.S. Treasury
Department (UST) initiated a Capital Purchase Program (CPP) which allows for qualifying financial
institutions to issue preferred stock to the UST, subject to certain 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
Corporations 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 March 31, 2009 would be as follows:
|
|
|
|
|
Total Capital (to Risk Weighted Assets) |
|
|
11.2 |
% |
Tier I Capital (to Risk Weighted Assets) |
|
|
8.4 |
% |
Tier I Capital (to Average Assets) |
|
|
7.2 |
% |
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.
The Corporations sources and uses of cash were discussed in general terms in the net interest
income section of Managements Discussion. The consolidated statements of cash flows provide
additional information. The Corporation generated $79.2 million in cash from operating activities
during the first quarter of 2009, mainly due to net income, as adjusted for non-cash expenses, most
notably the provision for loan losses. Investing activities resulted in a net cash outflow of
$413.0 million, due to purchases of available for sale securities exceeding the proceeds from the
sales and maturities of available for sale securities. Cash flows provided by financing activities
were $268.1 million, primarily due to net increases in deposits exceeding net decreases in
short-term borrowings and dividend payments.
Liquidity must also be managed at the Fulton Financial Corporation Parent Company level. For safety
and soundness reasons, banking regulations limit the amount of cash that can be transferred from
subsidiary banks to the Parent Company in the form of loans and dividends. Generally, these
limitations are based on the subsidiary banks regulatory capital levels and their net income. The
Parent Companys cash needs have increased in recent years, requiring additional sources of funds,
including the issuance of subordinated debt and trust-preferred securities.
36
These borrowing arrangements supplement the liquidity available from subsidiaries through dividends
and borrowings and provide some flexibility in Parent Company cash management. 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.
37
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
Corporations equity investments consist of $32.4 million of stocks of publicly traded financial
institutions, $85.1 million of FHLB and Federal Reserve Bank stock and $9.7 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 $40.4
million and fair value of $32.4 million at March 31, 2009. Gross unrealized gains in this portfolio
were $484,000, and gross unrealized losses were $8.5 million.
Management continuously monitors the fair value of its equity investments and evaluates current
market conditions and operating results of the companies. Periodic sale and purchase decisions are
made based on this monitoring process. None of the Corporations equity securities are classified
as trading. Future cash flows from these investments are not provided in the table on page 41 as
such investments do not have maturity dates.
Although the carrying value of financial institution stocks accounted for less than 0.2% of the
Corporations total assets at March 31, 2009, the Corporation has a history of realizing gains from
this portfolio. However, significant declines in the values of financial institution stocks held in
this portfolio have not only impacted the Corporations ability to realize gains on their sale, but
have also resulted in significant other-than-temporary impairment charges in 2008 and 2009.
The Corporation evaluated whether any unrealized losses on individual equity investments
constituted other-than-temporary impairment, which would require a write-down through a charge to
earnings. Based on the results of such evaluations, the Corporation recorded write-downs of
$956,000 for specific financial institution stocks that were deemed to exhibit other-than-temporary
impairment in value as of March 31, 2009. In addition, the Corporation recorded an
other-than-temporary impairment charge of $106,000 during the first quarter of 2009 for a mutual
fund investment. 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.
In addition to the Corporations investment portfolio, its investment management and trust services
income could be impacted by fluctuations in the securities markets. A portion of this revenue is
based on the value of the underlying investment portfolios. If the values of those investment
portfolios decrease, whether due to factors influencing U.S. securities markets in general, or
otherwise, the Corporations revenue could be negatively impacted. In addition, the Corporations
ability to sell its brokerage services is dependent, in part, upon consumers level of confidence
in the outlook for rising securities prices.
Debt Security Market Price Risk
Debt security market price risk is the risk that changes in the values of debt security investments
could have a material impact on the financial position or results of operations of the Corporation.
The Corporations debt security investments consist primarily of mortgage-backed securities and
collateralized mortgage obligations whose principal payments are guaranteed by U.S. government
38
sponsored agencies, state and municipal securities, U.S. government sponsored and U.S. government
debt securities, auction rate certificates and corporate debt securities. Only auction rate
certificates and corporate debt securities have significant debt security market price risk.
Auction Rate Certificates (ARCs)
The Corporations debt securities include ARCs purchased from customers of FFA. Due to the current
market environment, these ARCs are susceptible to significant market price risk. At March 31, 2009,
ARCs held by the Corporation had a cost basis of $218.6 million and fair value of $203.6 million,
or 1.2% of total assets.
ARCs are long-term securities structured to allow their sale in periodic auctions, resulting in
both the treatment of ARCs as short-term instruments in normal market conditions and fair values
that could be derived based on periodic auction prices. However, as previously disclosed, 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 March 31, 2009, 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 which were materially different from those that would be expected from
settlement of these investments in the illiquid market that presently exists. The expected cash
flow model produced fair values which assumed a return to market liquidity sometime within the next
three to five years. If liquidity does not return within a time frame that is materially consistent
with the Corporations assumptions, the fair value of ARCs could significantly change.
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:
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009 |
|
|
|
Amortized |
|
|
Estimated |
|
|
|
cost |
|
|
fair value |
|
|
|
(in thousands) |
|
Single-issuer trust preferred securities (1) |
|
$ |
97,902 |
|
|
$ |
54,994 |
|
Subordinated debt |
|
|
34,812 |
|
|
|
29,756 |
|
Pooled trust preferred securities |
|
|
27,040 |
|
|
|
10,692 |
|
|
|
|
|
|
|
|
Total corporate debt securities issued by
financial institutions |
|
$ |
159,754 |
|
|
$ |
95,442 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Single-issuer trust preferred securities with estimated fair values totaling $6.3 million
as of March 31, 2009 are classified as Level 3 assets under Statement 157. See Note I,
Fair Value Measurements in the Notes to Consolidated Financial Statements for additional
details. |
Historically, the Corporation determined the fair value of these securities based on prices
received from third party brokers and pricing agencies who determined fair values using both quoted
prices for similar assets, when available, and model-based valuation techniques that derived fair
value based on market-corroborated data, such as instruments with similar prepayment speeds and
default interest rates.
Due to distressed market prices that currently exist for these securities, the Corporation
determined that the market for pooled trust preferred securities and certain single-issuer trust
preferred securities held by the Corporation was not active. Consistent with the Financial
Accounting Standards Boards (FASB) Staff Position No. 157-3, Determining the Fair Value of a
Financial Asset When the Market for That Asset is not Active, issued in October 2008, and FASB
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,
issued in April 2009, the Corporation determined the fair value of its
39
investments in pooled trust
preferred securities using a discounted cash flows model, which applied a credit and liquidity
adjusted discount rate to expected cash flows. For certain single-issuer trust preferred
securities, the Corporation determined fair values based on quotes provided by third party brokers
who determined fair values based predominantly on internal valuation models and were not indicative
prices or binding offers.
In April 2009, the 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 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, for impaired debt securities if
they have the intent to sell, or will more likely than not be required to sell, before a recovery
in their 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 requirement to sell. Credit loss is measured as the difference between
the present value of an impaired debt securitys 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 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 is 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.
As a result of its adoption of FSP FAS 115-2, during the first quarter of 2009, the Corporation
recorded $2.0 million of other-than-temporary impairment charges as a reduction to investment
securities gains on the consolidated statements of income, related to investments in a pooled trust
preferred securities issued by financial institutions. These other-than-temporary impairment
charges were based on the credit losses determined by modeling expected cash flows. In addition,
the Corporation recorded $2.8 million ($1.8 million, net of tax) of non-credit related write-downs
to fair value as a component of other comprehensive loss during the first quarter of 2009.
During 2008, the Corporation recorded other-than-temporary impairment charges for pooled trust
preferred securities of $15.8 million. Upon adoption of FSP FAS 115-2, the Corporation determined
that $9.7 million of those other-than-temporary impairment charges were non-credit related. As
such, a $6.3 million (net of $3.4 million of taxes) increase to retained earnings and a
corresponding decrease to accumulated other comprehensive income was recorded as the cumulative
effect impact of adopting FSP FAS 115-2 as of January 1, 2009. Because previously recognized
other-than-temporary impairment charges were reversed through equity rather than earnings, $1.6
million of the $2.0 million of other-than-temporary impairment charges recorded during the first
quarter of 2009 were also presented as other-than-temporary impairment charges on the Corporations
statements of operations for the year ended December 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 Corporations other-than-temporary impairment evaluations for debt
securities and Note I, Fair Value Measurements, in the Notes to Consolidated Financial Statements
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 Corporations liquidity position and could affect its ability to meet obligations and continue
to grow. Second, movements in interest rates can create fluctuations in the Corporations net
income and changes in the economic value of its equity.
40
The Corporation employs various management techniques to minimize its exposure to interest rate
risk. An Asset/Liability Management Committee (ALCO), consisting of key financial and senior
management personnel, meets on a bi-weekly basis. The ALCO is responsible for reviewing the
interest rate sensitivity position of the Corporation, approving asset and liability management
policies, and overseeing the formulation and implementation of strategies regarding balance sheet
positions and earnings.
The following table provides information about the Corporations 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
Corporations 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) |
|
$ |
1,143,393 |
|
|
$ |
606,278 |
|
|
$ |
452,025 |
|
|
$ |
339,331 |
|
|
$ |
285,910 |
|
|
$ |
613,488 |
|
|
$ |
3,440,425 |
|
|
$ |
3,447,388 |
|
Average rate |
|
|
5.20 |
% |
|
|
6.56 |
% |
|
|
6.57 |
% |
|
|
6.53 |
% |
|
|
6.57 |
% |
|
|
6.42 |
% |
|
|
6.08 |
% |
|
|
|
|
Floating rate loans (1) (2) |
|
|
2,436,878 |
|
|
|
1,103,301 |
|
|
|
805,562 |
|
|
|
674,536 |
|
|
|
1,798,834 |
|
|
|
1,738,654 |
|
|
|
8,557,765 |
|
|
|
8,270,136 |
|
Average rate |
|
|
4.77 |
% |
|
|
5.22 |
% |
|
|
5.29 |
% |
|
|
5.26 |
% |
|
|
4.30 |
% |
|
|
6.01 |
% |
|
|
5.07 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate investments (3) |
|
|
723,880 |
|
|
|
521,095 |
|
|
|
357,647 |
|
|
|
245,972 |
|
|
|
188,075 |
|
|
|
670,634 |
|
|
|
2,707,303 |
|
|
|
2,736,271 |
|
Average rate |
|
|
4.60 |
% |
|
|
4.74 |
% |
|
|
4.15 |
% |
|
|
4.88 |
% |
|
|
4.96 |
% |
|
|
5.11 |
% |
|
|
4.75 |
% |
|
|
|
|
Floating rate investments (3) |
|
|
|
|
|
|
500 |
|
|
|
218,625 |
|
|
|
|
|
|
|
134 |
|
|
|
88,005 |
|
|
|
307,264 |
|
|
|
261,175 |
|
Average rate |
|
|
|
|
|
|
5.62 |
% |
|
|
4.50 |
% |
|
|
|
|
|
|
1.20 |
% |
|
|
3.56 |
% |
|
|
4.23 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other interest-earning assets |
|
|
116,363 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
116,363 |
|
|
|
116,363 |
|
Average rate |
|
|
4.77 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.77 |
% |
|
|
|
|
|
|
|
|
Total |
|
$ |
4,420,514 |
|
|
$ |
2,231,174 |
|
|
$ |
1,833,859 |
|
|
$ |
1,259,839 |
|
|
$ |
2,272,953 |
|
|
$ |
3,110,781 |
|
|
$ |
15,129,120 |
|
|
$ |
14,831,333 |
|
Average rate |
|
|
4.86 |
% |
|
|
5.47 |
% |
|
|
5.29 |
% |
|
|
5.53 |
% |
|
|
4.64 |
% |
|
|
5.83 |
% |
|
|
5.22 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate deposits (4) |
|
$ |
4,586,804 |
|
|
$ |
589,399 |
|
|
$ |
290,486 |
|
|
$ |
156,283 |
|
|
$ |
52,106 |
|
|
$ |
37,852 |
|
|
$ |
5,712,930 |
|
|
$ |
5,762,065 |
|
Average rate |
|
|
3.00 |
% |
|
|
3.52 |
% |
|
|
3.57 |
% |
|
|
4.36 |
% |
|
|
3.88 |
% |
|
|
1.23 |
% |
|
|
3.11 |
% |
|
|
|
|
Floating rate deposits (5) |
|
|
1,550,171 |
|
|
|
174,909 |
|
|
|
174,909 |
|
|
|
160,943 |
|
|
|
153,526 |
|
|
|
1,710,424 |
|
|
|
3,924,882 |
|
|
|
3,924,883 |
|
Average rate |
|
|
0.88 |
% |
|
|
0.61 |
% |
|
|
0.61 |
% |
|
|
0.55 |
% |
|
|
0.52 |
% |
|
|
0.46 |
% |
|
|
0.65 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate borrowings (6) |
|
|
398,931 |
|
|
|
403,772 |
|
|
|
87,792 |
|
|
|
30,777 |
|
|
|
818 |
|
|
|
864,190 |
|
|
|
1,786,280 |
|
|
|
1,775,279 |
|
Average rate |
|
|
4.62 |
% |
|
|
4.46 |
% |
|
|
3.89 |
% |
|
|
4.46 |
% |
|
|
5.10 |
% |
|
|
4.93 |
% |
|
|
4.70 |
% |
|
|
|
|
Floating rate borrowings (7) |
|
|
1,195,792 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,195,792 |
|
|
|
1,195,792 |
|
Average rate |
|
|
0.28 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.28 |
% |
|
|
|
|
|
|
|
|
Total |
|
$ |
7,731,698 |
|
|
$ |
1,168,080 |
|
|
$ |
553,187 |
|
|
$ |
348,003 |
|
|
$ |
206,450 |
|
|
$ |
2,612,466 |
|
|
$ |
12,619,884 |
|
|
$ |
12,658,019 |
|
Average rate |
|
|
2.24 |
% |
|
|
3.41 |
% |
|
|
2.68 |
% |
|
|
2.61 |
% |
|
|
1.38 |
% |
|
|
1.95 |
% |
|
|
2.30 |
% |
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amounts are based on contractual payments and maturities, adjusted for expected prepayments. |
|
(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, 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. Expected maturities, however, do not
necessarily estimate 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. Overdraft deposit balances are not included in the preceding table.
41
Included within the $8.6 billion of floating rate loans above are $3.6 billion of loans, or 42% of
the total, that float with the prime interest rate, $1.1 billion, or 13%, of loans which float with
other interest rates, primarily LIBOR, and $3.9 billion, or 45%, 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. The following table presents the percentage of
adjustable rate loans, stratified by their remaining fixed term at March 31, 2009:
|
|
|
|
|
|
|
Percent of Total |
|
|
Adjustable Rate |
Fixed Rate Term |
|
Loans |
One year |
|
|
19.2 |
% |
Two years |
|
|
0.9 |
|
Three years |
|
|
2.3 |
|
Four years |
|
|
1.3 |
|
Five years |
|
|
60.2 |
|
Greater than five years |
|
|
16.1 |
|
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 Corporations balance sheet as of a
point in time. This measurement is accomplished through stratification of the Corporations 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 Corporations 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 March 31, 2009, the cumulative six-month ratio of RSA/RSL was 1.08.
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
Corporations short-term earnings exposure to rate movements. The Corporations policy limits the
potential exposure of net interest income to 10% of the base case net interest income for a 100
basis point shock in interest rates, 15% for a 200 basis point shock and 20% for a 300 basis point
shock. A shock is an immediate upward or downward movement of interest rates across the yield
curve based upon changes in the prime rate. The shocks do not take into account changes in customer
behavior that could result in changes to mix and/or volumes in the balance sheet nor do they
account for competitive pricing over the forward 12-month period.
42
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):
|
|
|
|
|
|
|
|
|
|
|
Annual change |
|
|
|
|
in net interest |
|
|
Rate Shock |
|
income |
|
% Change |
+300 bp |
|
+ $55.5 million |
|
|
+ 10.5 |
% |
+200 bp |
|
+ $34.2 million |
|
|
+ 6.5 |
% |
+100 bp |
|
+ $14.6 million |
|
|
+ 2.8 |
% |
-100 bp |
|
- $16.5 million |
|
|
- 3.1 |
% |
Economic value of equity estimates the discounted present value of asset cash flows and liability
cash flows. Discount rates are based upon market prices for like assets and liabilities. Upward and
downward shocks of interest rates are used to determine the comparative effect of such interest
rate movements relative to the unchanged environment. This measurement tool is used primarily to
evaluate the longer-term repricing risks and options in the Corporations balance sheet. A policy
limit of 10% of economic equity may be at risk for every 100 basis point shock movement in interest
rates. As of March 31, 2009, the Corporation was within policy limits for every 100 basis point
shock movement in interest rates.
43
Item 4. Controls and Procedures
The Corporation carried out an evaluation, under the supervision and with the participation of the
Corporations management, including the Corporations Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure controls and procedures
pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Corporations Chief Executive
Officer and Chief Financial Officer concluded that, as of the end of the period covered by this
quarterly report, the Corporations 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 Commissions rules and forms.
There have been no changes in our internal control over financial reporting during the fiscal
quarter covered by this quarterly report that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
44
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 1A. Risk Factors
Information responsive to this item as of March 31, 2009 appears under the heading, Risk Factors
within the Corporations Form 10-K for the year ended December 31, 2008.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities and Use of Proceeds
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
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.
45
FULTON FINANCIAL CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
FULTON FINANCIAL CORPORATION |
|
|
|
|
|
|
|
|
|
Date: May 11, 2009
|
|
/s/ R. Scott Smith, Jr.
R. Scott Smith, Jr.
|
|
|
|
|
Chairman and Chief Executive Officer |
|
|
|
|
|
|
|
Date: May 11, 2009
|
|
/s/ Charles J. Nugent
Charles J. Nugent
|
|
|
|
|
Senior Executive Vice President and
Chief Financial Officer |
|
|
46
EXHIBIT INDEX
Exhibits Required Pursuant
to Item 601 of Regulation S-K
3.1 |
|
Articles of Incorporation, as amended and restated, of Fulton Financial Corporation as
amended Incorporated by reference to Exhibit 3.1 of the Fulton Financial Corporation Form
S-4 Registration Statement filed on October 7, 2005. |
|
3.2 |
|
Bylaws of Fulton Financial Corporation as amended Incorporated by reference to
Exhibit 3.1 of the Fulton Financial Corporation Current Report on Form 8-K dated September
18, 2008. |
|
3.3 |
|
Certificate of Designations of Fixed Rate Cumulative Preferred Stock, Series A of
Fulton Financial Corporation Incorporated by reference to Exhibit 3.1 of the Fulton
Financial Corporation Current Report on Form 8-K dated December 23, 2008. |
|
31.1 |
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002. |
|
31.2 |
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002. |
|
32.1 |
|
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002. |
|
32.2 |
|
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002. |
47