FULT 6.30.2013 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 June 30, 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 – 193,815,000 shares outstanding as of July 31, 2013.



FULTON FINANCIAL CORPORATION
FORM 10-Q FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2013
INDEX
 
Description
 
Page
 
 
 
 
PART I. FINANCIAL INFORMATION
 
 
 
 
 
 
 
 
 
 
(a)
 
Consolidated Balance Sheets - June 30, 2013 and December 31, 2012
 
 
 
 
(b)
 
 
 
 
 
(c)
 
 
 
 
 
(d)
 
 
 
 
 
(e)
 
 
 
 
 
(f)
 
 
 
 
 
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2




Item 1. Financial Statements
 
FULTON FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS 
 
(in thousands, except per-share data)
 
June 30,
2013
 
December 31,
2012
 
(unaudited)
 
ASSETS
 
 
 
Cash and due from banks
$
219,944

 
$
256,300

Interest-bearing deposits with other banks
130,065

 
173,257

Loans held for sale
60,909

 
67,899

Investment securities:
 
 
 
Held to maturity (estimated fair value of $246 in 2013 and $319 in 2012)
227

 
292

Available for sale
2,915,652

 
2,793,725

Loans, net of unearned income
12,645,418

 
12,146,971

Less: Allowance for loan losses
(216,431
)
 
(223,903
)
Net Loans
12,428,987

 
11,923,068

Premises and equipment
224,418

 
227,723

Accrued interest receivable
45,713

 
45,786

Goodwill
530,614

 
530,656

Intangible assets
3,838

 
4,907

Other assets
462,043

 
509,484

Total Assets
$
17,022,410

 
$
16,533,097

LIABILITIES
 
 
 
Deposits:
 
 
 
Noninterest-bearing
$
3,168,781

 
$
3,009,966

Interest-bearing
9,089,028

 
9,474,197

Total Deposits
12,257,809

 
12,484,163

Short-term borrowings:
 
 
 
Federal funds purchased
780,459

 
592,470

Other short-term borrowings
839,859

 
275,929

Total Short-Term Borrowings
1,620,318

 
868,399

Accrued interest payable
17,708

 
19,330

Other liabilities
208,676

 
185,296

Federal Home Loan Bank advances and long-term debt
889,167

 
894,253

Total Liabilities
14,993,678

 
14,451,441

SHAREHOLDERS’ EQUITY
 
 
 
Common stock, $2.50 par value, 600 million shares authorized, 217.5 million shares issued in 2013 and 216.8 million shares issued in 2012
543,637

 
542,093

Additional paid-in capital
1,429,019

 
1,426,267

Retained earnings
412,609

 
363,937

Accumulated other comprehensive income (loss)
(32,466
)
 
5,675

Treasury stock, at cost, 23.8 million shares in 2013 and 17.6 million shares in 2012
(324,067
)
 
(256,316
)
Total Shareholders’ Equity
2,028,732

 
2,081,656

Total Liabilities and Shareholders’ Equity
$
17,022,410

 
$
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 June 30
 
Six months ended June 30
 
2013
 
2012
 
2013
 
2012
INTEREST INCOME
 
 
 
 
 
 
 
Loans, including fees
$
135,032

 
$
141,541

 
$
269,162

 
$
285,887

Investment securities:
 
 
 
 
 
 
 
Taxable
14,516

 
18,624

 
27,913

 
37,285

Tax-exempt
2,345

 
2,596

 
4,824

 
5,297

Dividends
766

 
641

 
1,565

 
1,340

Loans held for sale
384

 
538

 
879

 
969

Other interest income
35

 
45

 
57

 
98

Total Interest Income
153,078

 
163,985

 
304,400

 
330,876

INTEREST EXPENSE
 
 
 
 
 
 
 
Deposits
9,498

 
14,743

 
19,899

 
30,993

Short-term borrowings
700

 
411

 
1,209

 
692

Long-term debt
10,815

 
11,301

 
21,583

 
22,966

Total Interest Expense
21,013

 
26,455

 
42,691

 
54,651

Net Interest Income
132,065

 
137,530

 
261,709

 
276,225

Provision for credit losses
13,500

 
25,500

 
28,500

 
53,500

Net Interest Income After Provision for Credit Losses
118,565

 
112,030

 
233,209

 
222,725

NON-INTEREST INCOME
 
 
 
 
 
 
 
Service charges on deposit accounts
14,651

 
15,367

 
28,762

 
30,209

Mortgage banking income
10,997

 
11,143

 
19,170

 
21,193

Investment management and trust services
10,601

 
9,822

 
20,697

 
19,199

Other service charges and fees
9,508

 
11,507

 
18,018

 
22,062

Other
3,694

 
3,931

 
7,590

 
9,494

Investment securities gains, net:
 
 
 
 
 
 
 
Net gains on sales of investment securities
2,892

 
1,595

 
5,365

 
2,846

Other-than-temporary impairment losses
(27
)
 
(57
)
 
(27
)
 
(57
)
Investment securities gains, net
2,865

 
1,538

 
5,338

 
2,789

Total Non-Interest Income
52,316

 
53,308

 
99,575

 
104,946

NON-INTEREST EXPENSE
 
 
 
 
 
 
 
Salaries and employee benefits
63,490

 
60,091

 
124,702

 
120,451

Net occupancy expense
11,447

 
11,205

 
23,291

 
22,140

Other outside services
5,315

 
5,101

 
8,175

 
8,014

Data processing
4,509

 
3,759

 
8,412

 
7,447

Equipment expense
3,893

 
3,185

 
7,801

 
6,554

Professional fees
3,395

 
2,984

 
6,442

 
5,566

Software
3,094

 
2,272

 
5,842

 
4,447

FDIC insurance expense
3,001

 
3,002

 
5,848

 
6,023

Other real estate owned and repossession expense
1,941

 
3,165

 
4,795

 
6,460

Marketing
1,922

 
2,583

 
3,794

 
5,055

Operating risk loss
1,860

 
2,055

 
3,626

 
5,423

Intangible amortization
535

 
761

 
1,069

 
1,562

Other
12,728

 
11,924

 
24,269

 
23,614

Total Non-Interest Expense
117,130

 
112,087

 
228,066

 
222,756

Income Before Income Taxes
53,751

 
53,251

 
104,718

 
104,915

Income taxes
13,169

 
13,360

 
24,909

 
26,892

Net Income
$
40,582

 
$
39,891

 
$
79,809

 
$
78,023

 
 
 
 
 
 
 
 
PER SHARE:
 
 
 
 
 
 
 
Net Income (Basic)
$
0.21

 
$
0.20

 
$
0.41

 
$
0.39

Net Income (Diluted)
0.21

 
0.20

 
0.41

 
0.39

Cash Dividends
0.08

 
0.07

 
0.16

 
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 June 30
 
Six months ended June 30
 
2013
 
2012
 
2013
 
2012
 
 
Net Income
$
40,582

 
$
39,891

 
$
79,809

 
$
78,023

Other Comprehensive Income (Loss), net of tax:
 
 
 
 
 
 
 
Unrealized loss on securities
(36,958
)
 
(10,704
)
 
(36,833
)
 
(6,120
)
Reclassification adjustment for securities gains included in net income
(1,862
)
 
(999
)
 
(3,470
)
 
(1,812
)
Non-credit related unrealized gain (loss) on other-than-temporarily impaired debt securities
355

 
(172
)
 
1,438

 
(37
)
Unrealized gain on derivative financial instruments
34

 
34

 
68

 
68

Amortization of net unrecognized pension and postretirement items
328

 
214

 
656

 
428

Other Comprehensive Loss
(38,103
)
 
(11,627
)
 
(38,141
)
 
(7,473
)
Total Comprehensive Income
$
2,479

 
$
28,264

 
$
41,668

 
$
70,550

 
 
 
 
 
 
 
 
See Notes to Consolidated Financial Statements
 
 
 
 
 
 
 


5


FULTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 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 (Loss)
 
 
 
Balance at December 31, 2012
199,225

 
$
542,093

 
$
1,426,267

 
$
363,937

 
$
5,675

 
$
(256,316
)
 
$
2,081,656

Net income

 

 

 
79,809

 

 

 
79,809

Other comprehensive loss

 

 

 

 
(38,141
)
 

 
(38,141
)
Stock issued, including related tax benefits
854

 
1,544

 
(455
)
 

 

 
3,586

 
4,675

Stock-based compensation awards

 

 
3,207

 

 

 

 
3,207

Acquisition of treasury stock
(6,421
)
 
 
 
 
 
 
 
 
 
(71,337
)
 
(71,337
)
Common stock cash dividends - $0.16 per share

 

 

 
(31,137
)
 

 

 
(31,137
)
Balance at June 30, 2013
193,658

 
$
543,637

 
$
1,429,019

 
$
412,609

 
$
(32,466
)
 
$
(324,067
)
 
$
2,028,732

 
 
 
 
 
 
 
 
 
 
 
 
 
 
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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
See Notes to Consolidated Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 

6


FULTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
(in thousands)
 
Six months ended June 30
 
2013
 
2012
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net Income
$
79,809

 
$
78,023

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

 

Provision for credit losses
28,500

 
53,500

Depreciation and amortization of premises and equipment
12,577

 
10,845

Net amortization of investment securities premiums
6,099

 
5,251

Investment securities gains, net
(5,338
)
 
(2,789
)
Net decrease (increase) in loans held for sale
6,990

 
(24,397
)
Amortization of intangible assets
1,069

 
1,562

Stock-based compensation
3,207

 
3,050

Excess tax benefits from stock-based compensation
(148
)
 
(14
)
Decrease in accrued interest receivable
73

 
2,815

Decrease in other assets
21,968

 
3,486

Decrease in accrued interest payable
(1,622
)
 
(1,961
)
(Decrease) increase in other liabilities
(10,782
)
 
2,550

Total adjustments
62,593

 
53,898

Net cash provided by operating activities
142,402

 
131,921

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Proceeds from sales of securities available for sale
176,266

 
210,804

Proceeds from maturities of securities held to maturity
65

 
121

Proceeds from maturities of securities available for sale
381,807

 
371,176

Purchase of securities held to maturity

 
(14
)
Purchase of securities available for sale
(674,228
)
 
(602,642
)
Decrease in short-term investments
43,192

 
56,868

Net increase in loans
(534,760
)
 
(88,253
)
Net purchases of premises and equipment
(9,272
)
 
(20,654
)
Net cash used in investing activities
(616,930
)
 
(72,594
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Net increase (decrease) in demand and savings deposits
55,058

 
(10,218
)
Net decrease in time deposits
(281,412
)
 
(279,305
)
Increase in short-term borrowings
751,919

 
334,648

Repayments of long-term debt
(5,086
)
 
(131,340
)
Net proceeds from issuance of common stock
4,527

 
3,143

Excess tax benefits from stock-based compensation
148

 
14

Dividends paid
(15,645
)
 
(26,056
)
Acquisition of treasury stock
(71,337
)
 

Net cash provided by (used in) financing activities
438,172

 
(109,114
)
Net Decrease in Cash and Due From Banks
(36,356
)
 
(49,787
)
Cash and Due From Banks at Beginning of Period
256,300

 
292,598

Cash and Due From Banks at End of Period
$
219,944

 
$
242,811

Supplemental Disclosures of Cash Flow Information:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
44,313

 
$
56,612

Income taxes
24,336

 
22,646

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 months ended June 30, 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 June 30
 
Six months ended June 30
 
2013
 
2012
 
2013
 
2012
 
(in thousands)
Weighted average shares outstanding (basic)
193,273

 
199,671

 
194,777

 
199,581

Effect of dilutive securities
1,073

 
1,135

 
996

 
994

Weighted average shares outstanding (diluted)
194,346

 
200,806

 
195,773

 
200,575

For the three and six months ended June 30, 2013, 4.3 million and 4.0 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. For the three and six months ended June 30, 2012, 5.2 million shares issuable under 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 (Loss)
The following table presents changes in other comprehensive income (loss): 
 
Before-Tax Amount
 
Tax Effect
 
Net of Tax Amount
 
(in thousands)
Three months ended June 30, 2013
 
 
 
 
 
Unrealized loss on securities
$
(56,858
)
 
$
19,900

 
$
(36,958
)
Reclassification adjustment for securities gains included in net income (1)
(2,865
)
 
1,003

 
(1,862
)
Non-credit related unrealized gains (losses) on other-than-temporarily impaired debt securities
546

 
(191
)
 
355

Unrealized gain on derivative financial instruments
51

 
(17
)
 
34

Amortization of net unrecognized pension and postretirement items (2)
504

 
(176
)
 
328

Total Other Comprehensive Income (Loss)
$
(58,622
)
 
$
20,519

 
$
(38,103
)
Three months ended June 30, 2012
 
 
 
 
 
Unrealized loss on securities
$
(16,467
)
 
$
5,763

 
$
(10,704
)
Reclassification adjustment for securities gains included in net income (1)
(1,538
)
 
539

 
(999
)
Non-credit related unrealized gains (losses) on other-than-temporarily impaired debt securities
(265
)
 
93

 
(172
)
Unrealized gain on derivative financial instruments
52

 
(18
)
 
34

Amortization of net unrecognized pension and postretirement items (2)
330

 
(116
)
 
214

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

 
$
(11,627
)
 
 
 
 
 
 
Six months ended June 30, 2013
 
 
 
 
 
Unrealized loss on securities
$
(56,666
)
 
$
19,833

 
$
(36,833
)
Reclassification adjustment for securities gains included in net income (1)
(5,338
)
 
1,868

 
(3,470
)
Non-credit related unrealized gains (losses) on other-than-temporarily impaired debt securities
2,212

 
(774
)
 
1,438

Unrealized gain on derivative financial instruments
105

 
(37
)
 
68

Amortization of net unrecognized pension and postretirement items (2)
1,009

 
(353
)
 
656

Total Other Comprehensive Income (Loss)
$
(58,678
)
 
$
20,537

 
$
(38,141
)
Six months ended June 30, 2012
 
 
 
 
 
Unrealized loss on securities
$
(9,415
)
 
$
3,295

 
$
(6,120
)
Reclassification adjustment for securities gains included in net income (1)
(2,789
)
 
977

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

 
(37
)
Unrealized gain on derivative financial instruments
104

 
(36
)
 
68

Amortization of net unrecognized pension and postretirement items (2)
659

 
(231
)
 
428

Total Other Comprehensive Income (Loss)
$
(11,498
)
 
$
4,025

 
$
(7,473
)

(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.

9


The following table presents changes in each component of accumulated other comprehensive income (loss), net of tax: 
 
Unrealized Gains (Losses) on Investment Securities Not Other-Than-Temporarily Impaired
 
Unrealized Non-Credit Gains (Losses) on Other-Than-Temporarily Impaired Debt Securities
 
Unrealized Effective Portions of Losses on Forward-Starting Interest Rate Swaps
 
Unrecognized Pension and Postretirement Plan Income (Costs)
 
Total
 
(in thousands)
Three months ended June 30, 2013
 
 
 
 
 
 
 
 
 
Balance at March 31, 2013
$
24,878

 
$
1,696

 
$
(2,784
)
 
$
(18,153
)
 
$
5,637

Other comprehensive income (loss) before reclassifications
(36,958
)
 
355

 

 

 
(36,603
)
Amounts reclassified from accumulated other comprehensive loss
(861
)
 
(1,001
)
 
34

 
328

 
(1,500
)
Balance at June 30, 2013
$
(12,941
)
 
$
1,050

 
$
(2,750
)
 
$
(17,825
)
 
$
(32,466
)
Three months ended June 30, 2012

 

 
 
 

 

Balance at March 31, 2012
$
30,825

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

Other comprehensive income (loss) before reclassifications
(10,704
)
 
(172
)
 

 

 
(10,876
)
Amounts reclassified from accumulated other comprehensive loss
(999
)
 

 
34

 
214

 
(751
)
Balance at June 30, 2012
$
19,122

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

 
 
 
 
 
 
 
 
 
 
Six months ended June 30, 2013
 
 
 
 
 
 
 
 
 
Balance at December 31, 2012
$
26,361

 
$
613

 
$
(2,818
)
 
$
(18,481
)
 
$
5,675

Other comprehensive income (loss) before reclassifications
(36,833
)
 
1,438

 

 

 
(35,395
)
Amounts reclassified from accumulated other comprehensive loss
(2,469
)
 
(1,001
)
 
68

 
656

 
(2,746
)
Balance at June 30, 2013
$
(12,941
)
 
$
1,050

 
$
(2,750
)
 
$
(17,825
)
 
$
(32,466
)
Six months ended June 30, 2012
 
 
 
 
 
 
 
 
 
Balance at December 31, 2011
$
27,054

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

Other comprehensive income (loss) before reclassifications
(6,120
)
 

 

 

 
(6,120
)
Amounts reclassified from accumulated other comprehensive loss
(1,812
)
 
(37
)
 
68

 
428

 
(1,353
)
Balance at June 30, 2012
$
19,122

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



10


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 June 30, 2013
(in thousands)
Mortgage-backed securities
$
227

 
$
19

 
$

 
$
246

 
 
 
 
 
 
 
 
Available for Sale at June 30, 2013
 
 
 
 
 
 
 
Equity securities
$
136,364

 
$
6,903

 
$
(148
)
 
$
143,119

U.S. Government securities
2,251

 

 

 
2,251

U.S. Government sponsored agency securities
809

 
11

 
(1
)
 
819

State and municipal securities
290,351

 
8,140

 
(2,758
)
 
295,733

Corporate debt securities
108,315

 
5,424

 
(6,262
)
 
107,477

Collateralized mortgage obligations
1,253,484

 
10,186

 
(23,108
)
 
1,240,562

Mortgage-backed securities
970,273

 
14,519

 
(11,693
)
 
973,099

Auction rate securities
172,092

 
15

 
(19,515
)
 
152,592

 
$
2,933,939

 
$
45,198

 
$
(63,485
)
 
$
2,915,652

 
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 $1.7 billion as of June 30, 2013 and $1.8 billion as of 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 ($95.3 million at June 30, 2013 and $71.7 million at December 31, 2012), common stocks of financial institutions ($40.9 million at June 30, 2013 and $44.2 million at December 31, 2012) and other equity investments ($6.9 million at June 30, 2013 and $6.7 million at December 31, 2012).
As of June 30, 2013, the financial institutions stock portfolio had a cost basis of $34.3 million and a fair value of $40.9 million, including an investment in a single financial institution with a cost basis of $20.0 million and a fair value of $23.2 million. The fair value of this investment accounted for approximately 57% 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.

11


The amortized cost and estimated fair values of debt securities as of June 30, 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
$

 
$

 
$
44,411

 
$
44,491

Due from one year to five years

 

 
66,739

 
70,642

Due from five years to ten years

 

 
190,392

 
194,234

Due after ten years

 

 
272,276

 
249,505

 

 

 
573,818

 
558,872

Collateralized mortgage obligations

 

 
1,253,484

 
1,240,562

Mortgage-backed securities
227

 
246

 
970,273

 
973,099

 
$
227

 
$
246

 
$
2,797,575

 
$
2,772,533

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
Three months ended June 30, 2013
 
 
(in thousands)
 
 
Equity securities
$
1,083

 
$
(28
)
 
$
(27
)
 
$
1,028

Debt securities
1,837

 

 

 
1,837

Total
$
2,920

 
$
(28
)
 
$
(27
)
 
$
2,865

Three months ended June 30, 2012
 
 
 
 
 
 
 
Equity securities
$
1,517

 
$

 
$
(57
)
 
$
1,460

Debt securities
78

 

 

 
78

Total
$
1,595

 
$

 
$
(57
)
 
$
1,538

 
 
 
 
 
 
 
 
Six months ended June 30, 2013
 
 
 
 
 
 
 
Equity securities
$
2,222

 
$
(28
)
 
$
(27
)
 
$
2,167

Debt securities
3,171

 

 

 
3,171

Total
$
5,393

 
$
(28
)
 
$
(27
)
 
$
5,338

Six months ended June 30, 2012
 
 
 
 
 
 
 
Equity securities
$
2,603

 
$

 
$
(57
)
 
$
2,546

Debt securities
243

 

 

 
243

Total
$
2,846

 
$

 
$
(57
)
 
$
2,789

The other-than-temporary impairment charges for equity securities during the three and six months ended June 30, 2013 and 2012 were for investments in stocks of financial institutions and were due to the severity and duration of the declines in the fair values of certain bank stock stocks, in conjunction with management's assessment of the near-term prospects of each specific issuer.

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 June 30, 2013 and 2012:
 
Three Months ended June 30
 
Six Months ended June 30
 
2013
 
2012
 
2013
 
2012
 
(in thousands)
Balance of cumulative credit losses on debt securities, beginning of period
$
(23,079
)
 
$
(22,692
)
 
$
(23,079
)
 
$
(22,781
)
Reductions for securities sold during the period
2,468

 

 
2,468

 

Reductions for increases in cash flows expected to be collected that are recognized over the remaining life of the security
4

 

 
4

 
89

Balance of cumulative credit losses on debt securities, end of period
$
(20,607
)
 
$
(22,692
)
 
$
(20,607
)
 
$
(22,692
)
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, 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
$

 
$

 
$
69

 
$
(1
)
 
$
69

 
$
(1
)
State and municipal securities
53,135

 
(2,758
)
 

 

 
53,135

 
(2,758
)
Corporate debt securities
6,877

 
(115
)
 
44,348

 
(6,147
)
 
51,225

 
(6,262
)
Collateralized mortgage obligations
805,728

 
(23,108
)
 

 

 
805,728

 
(23,108
)
Mortgage-backed securities
635,582

 
(11,693
)
 

 

 
635,582

 
(11,693
)
Auction rate securities
87

 
(2
)
 
151,934

 
(19,513
)
 
152,021

 
(19,515
)
Total debt securities
1,501,409

 
(37,676
)
 
196,351

 
(25,661
)
 
1,697,760

 
(63,337
)
Equity securities
332

 
(17
)
 
848

 
(131
)
 
1,180

 
(148
)
 
$
1,501,741

 
$
(37,693
)
 
$
197,199

 
$
(25,792
)
 
$
1,698,940

 
$
(63,485
)
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, 2013.
The unrealized holding losses on auction rate securities, or auction rate certificates (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 June 30, 2013, approximately $146 million, or 95%, of the ARCs were rated above investment grade, with approximately $8 million, or 5%, AAA rated and $100 million, or 66%, AA rated. Approximately $7 million, or 5%, of ARCs were either not rated or rated below investment grade by at least one ratings agency. Of this amount, approximately $5 million, or 70%, of the student loans underlying these ARCs have principal payments which are guaranteed by the federal government. In total, approximately $150 million, or 98%, of the student loans underlying the ARCs have principal payments which are guaranteed by the federal government. As of June 30, 2013, all ARCs were current and making scheduled interest payments. Based on management’s evaluations, ARCs with a fair value of $152.6 million were not subject to any other-than-temporary impairment charges as of June 30, 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.
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,

13


the Corporation does not consider those investments with unrealized holding losses as of June 30, 2013 to be other-than-temporarily impaired.
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:
 
June 30, 2013
 
December 31, 2012
 
Amortized
cost
 
Estimated
fair value
 
Amortized
cost
 
Estimated
fair value
 
(in thousands)
Single-issuer trust preferred securities
$
54,699

 
$
49,222

 
$
56,834

 
$
51,656

Subordinated debt
47,344

 
50,365

 
47,286

 
51,747

Pooled trust preferred securities
3,773

 
5,391

 
5,530

 
6,927

Corporate debt securities issued by financial institutions
105,816

 
104,978

 
109,650

 
110,330

Other corporate debt securities
2,499

 
2,499

 
2,512

 
2,512

Available for sale corporate debt securities
$
108,315

 
$
107,477

 
$
112,162

 
$
112,842


The Corporation’s investments in single-issuer trust preferred securities had an unrealized loss of $5.5 million at June 30, 2013. The Corporation did not record any other-than-temporary impairment charges for single-issuer trust preferred securities during the three months ended June 30, 2013 or 2012. The Corporation held seven single-issuer trust preferred securities that were rated below investment grade by at least one ratings agency, with an amortized cost of $20.8 million and an estimated fair value of $19.5 million at June 30, 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 $3.7 million at June 30, 2013 were not rated by any ratings agency.
As of June 30, 2013, the Corporation held eight pooled trust preferred securities with an amortized cost of $3.8 million and an estimated fair value of $5.4 million that were rated below investment grade by at least one ratings agency, with ratings ranging from C to Ca. 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.
Based on management’s evaluations, corporate debt securities with a fair value of $107.5 million were not subject to any additional other-than-temporary impairment charges as of June 30, 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.


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, 2013
 
December 31, 2012
 
(in thousands)
Real-estate - commercial mortgage
$
4,856,916

 
$
4,664,426

Commercial - industrial, financial and agricultural
3,712,974

 
3,612,065

Real-estate - home equity
1,760,268

 
1,632,390

Real-estate - residential mortgage
1,313,345

 
1,257,432

Real-estate - construction
610,280

 
584,118

Consumer
300,233

 
309,864

Leasing and other
83,855

 
75,521

Overdrafts
15,224

 
18,393

Loans, gross of unearned income
12,653,095

 
12,154,209

Unearned income
(7,677
)
 
(7,238
)
Loans, net of unearned income
$
12,645,418

 
$
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 include direct consumer installment loans and indirect automobile loans.
The following table presents the components of the allowance for credit losses:
 
June 30,
2013
 
December 31,
2012
 
(in thousands)
Allowance for loan losses
$
216,431

 
$
223,903

Reserve for unfunded lending commitments
1,195

 
1,536

Allowance for credit losses
$
217,626

 
$
225,439


15


The following table presents the activity in the allowance for credit losses:
 
Three months ended June 30
 
Six months ended June 30
 
2013
 
2012
 
2013
 
2012
 
(in thousands)
Balance at beginning of period
$
221,527

 
$
258,137

 
$
225,439

 
$
258,177

Loans charged off
(21,383
)
 
(50,540
)
 
(43,489
)
 
(80,799
)
Recoveries of loans previously charged off
3,982

 
4,219

 
7,176

 
6,438

Net loans charged off
(17,401
)
 
(46,321
)
 
(36,313
)
 
(74,361
)
Provision for credit losses
13,500

 
25,500

 
28,500

 
53,500

Balance at end of period
$
217,626

 
$
237,316

 
$
217,626

 
$
237,316


The following table presents the activity in the allowance for loan losses by portfolio segment:
 
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, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at March 31, 2013
$
63,985

 
$
56,672

 
$
23,701

 
$
33,484

 
$
16,004

 
$
2,286

 
$
2,787

 
$
21,122

 
$
220,041

Loans charged off
(5,193
)
 
(5,960
)
 
(1,966
)
 
(4,465
)
 
(2,597
)
 
(433
)
 
(769
)
 

 
(21,383
)
Recoveries of loans previously charged off
1,505

 
756

 
192

 
116

 
744

 
406

 
263

 

 
3,982

Net loans charged off
(3,688
)
 
(5,204
)
 
(1,774
)
 
(4,349
)
 
(1,853
)
 
(27
)
 
(506
)
 

 
(17,401
)
Provision for loan losses (1)
(1,601
)
 
6,089

 
3,809

 
3,549

 
320

 
238

 
644

 
743

 
13,791

Balance at June 30, 2013
$
58,696

 
$
57,557

 
$
25,736

 
$
32,684

 
$
14,471

 
$
2,497

 
$
2,925

 
$
21,865

 
$
216,431

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

Six months ended June 30, 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
(9,326
)
 
(15,462
)
 
(4,370
)
 
(7,515