FULT 3.31.2014 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, 2014, 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 – 188,969,000 shares outstanding as of April 30, 2014.


FULTON FINANCIAL CORPORATION
FORM 10-Q FOR THE THREE MONTHS ENDED MARCH 31, 2014
INDEX
 
Description
 
Page
 
 
 
 
PART I. FINANCIAL INFORMATION
 
 
 
 
 
 
 
 
 
 
(a)
Consolidated Balance Sheets - March 31, 2014 and December 31, 2013
 
 
 
 
(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)
 
March 31,
2014
 
December 31,
2013
 
(unaudited)
 
ASSETS
 
 
 
Cash and due from banks
$
260,389

 
$
218,540

Interest-bearing deposits with other banks
225,428

 
163,988

Federal Reserve Bank and Federal Home Loan Bank stock
81,634

 
84,173

Loans held for sale
24,417

 
21,351

Available for sale investment securities
2,501,198

 
2,568,434

Loans, net of unearned income
12,733,792

 
12,782,220

Less: Allowance for loan losses
(197,089
)
 
(202,780
)
Net Loans
12,536,703

 
12,579,440

Premises and equipment
225,647

 
226,021

Accrued interest receivable
43,376

 
44,037

Goodwill and intangible assets
532,747

 
533,076

Other assets
480,350

 
495,574

Total Assets
$
16,911,889

 
$
16,934,634

LIABILITIES
 
 
 
Deposits:
 
 
 
Noninterest-bearing
$
3,359,900

 
$
3,283,172

Interest-bearing
9,310,017

 
9,208,014

Total Deposits
12,669,917

 
12,491,186

Short-term borrowings:
 
 
 
Federal funds purchased
361,098

 
582,436

Other short-term borrowings
708,586

 
676,193

Total Short-Term Borrowings
1,069,684

 
1,258,629

Accrued interest payable
16,972

 
15,218

Other liabilities
213,136

 
222,830

Federal Home Loan Bank advances and long-term debt
883,461

 
883,584

Total Liabilities
14,853,170

 
14,871,447

SHAREHOLDERS’ EQUITY
 
 
 
Common stock, $2.50 par value, 600 million shares authorized, 217.9 million shares issued in 2014 and 217.8 million shares issued in 2013
544,821

 
544,568

Additional paid-in capital
1,434,546

 
1,432,974

Retained earnings
490,517

 
463,843

Accumulated other comprehensive loss
(21,889
)
 
(37,341
)
Treasury stock, at cost, 29.1 million shares in 2014 and 25.2 million shares in 2013
(389,276
)
 
(340,857
)
Total Shareholders’ Equity
2,058,719

 
2,063,187

Total Liabilities and Shareholders’ Equity
$
16,911,889

 
$
16,934,634

 
 
 
 
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
 
2014
 
2013
INTEREST INCOME
 
 
 
Loans, including fees
$
131,830

 
$
134,130

Investment securities:
 
 
 
Taxable
13,266

 
13,397

Tax-exempt
2,348

 
2,481

Dividends
332

 
390

Loans held for sale
134

 
495

Other interest income
882

 
429

Total Interest Income
148,792

 
151,322

INTEREST EXPENSE
 
 
 
Deposits
7,896

 
10,401

Short-term borrowings
633

 
509

Long-term debt
10,698

 
10,768

Total Interest Expense
19,227

 
21,678

Net Interest Income
129,565

 
129,644

Provision for credit losses
2,500

 
15,000

Net Interest Income After Provision for Credit Losses
127,065

 
114,644

NON-INTEREST INCOME
 
 
 
Service charges on deposit accounts
11,711

 
14,111

Investment management and trust services
10,958

 
10,096

Other service charges and fees
8,927

 
8,510

Mortgage banking income
3,605

 
8,173

Other
3,305

 
3,896

Investment securities gains, net
—

 
2,473

Total Non-Interest Income
38,506

 
47,259

NON-INTEREST EXPENSE
 
 
 
Salaries and employee benefits
59,566

 
61,212

Net occupancy expense
13,603

 
11,844

Other outside services
3,812

 
2,860

Data processing
3,796

 
3,903

Equipment expense
3,602

 
3,908

Software
2,925

 
2,748

Professional fees
2,904

 
3,047

FDIC insurance expense
2,689

 
2,847

Operating risk loss
1,828

 
1,766

Marketing
1,584

 
1,872

Other real estate owned and repossession expense
983

 
2,854

Intangible amortization
315

 
534

Other
11,947

 
11,541

Total Non-Interest Expense
109,554

 
110,936

Income Before Income Taxes
56,017

 
50,967

Income taxes
14,234

 
11,740

Net Income
$
41,783

 
$
39,227

 
 
 
 
PER SHARE:
 
 
 
Net Income (Basic)
$
0.22

 
$
0.20

Net Income (Diluted)
0.22

 
0.20

Cash Dividends
0.08

 
0.08

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
 
2014
 
2013
 
 
Net Income
$
41,783

 
$
39,227

Other Comprehensive Income (Loss), net of tax:
 
 
 
Unrealized gain on securities
13,933

 
125

Reclassification adjustment for postretirement amendment gains and securities gains included in net income
(944
)
 
(1,608
)
Non-credit related unrealized gain on other-than-temporarily impaired debt securities
189

 
1,083

Unrealized gain on derivative financial instruments
34

 
34

Unrecognized pension and postretirement income
2,144

 
—

Amortization of net unrecognized pension and postretirement items
96

 
328

Other Comprehensive Income (Loss)
15,452

 
(38
)
Total Comprehensive Income
$
57,235

 
$
39,189

 
 
 
 
See Notes to Consolidated Financial Statements
 
 
 


5

FULTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2014 AND 2013
 
(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, 2013
192,652

 
$
544,568

 
$
1,432,974

 
$
463,843

 
$
(37,341
)
 
$
(340,857
)
 
$
2,063,187

Net income

 

 

 
41,783

 

 

 
41,783

Other comprehensive income (loss)

 

 

 

 
15,452

 

 
15,452

Stock issued, including related tax benefits
198

 
253

 
539

 

 

 
1,385

 
2,177

Stock-based compensation awards

 

 
1,033

 

 

 

 
1,033

Acquisition of treasury stock
(4,000
)
 
 
 
 
 
 
 
 
 
(49,804
)
 
(49,804
)
Common stock cash dividends - $0.08 per share

 

 

 
(15,109
)
 

 

 
(15,109
)
Balance at March 31, 2014
188,850

 
$
544,821

 
$
1,434,546

 
$
490,517

 
$
(21,889
)
 
$
(389,276
)
 
$
2,058,719

 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 income (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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
See Notes to Consolidated Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 

6

FULTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
(in thousands)
 
Three months ended March 31
 
2014
 
2013
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net Income
$
41,783

 
$
39,227

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

 

Provision for credit losses
2,500

 
15,000

Depreciation and amortization of premises and equipment
6,629

 
6,171

Net amortization of investment securities premiums
1,435

 
3,846

Investment securities gains, net
—

 
(2,473
)
Net (increase) decrease in loans held for sale
(3,066
)
 
4,854

Amortization of intangible assets
315

 
534

Stock-based compensation
1,033

 
847

Excess tax benefits from stock-based compensation
(25
)
 
(88
)
Decrease (increase) in accrued interest receivable
661

 
(1,699
)
Decrease in other assets
7,271

 
7,074

Increase in accrued interest payable
1,754

 
2,063

Increase (decrease) in other liabilities
182

 
(11,713
)
Total adjustments
18,689

 
24,416

Net cash provided by operating activities
60,472

 
63,643

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Proceeds from sales of securities available for sale
12,548

 
56,896

Proceeds from maturities of securities held to maturity
—

 
35

Proceeds from maturities of securities available for sale
79,045

 
199,910

Purchase of securities available for sale
(11,700
)
 
(334,660
)
(Increase) decrease in short-term investments
(58,901
)
 
73,275

Net decrease (increase) in loans
40,017

 
(249,229
)
Net purchases of premises and equipment
(6,255
)
 
(5,202
)
Net cash provided by (used in) investing activities
54,754

 
(258,975
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Net increase in demand and savings deposits
94,093

 
19,339

Net increase (decrease) in time deposits
84,638

 
(115,042
)
(Decrease) increase in short-term borrowings
(188,945
)
 
258,567

Repayments of long-term debt
(123
)
 
(5,042
)
Net proceeds from issuance of common stock
2,152

 
2,647

Excess tax benefits from stock-based compensation
25

 
88

Dividends paid
(15,413
)
 
—

Acquisition of treasury stock
(49,804
)
 
(47,046
)
Net cash (used in) provided by financing activities
(73,377
)
 
113,511

Net Increase (Decrease) in Cash and Due From Banks
41,849

 
(81,821
)
Cash and Due From Banks at Beginning of Period
218,540

 
256,300

Cash and Due From Banks at End of Period
$
260,389

 
$
174,479

Supplemental Disclosures of Cash Flow Information:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
17,473

 
$
19,615

Income taxes
631

 
5,086

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, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. 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 March 31
 
2014
 
2013
 
(in thousands)
Weighted average shares outstanding (basic)
189,467

 
196,299

Effect of dilutive securities
1,022

 
918

Weighted average shares outstanding (diluted)
190,489

 
197,217

For the three months ended March 31, 2014 and March 31, 2013, 3.1 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.


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 March 31, 2014
 
 
 
 
 
Unrealized gain (loss) on securities
$
21,435

 
$
(7,502
)
 
$
13,933

Reclassification adjustment for postretirement gains included in net income (1)
(1,452
)
 
508

 
(944
)
Non-credit related unrealized gains (losses) on other-than-temporarily impaired debt securities
291

 
(102
)
 
189

Unrealized gain on derivative financial instruments
52

 
(18
)
 
34

Unrecognized pension and postretirement income
3,291

 
(1,147
)
 
2,144

Amortization of net unrecognized pension and postretirement items (1)
149

 
(53
)
 
96

Total Other Comprehensive Income (Loss)
$
23,766

 
$
(8,314
)
 
$
15,452

Three months ended March 31, 2013
 
 
 
 
 
Unrealized gain (loss) on securities
$
192

 
$
(67
)
 
$
125

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

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

 
(583
)
 
1,083

Unrealized gain on derivative financial instruments
54

 
(20
)
 
34

Amortization of net unrecognized pension and postretirement items (1)
505

 
(177
)
 
328

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

 
$
(38
)

(1)
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.
(2)
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.

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 March 31, 2014
 
 
 
 
 
 
 
 
 
Balance at December 31, 2013
$
(27,510
)
 
$
1,652

 
$
(2,682
)
 
$
(8,801
)
 
$
(37,341
)
Other comprehensive income (loss) before reclassifications
13,933

 
189

 
—

 
2,144

 
16,266

Amounts reclassified from accumulated other comprehensive income (loss)
—

 
—

 
34

 
(848
)
 
(814
)
Balance at March 31, 2014
$
(13,577
)
 
$
1,841

 
$
(2,648
)
 
$
(7,505
)
 
$
(21,889
)
Three months ended March 31, 2013

 

 
 
 

 

Balance at December 31, 2012
$
26,361

 
$
613

 
$
(2,818
)
 
$
(18,481
)
 
$
5,675

Other comprehensive income (loss) before reclassifications
125

 
1,083

 
—

 
—

 
1,208

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

 
34

 
328

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

 
$
1,696

 
$
(2,784
)
 
$
(18,153
)
 
$
5,637



9

NOTE D – Investment Securities
The following table presents the amortized cost and estimated fair values of investment securities, which were all classified as available for sale:
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
 
(in thousands)
March 31, 2014
 
 
 
 
 
 
 
Equity securities
$
34,231

 
$
11,524

 
$
(21
)
 
$
45,734

U.S. Government securities
526

 
—

 
—

 
526

U.S. Government sponsored agency securities
275

 
6

 
(1
)
 
280

State and municipal securities
278,019

 
7,190

 
(1,756
)
 
283,453

Corporate debt securities
100,348

 
6,292

 
(6,088
)
 
100,552

Collateralized mortgage obligations
1,031,968

 
7,638

 
(32,869
)
 
1,006,737

Mortgage-backed securities
914,502

 
13,582

 
(11,881
)
 
916,203

Auction rate securities
159,379

 
2

 
(11,668
)
 
147,713

 
$
2,519,248

 
$
46,234

 
$
(64,284
)
 
$
2,501,198

 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
 
(in thousands)
December 31, 2013
 
 
 
 
 
 
 
Equity securities
$
33,922

 
$
12,355

 
$
(76
)
 
$
46,201

U.S. Government securities
525

 
—

 
—

 
525

U.S. Government sponsored agency securities
720

 
7

 
(1
)
 
726

State and municipal securities
281,810

 
6,483

 
(3,444
)
 
284,849

Corporate debt securities
100,468

 
5,685

 
(7,404
)
 
98,749

Collateralized mortgage obligations
1,069,138

 
8,036

 
(44,776
)
 
1,032,398

Mortgage-backed securities
949,328

 
13,881

 
(17,497
)
 
945,712

Auction rate securities
172,299

 
234

 
(13,259
)
 
159,274

 
$
2,608,210

 
$
46,681

 
$
(86,457
)
 
$
2,568,434

Securities carried at $1.8 billion as of March 31, 2014 and $1.7 billion as of December 31, 2013 were pledged as collateral to secure public and trust deposits and customer repurchase agreements.
Equity securities include common stocks of financial institutions ($39.8 million at March 31, 2014 and $40.6 million at December 31, 2013) and other equity investments ($5.9 million at March 31, 2014 and $5.6 million at December 31, 2013).
As of March 31, 2014, the financial institutions stock portfolio had a cost basis of $28.5 million and a fair value of $39.8 million, including an investment in a single financial institution with a cost basis of $20.0 million and a fair value of $27.9 million. The fair value of this investment accounted for 70.1% 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.

10

The amortized cost and estimated fair values of debt securities as of March 31, 2014, 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.
 
 
Amortized
Cost
 
Estimated
Fair Value
 
(in thousands)
Due in one year or less
 
$
30,424

 
$
30,517

Due from one year to five years
 
67,544

 
71,350

Due from five years to ten years
 
199,377

 
203,240

Due after ten years
 
241,202

 
227,417

 
 
538,547

 
532,524

Mortgage-backed securities
 
914,502

 
916,203

Collateralized mortgage obligations
 
1,031,968

 
1,006,737

 
 
$
2,485,017

 
$
2,455,464

There were no losses recognized for the other-than-temporary impairment of investments during the three months ended March 31, 2014 and 2013. The following table presents information related to the gross realized gains and losses on the sales of equity and debt securities:
 
Gross
Realized
Gains
 
Gross
Realized
Losses
 
Net Gains
Three months ended March 31, 2014
(in thousands)
Equity securities
$
1

 
$
—

 
$
1

Debt securities
322

 
(323
)
 
(1
)
Total
$
323

 
$
(323
)
 
$
—

Three months ended March 31, 2013
 
 
 
 
 
Equity securities
$
1,139

 
$
—

 
$
1,139

Debt securities
1,334

 
—

 
1,334

Total
$
2,473

 
$
—

 
$
2,473

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 March 31, 2014 and 2013:
 
Three months ended March 31
 
2014
 
2013
 
(in thousands)
Balance of cumulative credit losses on debt securities, beginning of period
$
(20,691
)
 
$
(23,079
)
Reductions for increases in cash flows expected to be collected that are recognized over the remaining life of the security
4

 
—

Balance of cumulative credit losses on debt securities, end of period
$
(20,687
)
 
$
(23,079
)

11

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, 2014:
 
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
$
—

 
$
—

 
$
50

 
$
(1
)
 
$
50

 
$
(1
)
State and municipal securities
50,286

 
(1,510
)
 
3,996

 
(246
)
 
54,282

 
(1,756
)
Corporate debt securities
3,939

 
(58
)
 
38,804

 
(6,030
)
 
42,743

 
(6,088
)
Collateralized mortgage obligations
416,584

 
(13,921
)
 
313,758

 
(18,948
)
 
730,342

 
(32,869
)
Mortgage-backed securities
621,165

 
(11,881
)
 
—

 
—

 
621,165

 
(11,881
)
Auction rate securities
—

 
—

 
147,619

 
(11,668
)
 
147,619

 
(11,668
)
Total debt securities
1,091,974

 
(27,370
)
 
504,227

 
(36,893
)
 
1,596,201

 
(64,263
)
Equity securities
3

 
(1
)
 
118

 
(20
)
 
121

 
(21
)
 
$
1,091,977

 
$
(27,371
)
 
$
504,345

 
$
(36,913
)
 
$
1,596,322

 
$
(64,284
)
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, 2014.
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. The Corporation had previously purchased ARCs for investment management and trust 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 these customers due to the failure of these periodic auctions, which made these previously short-term investments illiquid.
As of March 31, 2014, approximately $143 million, or 97%, of the ARCs were rated above investment grade, with approximately $6 million, or 4%, AAA rated and $103 million, or 70%, AA rated. Approximately $4 million, or 3%, of ARCs were either not rated or rated below investment grade by at least one ratings agency. Of this amount, approximately $3 million, or 59%, of the student loans underlying these ARCs have principal payments which are guaranteed by the federal government. In total, approximately $146 million, or 99%, of the student loans underlying the ARCs have principal payments that are guaranteed by the federal government.
During the first quarter of 2014, the Corporation sold ARCs with a total book value of $11.9 million, with no gain or loss upon sale. As of March 31, 2014, all ARCs were current and making scheduled interest payments. Based on management’s evaluations, ARCs with a fair value of $147.7 million were not subject to any other-than-temporary impairment charges as of March 31, 2014. 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, the Corporation does not consider those investments with unrealized holding losses as of March 31, 2014 to be other-than-temporarily impaired.

12

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, 2014
 
December 31, 2013
 
Amortized
cost
 
Estimated
fair value
 
Amortized
cost
 
Estimated
fair value
 
(in thousands)
Single-issuer trust preferred securities
$
47,502

 
$
41,879

 
$
47,481

 
$
40,531

Subordinated debt
47,436

 
50,429

 
47,405

 
50,327

Pooled trust preferred securities
2,825

 
5,659

 
2,997

 
5,306

Corporate debt securities issued by financial institutions
97,763

 
97,967

 
97,883

 
96,164

Other corporate debt securities
2,585

 
2,585

 
2,585

 
2,585

Available for sale corporate debt securities
$
100,348

 
$
100,552

 
$
100,468

 
$
98,749


The Corporation’s investments in single-issuer trust preferred securities had an unrealized loss of $5.6 million at March 31, 2014. The Corporation did not record any other-than-temporary impairment charges for single-issuer trust preferred securities during the three months ended March 31, 2014 or 2013. Six of the Corporation's 22 single-issuer trust preferred securities 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 $11.7 million at March 31, 2014. All of the single-issuer trust preferred securities rated below investment grade were rated BB or Ba. Three single-issuer trust preferred securities with an amortized cost of $4.7 million and an estimated fair value of $3.8 million at March 31, 2014 were not rated by any ratings agency.
As of March 31, 2014, all eight of the Corporation's pooled trust preferred securities, with an amortized cost of $2.8 million and an estimated fair value of $5.7 million, 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 $100.6 million were not subject to any additional other-than-temporary impairment charges as of March 31, 2014. 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.
As mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), in December 2013, five regulatory bodies issued final rulings (Final Rules) implementing certain prohibitions and restrictions on the ability of a banking entity and non-bank financial company supervised by the Federal Reserve Board to engage in proprietary trading and have certain ownership interests in, or relationships with, a "covered fund" (the so-called "Volcker Rule"). The Final Rules generally treat as a covered fund any entity that would be an investment company under the Investment Company Act of 1940 (1940 Act) but for the application of the exemptions from SEC registration set forth in Section 3(c)(1) (fewer than 100 beneficial owners) or Section 3(c)(7) (qualified purchasers) of the 1940 Act. The Final Rules also require regulated entities to establish an internal compliance program that is consistent with the extent to which it engages in activities covered by the Volcker Rule, which must include making regular reports about those activities to regulators. Although the Final Rules provide some tiering of compliance and reporting obligations based on size, the fundamental prohibitions of the Volcker Rule apply to banking entities of any size, including the Corporation. Banking entities have until July 21, 2015 to conform their activities and investments to the requirements of the Final Rules. While the Corporation does not engage in proprietary trading or in any other activities prohibited by the Final Rules, the Corporation will continue to evaluate whether any of its investments that fall within the definition of a "covered fund" and would need to be disposed of by July 21, 2015. However, based on the Corporation's evaluation to date, it does not currently expect the Final Rules will have a material effect on its business, financial condition or results of operations.


13

NOTE E – Loans and Allowance for Credit Losses

Loans, Net of Unearned Income
Loans, net of unearned income are summarized as follows:
 
March 31, 2014
 
December 31, 2013
 
(in thousands)
Real-estate - commercial mortgage
$
5,137,454

 
$
5,101,922

Commercial - industrial, financial and agricultural
3,574,130

 
3,628,420

Real-estate - home equity
1,740,496

 
1,764,197

Real-estate - residential mortgage
1,331,465

 
1,337,380

Real-estate - construction
584,217

 
573,672

Consumer
270,021

 
283,124

Leasing and other
103,192

 
99,256

Overdrafts
3,034

 
4,045

Loans, gross of unearned income
12,744,009

 
12,792,016

Unearned income
(10,217
)
 
(9,796
)
Loans, net of unearned income
$
12,733,792

 
$
12,782,220


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:
 
March 31,
2014
 
December 31,
2013
 
(in thousands)
Allowance for loan losses
$
197,089

 
$
202,780

Reserve for unfunded lending commitments
1,917

 
2,137

Allowance for credit losses
$
199,006

 
$
204,917


14

The following table presents the activity in the allowance for credit losses:
 
Three months ended March 31
 
2014
 
2013
 
(in thousands)
Balance at beginning of period
$
204,917

 
$
225,439

Loans charged off
(10,268
)
 
(22,106
)
Recoveries of loans previously charged off
1,857

 
3,194

Net loans charged off
(8,411
)
 
(18,912
)
Provision for credit losses
2,500

 
15,000

Balance at end of period
$
199,006

 
$
221,527


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 March 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2013
$
55,659

 
$
50,330

 
$
28,222

 
$
33,082

 
$
12,649

 
$
3,260

 
$
3,370

 
$
16,208

 
$
202,780

Loans charged off
(1,386
)
 
(5,125
)
 
(1,651
)
 
(846
)
 
(214
)
 
(751
)
 
(295
)
 
—

 
(10,268
)
Recoveries of loans previously charged off
44

 
744

 
356

 
116

 
224

 
209

 
164

 
—

 
1,857

Net loans charged off
(1,342
)
 
(4,381
)
 
(1,295
)
 
(730
)
 
10

 
(542
)
 
(131
)
 
—

 
(8,411
)
Provision for loan losses (1)
(560
)
 
4,614

 
5,533

 
977

 
(2,817
)
 
606

 
(1,228
)
 
(4,405
)
 
2,720

Balance at March 31, 2014
$
53,757

 
$
50,563

 
$
32,460

 
$
33,329

 
$
9,842

 
$
3,324

 
$
2,011

 
$
11,803

 
$
197,089

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


(1)
The provision for loan losses excluded a $220,000 decrease in the reserve for unfunded lending commitments for the three months ended March 31, 2014 and excluded a $50,000 decrease in the reserve for unfunded lending commitments for the three months ended March 31, 2013. The total provision for credit losses, comprised of allocations for both funded and unfunded loans, was $2.5 million for the three months ended March 31, 2014 and $15.0 million for the three months ended March 31, 2013.

15

The following table presents loans, net of unearned income and their related 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
(1)
 
Total
 
(in thousands)
Allowance for loan losses at March 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Measured for impairment under FASB ASC Subtopic 450-20
$
37,363

 
$
36,859

 
$
22,969

 
$
11,618

 
$
7,256

 
$
3,309

 
$
2,011

 
$
11,803

 
$
133,188

Evaluated for impairment under FASB ASC Section 310-10-35
16,394

 
13,704

 
9,491

 
21,711

 
2,586

 
15

 
—

 
N/A

 
63,901

 
$
53,757

 
$
50,563

 
$
32,460

 
$
33,329

 
$
9,842

 
$
3,324

 
$
2,011

 
$
11,803

 
$
197,089

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans, net of unearned income at March 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Measured for impairment under FASB ASC Subtopic 450-20
$
5,075,556

 
$
3,528,857

 
$
1,726,342

 
$
1,279,783

 
$
555,852

 
$
270,004

 
$
96,009

 
N/A

 
$
12,532,403

Evaluated for impairment under FASB ASC Section 310-10-35
61,898

 
45,273

 
14,154

 
51,682

 
28,365

 
17

 
—

 
N/A

 
201,389

 
$
5,137,454

 
$
3,574,130

 
$
1,740,496

 
$
1,331,465

 
$
584,217

 
$
270,021

 
$
96,009

 
N/A

 
$
12,733,792

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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

 
(1)
The unallocated allowance, which was approximately 6% and 10% of the total allowance for credit losses as of March 31, 2014 and March 31, 2013, 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, as detailed in the following table.
 
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 restructurings (TDRs). An allowance for loan losses is established for an impaired loan if its carrying value exceeds its estimated fair value. Impaired loans to borrowers with total outstanding commitments greater than $1.0 million are evaluated individually for impairment. Impaired loans to borrowers with total outstanding commitments less than $1.0 million are pooled and measured for impairment collectively. All loans evaluated for impairment under FASB ASC Section 310-10-35 are measured for losses on a quarterly basis. As of March 31, 2014 and December 31, 2013, substantially all of the Corporation’s individually evaluated impaired loans with total outstanding balances greater than $1.0 million were measured based on the estimated fair value of each loan’s collateral. Collateral

16

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 and industrial loans. Commercial and industrial loans may also be secured by real property.
As of March 31, 2014 and 2013, approximately 79% and 73%, 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 state certified third-party appraisals that had been updated within the preceding 12 months.
When updated certified appraisals are not obtained for loans to commercial borrowers 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:
 
March 31, 2014
 
December 31, 2013
 
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
$
27,433

 
$
23,491

 
$
—

 
$
28,892

 
$
24,494

 
$
—

Commercial - secured
23,862

 
20,867

 
—

 
23,890

 
21,383

 
—

Real estate - home equity
399

 
300

 
—

 
399

 
300

 
—

Real estate - residential mortgage
317

 
317

 
—

 
—

 
—

 
—

Construction - commercial residential
26,475

 
20,705

 
—

 
18,943

 
13,740

 
—

Construction - commercial
2,992

 
1,962

 
—

 
2,996

 
1,976

 
—

 
81,478

 
67,642

 

 
75,120

 
61,893

 

With a related allowance recorded:
 
 
 

 

 

 

Real estate - commercial mortgage
47,010

 
38,407

 
16,394

 
43,282

 
35,830

 
14,444

Commercial - secured
36,309

 
23,765

 
13,232

 
34,267

 
22,324

 
13,315

Commercial - unsecured
693

 
641

 
472

 
1,113

 
1,048

 
752

Real estate - home equity
19,420

 
13,854

 
9,491

 
20,383

 
14,337

 
9,059

Real estate - residential mortgage
61,733

 
51,365

 
21,711

 
63,682

 
51,097

 
21,745

Construction - commercial residential
15,753

 
4,963

 
2,212

 
25,769

 
14,579

 
3,493

Construction - commercial
481

 
191

 
76

 
485

 
195

 
77

Construction - other
718

 
544

 
298

 
719

 
548

 
301

Consumer - direct
15

 
15

 
13

 
11

 
11

 
10

Consumer - indirect
15

 
2

 
2

 
2

 
2

 
2

 
182,147

 
133,747

 
63,901

 
189,713

 
139,971

 
63,198

Total
$
263,625

 
$
201,389

 
$
63,901

 
$
264,833

 
$
201,864

 
$
63,198

As of March 31, 2014 and December 31, 2013, there were $67.6 million and $61.9 million, respectively, of impaired loans that did not have a related allowance for loan loss. The estimated fair values of the collateral for these loans exceeded their carrying amount, or they were previously charged down to collateral values. Accordingly, no specific valuation allowance was considered to be necessary.

17

The following table presents average impaired loans by class segment:
 
Three months ended March 31
 
2014
 
2013
 
Average
Recorded
Investment
 
Interest
Income
Recognized (1)
 
Average
Recorded
Investment