Investment Securities

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



Held to Maturity at September 30, 2011	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(in thousands)
U.S. Government sponsored agency securities	$	5,987	$	—	$	(7	)	$	5,980
State and municipal securities	179		—		—			179
Mortgage-backed securities	568		47		—			615
	$	6,734	$	47	$	(7	)	$	6,774
Available for Sale at September 30, 2011
Equity securities	$	123,483	$	2,291	$	(5,408	)	$	120,366
U.S. Government securities	1,325		—		—			1,325
U.S. Government sponsored agency securities	4,735		110		(1		)	4,844
State and municipal securities	320,969		13,091		—			334,060
Corporate debt securities	130,455		4,892		(12,912		)	122,435
Collateralized mortgage obligations	1,078,396		29,212		(353		)	1,107,255
Mortgage-backed securities	802,142		36,763		(69		)	838,836
Auction rate securities	255,472		283		(15,053		)	240,702
	$	2,716,977	$	86,642	$	(33,796	)	$	2,769,823



Held to Maturity at December 31, 2010	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(in thousands)
U.S. Government sponsored agency securities	$	6,339	$	—	$	(1	)	$	6,338
State and municipal securities	346		—		—			346
Mortgage-backed securities	1,066		68		—			1,134
	$	7,751	$	68	$	(1	)	$	7,818
Available for Sale at December 31, 2010
Equity securities	$	133,570	$	3,872	$	(974	)	$	136,468
U.S. Government securities	1,649		—		—			1,649
U.S. Government sponsored agency securities	4,888		172		(2		)	5,058
State and municipal securities	345,053		6,003		(1,493		)	349,563
Corporate debt securities	137,101		3,808		(16,123		)	124,786
Collateralized mortgage obligations	1,085,613		23,457		(5,012		)	1,104,058
Mortgage-backed securities	843,446		31,080		(3,054		)	871,472
Auction rate securities	271,645		892		(11,858		)	260,679
	$	2,822,965	$	69,284	$	(38,516	)	$	2,853,733

Securities carried at $1.9 billion as of September 30, 2011 and December 31, 2010 were pledged as collateral to secure public and trust deposits and customer repurchase agreements. Available for sale equity securities include restricted investment securities issued by the Federal Home Loan Bank (FHLB) and the Federal Reserve Bank totaling $85.4 million and $96.4 million as of September 30, 2011 and December 31, 2010, respectively.

The amortized cost and estimated fair values of debt securities as of September 30, 2011, by contractual maturity, are shown in the following table. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.



	Held to Maturity				Available for Sale
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
	(in thousands)
Due in one year or less	$	6,052	$	6,045	$	70,852	$	71,305
Due from one year to five years	114		114		46,088		47,500
Due from five years to ten years	—		—		127,391		135,592
Due after ten years	—		—		468,625		448,969
	6,166		6,159		712,956		703,366
Collateralized mortgage obligations	—		—		1,078,396		1,107,255
Mortgage-backed securities	568		615		802,142		838,836
	$	6,734	$	6,774	$	2,593,494	$	2,649,457

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



	Gross Realized Gains		Gross Realized Losses			Other-than- temporary Impairment Losses			Net Gains (Losses)
	(in thousands)
Three months ended September 30, 2011
Equity securities	$	146	$	—		$	(244	)	$	(98	)
Debt securities	—		—			(345		)	(345		)
Total	$	146	$	—		$	(589	)	$	(443	)
Three months ended September 30, 2010:
Equity securities	$	601	$	(391	)	$	(480	)	$	(270	)
Debt securities	4,485		(54		)	(2,335		)	2,096
Total	$	5,086	$	(445	)	$	(2,815	)	$	1,826
Nine months ended September 30, 2011
Equity securities	$	194	$	—		$	(575	)	$	(381	)
Debt securities	3,605		(19		)	(1,698		)	1,888
Total	$	3,799	$	(19	)	$	(2,273	)	$	1,507
Nine months ended September 30, 2010:
Equity securities	$	1,451	$	(391	)	$	(1,813	)	$	(753	)
Debt securities	10,809		(72		)	(9,477		)	1,260
Total	$	12,260	$	(463	)	$	(11,290	)	$	507

The other-than-temporary impairment charges for equity securities during the three and nine months ended September 30, 2011 and 2010, respectively, were for investments in stocks of financial institutions. Other-than-temporary impairment charges related to financial institution stocks were due to the severity and duration of the declines in fair values of certain bank stock holdings, in conjunction with management’s assessment of the near-term prospects of each specific issuer. As of September 30, 2011, after other-than-temporary impairment charges, the financial institutions stock portfolio had a cost basis of $31.1 million and a fair value of $27.9 million.

The credit related other-than-temporary impairment charges for debt securities during the three and nine months ended September 30, 2011, included $53,000 and $1.4 million, respectively, for investments in pooled trust preferred securities issued by financial institutions. In addition, during the third quarter of 2011, the Corporation recorded $292,000 of other-than-temporary impairment charges for investments in student loan auction rate securities, also known as auction rate certificates (ARCs). The credit related other-than-temporary impairment charges for debt securities during the three and nine months ended September 30, 2010 were for investments in pooled trust preferred securities issued by financial institutions. Other-than-temporary impairment charges related to debt securities were determined based on expected cash flows models.

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



	Three Months Ended September 30						Nine Months Ended September 30
	2011			2010			2011			2010
	(in thousands)
Balance of cumulative credit losses on debt securities, beginning of period	$	(28,876	)	$	(22,754	)	$	(27,560	)	$	(15,612	)
Additions for credit losses recorded which were not previously recognized as components of earnings	(345		)	(2,335		)	(1,698		)	(9,477		)
Reductions for increases in cash flows expected to be collected that are recognized over the remaining life of the security	40			21			77			21
Balance of cumulative credit losses on debt securities, end of period	$	(29,181	)	$	(25,068	)	$	(29,181	)	$	(25,068	)

The following table presents the gross unrealized losses and estimated fair values of investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2011:



	Less than 12 months					12 months or longer					Total
	Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses
	(in thousands)
U.S. Government sponsored agency securities	$	5,401	$	(7	)	$	175	$	(1	)	$	5,576	$	(8	)
Corporate debt securities	16,909		(1,060		)	41,371		(11,852		)	58,280		(12,912		)
Collateralized mortgage obligations	101,324		(353		)	—		—			101,324		(353		)
Mortgage-backed securities	26,100		(69		)	—		—			26,100		(69		)
Auction rate securities	37,059		(1,915		)	182,341		(13,138		)	219,400		(15,053		)
Total debt securities	186,793		(3,404		)	223,887		(24,991		)	410,680		(28,395		)
Equity securities	13,747		(4,951		)	1,316		(457		)	15,063		(5,408		)
	$	200,540	$	(8,355	)	$	225,203	$	(25,448	)	$	425,743	$	(33,803	)

For its investments in equity securities, most notably its investments in stocks of financial institutions, management evaluates the near-term prospects of the issuers in relation to the severity and duration of the impairment. Based on that evaluation and the Corporation’s ability and intent to hold those investments for a reasonable period of time sufficient for a recovery of fair value, the Corporation does not consider those investments with unrealized holding losses as of September 30, 2011 to be other-than-temporarily impaired.

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

As noted above, during the three months ended September 30, 2011, the Corporation recorded $292,000 of other-than-temporary impairment charges for two individual ARCs based on an expected cash flows model. After other-than-temporary impairment charges, the two other-than-temporarily impaired ARCs had a cost basis of $1.6 million and a fair value of $1.1 million. These other-than-temporarily impaired ARCs have principal payments supported by non-guaranteed private student loans, as opposed to Federally guaranteed student loans. In addition, the student loans underlying these other-than-temporarily impaired ARCs had actual defaults of approximately 16%, resulting in an erosion of parity levels, or the ratio of total underlying ARC collateral to total bond values, to approximately 85% as of September 30, 2011.

As of September 30, 2011, approximately $192 million, or 80%, of the ARCs were rated above investment grade, with approximately $144 million, or 60%, AAA rated. Approximately $49 million, or 20%, of ARCs were rated below investment grade by at least one ratings agency or were not rated. Of this amount, approximately $28 million, or 58%, of the student loans underlying the ARCs have principal payments which are guaranteed by the Federal government. In total, approximately $214 million, or 89%, of the student loans underlying the ARCs have principal payments which are guaranteed by the Federal government. As of September 30, 2011, all ARCs were current and making scheduled interest payments. Based on management’s evaluations, ARCs with a fair value of $241 million were not subject to any additional other-than-temporary impairment charges as of September 30, 2011. The Corporation does not have the intent to sell and does not believe it will more likely than not be required to sell any of these securities prior to a recovery of their fair value to amortized cost, which may be maturity.

The Corporation’s collateralized mortgage obligations and mortgage-backed securities have contractual terms that generally do not permit the issuer to settle the securities at a price less than the amortized cost of the investment. Because the decline in market value of these securities is attributable to changes in interest rates and not credit quality, and because the Corporation does not have the intent to sell and does not believe it will more likely than not be required to sell any of these securities prior to a recovery of their fair value to amortized cost, the Corporation does not consider these investments to be other-than-temporarily impaired as of September 30, 2011.

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



	September 30, 2011				December 31, 2010
	Amortized cost		Estimated fair value		Amortized cost		Estimated fair value
	(in thousands)
Single-issuer trust preferred securities	$	86,366	$	77,861	$	91,257	$	81,789
Subordinated debt	35,080		36,754		34,995		35,915
Pooled trust preferred securities	6,464		5,275		8,295		4,528
Corporate debt securities issued by financial institutions	127,910		119,890		134,547		122,232
Other corporate debt securities	2,545		2,545		2,554		2,554
Available for sale corporate debt securities	$	130,455	$	122,435	$	137,101	$	124,786

The Corporation’s investments in single-issuer trust preferred securities had an unrealized loss of $8.5 million at September 30, 2011. The Corporation did not record any other-than-temporary impairment charges for single-issuer trust preferred securities during the three or nine months ended September 30, 2011 or 2010, respectively. The Corporation held 13 single-issuer trust preferred securities that were rated below investment grade by at least one ratings agency, with an amortized cost of $42.1 million and an estimated fair value of $38.7 million at September 30, 2011. The majority of the single-issuer trust preferred securities rated below investment grade were rated BB or Baa. Single-issuer trust preferred securities with an amortized cost of $10.8 million and an estimated fair value of $9.0 million at September 30, 2011 were not rated by any ratings agency.

The Corporation holds ten pooled trust preferred securities. As of September 30, 2011, nine of these securities, with an amortized cost of $5.8 million and an estimated fair value of $4.7 million, were rated below investment grade by at least one ratings agency, with ratings ranging from C to Ca. For each of the nine pooled trust preferred securities rated below investment grade, the class of securities held by the Corporation is below the most senior tranche, with the Corporation’s interests being subordinate to other investors in the pool. The Corporation determines the fair value of pooled trust preferred securities based on quotes provided by third-party brokers.

The amortized cost of pooled trust preferred securities is the purchase price of the securities, net of cumulative credit related other-than-temporary impairment charges, determined using an expected cash flows model. The most significant input to the expected cash flows model was the expected payment deferral rate for each pooled trust preferred security. The Corporation evaluates the financial metrics, such as capital ratios and non-performing asset ratios, of the individual financial institution issuers that comprise each pooled trust preferred security to estimate its expected deferral rate. The actual weighted average cumulative defaults and deferrals as a percentage of original collateral were approximately 39% as of September 30, 2011. The discounted cash flow modeling for pooled trust preferred securities held by the Corporation as of September 30, 2011 assumed, on average, an additional 19% expected deferral rate.

Based on management’s evaluations, corporate debt securities with a fair value of $122.4 million were not subject to any additional other-than-temporary impairment charges as of September 30, 2011. The Corporation does not have the intent to sell and does not believe it will more likely than not be required to sell any of these securities prior to a recovery of their fair value to amortized cost, which may be maturity.