FULT 9.30.2013 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 September 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 – 192,450,000 shares outstanding as of October 31, 2013.


FULTON FINANCIAL CORPORATION
FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2013
INDEX
 
Description
 
Page
 
 
 
 
PART I. FINANCIAL INFORMATION
 
 
 
 
 
 
 
 
 
 
(a)
Consolidated Balance Sheets - September 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)
 
September 30,
2013
 
December 31,
2012
 
(unaudited)
 
ASSETS
 
 
 
Cash and due from banks
$
262,938

 
$
256,300

Interest-bearing deposits with other banks
221,064

 
173,257

Loans held for sale
39,273

 
67,899

Investment securities:
 
 
 
Held to maturity (estimated fair value of $224 in 2013 and $319 in 2012)
206

 
292

Available for sale
2,686,443

 
2,793,725

Loans, net of unearned income
12,780,899

 
12,146,971

Less: Allowance for loan losses
(210,486
)
 
(223,903
)
Net Loans
12,570,413

 
11,923,068

Premises and equipment
227,299

 
227,723

Accrued interest receivable
44,715

 
45,786

Goodwill
530,614

 
530,656

Intangible assets
3,304

 
4,907

Other assets
464,502

 
509,484

Total Assets
$
17,050,771

 
$
16,533,097

LIABILITIES
 
 
 
Deposits:
 
 
 
Noninterest-bearing
$
3,338,075

 
$
3,009,966

Interest-bearing
9,383,046

 
9,474,197

Total Deposits
12,721,121

 
12,484,163

Short-term borrowings:
 
 
 
Federal funds purchased
493,274

 
592,470

Other short-term borrowings
705,303

 
275,929

Total Short-Term Borrowings
1,198,577

 
868,399

Accrued interest payable
16,657

 
19,330

Other liabilities
196,330

 
185,296

Federal Home Loan Bank advances and long-term debt
889,122

 
894,253

Total Liabilities
15,021,807

 
14,451,441

SHAREHOLDERS’ EQUITY
 
 
 
Common stock, $2.50 par value, 600 million shares authorized, 217.6 million shares issued in 2013 and 216.8 million shares issued in 2012
544,052

 
542,093

Additional paid-in capital
1,431,015

 
1,426,267

Retained earnings
437,173

 
363,937

Accumulated other comprehensive income (loss)
(40,871
)
 
5,675

Treasury stock, at cost, 25.3 million shares in 2013 and 17.6 million shares in 2012
(342,405
)
 
(256,316
)
Total Shareholders’ Equity
2,028,964

 
2,081,656

Total Liabilities and Shareholders’ Equity
$
17,050,771

 
$
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 September 30
 
Nine months ended September 30
 
2013
 
2012
 
2013
 
2012
INTEREST INCOME
 
 
 
 
 
 
 
Loans, including fees
$
136,150

 
$
140,511

 
$
405,312

 
$
426,398

Investment securities:
 
 
 
 
 
 
 
Taxable
12,977

 
16,658

 
40,890

 
53,943

Tax-exempt
2,327

 
2,558

 
7,151

 
7,855

Dividends
958

 
720

 
2,523

 
2,060

Loans held for sale
382

 
578

 
1,261

 
1,547

Other interest income
38

 
35

 
95

 
133

Total Interest Income
152,832

 
161,060

 
457,232

 
491,936

INTEREST EXPENSE
 
 
 
 
 
 
 
Deposits
8,743

 
13,848

 
28,642

 
44,841

Short-term borrowings
691

 
220

 
1,900

 
912

Long-term debt
10,865

 
11,111

 
32,448

 
34,077

Total Interest Expense
20,299

 
25,179

 
62,990

 
79,830

Net Interest Income
132,533

 
135,881

 
394,242

 
412,106

Provision for credit losses
9,500

 
23,000

 
38,000

 
76,500

Net Interest Income After Provision for Credit Losses
123,033

 
112,881

 
356,242

 
335,606

NON-INTEREST INCOME
 
 
 
 
 
 
 
Service charges on deposit accounts
13,938

 
15,651

 
42,700

 
45,860

Investment management and trust services
10,420

 
9,429

 
31,117

 
28,628

Other service charges and fees
9,518

 
11,119

 
27,536

 
33,181

Mortgage banking income
7,123

 
10,594

 
26,293

 
31,787

Other
3,725

 
5,108

 
11,315

 
14,602

Investment securities gains, net:
 
 
 
 
 
 
 
Other-than-temporary impairment losses
(125
)
 
(43
)
 
(146
)
 
(100
)
Less: Portion of gain recognized in other comprehensive income (loss) (before taxes)
28

 
—

 
22

 
—

Net other-than-temporary impairment losses
(97
)
 
(43
)
 
(124
)
 
(100
)
Net gains on sales of investment securities
2,730

 
85

 
8,095

 
2,931

Investment securities gains, net
2,633

 
42

 
7,971

 
2,831

Total Non-Interest Income
47,357

 
51,943

 
146,932

 
156,889

NON-INTEREST EXPENSE
 
 
 
 
 
 
 
Salaries and employee benefits
63,344

 
62,161

 
188,046

 
182,612

Net occupancy expense
11,519

 
11,161

 
34,810

 
33,301

Other outside services
5,048

 
5,600

 
13,223

 
13,614

Data processing
4,757

 
3,776

 
13,169

 
11,223

Equipment expense
3,646

 
3,816

 
11,447

 
10,370

Professional fees
3,329

 
2,728

 
9,771

 
8,294

Operating risk loss
3,297

 
1,404

 
6,923

 
6,827

Software
3,268

 
2,511

 
9,110

 
6,958

FDIC insurance expense
2,918

 
3,029

 
8,766

 
9,052

Marketing
2,251

 
648

 
6,045

 
5,703

Other real estate owned and repossession expense
1,453

 
2,249

 
6,248

 
8,709

Intangible amortization
534

 
756

 
1,603

 
2,318

Other
11,241

 
10,143

 
35,510

 
33,757

Total Non-Interest Expense
116,605

 
109,982

 
344,671

 
332,738

Income Before Income Taxes
53,785

 
54,842

 
158,503

 
159,757

Income taxes
13,837

 
13,260

 
38,746

 
40,152

Net Income
$
39,948

 
$
41,582

 
$
119,757

 
$
119,605

 
 
 
 
 
 
 
 
PER SHARE:
 
 
 
 
 
 
 
Net Income (Basic)
$
0.21

 
$
0.21

 
$
0.62

 
$
0.60

Net Income (Diluted)
0.21

 
0.21

 
0.61

 
0.60

Cash Dividends
0.08

 
0.08

 
0.24

 
0.22

See Notes to Consolidated Financial Statements
 
 
 
 
 
 
 

4

FULTON FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
 
(in thousands)
 
Three months ended September 30
 
Nine months ended September 30
 
2013
 
2012
 
2013
 
2012
 
 
Net Income
$
39,948

 
$
41,582

 
$
119,757

 
$
119,605

Other Comprehensive Income (Loss), net of tax:
 
 
 
 
 
 
 
Unrealized gain (loss) on securities
(6,951
)
 
10,834

 
(43,784
)
 
4,714

Reclassification adjustment for securities gains included in net income
(1,711
)
 
(28
)
 
(5,181
)
 
(1,840
)
Non-credit related unrealized gain (loss) on other-than-temporarily impaired debt securities
(106
)
 
271

 
1,332

 
234

Unrealized gain on derivative financial instruments
34

 
34

 
102

 
102

Amortization of net unrecognized pension and postretirement items
329

 
214

 
985

 
642

Other Comprehensive Income (Loss)
(8,405
)
 
11,325

 
(46,546
)
 
3,852

Total Comprehensive Income
$
31,543

 
$
52,907

 
$
73,211

 
$
123,457

 
 
 
 
 
 
 
 
See Notes to Consolidated Financial Statements
 
 
 
 
 
 
 


5

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

 

 

 
119,757

 

 

 
119,757

Other comprehensive income (loss)

 

 

 

 
(46,546
)
 

 
(46,546
)
Stock issued, including related tax benefits
1,107

 
1,959

 
562

 

 

 
4,838

 
7,359

Stock-based compensation awards

 

 
4,186

 

 

 

 
4,186

Acquisition of treasury stock
(8,000
)
 
 
 
 
 
 
 
 
 
(90,927
)
 
(90,927
)
Common stock cash dividends - $0.24 per share

 

 

 
(46,521
)
 

 

 
(46,521
)
Balance at September 30, 2013
192,332

 
$
544,052

 
$
1,431,015

 
$
437,173

 
$
(40,871
)
 
$
(342,405
)
 
$
2,028,964

 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 (loss)

 

 

 

 
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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
See Notes to Consolidated Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 

6

FULTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
(in thousands)
 
Nine months ended September 30
 
2013
 
2012
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net Income
$
119,757

 
$
119,605

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

 

Provision for credit losses
38,000

 
76,500

Depreciation and amortization of premises and equipment
19,165

 
16,735

Net amortization of investment securities premiums
8,749

 
8,039

Investment securities gains, net
(7,971
)
 
(2,831
)
Net decrease (increase) in loans held for sale
28,626

 
(38,468
)
Amortization of intangible assets
1,603

 
2,318

Stock-based compensation
4,186

 
3,963

Excess tax benefits from stock-based compensation
(237
)
 
(25
)
Decrease in accrued interest receivable
1,071

 
1,314

Decrease in other assets
38,485

 
12,956

Decrease in accrued interest payable
(2,673
)
 
(3,868
)
Decrease in other liabilities
(24,207
)
 
(2,191
)
Total adjustments
104,797

 
74,442

Net cash provided by operating activities
224,554

 
194,047

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Proceeds from sales of securities available for sale
283,242

 
225,539

Proceeds from maturities of securities held to maturity
86

 
228

Proceeds from maturities of securities available for sale
526,393

 
644,055

Purchase of securities held to maturity
—

 
(346
)
Purchase of securities available for sale
(723,859
)
 
(796,656
)
Increase in short-term investments
(47,807
)
 
(26,969
)
Net increase in loans
(684,529
)
 
(63,446
)
Net purchases of premises and equipment
(18,741
)
 
(30,232
)
Net cash used in investing activities
(665,215
)
 
(47,827
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Net increase in demand and savings deposits
595,722

 
510,296

Net decrease in time deposits
(358,764
)
 
(434,952
)
Increase (decrease) in short-term borrowings
330,178

 
(110,062
)
Repayments of long-term debt
(5,131
)
 
(131,526
)
Net proceeds from issuance of common stock
7,122

 
5,085

Excess tax benefits from stock-based compensation
237

 
25

Dividends paid
(31,138
)
 
(40,117
)
Acquisition of treasury stock
(90,927
)
 
(20,360
)
Net cash provided by (used in) financing activities
447,299

 
(221,611
)
Net Increase (Decrease) in Cash and Due From Banks
6,638

 
(75,391
)
Cash and Due From Banks at Beginning of Period
256,300

 
292,598

Cash and Due From Banks at End of Period
$
262,938

 
$
217,207

Supplemental Disclosures of Cash Flow Information:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
65,663

 
$
83,698

Income taxes
29,964

 
22,671

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 months ended September 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.
Diluted net income per share is calculated as net income 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 September 30
 
Nine months ended September 30
 
2013
 
2012
 
2013
 
2012
 
(in thousands)
Weighted average shares outstanding (basic)
192,251

 
198,956

 
193,926

 
199,371

Effect of dilutive securities
1,008

 
852

 
1,000

 
950

Weighted average shares outstanding (diluted)
193,259

 
199,808

 
194,926

 
200,321

For the three and nine months ended September 30, 2013, 3.2 million and 3.7 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 nine months ended September 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 September 30, 2013
 
 
 
 
 
Unrealized gain (loss) on securities
$
(10,691
)
 
$
3,740

 
$
(6,951
)
Reclassification adjustment for securities gains included in net income (1)
(2,633
)
 
922

 
(1,711
)
Non-credit related unrealized gains (losses) on other-than-temporarily impaired debt securities
(163
)
 
57

 
(106
)
Unrealized gain on derivative financial instruments
52

 
(18
)
 
34

Amortization of net unrecognized pension and postretirement items (2)
505

 
(176
)
 
329

Total Other Comprehensive Income (Loss)
$
(12,930
)
 
$
4,525

 
$
(8,405
)
Three months ended September 30, 2012
 
 
 
 
 
Unrealized gain (loss) on securities
$
16,667

 
$
(5,833
)
 
$
10,834

Reclassification adjustment for securities gains included in net income (1)
(42
)
 
14

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

 
(146
)
 
271

Unrealized gain on derivative financial instruments
52

 
(18
)
 
34

Amortization of net unrecognized pension and postretirement items (2)
329

 
(115
)
 
214

Total Other Comprehensive Income (Loss)
$
17,423

 
$
(6,098
)
 
$
11,325

 
 
 
 
 
 
Nine months ended September 30, 2013
 
 
 
 
 
Unrealized gain (loss) on securities
$
(67,357
)
 
$
23,573

 
$
(43,784
)
Reclassification adjustment for securities gains included in net income (1)
(7,971
)
 
2,790

 
(5,181
)
Non-credit related unrealized gains (losses) on other-than-temporarily impaired debt securities
2,049

 
(717
)
 
1,332

Unrealized gain on derivative financial instruments
157

 
(55
)
 
102

Amortization of net unrecognized pension and postretirement items (2)
1,515

 
(530
)
 
985

Total Other Comprehensive Income (Loss)
$
(71,607
)
 
$
25,061

 
$
(46,546
)
Nine months ended September 30, 2012
 
 
 
 
 
Unrealized gain (loss) on securities
$
7,252

 
$
(2,538
)
 
$
4,714

Reclassification adjustment for securities gains included in net income (1)
(2,831
)
 
991

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

 
(126
)
 
234

Unrealized gain on derivative financial instruments
157

 
(55
)
 
102

Amortization of net unrecognized pension and postretirement items (2)
987

 
(345
)
 
642

Total Other Comprehensive Income (Loss)
$
5,925

 
$
(2,073
)
 
$
3,852


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

 
$
(2,750
)
 
$
(17,825
)
 
$
(32,466
)
Other comprehensive income (loss) before reclassifications
(6,951
)
 
(106
)
 
—

 
—

 
(7,057
)
Amounts reclassified from accumulated other comprehensive income (loss)
(1,774
)
 
63

 
34

 
329

 
(1,348
)
Balance at September 30, 2013
$
(21,666
)
 
$
1,007

 
$
(2,716
)
 
$
(17,496
)
 
$
(40,871
)
Three months ended September 30, 2012

 

 
 
 

 

Balance at June 30, 2012
$
19,122

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

Other comprehensive income (loss) before reclassifications
10,834

 
271

 
—

 
—

 
11,105

Amounts reclassified from accumulated other comprehensive income (loss)
(40
)
 
12

 
34

 
214

 
220

Balance at September 30, 2012
$
29,916

 
$
(765
)
 
$
(2,852
)
 
$
(14,492
)
 
$
11,807

 
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2013
 
 
 
 
 
 
 
 
 
Balance at December 31, 2012
$
26,361

 
$
613

 
$
(2,818
)
 
$
(18,481
)
 
$
5,675

Other comprehensive income (loss) before reclassifications
(43,784
)
 
1,332

 
—

 
—

 
(42,452
)
Amounts reclassified from accumulated other comprehensive income (loss)
(4,243
)
 
(938
)
 
102

 
985

 
(4,094
)
Balance at September 30, 2013
$
(21,666
)
 
$
1,007

 
$
(2,716
)
 
$
(17,496
)
 
$
(40,871
)
Nine months ended September 30, 2012
 
 
 
 
 
 
 
 
 
Balance at December 31, 2011
$
27,054

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

Other comprehensive income (loss) before reclassifications
4,714

 
234

 
—

 
—

 
4,948

Amounts reclassified from accumulated other comprehensive income (loss)
(1,852
)
 
12

 
102

 
642

 
(1,096
)
Balance at September 30, 2012
$
29,916

 
$
(765
)
 
$
(2,852
)
 
$
(14,492
)
 
$
11,807



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 September 30, 2013
(in thousands)
Mortgage-backed securities
$
206

 
$
18

 
$
—

 
$
224

 
 
 
 
 
 
 
 
Available for Sale at September 30, 2013
 
 
 
 
 
 
 
Equity securities
$
123,111

 
$
8,596

 
$
(130
)
 
$
131,577

U.S. Government securities
2,250

 
—

 
—

 
2,250

U.S. Government sponsored agency securities
828

 
8

 
(1
)
 
835

State and municipal securities
288,659

 
7,552

 
(2,698
)
 
293,513

Corporate debt securities
108,272

 
5,115

 
(6,836
)
 
106,551

Collateralized mortgage obligations
1,113,753

 
9,373

 
(40,149
)
 
1,082,977

Mortgage-backed securities
909,292

 
15,209

 
(10,271
)
 
914,230

Auction rate securities
172,052

 
36

 
(17,578
)
 
154,510

 
$
2,718,217

 
$
45,889

 
$
(77,663
)
 
$
2,686,443

 
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 September 30, 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 ($87.9 million at September 30, 2013 and $71.7 million at December 31, 2012), common stocks of financial institutions ($36.8 million at September 30, 2013 and $44.2 million at December 31, 2012) and other equity investments ($6.9 million at September 30, 2013 and $6.7 million at December 31, 2012).
As of September 30, 2013, the financial institutions stock portfolio had a cost basis of $28.5 million and a fair value of $36.8 million, including an investment in a single financial institution with a cost basis of $20.0 million and a fair value of $26.2 million. The fair value of this investment accounted for 71.1% 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 September 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
$
—

 
$
—

 
$
45,346

 
$
45,470

Due from one year to five years
—

 
—

 
63,113

 
66,924

Due from five years to ten years
—

 
—

 
197,964

 
201,552

Due after ten years
—

 
—

 
265,638

 
243,713

 
—

 
—

 
572,061

 
557,659

Collateralized mortgage obligations
—

 
—

 
1,113,753

 
1,082,977

Mortgage-backed securities
206

 
224

 
909,292

 
914,230

 
$
206

 
$
224

 
$
2,595,106

 
$
2,554,866

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 September 30, 2013
 
 
(in thousands)
 
 
Equity securities
$
2,135

 
$
—

 
$
—

 
$
2,135

Debt securities
617

 
(22
)
 
(97
)
 
498

Total
$
2,752

 
$
(22
)
 
$
(97
)
 
$
2,633

Three months ended September 30, 2012
 
 
 
 
 
 
 
Equity securities
$
—

 
$
—

 
$
(24
)
 
$
(24
)
Debt securities
85

 
—

 
(19
)
 
66

Total
$
85

 
$
—

 
$
(43
)
 
$
42

 
 
 
 
 
 
 
 
Nine months ended September 30, 2013
 
 
 
 
 
 
 
Equity securities
$
4,357

 
$
(28
)
 
$
(27
)
 
$
4,302

Debt securities
3,788

 
(22
)
 
(97
)
 
3,669

Total
$
8,145

 
$
(50
)
 
$
(124
)
 
$
7,971

Nine months ended September 30, 2012
 
 
 
 
 
 
 
Equity securities
$
2,603

 
$
—

 
$
(81
)
 
$
2,522

Debt securities
328

 
—

 
(19
)
 
309

Total
$
2,931

 
$
—

 
$
(100
)
 
$
2,831

The other-than-temporary impairment charges for equity securities during the three and nine months ended September 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.
The credit related other-than-temporary impairment charges for debt securities during the three and nine months ended September 30, 2013 and 2012 were for investments in pooled trust preferred securities issued by financial institutions. The credit related other-than-temporary impairment charges for the pooled trust preferred securities were determined based on an expected cash flows model.

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 held by the Corporation at September 30, 2013 and 2012:
 
Three Months ended September 30
 
Nine Months ended September 30
 
2013
 
2012
 
2013
 
2012
 
(in thousands)
Balance of cumulative credit losses on debt securities, beginning of period
$
(20,607
)
 
$
(22,692
)
 
$
(23,079
)
 
$
(22,781
)
Reductions for securities sold during the period
—

 
—

 
2,468

 
—

Additions for credit losses recorded which were not previously recognized as components of earnings
(97
)
 
(19
)
 
(97
)
 
(19
)
Reductions for increases in cash flows expected to be collected that are recognized over the remaining life of the security
—

 
66

 
4

 
155

Balance of cumulative credit losses on debt securities, end of period
$
(20,704
)
 
$
(22,645
)
 
$
(20,704
)
 
$
(22,645
)
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, 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
$
—

 
$
—

 
$
59

 
$
(1
)
 
$
59

 
$
(1
)
State and municipal securities
54,679

 
(2,698
)
 
—

 
—

 
54,679

 
(2,698
)
Corporate debt securities
6,889

 
(108
)
 
42,989

 
(6,728
)
 
49,878

 
(6,836
)
Collateralized mortgage obligations
746,630

 
(40,149
)
 
—

 
—

 
746,630

 
(40,149
)
Mortgage-backed securities
499,406

 
(10,271
)
 
—

 
—

 
499,406

 
(10,271
)
Auction rate securities
87

 
(3
)
 
153,245

 
(17,575
)
 
153,332

 
(17,578
)
Total debt securities
1,307,691

 
(53,229
)
 
196,293

 
(24,304
)
 
1,503,984

 
(77,533
)
Equity securities
17

 
(1
)
 
850

 
(129
)
 
867

 
(130
)
 
$
1,307,708

 
$
(53,230
)
 
$
197,143

 
$
(24,433
)
 
$
1,504,851

 
$
(77,663
)
The Corporation’s collateralized mortgage obligations and mortgage-backed securities have contractual terms that generally do not permit the issuer to settle the securities at a price less than the amortized cost of the investment. Because the decline in market value of these securities is attributable to changes in interest rates and not credit quality, and because the Corporation does not have the intent to sell and does not believe it will more likely than not be required to sell any of these securities prior to a recovery of their fair value to amortized cost, the Corporation does not consider these investments to be other-than-temporarily impaired as of September 30, 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 September 30, 2013, approximately $147 million, or 95%, of the ARCs were rated above investment grade, with approximately $8 million, or 5%, AAA rated and $100 million, or 65%, AA rated. Approximately $8 million, or 5%, of ARCs were either not rated or rated below investment grade by at least one ratings agency. Of this amount, approximately $6 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 98%, of the student loans underlying the ARCs have principal payments which are guaranteed by the federal government. As of September 30, 2013, all ARCs were current and making scheduled interest payments. Based on management’s evaluations, ARCs with a fair value of $154.5 million were not subject to any other-than-temporary impairment charges as of September 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.

13

For its investments in equity securities, particularly its investments in stocks of financial institutions, management evaluates the near-term prospects of the issuers in relation to the severity and duration of the impairment. Based on that evaluation and the Corporation’s ability and intent to hold those investments for a reasonable period of time sufficient for a recovery of fair value, the Corporation does not consider those investments with unrealized holding losses as of September 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:
 
September 30, 2013
 
December 31, 2012
 
Amortized
cost
 
Estimated
fair value
 
Amortized
cost
 
Estimated
fair value
 
(in thousands)
Single-issuer trust preferred securities
$
54,722

 
$
48,368

 
$
56,834

 
$
51,656

Subordinated debt
47,375

 
50,493

 
47,286

 
51,747

Pooled trust preferred securities
3,676

 
5,191

 
5,530

 
6,927

Corporate debt securities issued by financial institutions
105,773

 
104,052

 
109,650

 
110,330

Other corporate debt securities
2,499

 
2,499

 
2,512

 
2,512

Available for sale corporate debt securities
$
108,272

 
$
106,551

 
$
112,162

 
$
112,842


The Corporation’s investments in single-issuer trust preferred securities had an unrealized loss of $6.4 million at September 30, 2013. The Corporation did not record any other-than-temporary impairment charges for single-issuer trust preferred securities during the three and nine months ended September 30, 2013 or 2012. The Corporation held six single-issuer trust preferred securities that were rated below investment grade by at least one ratings agency, with an amortized cost of $13.5 million and an estimated fair value of $11.6 million at September 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 $3.8 million at September 30, 2013 were not rated by any ratings agency.
As of September 30, 2013, the Corporation held eight pooled trust preferred securities with an amortized cost of $3.7 million and an estimated fair value of $5.2 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 $106.6 million were not subject to any additional other-than-temporary impairment charges as of September 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:
 
September 30, 2013
 
December 31, 2012
 
(in thousands)
Real-estate - commercial mortgage
$
5,063,373

 
$
4,664,426

Commercial - industrial, financial and agricultural
3,645,270

 
3,612,065

Real-estate - home equity
1,773,554

 
1,632,390

Real-estate - residential mortgage
1,327,469

 
1,257,432

Real-estate - construction
577,342

 
584,118

Consumer
296,142

 
309,864

Leasing and other
89,819

 
75,521

Overdrafts
16,706

 
18,393

Loans, gross of unearned income
12,789,675

 
12,154,209

Unearned income
(8,776
)
 
(7,238
)
Loans, net of unearned income
$
12,780,899

 
$
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:
 
September 30,
2013
 
December 31,
2012
 
(in thousands)
Allowance for loan losses
$
210,486

 
$
223,903

Reserve for unfunded lending commitments
2,352

 
1,536

Allowance for credit losses
$
212,838

 
$
225,439


15

The following table presents the activity in the allowance for credit losses:
 
Three months ended September 30
 
Nine months ended September 30
 
2013
 
2012
 
2013
 
2012
 
(in thousands)
Balance at beginning of period
$
217,626

 
$
237,316

 
$
225,439

 
$
258,177

Loans charged off
(18,108
)
 
(29,966
)
 
(61,597
)
 
(110,765
)
Recoveries of loans previously charged off
3,820

 
4,918

 
10,996

 
11,356

Net loans charged off
(14,288
)
 
(25,048
)
 
(50,601
)
 
(99,409
)
Provision for credit losses
9,500

 
23,000

 
38,000

 
76,500

Balance at end of period
$
212,838

 
$
235,268

 
$
212,838

 
$
235,268


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 September 30, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at June 30, 2013
$
58,696

 
$
57,557

 
$
25,736

 
$
32,684

 
$
14,471

 
$
2,497

 
$
2,925

 
$
21,865

 
$
216,431

Loans charged off
(3,724
)
 
(9,394
)
 
(2,365
)
 
(767
)
 
(598
)
 
(473
)
 
(787
)
 
—

 
(18,108
)
Recoveries of loans previously charged off
185

 
2,295

 
198

 
245

 
379

 
294

 
224

 
—

 
3,820

Net loans charged off
(3,539
)
 
(7,099
)
 
(2,167
)
 
(522
)
 
(219
)
 
(179
)
 
(563
)
 
—

 
(14,288
)
Provision for loan losses (1)
3,470

 
1,437

 
4,451

 
1,595

 
(1,221
)
 
610

 
620

 
(2,619
)
 
8,343

Balance at September 30, 2013
$
58,627

 
$
51,895

 
$
28,020

 
$
33,757

 
$
13,031

 
$
2,928

 
$
2,982

 
$
19,246

 
$
210,486

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

Nine months ended September 30, 2013