FULT 6.30.2012 10Q

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20459 

FORM 10-Q

(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2012, or

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

For the transition period from              to              

Commission File No. 0-10587
FULTON FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter) 
PENNSYLVANIA
 
23-2195389
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
One Penn Square, P.O. Box 4887, Lancaster, Pennsylvania
 
17604
(Address of principal executive offices)
 
(Zip Code)

(717) 291-2411
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
ý
  
Accelerated filer
 
¨
Non-accelerated filer
 
¨
  
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý

APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
Common Stock, $2.50 Par Value – 200,389,000 shares outstanding as of July 31, 2012.


FULTON FINANCIAL CORPORATION
FORM 10-Q FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2012
INDEX
 
Description
 
Page
 
 
 
 
PART I. FINANCIAL INFORMATION
 
 
 
 
 
 
 
 
 
 
(a)
 
 
 
 
 
(b)
 
 
 
 
 
(c)
 
 
 
 
 
(d)
 
 
 
 
 
(e)
 
 
 
 
 
(f)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2



Item 1. Financial Statements
 
FULTON FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS 
 
(in thousands, except per-share data)
 
June 30,
2012
 
December 31,
2011
 
(unaudited)
 
ASSETS
 
 
 
Cash and due from banks
$
242,811

 
$
292,598

Interest-bearing deposits with other banks
118,468

 
175,336

Loans held for sale
71,406

 
47,009

Investment securities:
 
 
 
Held to maturity (estimated fair value of $6,571 in 2012 and $6,669 in 2011)
6,562

 
6,669

Available for sale
2,864,270

 
2,673,298

Loans, net of unearned income
11,982,833

 
11,968,970

Less: Allowance for loan losses
(235,737
)
 
(256,471
)
Net Loans
11,747,096

 
11,712,499

Premises and equipment
222,083

 
212,274

Accrued interest receivable
48,283

 
51,098

Goodwill
535,980

 
536,005

Intangible assets
6,642

 
8,204

Other assets
474,149

 
655,518

Total Assets
$
16,337,750

 
$
16,370,508

LIABILITIES
 
 
 
Deposits:
 
 
 
Noninterest-bearing
$
2,748,269

 
$
2,588,034

Interest-bearing
9,484,215

 
9,937,705

Total Deposits
12,232,484

 
12,525,739

Short-term borrowings:
 
 
 
Federal funds purchased
566,167

 
253,470

Other short-term borrowings
365,514

 
343,563

Total Short-Term Borrowings
931,681

 
597,033

Accrued interest payable
23,725

 
25,686

Other liabilities
199,867

 
189,362

Federal Home Loan Bank advances and long-term debt
908,809

 
1,040,149

Total Liabilities
14,296,566

 
14,377,969

SHAREHOLDERS’ EQUITY
 
 
 
Common stock, $2.50 par value, 600 million shares authorized, 216.6 million shares issued in 2012 and 216.2 million shares issued in 2011
541,587

 
540,386

Additional paid-in capital
1,425,037

 
1,423,727

Retained earnings
313,970

 
264,059

Accumulated other comprehensive income
482

 
7,955

Treasury stock, at cost, 15.8 million shares in 2012 and 16.0 million shares in 2011
(239,892
)
 
(243,588
)
Total Shareholders’ Equity
2,041,184

 
1,992,539

Total Liabilities and Shareholders’ Equity
$
16,337,750

 
$
16,370,508

 
 
 
 
See Notes to Consolidated Financial Statements
 
 
 
 

3

FULTON FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
 
(in thousands, except per-share data)
 
Three Months Ended
June 30
 
Six Months Ended
June 30
 
2012
 
2011
 
2012
 
2011
INTEREST INCOME
 
 
 
 
 
 
 
Loans, including fees
$
141,541

 
$
149,751

 
$
285,887

 
$
299,247

Investment securities:
 
 
 
 
 
 
 
Taxable
18,624

 
20,749

 
37,285

 
42,556

Tax-exempt
2,596

 
3,146

 
5,297

 
6,321

Dividends
641

 
696

 
1,340

 
1,379

Loans held for sale
538

 
492

 
969

 
992

Other interest income
45

 
101

 
98

 
134

Total Interest Income
163,985

 
174,935

 
330,876

 
350,629

INTEREST EXPENSE
 
 
 
 
 
 
 
Deposits
14,743

 
21,775

 
30,993

 
45,061

Short-term borrowings
411

 
168

 
692

 
422

Long-term debt
11,301

 
12,347

 
22,966

 
24,938

Total Interest Expense
26,455

 
34,290

 
54,651

 
70,421

Net Interest Income
137,530

 
140,645

 
276,225

 
280,208

Provision for credit losses
25,500

 
36,000

 
53,500

 
74,000

Net Interest Income After Provision for Credit Losses
112,030

 
104,645

 
222,725

 
206,208

NON-INTEREST INCOME
 
 
 
 
 
 
 
Service charges on deposit accounts
15,367

 
14,332

 
30,209

 
27,637

Other service charges and fees
11,507

 
12,709

 
22,062

 
24,191

Mortgage banking income
11,143

 
6,049

 
21,193

 
11,512

Investment management and trust services
9,822

 
9,638

 
19,199

 
18,842

Other
3,987

 
3,386

 
9,592

 
7,108

Investment securities gains (losses), net:
 
 
 
 
 
 
 
Other-than-temporary impairment losses
(57
)
 
(71
)
 
(57
)
 
(1,092
)
Less: Portion of gain recognized in other comprehensive income (before taxes)
—

 
(322
)
 
—

 
(592
)
Net other-than-temporary impairment losses
(57
)
 
(393
)
 
(57
)
 
(1,684
)
Net gains on sales of investment securities
1,595

 
58

 
2,846

 
3,634

Investment securities gains (losses), net
1,538

 
(335
)
 
2,789

 
1,950

Total Non-Interest Income
53,364

 
45,779

 
105,044

 
91,240

NON-INTEREST EXPENSES
 
 
 
 
 
 
 
Salaries and employee benefits
60,091

 
56,070

 
120,451

 
110,378

Net occupancy expense
11,205

 
10,874

 
22,140

 
22,240

Data processing
3,759

 
3,214

 
7,447

 
6,586

Equipment expense
3,185

 
3,377

 
6,554

 
6,509

FDIC insurance expense
3,002


3,264

 
6,023

 
8,018

Professional fees
2,984


3,102

 
5,566

 
5,951

Other real estate owned and repossession expense
2,823

 
982

 
5,751

 
2,253

Marketing
2,583

 
1,863

 
5,055

 
4,699

Software
2,272

 
1,973

 
4,447

 
4,004

Operating risk loss
2,055

 
(8
)
 
5,423

 
(470
)
Intangible amortization
761

 
1,172

 
1,562

 
2,350

Other
17,423


15,002

 
32,435

 
29,231

Total Non-Interest Expenses
112,143

 
100,885

 
222,854

 
201,749

Income Before Income Taxes
53,251

 
49,539

 
104,915

 
95,699

Income taxes
13,360

 
13,154

 
26,892

 
25,529

Net Income
$
39,891

 
$
36,385

 
$
78,023

 
$
70,170

 
 
 
 
 
 
 
 
PER SHARE:
 
 
 
 
 
 
 
Net Income (Basic)
$
0.20

 
$
0.18

 
$
0.39

 
$
0.35

Net Income (Diluted)
0.20

 
0.18

 
0.39

 
0.35

Cash Dividends
0.07

 
0.05

 
0.14

 
0.09

See Notes to Consolidated Financial Statements
 
 
 
 
 
 
 

4

FULTON FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
 
(in thousands)
 
Three Months Ended June 30
 
Six Months Ended June 30
 
2012
 
2011
 
2012
 
2011
 
 
Net Income
$
39,891

 
$
36,385

 
$
78,023

 
$
70,170

Other Comprehensive Income (Loss), net of tax:
 
 
 
 
 
 
 
Unrealized (loss) gain on securities
(10,704
)
 
13,451

 
(6,120
)
 
17,019

Reclassification adjustment for securities (gains) losses included in net income
(999
)
 
218

 
(1,812
)
 
(1,267
)
Non-credit related unrealized gain (loss) on other-than-temporarily impaired debt securities
(172
)
 
480

 
(37
)
 
729

Unrealized gain on derivative financial instruments
34

 
34

 
68

 
68

Amortization (accretion) of net unrecognized pension and postretirement items
214

 
(12
)
 
428

 
(24
)
Other Comprehensive Income (Loss)
(11,627
)
 
14,171

 
(7,473
)
 
16,525

Total Comprehensive Income
$
28,264

 
$
50,556

 
$
70,550

 
$
86,695

 
 
 
 
 
 
 
 
See Notes to Consolidated Financial Statements
 
 
 
 
 
 
 


5

FULTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2012 AND 2011
 
(in thousands, except per-share data)
 
Common Stock
 
 
 
Retained
Earnings
 
 
 
Treasury
Stock
 
Total
 
Shares
Outstanding
 
Amount
 
Additional Paid-in
Capital
 
Accumulated
Other Comprehensive
Income
 
 
 
Balance at December 31, 2011
200,164

 
$
540,386

 
$
1,423,727

 
$
264,059

 
$
7,955

 
$
(243,588
)
 
$
1,992,539

Net income

 

 

 
78,023

 

 

 
78,023

Other comprehensive loss

 

 

 

 
(7,473
)
 

 
(7,473
)
Stock issued, including related tax benefits
716

 
1,201

 
(1,740
)
 

 

 
3,696

 
3,157

Stock-based compensation awards

 

 
3,050

 

 

 

 
3,050

Common stock cash dividends - $0.14 per share

 

 

 
(28,112
)
 

 

 
(28,112
)
Balance at June 30, 2012
200,880

 
$
541,587

 
$
1,425,037

 
$
313,970

 
$
482

 
$
(239,892
)
 
$
2,041,184

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2010
199,050

 
$
538,492

 
$
1,420,127

 
$
158,453

 
$
12,495

 
$
(249,178
)
 
$
1,880,389

Net income

 

 

 
70,170

 

 

 
70,170

Other comprehensive income

 

 

 

 
16,525

 

 
16,525

Stock issued, including related tax benefits
320

 
431

 
398

 

 

 
2,247

 
3,076

Stock-based compensation awards

 

 
1,101

 

 

 

 
1,101

Common stock cash dividends - $0.09 per share

 

 

 
(17,952
)
 

 

 
(17,952
)
Balance at June 30, 2011
199,370

 
$
538,923

 
$
1,421,626

 
$
210,671

 
$
29,020

 
$
(246,931
)
 
$
1,953,309

 
 
 
 
 
 
 
 
 
 
 
 
 
 
See Notes to Consolidated Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 

6

FULTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
(in thousands)
 
Six Months Ended
June 30
 
2012
 
2011
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net Income
$
78,023

 
$
70,170

Adjustments to reconcile net income to net cash provided by operating activities:

 

Provision for credit losses
53,500

 
74,000

Depreciation and amortization of premises and equipment
10,845

 
10,462

Net amortization of investment securities premiums
5,251

 
1,999

Investment securities gains, net
(2,789
)
 
(1,950
)
Net (increase) decrease in loans held for sale
(24,397
)
 
36,807

Amortization of intangible assets
1,562

 
2,350

Stock-based compensation
3,050

 
1,101

Excess tax benefits from stock-based compensation
(14
)
 
—

Decrease in accrued interest receivable
2,815

 
2,454

Decrease in other assets
3,829

 
22,955

Decrease in accrued interest payable
(1,961
)
 
(3,889
)
Increase (decrease) in other liabilities
5,910

 
(11,566
)
Total adjustments
57,601

 
134,723

Net cash provided by operating activities
135,624

 
204,893

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Proceeds from sales of securities available for sale
210,804

 
416,480

Proceeds from maturities of securities held to maturity
121

 
160

Proceeds from maturities of securities available for sale
371,176

 
279,841

Purchase of securities held to maturity
(14
)
 
(14
)
Purchase of securities available for sale
(602,642
)
 
(356,323
)
Decrease (increase) in short-term investments
56,868

 
(91,670
)
Net increase in loans
(88,224
)
 
(49
)
Net purchases of premises and equipment
(20,654
)
 
(9,623
)
Net cash (used in) provided by investing activities
(72,565
)
 
238,802

CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Net (decrease) increase in demand and savings deposits
(13,950
)
 
229,071

Net decrease in time deposits
(279,305
)
 
(354,757
)
Increase (decrease) in short-term borrowings
334,648

 
(127,496
)
Repayments of long-term debt
(131,340
)
 
(93,913
)
Net proceeds from issuance of stock
3,143

 
3,076

Excess tax benefits from stock-based compensation
14

 
—

Dividends paid
(26,056
)
 
(13,939
)
Net cash used in financing activities
(112,846
)
 
(357,958
)
 
 
 
 
Net (Decrease) Increase in Cash and Due From Banks
(49,787
)
 
85,737

Cash and Due From Banks at Beginning of Period
292,598

 
198,954

Cash and Due From Banks at End of Period
$
242,811

 
$
284,691

 
 
 
 
Supplemental Disclosures of Cash Flow Information:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
56,612

 
$
74,310

Income taxes
22,646

 
7,469

See Notes to Consolidated Financial Statements
 
 
 
 

7

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 conformity with U.S. generally accepted accounting principles (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the amounts of assets and liabilities as of the date of the financial statements as well as revenues and expenses during the period. Actual results could differ from those estimates. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six-month periods ended June 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. The Corporation evaluates subsequent events through the date of filing with the Securities and Exchange Commission (SEC).

NOTE B – Net Income Per Share
Basic net income per common share is calculated as net income divided by the weighted average number of common shares outstanding.
For diluted net income per common share, net income is divided by the weighted average number of common shares outstanding plus the incremental number of shares added as a result of converting common stock equivalents, calculated using the treasury stock method. The Corporation’s common stock equivalents consist of outstanding stock options and restricted stock.
A reconciliation of weighted average common shares outstanding used to calculate basic net income per common share and diluted net income per common share follows for the three and six months ended June 30:
 
Three Months Ended
June 30
 
Six Months Ended
June 30
 
2012
 
2011
 
2012
 
2011
 
(in thousands)
 
 
 
 
Weighted average shares outstanding (basic)
199,671

 
198,772

 
199,581

 
198,686

Effect of dilutive securities
1,135

 
755

 
994

 
721

Weighted average shares outstanding (diluted)
200,806

 
199,527

 
200,575

 
199,407

For the three and six months ended June 30, 2012, 5.2 million stock options were excluded from the diluted net income per share computation as their effect would have been anti-dilutive. For the three and six months ended June 30, 2011, 4.6 million stock options were excluded from the diluted net income per share computation as their effect would have been anti-dilutive.



8


NOTE C – Accumulated Other Comprehensive Income
The following table presents changes in other comprehensive income for the three and six months ended June 30, 2012 and 2011: 
 
Before-Tax Amount
 
Tax Effect
 
Net of Tax Amount
 
(in thousands)
Three Months Ended June 30, 2012
 
 
 
 
 
Unrealized gain (loss) on securities
$
(16,468
)
 
$
5,764

 
$
(10,704
)
Reclassification adjustment for securities (gains) losses included in net income
(1,537
)
 
538

 
(999
)
Non-credit related unrealized gain (loss) on other-than-temporarily impaired debt securities
(264
)
 
92

 
(172
)
Unrealized gain on derivative financial instruments
52

 
(18
)
 
34

Amortization (accretion) of net unrecognized pension and postretirement items
329

 
(115
)
 
214

Total Other Comprehensive Income (Loss)
$
(17,888
)
 
$
6,261

 
$
(11,627
)
Three Months Ended June 30, 2011
 
 
 
 
 
Unrealized gain (loss) on securities
$
20,694

 
$
(7,243
)
 
$
13,451

Reclassification adjustment for securities (gains) losses included in net income
335

 
(117
)
 
218

Non-credit related unrealized gain (loss) on other-than-temporarily impaired debt securities
738

 
(258
)
 
480

Unrealized gain on derivative financial instruments
52

 
(18
)
 
34

Amortization (accretion) of net unrecognized pension and postretirement items
(19
)
 
7

 
(12
)
Total Other Comprehensive Income (Loss)
$
21,800

 
$
(7,629
)
 
$
14,171

Six Months Ended June 30, 2012
 
 
 
 
 
Unrealized gain (loss) on securities
$
(9,415
)
 
$
3,295

 
$
(6,120
)
Reclassification adjustment for securities (gains) losses included in net income
(2,788
)
 
976

 
(1,812
)
Non-credit related unrealized gain (loss) on other-than-temporarily impaired debt securities
(57
)
 
20

 
(37
)
Unrealized gain on derivative financial instruments
104

 
(36
)
 
68

Amortization (accretion) of net unrecognized pension and postretirement items
659

 
(231
)
 
428

Total Other Comprehensive Income (Loss)
$
(11,497
)
 
$
4,024

 
$
(7,473
)
Six Months Ended June 30, 2011
 
 
 
 
 
Unrealized gain (loss) on securities
$
26,183

 
$
(9,164
)
 
$
17,019

Reclassification adjustment for securities (gains) losses included in net income
(1,949
)
 
682

 
(1,267
)
Non-credit related unrealized gain (loss) on other-than-temporarily impaired debt securities
1,121

 
(392
)
 
729

Unrealized gain on derivative financial instruments
104

 
(36
)
 
68

Amortization (accretion) of net unrecognized pension and postretirement items
(37
)
 
13

 
(24
)
Total Other Comprehensive Income (Loss)
$
25,422

 
$
(8,897
)
 
$
16,525


9

The following table presents changes in each component of accumulated other comprehensive income, net of tax, for the three and six months ended June 30, 2012 and 2011: 
 
Unrealized Gains on Investment Securities Not Other-Than-Temporarily Impaired
 
Unrealized Non-Credit Losses on Other-Than-Temporarily Impaired Debt Securities
 
Unrecognized Pension and Postretirement Plan Items
 
Unrealized Effective Portions of Losses on Forward-Starting Interest Rate Swaps
 
Total
 
(in thousands)
Three months ended June 30, 2012
 
 
 
 
 
 
 
 
 
Balance at March 31, 2012
$
30,825

 
$
(876
)
 
$
(14,920
)
 
$
(2,920
)
 
$
12,109

Current-period other comprehensive income (loss)
(11,703
)
 
(172
)
 
214

 
34

 
(11,627
)
Balance at June 30, 2012
$
19,122

 
$
(1,048
)
 
$
(14,706
)
 
$
(2,886
)
 
$
482

Three months ended June 30, 2011

 

 

 

 

Balance at March 31, 2011
$
23,791

 
$
(1,460
)
 
$
(4,426
)
 
$
(3,056
)
 
$
14,849

Current-period other comprehensive income (loss)
13,436

 
713

 
(12
)
 
34

 
14,171

Balance at June 30, 2011
$
37,227

 
$
(747
)
 
$
(4,438
)
 
$
(3,022
)
 
$
29,020

 
 
 
 
 
 
 
 
 
 
Six months ended June 30, 2012
 
 
 
 
 
 
 
 
 
Balance at December 31, 2011
$
27,054

 
$
(1,011
)
 
$
(15,134
)
 
$
(2,954
)
 
$
7,955

Current-period other comprehensive income (loss)
(7,932
)
 
(37
)
 
428

 
68

 
(7,473
)
Balance at June 30, 2012
$
19,122

 
$
(1,048
)
 
$
(14,706
)
 
$
(2,886
)
 
$
482

Six months ended June 30, 2011
 
 
 
 
 
 
 
 
 
Balance at December 31, 2010
$
22,354

 
$
(2,355
)
 
$
(4,414
)
 
$
(3,090
)
 
$
12,495

Current-period other comprehensive income (loss)
14,873

 
1,608

 
(24
)
 
68

 
16,525

Balance at June 30, 2011
$
37,227

 
$
(747
)
 
$
(4,438
)
 
$
(3,022
)
 
$
29,020




NOTE D – Investment Securities
The following table presents the amortized cost and estimated fair values of investment securities:
Held to Maturity at June 30, 2012
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
 
(in thousands)
U.S. Government sponsored agency securities
$
6,001

 
$
—

 
$
(27
)
 
$
5,974

State and municipal securities
179

 
—

 
—

 
179

Mortgage-backed securities
382

 
36

 
—

 
418

 
$
6,562

 
$
36

 
$
(27
)
 
$
6,571

Available for Sale at June 30, 2012
 
 
 
 
 
 
 
Equity securities
$
104,086

 
$
2,738

 
$
(1,413
)
 
$
105,411

U.S. Government securities
327

 
—

 
—

 
327

U.S. Government sponsored agency securities
3,939

 
54

 
(1
)
 
3,992

State and municipal securities
289,364

 
14,153

 
(37
)
 
303,480

Corporate debt securities
135,886

 
5,991

 
(11,502
)
 
130,375

Collateralized mortgage obligations
965,499

 
16,441

 
(283
)
 
981,657

Mortgage-backed securities
1,098,949

 
36,797

 
—

 
1,135,746

Auction rate securities
238,408

 
—

 
(35,126
)
 
203,282

 
$
2,836,458

 
$
76,174

 
$
(48,362
)
 
$
2,864,270


10

Held to Maturity at December 31, 2011
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
 
(in thousands)
U.S. Government sponsored agency securities
$
5,987

 
$
—

 
$
(14
)
 
$
5,973

State and municipal securities
179

 
—

 
—

 
179

Mortgage-backed securities
503

 
44

 
—

 
547

 
$
6,669

 
$
44

 
$
(14
)
 
$
6,699

Available for Sale at December 31, 2011
 
 
 
 
 
 
 
Equity securities
$
117,486

 
$
2,383

 
$
(2,819
)
 
$
117,050

U.S. Government securities
334

 
—

 
—

 
334

U.S. Government sponsored agency securities
3,987

 
87

 
(1
)
 
4,073

State and municipal securities
306,186

 
15,832

 
—

 
322,018

Corporate debt securities
132,855

 
4,979

 
(14,528
)
 
123,306

Collateralized mortgage obligations
982,851

 
19,186

 
(828
)
 
1,001,209

Mortgage-backed securities
848,675

 
31,837

 
(415
)
 
880,097

Auction rate securities
240,852

 
120

 
(15,761
)
 
225,211

 
$
2,633,226

 
$
74,424

 
$
(34,352
)
 
$
2,673,298

Securities carried at $1.8 billion as of June 30, 2012 and December 31, 2011 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 $76.1 million and $82.5 million as of June 30, 2012 and December 31, 2011, respectively.
The amortized cost and estimated fair values of debt securities as of June 30, 2012, 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
$
179

 
$
179

 
$
53,656

 
$
54,119

Due from one year to five years
6,001

 
5,974

 
61,264

 
64,298

Due from five years to ten years
—

 
—

 
142,646

 
152,850

Due after ten years
—

 
—

 
410,358

 
370,189

 
6,180

 
6,153

 
667,924

 
641,456

Collateralized mortgage obligations
—

 
—

 
965,499

 
981,657

Mortgage-backed securities
382

 
418

 
1,098,949

 
1,135,746

 
$
6,562

 
$
6,571

 
$
2,732,372

 
$
2,758,859


11

The following table presents information related to the 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 June 30, 2012
 
 
 
 
 
 
 
Equity securities
$
1,517

 
$
—

 
$
(57
)
 
$
1,460

Debt securities
78

 
—

 
—

 
78

Total
$
1,595

 
$
—

 
$
(57
)
 
$
1,538

Three months ended June 30, 2011:
 
 
 
 
 
 
 
Equity securities
$
43

 
$
—

 
$
(34
)
 
$
9

Debt securities
16

 
(1
)
 
(359
)
 
(344
)
Total
$
59

 
$
(1
)
 
$
(393
)
 
$
(335
)
 
 
 
 
 
 
 
 
Six months ended June 30, 2012
 
 
 
 
 
 
 
Equity securities
$
2,603

 
$
—

 
$
(57
)
 
$
2,546

Debt securities
243

 
—

 
—

 
243

Total
$
2,846

 
$
—

 
$
(57
)
 
$
2,789

Six months ended June 30, 2011:
 
 
 
 
 
 
 
Equity securities
$
48

 
$
—

 
$
(331
)
 
$
(283
)
Debt securities
3,605

 
(19
)
 
(1,353
)
 
2,233

Total
$
3,653

 
$
(19
)
 
$
(1,684
)
 
$
1,950

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 at June 30, 2012 and 2011:
 
Three Months ended June 30
 
Six Months ended June 30
 
2012
 
2011
 
2012
 
2011
 
(in thousands)
Balance of cumulative credit losses on debt securities, beginning of period
$
(22,692
)
 
$
(28,517
)
 
$
(22,781
)
 
$
(27,560
)
Additions for credit losses recorded which were not previously recognized as components of earnings
—

 
(359
)
 
—

 
(1,353
)
Reductions for increases in cash flows expected to be collected that are recognized over the remaining life of the security
—

 
—

 
89

 
37

Balance of cumulative credit losses on debt securities, end of period
$
(22,692
)
 
$
(28,876
)
 
$
(22,692
)
 
$
(28,876
)

12

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 June 30, 2012:

 
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
$
112

 
$
(1
)
 
$
5,344

 
$
(27
)
 
$
5,456

 
$
(28
)
State and municipal securities
8,356

 
(37
)
 
—

 
—

 
8,356

 
(37
)
Corporate debt securities
6,942

 
(1,678
)
 
37,562

 
(9,824
)
 
44,504

 
(11,502
)
Collateralized mortgage obligations
95,032

 
(283
)
 
—

 
—

 
95,032

 
(283
)
Auction rate securities
21,868

 
(2,064
)
 
181,414

 
(33,062
)
 
203,282

 
(35,126
)
Total debt securities
132,310

 
(4,063
)
 
224,320

 
(42,913
)
 
356,630

 
(46,976
)
Equity securities
6,221

 
(613
)
 
4,287

 
(800
)
 
10,508

 
(1,413
)
 
$
138,531

 
$
(4,676
)
 
$
228,607

 
$
(43,713
)
 
$
367,138

 
$
(48,389
)
For its investments in equity securities, particularly 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 June 30, 2012 to be other-than-temporarily impaired. As of June 30, 2012, the financial institutions stock portfolio had a cost basis of $21.3 million and a fair value of $22.6 million.
The unrealized holding losses on student loan auction rate securities, also known as auction rate certificates (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 purchased ARCs for customers as short-term investments with fair values that could be derived based on periodic auctions under normal market conditions. During 2008 and 2009, the Corporation purchased ARCs from customers due to the failure of these periodic auctions, which made these previously short-term investments illiquid.
As of June 30, 2012, approximately $155 million, or 76%, of the ARCs were rated above investment grade, with approximately $24 million, or 12%, AAA rated and $94 million, or 46%, AA rated. Approximately $48 million, or 24%, of ARCs were either not rated or rated below investment grade by at least one ratings agency. Of this amount, approximately $30 million, or 61%, of the student loans underlying these ARCs have principal payments which are guaranteed by the federal government. In total, approximately $184 million, or 90%, of the student loans underlying the ARCs have principal payments which are guaranteed by the federal government. As of June 30, 2012, all ARCs were current and making scheduled interest payments. Based on management’s evaluations, ARCs with a fair value of $203.3 million were not subject to any other-than-temporary impairment charges as of June 30, 2012. 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 at 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 June 30, 2012.

13

The majority of the Corporation's available for sale corporate debt securities are issued by financial institutions. The following table presents the amortized cost and estimated fair values of corporate debt securities:
 
June 30, 2012
 
December 31, 2011
 
Amortized
cost
 
Estimated
fair value
 
Amortized
cost
 
Estimated
fair value
 
(in thousands)
Single-issuer trust preferred securities
$
84,321

 
$
76,823

 
$
83,899

 
$
74,365

Subordinated debt
43,233

 
46,012

 
40,184

 
41,296

Pooled trust preferred securities
5,810

 
5,018

 
6,236

 
5,109

Corporate debt securities issued by financial institutions
133,364

 
127,853

 
130,319

 
120,770

Other corporate debt securities
2,522

 
2,522

 
2,536

 
2,536

Available for sale corporate debt securities
$
135,886

 
$
130,375

 
$
132,855

 
$
123,306


The Corporation’s investments in single-issuer trust preferred securities had an unrealized loss of $7.5 million at June 30, 2012. The Corporation did not record any other-than-temporary impairment charges for single-issuer trust preferred securities during the six months ended June 30, 2012 or 2011. The Corporation held 12 single-issuer trust preferred securities that were rated below investment grade by at least one ratings agency, with an amortized cost of $41.7 million and an estimated fair value of $40.7 million at June 30, 2012. The majority of the single-issuer trust preferred securities rated below investment grade were rated BB or Ba. Single-issuer trust preferred securities with an amortized cost of $8.0 million and an estimated fair value of $6.5 million at June 30, 2012 were not rated by any ratings agency.
The Corporation held ten pooled trust preferred securities as of June 30, 2012. Nine of these securities, with an amortized cost of $5.6 million and an estimated fair value of $4.8 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 was 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 is 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 40.4% as of June 30, 2012.
Based on management’s evaluations, corporate debt securities with a fair value of $130.4 million were not subject to any other-than-temporary impairment charges as of June 30, 2012. 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.



14


NOTE E – Loans and Allowance for Credit Losses
Loans, Net of Unearned Income
Loans, net of unearned income are summarized as follows:
 
June 30, 2012
 
December 31, 2011
 
(in thousands)
Real-estate - commercial mortgage
$
4,653,097

 
$
4,602,596

Commercial - industrial, financial and agricultural
3,538,188

 
3,639,368

Real-estate - home equity
1,599,468

 
1,624,562

Real-estate - residential mortgage
1,183,613

 
1,097,192

Real-estate - construction
619,060

 
615,445

Consumer
308,469

 
318,101

Leasing and other
69,872

 
63,254

Overdrafts
18,332

 
15,446

Loans, gross of unearned income
11,990,099

 
11,975,964

Unearned income
(7,266
)
 
(6,994
)
Loans, net of unearned income
$
11,982,833

 
$
11,968,970

Allowance for Credit Losses
The allowance for credit losses consists of the allowance for loan losses and the reserve for unfunded lending commitments. The allowance for loan losses represents management’s estimate of losses inherent in the loan portfolio as of the balance sheet date and is recorded as a reduction to loans. The reserve for unfunded lending commitments represents management’s estimate of losses inherent in its unfunded loan commitments and is recorded in other liabilities on the consolidated balance sheet. The allowance for credit losses is increased by charges to expense, through the provision for credit losses, and decreased by charge-offs, net of recoveries.
The Corporation’s established methodology for evaluating the adequacy of the allowance for loan losses considers both components of the allowance: (1) specific allowances allocated to loans evaluated for impairment under the Financial Accounting Standards Board’s (FASB) Accounting Standards Codification (ASC) Section 310-10-35, and (2) allowances calculated for pools of loans measured for impairment under FASB ASC Subtopic 450-20.
The development of the Corporation’s allowance for credit losses is based first on a segmentation of its loan portfolio by general loan type, or "portfolio segments," as presented in the table under the heading, "Loans, Net of Unearned Income," above. Certain portfolio segments are further disaggregated and evaluated collectively for impairment based on “class segments,” which are largely based on the type of collateral underlying each loan. For commercial loans, class segments include loans secured by collateral and unsecured loans. Construction loan class segments include loans secured by commercial real estate and loans secured by residential real estate. Consumer loan class segments are based on collateral types and include direct consumer installment loans and indirect automobile loans.

15

The following table presents the components of the allowance for credit losses:
 
June 30,
2012
 
December 31,
2011
 
(in thousands)
Allowance for loan losses
$
235,737

 
$
256,471

Reserve for unfunded lending commitments
1,579

 
1,706

Allowance for credit losses
$
237,316

 
$
258,177

The following table presents the activity in the allowance for credit losses for the three and six months ended June 30:
 
Three months ended
June 30
 
Six months ended
June 30
 
2012
 
2011
 
2012
 
2011
 
(in thousands)
Balance at beginning of period
$
258,137

 
$
271,156

 
$
258,177

 
$
275,498

Loans charged off
(50,540
)
 
(40,675
)
 
(80,799
)
 
(86,204
)
Recoveries of loans previously charged off
4,219

 
2,152

 
6,438

 
5,339

Net loans charged off
(46,321
)
 
(38,523
)
 
(74,361
)
 
(80,865
)
Provision for credit losses
25,500

 
36,000

 
53,500

 
74,000

Balance at end of period
$
237,316

 
$
268,633

 
$
237,316

 
$
268,633



16

The following table presents the activity in the allowance for loan losses by portfolio segment for the three and six months ended June 30, 2012 and 2011:
 
Real Estate -
Commercial
Mortgage
 
Commercial -
Industrial,
Financial and
Agricultural
 
Real Estate -
Home
Equity
 
Real Estate -
Residential
Mortgage
 
Real Estate -
Construction
 
Consumer
 
Leasing
and other
and
overdrafts
 
Unallocated
 
Total
 
(in thousands)
Three months ended June 30, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at March 31, 2012
$
81,652

 
$
79,756

 
$
13,083

 
$
24,851

 
$
31,186

 
$
1,643

 
$
3,274

 
$
21,051

 
$
256,496

Loans charged off
(23,699
)
 
(13,017
)
 
(2,789
)
 
(1,492
)
 
(8,442
)
 
(471
)
 
(630
)
 
—

 
(50,540
)
Recoveries of loans previously charged off
1,153

 
717

 
278

 
71

 
1,539

 
281

 
180

 
—

 
4,219

Net loans charged off
(22,546
)
 
(12,300
)
 
(2,511
)
 
(1,421
)
 
(6,903
)
 
(190
)
 
(450
)
 
—

 
(46,321
)
Provision for loan losses (1)
10,763

 
4,475

 
3,872

 
3,281

 
1,276

 
363

 
419

 
1,113

 
25,562

Balance at June 30, 2012
$
69,869

 
$
71,931

 
$
14,444

 
$
26,711

 
$
25,559

 
$
1,816

 
$
3,243

 
$
22,164

 
$
235,737

Three months ended June 30, 2011
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at March 31, 2011
48,558

 
100,180

 
5,656

 
19,575

 
55,491

 
4,736

 
2,576

 
33,500

 
270,272

Loans charged off
(7,074
)
 
(15,406
)
 
(1,650
)
 
(7,707
)
 
(7,468
)
 
(681
)
 
(689
)
 
—

 
(40,675
)
Recoveries of loans previously charged off
191

 
1,003

 
2

 
190

 
79

 
433

 
254

 
—

 
2,152

Net loans charged off
(6,883
)
 
(14,403
)
 
(1,648
)
 
(7,517
)
 
(7,389
)
 
(248
)
 
(435
)
 
—

 
(38,523
)
Provision for loan losses
9,040

 
10,224

 
1,862

 
11,958

 
7,239

 
343

 
590

 
(6,322
)
 
34,934

Impact of change in allowance methodology
22,883

 
(13,388
)
 
3,690

 
7,896

 
(24,771
)
 
(3,076
)
 
(944
)
 
7,710

 
—

Provision for loan losses, including impact of change in allowance methodology (1)
31,923

 
(3,164
)
 
5,552

 
19,854

 
(17,532
)
 
(2,733
)
 
(354
)
 
1,388

 
34,934

Balance at June 30, 2011
73,598

 
82,613

 
9,560

 
31,912

 
30,570

 
1,755

 
1,787

 
34,888

 
266,683

Six months ended June 30, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2011
$
85,112

 
$
74,896

 
$
12,841

 
$
22,986

 
$
30,066