FULT 9.30.2012 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 September 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 – 199,109,000 shares outstanding as of October 31, 2012.


FULTON FINANCIAL CORPORATION
FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 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)
 
September 30,
2012
 
December 31,
2011
 
(unaudited)
 
ASSETS
 
 
 
Cash and due from banks
$
217,207

 
$
292,598

Interest-bearing deposits with other banks
202,305

 
175,336

Loans held for sale
85,477

 
47,009

Investment securities:
 
 
 
Held to maturity (estimated fair value of $487 in 2012 and $6,699 in 2011)
454

 
6,669

Available for sale
2,789,684

 
2,673,298

Loans, net of unearned income
11,933,001

 
11,968,970

Less: Allowance for loan losses
(233,864
)
 
(256,471
)
Net Loans
11,699,137

 
11,712,499

Premises and equipment
225,771

 
212,274

Accrued interest receivable
49,784

 
51,098

Goodwill
535,959

 
536,005

Intangible assets
5,886

 
8,204

Other assets
461,465

 
655,518

Total Assets
$
16,273,129

 
$
16,370,508

LIABILITIES
 
 
 
Deposits:
 
 
 
Noninterest-bearing
$
2,903,591

 
$
2,588,034

Interest-bearing
9,697,719

 
9,937,705

Total Deposits
12,601,310

 
12,525,739

Short-term borrowings:
 
 
 
Federal funds purchased
170,261

 
253,470

Other short-term borrowings
316,710

 
343,563

Total Short-Term Borrowings
486,971

 
597,033

Accrued interest payable
21,818

 
25,686

Other liabilities
193,724

 
189,362

Federal Home Loan Bank advances and long-term debt
908,623

 
1,040,149

Total Liabilities
14,212,446

 
14,377,969

SHAREHOLDERS’ EQUITY
 
 
 
Common stock, $2.50 par value, 600 million shares authorized, 216.7 million shares issued in 2012 and 216.2 million shares issued in 2011
541,820

 
540,386

Additional paid-in capital
1,425,801

 
1,423,727

Retained earnings
339,638

 
264,059

Accumulated other comprehensive income
11,807

 
7,955

Treasury stock, at cost, 17.8 million shares in 2012 and 16.0 million shares in 2011
(258,383
)
 
(243,588
)
Total Shareholders’ Equity
2,060,683

 
1,992,539

Total Liabilities and Shareholders’ Equity
$
16,273,129

 
$
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
September 30
 
Nine months ended
September 30
 
2012
 
2011
 
2012
 
2011
INTEREST INCOME
 
 
 
 
 
 
 
Loans, including fees
$
140,511

 
$
149,460

 
$
426,398

 
$
448,707

Investment securities:
 
 
 
 
 
 
 
Taxable
16,658

 
20,166

 
53,943

 
62,722

Tax-exempt
2,558

 
2,896

 
7,855

 
9,217

Dividends
720

 
698

 
2,060

 
2,077

Loans held for sale
578

 
425

 
1,547

 
1,417

Other interest income
35

 
91

 
133

 
225

Total Interest Income
161,060

 
173,736

 
491,936

 
524,365

INTEREST EXPENSE
 
 
 
 
 
 
 
Deposits
13,848

 
19,684

 
44,841

 
64,745

Short-term borrowings
220

 
151

 
912

 
573

Long-term debt
11,111

 
12,408

 
34,077

 
37,346

Total Interest Expense
25,179

 
32,243

 
79,830

 
102,664

Net Interest Income
135,881

 
141,493

 
412,106

 
421,701

Provision for credit losses
23,000

 
31,000

 
76,500

 
105,000

Net Interest Income After Provision for Credit Losses
112,881

 
110,493

 
335,606

 
316,701

NON-INTEREST INCOME
 
 
 
 
 
 
 
Service charges on deposit accounts
15,651

 
15,164

 
45,860

 
42,801

Other service charges and fees
11,119

 
12,507

 
33,181

 
36,698

Mortgage banking income
10,594

 
7,942

 
31,787

 
19,454

Investment management and trust services
9,429

 
8,914

 
28,628

 
27,756

Other
5,169

 
4,055

 
14,761

 
11,163

Investment securities gains (losses), net:
 
 
 
 
 
 
 
Other-than-temporary impairment losses
(43
)
 
(509
)
 
(100
)
 
(1,601
)
Less: Portion of gain recognized in other comprehensive income (before taxes)
—

 
(80
)
 
—

 
(672
)
Net other-than-temporary impairment losses
(43
)
 
(589
)
 
(100
)
 
(2,273
)
Net gains on sales of investment securities
85

 
146

 
2,931

 
3,780

Investment securities gains (losses), net
42

 
(443
)
 
2,831

 
1,507

Total Non-Interest Income
52,004

 
48,139

 
157,048

 
139,379

NON-INTEREST EXPENSE
 
 
 
 
 
 
 
Salaries and employee benefits
62,161

 
58,948

 
182,612

 
169,326

Net occupancy expense
11,161

 
10,790

 
33,301

 
33,030

Other outside services
4,996

 
1,846

 
11,782

 
5,256

Equipment expense
3,816

 
3,032

 
10,370

 
9,541

Data processing
3,776

 
3,473

 
11,223

 
10,059

FDIC insurance expense
3,029


3,732

 
9,052

 
11,750

Professional fees
2,728


3,247

 
8,294

 
9,198

Software
2,511

 
2,142

 
6,958

 
6,146

Other real estate owned and repossession expense
2,096

 
2,548

 
7,847

 
4,801

Operating risk loss
1,404

 
776

 
6,827

 
306

Intangible amortization
756

 
953

 
2,318

 
3,303

Marketing
648

 
1,923

 
5,703

 
6,622

Other
10,961


12,457

 
36,610

 
38,278

Total Non-Interest Expense
110,043

 
105,867

 
332,897

 
307,616

Income Before Income Taxes
54,842

 
52,765

 
159,757

 
148,464

Income taxes
13,260

 
13,441

 
40,152

 
38,970

Net Income
$
41,582

 
$
39,324

 
$
119,605

 
$
109,494

 
 
 
 
 
 
 
 
PER SHARE:
 
 
 
 
 
 
 
Net Income (Basic)
$
0.21

 
$
0.20

 
$
0.60

 
$
0.55

Net Income (Diluted)
0.21

 
0.20

 
0.60

 
0.55

Cash Dividends
0.08

 
0.05

 
0.22

 
0.14

See Notes to Consolidated Financial Statements
 
 
 
 
 
 
 

4

FULTON FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
 
(in thousands)
 
Three months ended September 30
 
Nine months ended September 30
 
2012
 
2011
 
2012
 
2011
 
 
Net Income
$
41,582

 
$
39,324

 
$
119,605

 
$
109,494

Other Comprehensive Income (Loss), net of tax:
 
 
 
 
 
 
 
Unrealized gain (loss) on securities
10,834

 
(1,876
)
 
4,714

 
15,143

Reclassification adjustment for securities (gains) losses included in net income
(28
)
 
288

 
(1,840
)
 
(979
)
Non-credit related unrealized gain (loss) on other-than-temporarily impaired debt securities
271

 
(542
)
 
234

 
187

Unrealized gain on derivative financial instruments
34

 
34

 
102

 
102

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

 
(13
)
 
642

 
(37
)
Other Comprehensive Income (Loss)
11,325

 
(2,109
)
 
3,852

 
14,416

Total Comprehensive Income
$
52,907

 
$
37,215

 
$
123,457

 
$
123,910

 
 
 
 
 
 
 
 
See Notes to Consolidated Financial Statements
 
 
 
 
 
 
 


5

FULTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 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

 

 

 
119,605

 

 

 
119,605

Other comprehensive income

 

 

 

 
3,852

 

 
3,852

Stock issued, including related tax benefits
926

 
1,434

 
(1,889
)
 

 

 
5,565

 
5,110

Stock-based compensation awards

 

 
3,963

 

 

 

 
3,963

Acquisition of treasury stock
(2,115
)
 
 
 
 
 
 
 
 
 
(20,360
)
 
(20,360
)
Common stock cash dividends - $0.22 per share

 

 

 
(44,026
)
 

 

 
(44,026
)
Balance at September 30, 2012
198,975

 
$
541,820

 
$
1,425,801

 
$
339,638

 
$
11,807

 
$
(258,383
)
 
$
2,060,683

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2010
199,050

 
$
538,492

 
$
1,420,127

 
$
158,453

 
$
12,495

 
$
(249,178
)
 
$
1,880,389

Net income

 

 

 
109,494

 

 

 
109,494

Other comprehensive income

 

 

 

 
14,416

 

 
14,416

Stock issued, including related tax benefits
841

 
1,508

 
(451
)
 

 

 
3,791

 
4,848

Stock-based compensation awards

 

 
3,473

 

 

 

 
3,473

Common stock cash dividends - $0.14 per share

 

 

 
(27,961
)
 

 

 
(27,961
)
Balance at September 30, 2011
199,891

 
$
540,000

 
$
1,423,149

 
$
239,986

 
$
26,911

 
$
(245,387
)
 
$
1,984,659

 
 
 
 
 
 
 
 
 
 
 
 
 
 
See Notes to Consolidated Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 

6

FULTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
(in thousands)
 
Nine months ended
September 30
 
2012
 
2011
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net Income
$
119,605

 
$
109,494

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

 

Provision for credit losses
76,500

 
105,000

Depreciation and amortization of premises and equipment
16,735

 
15,824

Net amortization of investment securities premiums
8,039

 
2,596

Investment securities gains, net
(2,831
)
 
(1,507
)
Net (increase) decrease in loans held for sale
(38,468
)
 
20,386

Amortization of intangible assets
2,318

 
3,303

Stock-based compensation
3,963

 
3,473

Excess tax benefits from stock-based compensation
(25
)
 
—

Decrease in accrued interest receivable
1,314

 
1,381

Decrease in other assets
12,498

 
13,599

Decrease in accrued interest payable
(3,868
)
 
(5,655
)
Decrease in other liabilities
(1,966
)
 
(18,862
)
Total adjustments
74,209

 
139,538

Net cash provided by operating activities
193,814

 
249,032

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Proceeds from sales of securities available for sale
225,539

 
419,803

Proceeds from maturities of securities held to maturity
228

 
388

Proceeds from maturities of securities available for sale
644,055

 
440,475

Purchase of securities held to maturity
(346
)
 
(28
)
Purchase of securities available for sale
(796,656
)
 
(616,586
)
Decrease in short-term investments
(26,969
)
 
(223,063
)
Net increase in loans
(63,440
)
 
(74,029
)
Net purchases of premises and equipment
(30,232
)
 
(13,978
)
Net cash used in investing activities
(47,821
)
 
(67,018
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Net increase in demand and savings deposits
510,523

 
728,652

Net decrease in time deposits
(434,952
)
 
(479,609
)
Decrease in short-term borrowings
(110,062
)
 
(225,122
)
Repayments of long-term debt
(131,526
)
 
(93,945
)
Net proceeds from issuance of stock
5,085

 
4,848

Excess tax benefits from stock-based compensation
25

 
—

Dividends paid
(40,117
)
 
(23,922
)
Acquisition of treasury stock
(20,360
)
 
—

Net cash used in financing activities
(221,384
)
 
(89,098
)
 
 
 
 
Net (Decrease) Increase in Cash and Due From Banks
(75,391
)
 
92,916

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

 
198,954

Cash and Due From Banks at End of Period
$
217,207

 
$
291,870

Supplemental Disclosures of Cash Flow Information:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
83,698

 
$
108,319

Income taxes
22,747

 
21,216

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 nine-month periods ended September 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 nine months ended September 30:
 
Three months ended
September 30
 
Nine months ended
September 30
 
2012
 
2011
 
2012
 
2011
 
(in thousands)
Weighted average shares outstanding (basic)
198,956

 
199,028

 
199,371

 
198,801

Effect of dilutive securities
852

 
786

 
950

 
743

Weighted average shares outstanding (diluted)
199,808

 
199,814

 
200,321

 
199,544

For the three and nine months ended September 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 nine months ended September 30, 2011, 5.8 million and 5.0 million stock options, respectively, 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 nine months ended September 30, 2012 and 2011: 
 
Before-Tax Amount
 
Tax Effect
 
Net of Tax Amount
 
(in thousands)
Three months ended September 30, 2012
 
 
 
 
 
Unrealized gain (loss) on securities
$
16,668

 
$
(5,834
)
 
$
10,834

Reclassification adjustment for securities (gains) losses included in net income
(43
)
 
15

 
(28
)
Non-credit related unrealized gain (loss) on other-than-temporarily impaired debt securities
417

 
(146
)
 
271

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)
$
17,423

 
$
(6,098
)
 
$
11,325

Three months ended September 30, 2011
 
 
 
 
 
Unrealized gain (loss) on securities
$
(2,886
)
 
$
1,010

 
$
(1,876
)
Reclassification adjustment for securities (gains) losses included in net income
443

 
(155
)
 
288

Non-credit related unrealized gain (loss) on other-than-temporarily impaired debt securities
(834
)
 
292

 
(542
)
Unrealized gain on derivative financial instruments
52

 
(18
)
 
34

Amortization (accretion) of net unrecognized pension and postretirement items
(20
)
 
7

 
(13
)
Total Other Comprehensive Income (Loss)
$
(3,245
)
 
$
1,136

 
$
(2,109
)
Nine months ended September 30, 2012
 
 
 
 
 
Unrealized gain (loss) on securities
$
7,252

 
$
(2,538
)
 
$
4,714

Reclassification adjustment for securities (gains) losses included in net income
(2,831
)
 
991

 
(1,840
)
Non-credit related unrealized gain (loss) on other-than-temporarily impaired debt securities
360

 
(126
)
 
234

Unrealized gain on derivative financial instruments
157

 
(55
)
 
102

Amortization (accretion) of net unrecognized pension and postretirement items
988

 
(346
)
 
642

Total Other Comprehensive Income (Loss)
$
5,926

 
$
(2,074
)
 
$
3,852

Nine months ended September 30, 2011
 
 
 
 
 
Unrealized gain (loss) on securities
$
23,297

 
$
(8,154
)
 
$
15,143

Reclassification adjustment for securities (gains) losses included in net income
(1,506
)
 
527

 
(979
)
Non-credit related unrealized gain (loss) on other-than-temporarily impaired debt securities
288

 
(101
)
 
187

Unrealized gain on derivative financial instruments
157

 
(55
)
 
102

Amortization (accretion) of net unrecognized pension and postretirement items
(57
)
 
20

 
(37
)
Total Other Comprehensive Income (Loss)
$
22,179

 
$
(7,763
)
 
$
14,416


9

The following table presents changes in each component of accumulated other comprehensive income, net of tax, for the three and nine months ended September 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 September 30, 2012
 
 
 
 
 
 
 
 
 
Balance at June 30, 2012
$
19,122

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

Current-period other comprehensive income
10,793

 
284

 
214

 
34

 
11,325

Balance at September 30, 2012
$
29,915

 
$
(764
)
 
$
(14,492
)
 
$
(2,852
)
 
$
11,807

Three months ended September 30, 2011

 

 

 

 

Balance at June 30, 2011
$
37,227

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

Current-period other comprehensive income (loss)
(1,813
)
 
(317
)
 
(13
)
 
34

 
(2,109
)
Balance at September 30, 2011
$
35,414

 
$
(1,064
)
 
$
(4,451
)
 
$
(2,988
)
 
$
26,911

 
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2012
 
 
 
 
 
 
 
 
 
Balance at December 31, 2011
$
27,054

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

Current-period other comprehensive income
2,861

 
247

 
642

 
102

 
3,852

Balance at September 30, 2012
$
29,915

 
$
(764
)
 
$
(14,492
)
 
$
(2,852
)
 
$
11,807

Nine months ended September 30, 2011
 
 
 
 
 
 
 
 
 
Balance at December 31, 2010
$
22,354

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

Current-period other comprehensive income (loss)
13,060

 
1,291

 
(37
)
 
102

 
14,416

Balance at September 30, 2011
$
35,414

 
$
(1,064
)
 
$
(4,451
)
 
$
(2,988
)
 
$
26,911



NOTE D – Investment Securities
The following table presents the amortized cost and estimated fair values of investment securities:
Held to Maturity at September 30, 2012
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
 
(in thousands)
State and municipal securities
$
114

 
$
—

 
$
—

 
$
114

Mortgage-backed securities
340

 
33

 
—

 
373

 
$
454

 
$
33

 
$
—

 
$
487

Available for Sale at September 30, 2012
 
 
 
 
 
 
 
Equity securities
$
113,838

 
$
4,569

 
$
(1,089
)
 
$
117,318

U.S. Government securities
326

 
—

 
—

 
326

U.S. Government sponsored agency securities
2,401

 
39

 
—

 
2,440

State and municipal securities
293,056

 
14,978

 
(2
)
 
308,032

Corporate debt securities
110,111

 
6,376

 
(10,361
)
 
106,126

Collateralized mortgage obligations
1,014,837

 
15,733

 
(380
)
 
1,030,190

Mortgage-backed securities
1,021,882

 
43,308

 
—

 
1,065,190

Auction rate securities
188,378

 
—

 
(28,316
)
 
160,062

 
$
2,744,829

 
$
85,003

 
$
(40,148
)
 
$
2,789,684


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 $1.9 billion as of September 30, 2012 and $1.8 billion as of 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 ($73.2 million at September 30, 2012 and $82.5 million at December 31, 2011), common stocks of financial institutions ($37.4 million at September 30, 2012 and $27.9 million at December 31, 2011) and other equity investments ($6.7 million at September 30, 2012 and December 31, 2011).
As of September 30, 2012, the financial institutions stock portfolio had a cost basis of $34.0 million and a fair value of $37.4 million. On July 31, 2012, the Corporation entered into an agreement with a private investor to immediately purchase $12.7 million of common stock of another financial institution and, contingent upon the Corporation receiving regulatory approval to own more than 5% of that financial institution, to purchase an additional $6.4 million of common stock of that financial institution. The Corporation acquired the common stock as a passive investment. As of September 30, 2012, the Corporation's total investment in the common stock of that financial institution had a cost basis of $13.6 million and a fair value of $14.8 million. This investment accounted for approximately 40% of the Corporation's investments in the common stocks of publicly traded financial institutions.  On that date, no other investment within the Corporation's financial institutions stock portfolio exceeded 5% of the portfolio's fair value. In October 2012, the Corporation received the required regulatory approval to purchase, and completed the purchase of, the additional $6.4 million of common stock of that financial institution. As a result of this additional investment, the Corporation owned, in the aggregate, approximately 7.2% of the outstanding shares of that financial institution.

11

The amortized cost and estimated fair values of debt securities as of September 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
$
114

 
$
114

 
$
36,622

 
$
36,707

Due from one year to five years
—

 
—

 
60,067

 
63,879

Due from five years to ten years
—

 
—

 
162,239

 
174,060

Due after ten years
—

 
—

 
335,344

 
302,340

 
114

 
114

 
594,272

 
576,986

Collateralized mortgage obligations
—

 
—

 
1,014,837

 
1,030,190

Mortgage-backed securities
340

 
373

 
1,021,882

 
1,065,190

 
$
454

 
$
487

 
$
2,630,991

 
$
2,672,366

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 September 30, 2012
 
 
 
 
 
 
 
Equity securities
$
—

 
$
—

 
$
(24
)
 
$
(24
)
Debt securities
85

 
—

 
(19
)
 
66

Total
$
85

 
$
—

 
$
(43
)
 
$
42

Three months ended September 30, 2011
 
 
 
 
 
 
 
Equity securities
$
146

 
$
—

 
$
(244
)
 
$
(98
)
Debt securities
—

 
—

 
(345
)
 
(345
)
Total
$
146

 
$
—

 
$
(589
)
 
$
(443
)
 
 
 
 
 
 
 
 
Nine months ended September 30, 2012
 
 
 
 
 
 
 
Equity securities
$
2,603

 
$
—

 
$
(81
)
 
$
2,522

Debt securities
328

 
—

 
(19
)
 
309

Total
$
2,931

 
$
—

 
$
(100
)
 
$
2,831

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

The other-than-temporary impairment charges for equity securities during the three and nine months ended September 30, 2012 and 2011 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.
The credit related other-than-temporary impairment charges for debt securities during the three and nine months ended September 30, 2012 were for investments in pooled trust preferred securities issued by financial institutions. During the third quarter of 2011, the Corporation recorded $292,000 of other-than-temporary impairment charges for investments in student loan auction rate certificates (ARCs). Other-than-temporary impairment charges related to debt securities were determined based on expected cash flows models.

12

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 September 30, 2012 and 2011:
 
Three months ended September 30
 
Nine months ended September 30
 
2012
 
2011
 
2012
 
2011
 
(in thousands)
Balance of cumulative credit losses on debt securities, beginning of period
$
(22,692
)
 
$
(28,876
)
 
$
(22,781
)
 
$
(27,560
)
Additions for credit losses recorded which were not previously recognized as components of earnings
(19
)
 
(345
)
 
(19
)
 
(1,698
)
Reductions for increases in cash flows expected to be collected that are recognized over the remaining life of the security
66

 
40

 
155

 
77

Balance of cumulative credit losses on debt securities, end of period
$
(22,645
)
 
$
(29,181
)
 
$
(22,645
)
 
$
(29,181
)
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, 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)
State and municipal securities
$
567

 
$
(2
)
 
$
—

 
$
—

 
$
567

 
$
(2
)
Corporate debt securities
6,649

 
(1,082
)
 
38,816

 
(9,279
)
 
45,465

 
(10,361
)
Collateralized mortgage obligations
137,520

 
(211
)
 
15,618

 
(169
)
 
153,138

 
(380
)
Auction rate securities
18,258

 
(1,274
)
 
141,804

 
(27,042
)
 
160,062

 
(28,316
)
Total debt securities
162,994

 
(2,569
)
 
196,238

 
(36,490
)
 
359,232

 
(39,059
)
Equity securities
2,099

 
(145
)
 
6,247

 
(944
)
 
8,346

 
(1,089
)
 
$
165,093

 
$
(2,714
)
 
$
202,485

 
$
(37,434
)
 
$
367,578

 
$
(40,148
)
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. As of September 30, 2012, the financial institutions stock portfolio had a cost basis of $34.0 million and a fair value of $37.4 million. 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, 2012 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) is the investment management and trust division of the Corporation’s Fulton Bank, N.A. subsidiary. 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. During the three and nine months ended September 30, 2012, ARCs with a par value of $51.5 million and $56.1 million, respectively, were called at par value by their issuers.
As of September 30, 2012, approximately $149 million, or 93%, of the ARCs were rated above investment grade, with approximately $21 million, or 13%, AAA rated and $94 million, or 59%, AA rated. Approximately $11 million, or 7%, of ARCs were either not rated or rated below investment grade by at least one ratings agency. Of this amount, approximately $8 million, or 72%, of the student loans underlying these ARCs have principal payments which are guaranteed by the federal government. In total, approximately $156 million, or 98%, of the student loans underlying the ARCs have principal payments which are guaranteed by the federal government. As of September 30, 2012, all ARCs were current and making scheduled interest payments. Based on management’s evaluations, ARCs with a fair value of $160.1 million were not subject to any other-than-temporary impairment charges as of September 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

13

of their fair value to amortized cost, the Corporation does not consider these investments to be other-than-temporarily impaired as of September 30, 2012.
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 value of corporate debt securities:
 
September 30, 2012
 
December 31, 2011
 
Amortized
cost
 
Estimated
fair value
 
Amortized
cost
 
Estimated
fair value
 
(in thousands)
Single-issuer trust preferred securities
$
57,726

 
$
50,426

 
$
83,899

 
$
74,365

Subordinated debt
44,262

 
48,037

 
40,184

 
41,296

Pooled trust preferred securities
5,601

 
5,141

 
6,236

 
5,109

Corporate debt securities issued by financial institutions
107,589

 
103,604

 
130,319

 
120,770

Other corporate debt securities
2,522

 
2,522

 
2,536

 
2,536

Available for sale corporate debt securities
$
110,111

 
$
106,126

 
$
132,855

 
$
123,306


The Corporation’s investments in single-issuer trust preferred securities had an unrealized loss of $7.3 million at September 30, 2012. The Corporation did not record any other-than-temporary impairment charges for single-issuer trust preferred securities during the nine months ended September 30, 2012 or 2011. The Corporation held eight single-issuer trust preferred securities that were rated below investment grade by at least one ratings agency, with an amortized cost of $22.9 million and an estimated fair value of $21.6 million at September 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 $5.6 million and an estimated fair value of $4.1 million at September 30, 2012 were not rated by any ratings agency.
The Corporation held ten pooled trust preferred securities as of September 30, 2012. Nine of these securities, with an amortized cost of $5.4 million and an estimated fair value of $5.0 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 assets 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 41.2% as of September 30, 2012.
Based on management’s evaluations, corporate debt securities with a fair value of $106.1 million were not subject to any other-than-temporary impairment charges as of September 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.



14


NOTE E – Loans and Allowance for Credit Losses
Loans, Net of Unearned Income
Loans, net of unearned income are summarized as follows:
 
September 30, 2012
 
December 31, 2011
 
(in thousands)
Real-estate - commercial mortgage
$
4,632,509

 
$
4,602,596

Commercial - industrial, financial and agricultural
3,507,846

 
3,639,368

Real-estate - home equity
1,603,456

 
1,624,562

Real-estate - residential mortgage
1,213,831

 
1,097,192

Real-estate - construction
597,358

 
615,445

Consumer
301,182

 
318,101

Leasing and other
71,343

 
63,254

Overdrafts
12,480

 
15,446

Loans, gross of unearned income
11,940,005

 
11,975,964

Unearned income
(7,004
)
 
(6,994
)
Loans, net of unearned income
$
11,933,001

 
$
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:
 
September 30,
2012
 
December 31,
2011
 
(in thousands)
Allowance for loan losses
$
233,864

 
$
256,471

Reserve for unfunded lending commitments
1,404

 
1,706

Allowance for credit losses
$
235,268

 
$
258,177

The following table presents the activity in the allowance for credit losses for the three and nine months ended September 30:
 
Three months ended
September 30
 
Nine months ended
September 30
 
2012
 
2011
 
2012
 
2011
 
(in thousands)
Balance at beginning of period
$
237,316

 
$
268,633

 
$
258,177

 
$
275,498

Loans charged off
(29,966
)
 
(32,897
)
 
(110,765
)
 
(119,101
)
Recoveries of loans previously charged off
4,918

 
2,081

 
11,356

 
7,420

Net loans charged off
(25,048
)
 
(30,816
)
 
(99,409
)
 
(111,681
)
Provision for credit losses
23,000

 
31,000

 
76,500

 
105,000

Balance at end of period
$
235,268

 
$
268,817

 
$
235,268

 
$
268,817



16

The following table presents the activity in the allowance for loan losses by portfolio segment for the three and nine months ended September 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 September 30, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at June 30, 2012
$
69,868

 
$
71,931

 
$
14,444

 
$
26,711

 
$
25,559

 
$
1,816

 
$
3,243

 
$
22,164

 
$
235,736

Loans charged off
(7,463
)
 
(10,471
)
 
(1,688
)
 
(670
)
 
(8,364
)
 
(685
)
 
(625
)
 
—

 
(29,966
)
Recoveries of loans previously charged off
1,317

 
1,693

 
343

 
25

 
1,040

 
202

 
298

 
—

 
4,918

Net loans charged off
(6,146
)
 
(8,778
)
 
(1,345
)
 
(645
)
 
(7,324
)
 
(483
)
 
(327
)
 
—

 
(25,048
)
Provision for loan losses (1)
8,447

 
4,721

 
2,337

 
2,790

 
3,893

 
530

 
77

 
381

 
23,176

Balance at September 30, 2012
$
72,169

 
$
67,874

 
$
15,436

 
$
28,856

 
$
22,128

 
$
1,863

 
$
2,993

 
$
22,545

 
$
233,864

Three months ended September 30, 2011
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at June 30, 2011
$
73,598

 
$
82,613

 
$
9,560

 
$
31,912

 
$
30,570

 
$
1,755

 
$
1,787

 
$
34,888

 
$
266,683

Loans charged off
(5,730
)
 
(14,840
)
 
(1,158
)
 
(1,514
)
 
(8,535
)
 
(634
)
 
(486
)
 
—

 
(32,897
)
Recoveries of loans previously charged off
249

 
695

 
23

 
36

 
595

 
291

 
192

 
—

 
2,081

Net loans charged off
(5,481
)
 
(14,145
)
 
(1,135
)
 
(1,478
)
 
(7,940
)
 
(343
)
 
(294
)
 
—

 
(30,816
)
Provision for loan losses (1)
13,066

 
11,669

 
1,418

 
2,902

 
10,415

 
2,990

 
768

 
(12,117
)
 
31,111

Balance at September 30, 2011
$
81,183

 
$
80,137

 
$
9,843

 
$
33,336

 
$
33,045

 
$
4,402

 
$
2,261

 
$
22,771

 
$
266,978

Nine months ended September 30, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2011
$
85,112

 
$
74,896

 
$
12,841

 
$
22,986

 
$
30,066

 
$
2,083

 
$
2,397

 
$
26,090

 
$