FULT 3.31.2013 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 March 31, 2013, 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 – 195,148,000 shares outstanding as of April 30, 2013.


FULTON FINANCIAL CORPORATION
FORM 10-Q FOR THE THREE MONTHS ENDED MARCH 31, 2013
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)
 
March 31,
2013
 
December 31,
2012
 
(unaudited)
 
ASSETS
 
 
 
Cash and due from banks
$
174,479

 
$
256,300

Interest-bearing deposits with other banks
97,202

 
173,257

Loans held for sale
63,045

 
67,899

Investment securities:
 
 
 
Held to maturity (estimated fair value of $279 in 2013 and $319 in 2012)
257

 
292

Available for sale
2,811,847

 
2,793,725

Loans, net of unearned income
12,377,288

 
12,146,971

Less: Allowance for loan losses
(220,041
)
 
(223,903
)
Net Loans
12,157,247

 
11,923,068

Premises and equipment
226,754

 
227,723

Accrued interest receivable
47,485

 
45,786

Goodwill
530,614

 
530,656

Intangible assets
4,373

 
4,907

Other assets
569,434

 
509,484

Total Assets
$
16,682,737

 
$
16,533,097

LIABILITIES
 
 
 
Deposits:
 
 
 
Noninterest-bearing
$
3,075,511

 
$
3,009,966

Interest-bearing
9,312,949

 
9,474,197

Total Deposits
12,388,460

 
12,484,163

Short-term borrowings:
 
 
 
Federal funds purchased
729,521

 
592,470

Other short-term borrowings
397,445

 
275,929

Total Short-Term Borrowings
1,126,966

 
868,399

Accrued interest payable
21,393

 
19,330

Other liabilities
194,944

 
185,296

Federal Home Loan Bank advances and long-term debt
889,211

 
894,253

Total Liabilities
14,620,974

 
14,451,441

SHAREHOLDERS’ EQUITY
 
 
 
Common stock, $2.50 par value, 600 million shares authorized, 217.0 million shares issued in 2013 and 216.8 million shares issued in 2012
542,486

 
542,093

Additional paid-in capital
1,427,310

 
1,426,267

Retained earnings
387,546

 
363,937

Accumulated other comprehensive income
5,637

 
5,675

Treasury stock, at cost, 21.7 million shares in 2013 and 17.6 million shares in 2012
(301,216
)
 
(256,316
)
Total Shareholders’ Equity
2,061,763

 
2,081,656

Total Liabilities and Shareholders’ Equity
$
16,682,737

 
$
16,533,097

 
 
 
 
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 March 31
 
2013
 
2012
INTEREST INCOME
 
 
 
Loans, including fees
$
134,130

 
$
144,346

Investment securities:
 
 
 
Taxable
13,397

 
18,661

Tax-exempt
2,479

 
2,701

Dividends
799

 
699

Loans held for sale
495

 
431

Other interest income
22

 
53

Total Interest Income
151,322

 
166,891

INTEREST EXPENSE
 
 
 
Deposits
10,401

 
16,250

Short-term borrowings
509

 
281

Long-term debt
10,768

 
11,665

Total Interest Expense
21,678

 
28,196

Net Interest Income
129,644

 
138,695

Provision for credit losses
15,000

 
28,000

Net Interest Income After Provision for Credit Losses
114,644

 
110,695

NON-INTEREST INCOME
 
 
 
Service charges on deposit accounts
14,111

 
14,842

Investment management and trust services
10,096

 
9,377

Other service charges and fees
8,510

 
10,555

Mortgage banking income
8,173

 
10,050

Other
3,896

 
5,563

Investment securities gains, net
2,473

 
1,251

Total Non-Interest Income
47,259

 
51,638

NON-INTEREST EXPENSE
 
 
 
Salaries and employee benefits
61,212

 
60,360

Net occupancy expense
11,844

 
10,935

Equipment expense
3,908

 
3,369

Data processing
3,903

 
3,688

Professional fees
3,047

 
2,582

Other outside services
2,860

 
2,913

Other real estate owned and repossession expense
2,854

 
3,295

FDIC insurance expense
2,847

 
3,021

Software
2,748

 
2,175

Marketing
1,872

 
2,472

Operating risk loss
1,766

 
3,368

Intangible amortization
534

 
801

Other
11,541

 
11,690

Total Non-Interest Expense
110,936

 
110,669

Income Before Income Taxes
50,967

 
51,664

Income taxes
11,740

 
13,532

Net Income
$
39,227

 
$
38,132

 
 
 
 
PER SHARE:
 
 
 
Net Income (Basic)
$
0.20

 
$
0.19

Net Income (Diluted)
0.20

 
0.19

Cash Dividends
0.08

 
0.07

 
 
 
 
See Notes to Consolidated Financial Statements
 
 
 

4

FULTON FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
 
(in thousands)
 
Three months ended March 31
 
2013
 
2012
 
 
Net Income
$
39,227

 
$
38,132

Other Comprehensive Income (Loss), net of tax:
 
 
 
Unrealized gain on securities
125

 
4,584

Reclassification adjustment for securities gains included in net income
(1,608
)
 
(813
)
Non-credit related unrealized gain on other-than-temporarily impaired debt securities
1,083

 
135

Unrealized gain on derivative financial instruments
34

 
34

Amortization of net unrecognized pension and postretirement items
328

 
214

Other Comprehensive Income (Loss)
(38
)
 
4,154

Total Comprehensive Income
$
39,189

 
$
42,286

 
 
 
 
See Notes to Consolidated Financial Statements
 
 
 


5

FULTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2013 AND 2012
 
(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, 2012
199,225

 
$
542,093

 
$
1,426,267

 
$
363,937

 
$
5,675

 
$
(256,316
)
 
$
2,081,656

Net income

 

 

 
39,227

 

 

 
39,227

Other comprehensive loss

 

 

 

 
(38
)
 

 
(38
)
Stock issued, including related tax benefits
297

 
393

 
196

 

 

 
2,146

 
2,735

Stock-based compensation awards

 

 
847

 

 

 

 
847

Acquisition of treasury stock
(4,246
)
 
 
 
 
 
 
 
 
 
(47,046
)
 
(47,046
)
Common stock cash dividends - $0.08 per share

 

 

 
(15,618
)
 

 

 
(15,618
)
Balance at March 31, 2013
195,276

 
$
542,486

 
$
1,427,310

 
$
387,546

 
$
5,637

 
$
(301,216
)
 
$
2,061,763

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2011
200,164

 
$
540,386

 
$
1,423,727

 
$
264,059

 
$
7,955

 
$
(243,588
)
 
$
1,992,539

Net income

 

 

 
38,132

 

 

 
38,132

Other comprehensive income

 

 

 

 
4,154

 

 
4,154

Stock issued, including related tax benefits
190

 
208

 
(565
)
 

 

 
1,722

 
1,365

Stock-based compensation awards

 

 
713

 

 

 

 
713

Common stock cash dividends - $0.07 per share

 

 

 
(14,040
)
 

 

 
(14,040
)
Balance at March 31, 2012
200,354

 
$
540,594

 
$
1,423,875

 
$
288,151

 
$
12,109

 
$
(241,866
)
 
$
2,022,863

 
 
 
 
 
 
 
 
 
 
 
 
 
 
See Notes to Consolidated Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 

6

FULTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
(in thousands)
 
Three months ended
March 31
 
2013
 
2012
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net Income
$
39,227

 
$
38,132

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

 

Provision for credit losses
15,000

 
28,000

Depreciation and amortization of premises and equipment
5,508

 
5,327

Net amortization of investment securities premiums
3,846

 
2,849

Investment securities gains, net
(2,473
)
 
(1,251
)
Net decrease (increase) in loans held for sale
4,854

 
(23,119
)
Amortization of intangible assets
534

 
801

Stock-based compensation
847

 
713

Excess tax benefits from stock-based compensation
(88
)
 
(3
)
Increase in accrued interest receivable
(1,699
)
 
(149
)
Decrease (increase) in other assets
7,194

 
(48
)
Increase in accrued interest payable
2,063

 
1,988

Increase in other liabilities
3,008

 
7,714

Total adjustments
38,594

 
22,822

Net cash provided by operating activities
77,821

 
60,954

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Proceeds from sales of securities available for sale
59,043

 
183,685

Proceeds from maturities of securities held to maturity
35

 
75

Proceeds from maturities of securities available for sale
199,910

 
177,855

Purchase of securities held to maturity
—

 
(14
)
Purchase of securities available for sale
(339,707
)
 
(539,783
)
Decrease in short-term investments
76,055

 
69,109

Net increase in loans
(249,229
)
 
(16,821
)
Net purchases of premises and equipment
(4,539
)
 
(8,809
)
Net cash used in investing activities
(258,432
)
 
(134,703
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Net increase (decrease) in demand and savings deposits
19,339

 
(45,297
)
Net decrease in time deposits
(115,042
)
 
(137,381
)
Increase in short-term borrowings
258,567

 
367,517

Repayments of long-term debt
(5,042
)
 
(106,168
)
Net proceeds from issuance of common stock
2,647

 
1,362

Excess tax benefits from stock-based compensation
88

 
3

Dividends paid
(14,721
)
 
(12,010
)
Acquisition of treasury stock
(47,046
)
 
—

Net cash provided by financing activities
98,790

 
68,026

Net Decrease in Cash and Due From Banks
(81,821
)
 
(5,723
)
Cash and Due From Banks at Beginning of Period
256,300

 
292,598

Cash and Due From Banks at End of Period
$
174,479

 
$
286,875

Supplemental Disclosures of Cash Flow Information:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
19,615

 
$
26,208

Income taxes
5,086

 
4,169

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 months ended March 31, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013. The Corporation evaluates subsequent events through the filing date of this Form 10-Q with the Securities and Exchange Commission (SEC).

NOTE B – Net Income Per Share
Basic net income per share is calculated as net income divided by the weighted average number of shares outstanding.
For diluted net income per share, net income is divided by the weighted average number of 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 shares outstanding used to calculate basic net income per share and diluted net income per share follows:
 
Three months ended March 31
 
2013
 
2012
 
(in thousands)
Weighted average shares outstanding (basic)
196,299

 
199,492

Effect of dilutive securities
918

 
852

Weighted average shares outstanding (diluted)
197,217

 
200,344

For the three months ended March 31, 2013 and 2012, 3.7 million and 5.2 million shares issuable under 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 (loss) for the three months ended March 31, 2013 and 2012: 
 
Before-Tax Amount
 
Tax Effect
 
Net of Tax Amount
 
(in thousands)
Three months ended March 31, 2013
 
 
 
 
 
Unrealized gain (loss) on securities
$
192

 
$
(67
)
 
$
125

Reclassification adjustment for securities (gains) losses included in net income (1)
(2,473
)
 
865

 
(1,608
)
Non-credit related unrealized gain (loss) on other-than-temporarily impaired debt securities
1,666

 
(583
)
 
1,083

Unrealized gain on derivative financial instruments
54

 
(20
)
 
34

Amortization (accretion) of net unrecognized pension and postretirement income (cost) (2)
505

 
(177
)
 
328

Total Other Comprehensive Income (Loss)
$
(56
)
 
$
18

 
$
(38
)
Three months ended March 31, 2012
 
 
 
 
 
Unrealized gain (loss) on securities
$
7,052

 
$
(2,468
)
 
$
4,584

Reclassification adjustment for securities (gains) losses included in net income (1)
(1,251
)
 
438

 
(813
)
Non-credit related unrealized gain (loss) on other-than-temporarily impaired debt securities
208

 
(73
)
 
135

Unrealized gain on derivative financial instruments
52

 
(18
)
 
34

Amortization (accretion) of net unrecognized pension and postretirement income (cost) (2)
329

 
(115
)
 
214

Total Other Comprehensive Income (Loss)
$
6,390

 
$
(2,236
)
 
$
4,154

 
 
 
 
 
 

(1)
Amounts reclassified out of accumulated other comprehensive income. Before-tax amounts included within "Investment securities gains, net" on the consolidated statements of income. See Note D, "Investment Securities," for additional details.
(2)
Amounts reclassified out of accumulated other comprehensive income. Before-tax amounts included within "Salaries and employee benefits" on the consolidated statements of income. See Note H, "Employee Benefit Plans," for additional details.
The following table presents changes in each component of accumulated other comprehensive income, net of tax, for the three months ended March 31, 2013 and 2012: 
 
Unrealized Gains (Losses) on Investment Securities Not Other-Than-Temporarily Impaired
 
Unrealized Non-Credit Gains (Losses) on Other-Than-Temporarily Impaired Debt Securities
 
Unrecognized Pension and Postretirement Plan Income (Costs)
 
Unrealized Effective Portions of Losses on Forward-Starting Interest Rate Swaps
 
Total
 
(in thousands)
Three months ended March 31, 2013
 
 
 
 
 
 
 
 
 
Balance at December 31, 2012
$
26,361

 
$
613

 
$
(18,481
)
 
$
(2,818
)
 
$
5,675

Other comprehensive income (loss) before reclassifications
125

 
1,083

 
—

 
—

 
1,208

Amounts reclassified from accumulated other comprehensive income (loss)
(1,608
)
 
—

 
328

 
34

 
(1,246
)
Balance at March 31, 2013
$
24,878

 
$
1,696

 
$
(18,153
)
 
$
(2,784
)
 
$
5,637

Three months ended March 31, 2012

 

 

 

 

Balance at December 31, 2011
$
27,054

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

Other comprehensive income (loss) before reclassifications
4,584

 
135

 
—

 
—

 
4,719

Amounts reclassified from accumulated other comprehensive income (loss)
(813
)
 
—

 
214

 
34

 
(565
)
Balance at March 31, 2012
$
30,825

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

 
 
 
 
 
 
 
 
 
 


9

NOTE D – Investment Securities
The following table presents the amortized cost and estimated fair values of investment securities:
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
Held to Maturity at March 31, 2013
(in thousands)
Mortgage-backed securities
$
257

 
$
22

 
$
—

 
$
279

 
 
 
 
 
 
 
 
Available for Sale at March 31, 2013
 
 
 
 
 
 
 
Equity securities
$
117,624

 
$
6,507

 
$
(241
)
 
$
123,890

U.S. Government securities
325

 
—

 
—

 
325

U.S. Government sponsored agency securities
885

 
10

 
(1
)
 
894

State and municipal securities
283,142

 
12,221

 
(170
)
 
295,193

Corporate debt securities
112,221

 
8,906

 
(6,083
)
 
115,044

Collateralized mortgage obligations
1,293,745

 
15,279

 
(3,225
)
 
1,305,799

Mortgage-backed securities
789,048

 
27,022

 
(7
)
 
816,063

Auction rate securities
173,966

 
—

 
(19,327
)
 
154,639

 
$
2,770,956

 
$
69,945

 
$
(29,054
)
 
$
2,811,847

 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
Held to Maturity at December 31, 2012
(in thousands)
Mortgage-backed securities
$
292

 
$
27

 
$
—

 
$
319

 
 
 
 
 
 
 
 
Available for Sale at December 31, 2012
 
 
 
 
 
 
 
Equity securities
$
118,465

 
$
5,016

 
$
(918
)
 
$
122,563

U.S. Government securities
325

 
—

 
—

 
325

U.S. Government sponsored agency securities
2,376

 
21

 
—

 
2,397

State and municipal securities
301,842

 
13,763

 
(86
)
 
315,519

Corporate debt securities
112,162

 
7,858

 
(7,178
)
 
112,842

Collateralized mortgage obligations
1,195,234

 
16,008

 
(123
)
 
1,211,119

Mortgage-backed securities
847,790

 
31,831

 
—

 
879,621

Auction rate securities
174,026

 
—

 
(24,687
)
 
149,339

 
$
2,752,220

 
$
74,497

 
$
(32,992
)
 
$
2,793,725

Securities carried at $1.8 billion as of March 31, 2013 and December 31, 2012 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 ($74.5 million at March 31, 2013 and $71.7 million at December 31, 2012), common stocks of financial institutions ($42.5 million at March 31, 2013 and $44.2 million at December 31, 2012) and other equity investments ($6.9 million at March 31, 2013 and $6.7 million at December 31, 2012).
As of March 31, 2013, the financial institutions stock portfolio had a cost basis of $36.4 million and a fair value of $42.5 million, including an investment in a single financial institution with a cost basis of $20.0 million and a fair value of $22.6 million. The fair value of this investment accounted for approximately 50% of the fair value of the Corporation's investments in the common stocks of publicly traded financial institutions. No other investment within the financial institutions stock portfolio exceeded 5% of the portfolio's fair value.

10

The amortized cost and estimated fair values of debt securities as of March 31, 2013, 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
$
—

 
$
—

 
$
36,715

 
$
36,777

Due from one year to five years
—

 
—

 
64,996

 
69,357

Due from five years to ten years
—

 
—

 
179,933

 
190,269

Due after ten years
—

 
—

 
288,895

 
269,692

 
—

 
—

 
570,539

 
566,095

Collateralized mortgage obligations
—

 
—

 
1,293,745

 
1,305,799

Mortgage-backed securities
257

 
279

 
789,048

 
816,063

 
$
257

 
$
279

 
$
2,653,332

 
$
2,687,957

There were no gross realized losses on the sales of investment securities or other-than-temporary impairment losses recognized for investment securities during the three months ended March 31, 2013 and 2012. The following table presents information related to the gross realized gains on the sales of equity and debt securities (in thousands):
Three months ended March 31, 2013
 
Equity securities
$
1,139

Debt securities
1,334

Total
$
2,473

Three months ended March 31, 2012
 
Equity securities
$
1,086

Debt securities
165

Total
$
1,251

There were no changes in the total cumulative credit related other-than-temporary impairment charges during the three months ended March 31, 2013 and 2012. The cumulative credit related other-than-temporary impairment charges for debt securities still held by the Corporation at March 31, 2013 and 2012 were $23.1 million and $22.7 million, respectively.
The following table presents the gross unrealized losses and estimated fair values of investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2013:
 
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
$
—

 
$
—

 
$
80

 
$
(1
)
 
$
80

 
$
(1
)
State and municipal securities
15,203

 
(170
)
 
—

 
—

 
15,203

 
(170
)
Corporate debt securities
2,992

 
(4
)
 
44,513

 
(6,079
)
 
47,505

 
(6,083
)
Collateralized mortgage obligations
457,415

 
(3,225
)
 
—

 
—

 
457,415

 
(3,225
)
Mortgage-backed securities
25,033

 
(7
)
 
—

 
—

 
25,033

 
(7
)
Auction rate securities
10,954

 
(502
)
 
143,596

 
(18,825
)
 
154,550

 
(19,327
)
Total debt securities
511,597

 
(3,908
)
 
188,189

 
(24,905
)
 
699,786

 
(28,813
)
Equity securities
1,077

 
(60
)
 
1,618

 
(181
)
 
2,695

 
(241
)
 
$
512,674

 
$
(3,968
)
 
$
189,807

 
$
(25,086
)
 
$
702,481

 
$
(29,054
)
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,

11

the Corporation does not consider those investments with unrealized holding losses as of March 31, 2013 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.
As of March 31, 2013, approximately $143 million, or 92%, of the ARCs were rated above investment grade, with approximately $8 million, or 5%, AAA rated and $100 million, or 65%, AA rated. Approximately $12 million, or 8%, 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 $151 million, or 97%, of the student loans underlying the ARCs have principal payments which are guaranteed by the federal government. As of March 31, 2013, all ARCs were current and making scheduled interest payments. Based on management’s evaluations, ARCs with a fair value of $154.6 million were not subject to any other-than-temporary impairment charges as of March 31, 2013. 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 March 31, 2013.
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:
 
March 31, 2013
 
December 31, 2012
 
Amortized
cost
 
Estimated
fair value
 
Amortized
cost
 
Estimated
fair value
 
(in thousands)
Single-issuer trust preferred securities
$
56,863

 
$
52,523

 
$
56,834

 
$
51,656

Subordinated debt
47,315

 
51,652

 
47,286

 
51,747

Pooled trust preferred securities
5,530

 
8,356

 
5,530

 
6,927

Corporate debt securities issued by financial institutions
109,708

 
112,531

 
109,650

 
110,330

Other corporate debt securities
2,513

 
2,513

 
2,512

 
2,512

Available for sale corporate debt securities
$
112,221

 
$
115,044

 
$
112,162

 
$
112,842


The Corporation’s investments in single-issuer trust preferred securities had an unrealized loss of $4.3 million at March 31, 2013. The Corporation did not record any other-than-temporary impairment charges for single-issuer trust preferred securities during the three months ended March 31, 2013 or 2012. 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 $22.7 million at March 31, 2013. 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 $4.7 million and an estimated fair value of $3.4 million at March 31, 2013 were not rated by any ratings agency.
The Corporation held ten pooled trust preferred securities as of March 31, 2013. Nine of these securities, with an amortized cost of $5.4 million and an estimated fair value of $8.2 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

12

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.
Based on management’s evaluations, corporate debt securities with a fair value of $115.0 million were not subject to any additional other-than-temporary impairment charges as of March 31, 2013. 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.

NOTE E – Loans and Allowance for Credit Losses
Loans, Net of Unearned Income
Loans, net of unearned income are summarized as follows:
 
March 31, 2013
 
December 31, 2012
 
(in thousands)
Real-estate - commercial mortgage
$
4,729,930

 
$
4,664,426

Commercial - industrial, financial and agricultural
3,658,483

 
3,612,065

Real-estate - home equity
1,689,446

 
1,632,390

Real-estate - residential mortgage
1,303,454

 
1,257,432

Real-estate - construction
597,597

 
584,118

Consumer
309,138

 
309,864

Leasing and other
78,801

 
75,521

Overdrafts
17,906

 
18,393

Loans, gross of unearned income
12,384,755

 
12,154,209

Unearned income
(7,467
)
 
(7,238
)
Loans, net of unearned income
$
12,377,288

 
$
12,146,971

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 incurred losses 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 incurred losses 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 allowance for credit losses includes: (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 Corporation segments 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, loans to commercial borrowers secured by residential real estate and loans to individuals secured by residential real estate. Consumer loan class segments are based on collateral types and include direct consumer installment loans and indirect automobile loans.
The following table presents the components of the allowance for credit losses:
 
March 31,
2013
 
December 31,
2012
 
(in thousands)
Allowance for loan losses
$
220,041

 
$
223,903

Reserve for unfunded lending commitments
1,486

 
1,536

Allowance for credit losses
$
221,527

 
$
225,439


13

The following table presents the activity in the allowance for credit losses for the three months ended March 31:
 
2013
 
2012
 
(in thousands)
Balance at beginning of period
$
225,439

 
$
258,177

Loans charged off
(22,106
)
 
(30,259
)
Recoveries of loans previously charged off
3,194

 
2,219

Net loans charged off
(18,912
)
 
(28,040
)
Provision for credit losses
15,000

 
28,000

Balance at end of period
$
221,527

 
$
258,137


The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2013 and 2012:
 
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 March 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2012
$
62,928

 
$
60,205

 
$
22,776

 
$
34,536

 
$
17,287

 
$
2,367

 
$
2,752

 
$
21,052

 
$
223,903

Loans charged off
(4,133
)
 
(9,502
)
 
(2,404
)
 
(3,050
)
 
(1,986
)
 
(550
)
 
(481
)
 
—

 
(22,106
)
Recoveries of loans previously charged off
1,064

 
379

 
331

 
81

 
671

 
506

 
162

 
—

 
3,194

Net loans charged off
(3,069
)
 
(9,123
)
 
(2,073
)
 
(2,969
)
 
(1,315
)
 
(44
)
 
(319
)
 
—

 
(18,912
)
Provision for loan losses (1)
4,126

 
5,590

 
2,998

 
1,917

 
32

 
(37
)
 
354

 
70

 
15,050

Balance at March 31, 2013
$
63,985

 
$
56,672

 
$
23,701

 
$
33,484

 
$
16,004

 
$
2,286

 
$
2,787

 
$
21,122

 
$
220,041

Three months ended March 31, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2011
$
85,112

 
$
74,896

 
$
12,841

 
$
22,986

 
$
30,066

 
$
2,083

 
$
2,397

 
$
26,090

 
$
256,471

Loans charged off
(11,891
)
 
(5,669
)
 
(2,206
)
 
(847
)
 
(8,571
)
 
(634
)
 
(441
)
 
—

 
(30,259
)
Recoveries of loans previously charged off
816

 
636

 
20

 
73

 
64

 
350

 
260

 
—

 
2,219

Net loans charged off
(11,075
)
 
(5,033
)
 
(2,186
)
 
(774
)
 
(8,507
)
 
(284
)
 
(181
)
 
—

 
(28,040
)
Provision for loan losses (1)
7,615

 
9,893

 
2,428

 
2,639

 
9,627

 
(156
)
 
1,058

 
(5,039
)
 
28,065

Balance at March 31, 2012
$
81,652

 
$
79,756

 
$
13,083

 
$
24,851

 
$
31,186

 
$
1,643

 
$
3,274

 
$
21,051

 
$
256,496

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
The provision for loan losses is gross of a $50,000 and $65,000 decrease, respectively, in the reserve for unfunded lending commitments for the three months ended March 31, 2013 and 2012. The total provision for credit losses, comprised of allocations for both funded and unfunded loans, was $15.0 million and $28.0 million, respectively, for the three months ended March 31, 2013 and 2012.

14

The following table presents loans, net of unearned income and their related allowance for loan losses, by portfolio segment, as of March 31, 2013 and 2012:
 
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
(1)
 
Total
 
(in thousands)
Allowance for loan losses at March 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Measured for impairment under FASB ASC Subtopic 450-20
$
40,920

 
$
38,988

 
$
14,947

 
$
10,075

 
$
8,838

 
$
2,271

 
$
2,758

 
$
21,122

 
$
139,919

Evaluated for impairment under FASB ASC Section 310-10-35
23,065

 
17,684

 
8,754

 
23,409

 
7,166

 
15

 
29

 
N/A

 
80,122

 
$
63,985

 
$
56,672

 
$
23,701

 
$
33,484

 
$
16,004

 
$
2,286

 
$
2,787

 
$
21,122

 
$
220,041

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans, net of unearned income at March 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Measured for impairment under FASB ASC Subtopic 450-20
$
4,646,355

 
$
3,591,753

 
$
1,675,577

 
$
1,247,976

 
$
554,757

 
$
309,120

 
$
89,195

 
N/A

 
$
12,114,733

Evaluated for impairment under FASB ASC Section 310-10-35
83,575

 
66,730

 
13,869

 
55,478

 
42,840

 
18

 
45

 
N/A

 
262,555

 
$
4,729,930

 
$
3,658,483

 
$
1,689,446

 
$
1,303,454

 
$
597,597

 
$
309,138

 
$
89,240

 
N/A

 
$
12,377,288

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses at March 31, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Measured for impairment under FASB ASC Subtopic 450-20
$
50,619

 
$
47,484

 
$
9,549

 
$
8,045

 
$
17,551

 
$
1,638

 
$
3,253

 
$
21,051

 
$
159,190

Evaluated for impairment under FASB ASC Section 310-10-35
31,033

 
32,272

 
3,534

 
16,806

 
13,635

 
5

 
21

 
N/A

 
97,306

 
$
81,652

 
$
79,756

 
$
13,083

 
$
24,851

 
$
31,186

 
$
1,643

 
$
3,274

 
$
21,051

 
$
256,496

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans, net of unearned income at March 31, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Measured for impairment under FASB ASC Subtopic 450-20
$
4,523,691

 
$
3,441,018

 
$
1,595,522

 
$
1,136,726

 
$
581,381

 
$
309,160

 
$
71,094

 
N/A

 
$
11,658,592

Evaluated for impairment under FASB ASC Section 310-10-35
110,737

 
77,210

 
6,358

 
40,748

 
66,319

 
8

 
32

 
N/A

 
301,412

 
$
4,634,428

 
$
3,518,228

 
$
1,601,880

 
$
1,177,474

 
$
647,700

 
$
309,168

 
$
71,126

 
N/A

 
$
11,960,004

 
(1)
The unallocated allowance, which was approximately 10% and 8% of the total allowance for credit losses as of March 31, 2013 and March 31, 2012, respectively, was, in the opinion of management, reasonable and appropriate given that the estimates used in the allocation process are inherently imprecise.
N/A – Not applicable.
In March 2013, the Corporation sold $9.9 million of non-accrual commercial mortgage, commercial and construction loans to an investor, resulting in a total increase to charge-offs of $5.2 million during the three months ended March 31, 2013. Below is a summary of the transaction:
 
Real Estate - Commercial mortgage
 
Commercial - industrial, financial and agricultural
 
Real Estate - Construction
 
Total
 
(in thousands)
Unpaid principal balance of loans sold
$
7,690

 
$
4,730

 
$
740

 
$
13,160

Charge-offs prior to sale
(2,420
)
 
(710
)
 
(150
)
 
(3,280
)
Net recorded investment in loans sold
5,270

 
4,020

 
590

 
9,880

Proceeds from sale, net of selling expenses
2,770

 
1,730

 
140

 
4,640

Total charge-off upon sale
$
(2,500
)
 
$
(2,290
)
 
$
(450
)
 
$
(5,240
)
 
 
 
 
 
 
 
 
Existing allocation for credit losses on sold loans
$
(2,870
)
 
$
(1,960
)
 
$
(300
)
 
$
(5,130
)

Impaired Loans
A loan is considered to be impaired if it is probable that all amounts will not be collected according to the contractual terms of the loan agreement. Impaired loans consist of all loans on non-accrual status and accruing troubled debt restructuring (TDRs). An allowance for loan losses is established for an impaired loan if its carrying value exceeds its estimated fair value. Impaired loans with balances greater than $1.0 million are evaluated individually for impairment. Impaired loans with balances less than $1.0 million are pooled and measured for impairment collectively. All loans evaluated for impairment under FASB ASC Section

15

310-10-35 are measured for losses on a quarterly basis. As of March 31, 2013 and December 31, 2012, substantially all of the Corporation’s individually evaluated impaired loans with balances greater than $1.0 million were measured based on the estimated fair value of each loan’s collateral. Collateral could be in the form of real estate in the case of impaired commercial mortgages and construction loans, or business assets, such as accounts receivable or inventory, in the case of commercial loans. Commercial loans may also be secured by real property.
As of March 31, 2013 and 2012, approximately 73% and 82%, respectively, of impaired loans with principal balances greater than $1.0 million, whose primary collateral is real estate, were measured at estimated fair value using certified third-party appraisals that had been updated within the preceding 12 months.
When updated certified appraisals are not obtained for loans evaluated for impairment under FASB ASC Section 310-10-35 that are secured by real estate, fair values are estimated based on the original appraisal values, as long as the original appraisal indicated a strong loan-to-value position and, in the opinion of the Corporation's internal loan evaluation staff, there has not been a significant deterioration in the collateral value since the original appraisal was performed. Original appraisals are typically used only when the estimated collateral value, as adjusted appropriately for the age of the appraisal, results in a current loan-to-value ratio that is lower than the Corporation's loan-to-value requirements for new loans, generally less than 70%.
The following table presents total impaired loans by class segment as of March 31, 2013 and December 31, 2012:
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2013
 
December 31, 2012
 
Unpaid
Principal
Balance
 
Recorded
Investment
 
Related
Allowance
 
Unpaid
Principal
Balance
 
Recorded
Investment
 
Related
Allowance
 
(in thousands)
With no related allowance recorded:
 
 
 
 
 
 
 
 
 
 
Real estate - commercial mortgage
$
39,822

 
$
30,090

 
$
—

 
$
44,649

 
$
34,189

 
$
—

Commercial - secured
37,359

 
32,713

 
—

 
40,409

 
30,112

 
—

Commercial - unsecured
—

 
—

 
—

 
132

 
131

 
—

Real estate - home equity
110

 
110

 
—

 
300

 
300

 
—

Real estate - residential mortgage
1,495

 
1,495

 
—

 
486

 
486

 
—

Construction - commercial residential
29,488

 
21,752

 
—

 
40,432

 
23,548

 
—

Construction - commercial
4,370

 
4,273

 
—

 
6,294

 
5,685

 
—

 
112,644

 
90,433

 

 
132,702

 
94,451

 

With a related allowance recorded:
 
 
 

 

 

 

Real estate - commercial mortgage
65,660

 
53,485

 
23,065

 
69,173

 
55,443

 
21,612

Commercial - secured
44,282

 
32,614

 
16,633

 
52,660

 
39,114

 
17,187

Commercial - unsecured
1,420

 
1,403

 
1,051

 
2,142

 
2,083

 
1,597

Real estate - home equity
13,759

 
13,759

 
8,754

 
12,843

 
12,843

 
8,380

Real estate - residential mortgage
53,983

 
53,983

 
23,409

 
53,610

 
53,610

 
24,108

Construction - commercial residential
25,025

 
13,160

 
5,984

 
21,336

 
9,831

 
4,787

Construction - commercial
3,988

 
3,165

 
903

 
2,602

 
2,350

 
1,146

Construction - other
490

 
490

 
279

 
576

 
576

 
326

Consumer - direct
18

 
18

 
15

 
29

 
29

 
25

Leasing and other and overdrafts
45

 
45

 
29

 
10

 
10

 
7