FULT 6.30.2014 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 June 30, 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 –187,792,000 shares outstanding as of July 31, 2014.

1

FULTON FINANCIAL CORPORATION
FORM 10-Q FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2014
INDEX
 
Description
 
Page
 
 
 
 
PART I. FINANCIAL INFORMATION
 
 
 
 
 
 
 
 
 
 
(a)
Consolidated Balance Sheets - June 30, 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
 

CONSOLIDATED BALANCE SHEETS 
 
(in thousands, except per-share data)
 
June 30,
2014
 
December 31,
2013
 
(unaudited)
 
ASSETS
 
 
 
Cash and due from banks
$
258,837

 
$
218,540

Interest-bearing deposits with other banks
222,894

 
163,988

Federal Reserve Bank and Federal Home Loan Bank stock
82,624

 
84,173

Loans held for sale
36,079

 
21,351

Available for sale investment securities
2,497,776

 
2,568,434

Loans, net of unearned income
12,839,511

 
12,782,220

Less: Allowance for loan losses
(191,685
)
 
(202,780
)
Net Loans
12,647,826

 
12,579,440

Premises and equipment
225,168

 
226,021

Accrued interest receivable
42,116

 
44,037

Goodwill and intangible assets
532,432

 
533,076

Other assets
487,887

 
495,574

Total Assets
$
17,033,639

 
$
16,934,634

LIABILITIES
 
 
 
Deposits:
 
 
 
Noninterest-bearing
$
3,484,125

 
$
3,283,172

Interest-bearing
9,209,534

 
9,208,014

Total Deposits
12,693,659

 
12,491,186

Short-term borrowings:
 
 
 
Federal funds purchased
384,011

 
582,436

Other short-term borrowings
624,296

 
676,193

Total Short-Term Borrowings
1,008,307

 
1,258,629

Accrued interest payable
16,647

 
15,218

Other liabilities
246,831

 
222,830

Federal Home Loan Bank advances and long-term debt
968,395

 
883,584

Total Liabilities
14,933,839

 
14,871,447

SHAREHOLDERS’ EQUITY
 
 
 
Common stock, $2.50 par value, 600 million shares authorized, 218.0 million shares issued in 2014 and 217.8 million shares issued in 2013
545,066

 
544,568

Additional paid-in capital
1,436,759

 
1,432,974

Retained earnings
514,988

 
463,843

Accumulated other comprehensive loss
(9,161
)
 
(37,341
)
Treasury stock, at cost, 29.0 million shares in 2014 and 25.2 million shares in 2013
(387,852
)
 
(340,857
)
Total Shareholders’ Equity
2,099,800

 
2,063,187

Total Liabilities and Shareholders’ Equity
$
17,033,639

 
$
16,934,634

 
 
 
 
See Notes to Consolidated Financial Statements
 
 
 
 

3


CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
 
(in thousands, except per-share data)
Three months ended June 30
 
Six months ended June 30
 
2014
 
2013
 
2014
 
2013
INTEREST INCOME
 
 
 
 
 
 
 
Loans, including fees
$
131,440

 
$
135,032

 
$
263,270

 
$
269,162

Investment securities:
 
 
 
 
 
 
 
Taxable
12,418

 
14,516

 
25,684

 
27,913

Tax-exempt
2,298

 
2,343

 
4,646

 
4,824

Dividends
325

 
364

 
657

 
754

Loans held for sale
214

 
384

 
348

 
879

Other interest income
1,207

 
439

 
2,089

 
868

Total Interest Income
147,902

 
153,078

 
296,694

 
304,400

INTEREST EXPENSE
 
 
 
 
 
 
 
Deposits
8,685

 
9,498

 
16,581

 
19,899

Short-term borrowings
540

 
700

 
1,173

 
1,209

Long-term debt
10,779

 
10,815

 
21,477

 
21,583

Total Interest Expense
20,004

 
21,013

 
39,231

 
42,691

Net Interest Income
127,898

 
132,065

 
257,463

 
261,709

Provision for credit losses
3,500

 
13,500

 
6,000

 
28,500

Net Interest Income After Provision for Credit Losses
124,398

 
118,565

 
251,463

 
233,209

NON-INTEREST INCOME
 
 
 
 
 
 
 
Service charges on deposit accounts
12,552

 
14,651

 
24,263

 
28,762

Investment management and trust services
11,339

 
10,601

 
22,297

 
20,697

Other service charges and fees
10,526

 
9,508

 
19,453

 
18,018

Mortgage banking income
5,741

 
10,997

 
9,346

 
19,170

Other
3,602

 
3,694

 
6,907

 
7,590

Investment securities gains, net:
 
 
 
 
 
 
 
Net gains on sales of investment securities
1,124

 
2,892

 
1,124

 
5,365

Other-than-temporary impairment losses
(12
)
 
(27
)
 
(12
)
 
(27
)
Investment securities gains, net
1,112

 
2,865

 
1,112

 
5,338

Total Non-Interest Income
44,872

 
52,316

 
83,378

 
99,575

NON-INTEREST EXPENSE
 
 
 
 
 
 
 
Salaries and employee benefits
63,623

 
63,490

 
123,189

 
124,702

Net occupancy expense
11,464

 
11,447

 
25,067

 
23,291

Other outside services
7,240

 
5,315

 
11,052

 
8,175

Data processing
4,331

 
4,509

 
8,127

 
8,412

Professional fees
3,559

 
3,395

 
6,463

 
6,442

Equipment expense
3,360

 
3,893

 
6,962

 
7,801

Software
3,209

 
3,094

 
6,134

 
5,842

FDIC insurance expense
2,615

 
3,001

 
5,304

 
5,848

Marketing
2,337

 
1,922

 
3,921

 
3,794

Other real estate owned and repossession expense
748

 
1,941

 
1,731

 
4,795

Operating risk loss
716

 
1,860

 
2,544

 
3,626

Intangible amortization
315

 
535

 
630

 
1,069

Other
12,657

 
12,728

 
24,604

 
24,269

Total Non-Interest Expense
116,174

 
117,130

 
225,728

 
228,066

Income Before Income Taxes
53,096

 
53,751

 
109,113

 
104,718

Income taxes
13,500

 
13,169

 
27,734

 
24,909

Net Income
$
39,596

 
$
40,582

 
$
81,379

 
$
79,809

 
 
 
 
 
 
 
 
PER SHARE:
 
 
 
 
 
 
 
Net Income (Basic)
$
0.21

 
$
0.21

 
$
0.43

 
$
0.41

Net Income (Diluted)
0.21

 
0.21

 
0.43

 
0.41

Cash Dividends
0.08

 
0.08

 
0.16

 
0.16

See Notes to Consolidated Financial Statements
 
 
 
 
 
 
 

4


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
 
(in thousands)
 
Three months ended June 30
 
Six months ended June 30
 
2014
 
2013
 
2014
 
2013
 
 
Net Income
$
39,596

 
$
40,582

 
$
81,379

 
$
79,809

Other Comprehensive Income (Loss), net of tax:
 
 
 
 
 
 
 
Unrealized gain (loss) on securities
12,990

 
(36,958
)
 
26,923

 
(36,833
)
Reclassification adjustment for postretirement amendment gains included in net income
—

 
—

 
(944
)
 
—

Reclassification adjustment for securities gains included in net income
(723
)
 
(1,862
)
 
(723
)
 
(3,470
)
Non-credit related unrealized gain on other-than-temporarily impaired debt securities
323

 
355

 
512

 
1,438

Unrealized gain on derivative financial instruments
34

 
34

 
68

 
68

Unrecognized pension and postretirement income
—

 
—

 
2,144

 
—

Amortization of net unrecognized pension and postretirement items
104

 
328

 
200

 
656

Other Comprehensive Income (Loss)
12,728

 
(38,103
)
 
28,180

 
(38,141
)
Total Comprehensive Income
$
52,324

 
$
2,479

 
$
109,559

 
$
41,668

 
 
 
 
 
 
 
 
See Notes to Consolidated Financial Statements
 
 
 
 
 
 
 


5


CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 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

 

 

 
81,379

 

 

 
81,379

Other comprehensive income (loss)

 

 

 

 
28,180

 

 
28,180

Stock issued, including related tax benefits
381

 
498

 
763

 

 

 
2,809

 
4,070

Stock-based compensation awards

 

 
3,022

 

 

 

 
3,022

Acquisition of treasury stock
(4,000
)
 
 
 
 
 
 
 
 
 
(49,804
)
 
(49,804
)
Common stock cash dividends - $0.16 per share

 

 

 
(30,234
)
 

 

 
(30,234
)
Balance at June 30, 2014
189,033

 
$
545,066

 
$
1,436,759

 
$
514,988

 
$
(9,161
)
 
$
(387,852
)
 
$
2,099,800

 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 income (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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
See Notes to Consolidated Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 

6


CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
(in thousands)
 
Six months ended June 30
 
2014
 
2013
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net Income
$
81,379

 
$
79,809

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

 

Provision for credit losses
6,000

 
28,500

Depreciation and amortization of premises and equipment
12,354

 
12,577

Net amortization of investment securities premiums
2,908

 
6,099

Investment securities gains, net
(1,112
)
 
(5,338
)
Net (increase) decrease in loans held for sale
(14,728
)
 
6,990

Amortization of intangible assets
630

 
1,069

Stock-based compensation
3,022

 
3,207

Excess tax benefits from stock-based compensation
(52
)
 
(148
)
Decrease in accrued interest receivable
1,921

 
73

(Increase) decrease in other assets
(3,039
)
 
21,847

Increase (decrease) in accrued interest payable
1,429

 
(1,622
)
Increase (decrease) in other liabilities
3,646

 
(10,782
)
Total adjustments
12,979

 
62,472

Net cash provided by operating activities
94,358

 
142,281

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Proceeds from sales of securities available for sale
15,189

 
172,931

Proceeds from maturities of securities held to maturity
—

 
65

Proceeds from maturities of securities available for sale
174,619

 
381,807

Purchase of securities available for sale
(60,952
)
 
(647,141
)
(Increase) decrease in short-term investments
(57,357
)
 
19,561

Net increase in loans
(74,766
)
 
(534,760
)
Net purchases of premises and equipment
(11,501
)
 
(9,272
)
Net cash used in investing activities
(14,768
)
 
(616,809
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Net increase in demand and savings deposits
104,390

 
55,058

Net increase (decrease) in time deposits
98,083

 
(281,412
)
(Decrease) increase in short-term borrowings
(250,322
)
 
751,919

Additions to long-term debt
90,000

 
—

Repayments of long-term debt
(5,189
)
 
(5,086
)
Net proceeds from issuance of common stock
4,018

 
4,527

Excess tax benefits from stock-based compensation
52

 
148

Dividends paid
(30,521
)
 
(15,645
)
Acquisition of treasury stock
(49,804
)
 
(71,337
)
Net cash (used in) provided by financing activities
(39,293
)
 
438,172

Net Increase (Decrease) in Cash and Due From Banks
40,297

 
(36,356
)
Cash and Due From Banks at Beginning of Period
218,540

 
256,300

Cash and Due From Banks at End of Period
$
258,837

 
$
219,944

Supplemental Disclosures of Cash Flow Information:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
37,802

 
$
44,313

Income taxes
16,407

 
24,336

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, 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).

Recent Accounting Standards
In April 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Codification (ASC) Update 2014-08, "Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity." ASC Update 2014-08 changes the criteria for reporting discontinued operations, including a change in the definition of what constitutes the disposal of a component and additional disclosure requirements. For public business entities ASC Update 2014-08 is effective for disposals that occur within annual periods beginning after December 15, 2014. For the Corporation, this standards update is effective with its March 31, 2015 quarterly report on Form 10-Q. The adoption of ASC Update 2014-08 is not expected to have an impact on the Corporation's consolidated financial statements.

In May 2014, the FASB issued ASC Update 2014-09, "Revenue from Contracts with Customers." This standards update provides a framework that replaces most existing revenue recognition guidance. The core principle prescribed by this standards update is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASC Update 2014-09 is effective for interim and annual reporting periods beginning after December 15, 2016. Early application is not permitted. For the Corporation, this standards update is effective with its March 31, 2017 quarterly report on Form 10-Q. The Corporation is currently evaluating the impact of the pending adoption of ASC Update 2014-09 on its consolidated financial statements.

In June 2014, the FASB issued ASC Update 2014-11, "Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures." In addition to new disclosure requirements, ASC Update 2014-11 requires that all repurchase-to-maturity transactions be accounted for as secured borrowings rather than as sales of financial assets. Also, all transfers of financial assets executed contemporaneously with a repurchase agreement with the same counterparty must be accounted for separately, the result of which would be the treatment of such transactions as a secured borrowings. ASC Update 2014-11 is effective for public business entities’ interim and annual reporting periods beginning after December 15, 2014. For the Corporation, this standards update is effective with its March 31, 2015 quarterly report on Form 10-Q. The adoption of ASC Update 2014-11 is not expected to have a material impact on the Corporation’s consolidated financial statements.
In June 2014, the FASB issued ASC Update 2014-12, "Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period." ASC Update 2014-12 clarifies guidance related to accounting for share-based payment awards with terms that allow an employee to vest in the award regardless of whether the employee is rendering service on the date a performance target is achieved. ASC Update 2014-12 requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. ASC Update 2014-12 is effective for public business entities’ interim and annual reporting periods beginning after December 15, 2014, with earlier adoption permitted. For the Corporation, this standards update is effective with its March 31, 2015 quarterly report on Form 10-Q. The adoption of ASC Update 2014-12 is not expected to have a material impact on the Corporation’s consolidated financial statements.

Reclassifications

Certain amounts in the 2013 consolidated financial statements and notes have been reclassified to conform to the 2014 presentation.


8

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, restricted stock, restricted stock units (RSUs) and performance-based restricted stock units (PSUs). PSUs are required to be included in weighted average shares outstanding if performance measures, as defined in each PSU award agreement, are met as of the end of the period.
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
 
2014
 
2013
 
2014
 
2013
 
(in thousands)
Weighted average shares outstanding (basic)
188,139

 
193,273

 
188,799

 
194,777

Impact of common stock equivalents
1,043

 
1,073

 
1,033

 
996

Weighted average shares outstanding (diluted)
189,182

 
194,346

 
189,832

 
195,773

For the three and six months ended June 30, 2014, 3.3 million and 3.2 million shares issuable under stock options, respectively, were excluded from the diluted net income per share computation as their effect would have been anti-dilutive. 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.

9

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, 2014
 
 
 
 
 
Unrealized gain (loss) on securities
$
19,984

 
$
(6,994
)
 
$
12,990

Reclassification adjustment for securities gains included in net income (1)
(1,112
)
 
389

 
(723
)
Non-credit related unrealized gains (losses) on other-than-temporarily impaired debt securities
497

 
(174
)
 
323

Unrealized gain on derivative financial instruments
52

 
(18
)
 
34

Amortization of net unrecognized pension and postretirement items (2)
160

 
(56
)
 
104

Total Other Comprehensive Income (Loss)
$
19,581

 
$
(6,853
)
 
$
12,728

Three months ended June 30, 2013
 
 
 
 
 
Unrealized gain (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
52

 
(18
)
 
34

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

 
(177
)
 
328

Total Other Comprehensive Income (Loss)
$
(58,620
)
 
$
20,517

 
$
(38,103
)
 
 
 
 
 
 
Six months ended June 30, 2014
 
 
 
 
 
Unrealized gain (loss) on securities
$
41,419

 
$
(14,496
)
 
$
26,923

Reclassification adjustment for securities gains included in net income (1)
(1,112
)
 
389

 
(723
)
Reclassification adjustment for postretirement gains included in net income (2)
(1,452
)
 
508

 
(944
)
Non-credit related unrealized gains (losses) on other-than-temporarily impaired debt securities
788

 
(276
)
 
512

Unrealized gain on derivative financial instruments
105

 
(37
)
 
68

Unrecognized pension and postretirement income
3,291

 
(1,147
)
 
2,144

Amortization of net unrecognized pension and postretirement items (2)
309

 
(109
)
 
200

Total Other Comprehensive Income (Loss)
$
43,348

 
$
(15,168
)
 
$
28,180

Six months ended June 30, 2013
 
 
 
 
 
Unrealized gain (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)
1,010

 
(354
)
 
656

Total Other Comprehensive Income (Loss)
$
(58,677
)
 
$
20,536

 
$
(38,141
)

(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.

10

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

 
$
(2,648
)
 
$
(7,505
)
 
$
(21,889
)
Other comprehensive income (loss) before reclassifications
12,990

 
323

 
—

 
—

 
13,313

Amounts reclassified from accumulated other comprehensive income (loss)
7

 
(730
)
 
34

 
104

 
(585
)
Balance at June 30, 2014
$
(580
)
 
$
1,434

 
$
(2,614
)
 
$
(7,401
)
 
$
(9,161
)
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 income (loss)
(861
)
 
(1,001
)
 
34

 
328

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

 
$
(2,750
)
 
$
(17,825
)
 
$
(32,466
)
 
 
 
 
 
 
 
 
 
 
Six months ended June 30, 2014
 
 
 
 
 
 
 
 
 
Balance at December 31, 2013
$
(27,510
)
 
$
1,652

 
$
(2,682
)
 
$
(8,801
)
 
$
(37,341
)
Other comprehensive income (loss) before reclassifications
26,923

 
512

 
—

 
2,144

 
29,579

Amounts reclassified from accumulated other comprehensive income (loss)
7

 
(730
)
 
68

 
(744
)
 
(1,399
)
Balance at June 30, 2014
$
(580
)
 
$
1,434

 
$
(2,614
)
 
$
(7,401
)
 
$
(9,161
)
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 income (loss)
(2,469
)
 
(1,001
)
 
68

 
656

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

 
$
(2,750
)
 
$
(17,825
)
 
$
(32,466
)


11

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)
June 30, 2014
 
 
 
 
 
 
 
Equity securities
$
34,275

 
$
11,987

 
$
(14
)
 
$
46,248

U.S. Government securities
525

 
—

 
—

 
525

U.S. Government sponsored agency securities
254

 
6

 
—

 
260

State and municipal securities
262,368

 
8,244

 
(789
)
 
269,823

Corporate debt securities
99,634

 
5,881

 
(4,862
)
 
100,653

Collateralized mortgage obligations
1,022,728

 
8,224

 
(28,221
)
 
1,002,731

Mortgage-backed securities
918,210

 
17,121

 
(4,726
)
 
930,605

Auction rate securities
158,463

 
1

 
(11,533
)
 
146,931

 
$
2,496,457

 
$
51,464

 
$
(50,145
)
 
$
2,497,776

 
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 June 30, 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 ($40.2 million at June 30, 2014 and $40.6 million at December 31, 2013) and other equity investments ($6.0 million at June 30, 2014 and $5.6 million at December 31, 2013).
As of June 30, 2014, the financial institutions stock portfolio had a cost basis of $28.5 million and a fair value of $40.2 million, including an investment in a single financial institution with a cost basis of $20.0 million and a fair value of $28.2 million. The fair value of this investment accounted for 70.2% 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.

12

The amortized cost and estimated fair values of debt securities as of June 30, 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
 
$
20,164

 
$
20,226

Due from one year to five years
 
71,674

 
75,583

Due from five years to ten years
 
194,644

 
200,454

Due after ten years
 
234,762

 
221,929

 
 
521,244

 
518,192

Collateralized mortgage obligations
 
1,022,728

 
1,002,731

Mortgage-backed securities
 
918,210

 
930,605

 
 
$
2,462,182

 
$
2,451,528

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
 
Other-than-
temporary
Impairment
Losses
 
Net Gains (Losses)
Three months ended June 30, 2014
(in thousands)
Equity securities
$
—

 
$
—

 
$
(12
)
 
$
(12
)
Debt securities
1,124

 
—

 
—

 
1,124

Total
$
1,124

 
$
—

 
$
(12
)
 
$
1,112

Three months ended June 30, 2013
 
 
 
 
 
 
 
Equity securities
$
1,083

 
$
(28
)
 
$
(27
)
 
$
1,028

Debt securities
1,837

 
—

 
—

 
1,837

Total
$
2,920

 
$
(28
)
 
$
(27
)
 
$
2,865

 
 
 
 
 
 
 
 
Six months ended June 30, 2014
 
 
 
 
 
 
 
Equity securities
$
1

 
$
—

 
$
(12
)
 
$
(11
)
Debt securities
1,446

 
(323
)
 
—

 
1,123

Total
$
1,447

 
$
(323
)
 
$
(12
)
 
$
1,112

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


The other-than-temporary impairment charges for equity securities during the three and six months ended June 30, 2014 and 2013 were for investments in common stocks of financial institutions and were due to the severity and duration of the declines in the fair values of certain financial institution stocks, in conjunction with management's assessment of the near-term prospects of each specific financial institution.





13

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 June 30, 2014 and 2013:
 
Three months ended June 30
 
Six months ended June 30
 
2014
 
2013
 
2014
 
2013
 
(in thousands)
Balance of cumulative credit losses on debt securities, beginning of period
$
(19,961
)
 
$
(23,079
)
 
$
(20,691
)
 
$
(23,079
)
Reductions for securities sold during the period
2,746

 
2,468

 
3,472

 
2,468

Reductions for increases in cash flows expected to be collected that are recognized over the remaining life of the security
1

 
4

 
5

 
4

Balance of cumulative credit losses on debt securities, end of period
$
(17,214
)
 
$
(20,607
)
 
$
(17,214
)
 
$
(20,607
)
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, 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)
State and municipal securities
$
8,531

 
$
(39
)
 
$
34,089

 
$
(750
)
 
$
42,620

 
$
(789
)
Corporate debt securities
—

 
—

 
42,995

 
(4,862
)
 
42,995

 
(4,862
)
Collateralized mortgage obligations
33,465

 
(97
)
 
677,357

 
(28,124
)
 
710,822

 
(28,221
)
Mortgage-backed securities
37,304

 
(45
)
 
302,835

 
(4,681
)
 
340,139

 
(4,726
)
Auction rate securities
—

 
—

 
146,839

 
(11,533
)
 
146,839

 
(11,533
)
Total debt securities
79,300

 
(181
)
 
1,204,115

 
(49,950
)
 
1,283,415

 
(50,131
)
Equity securities
2

 
(1
)
 
77

 
(13
)
 
79

 
(14
)
 
$
79,302

 
$
(182
)
 
$
1,204,192

 
$
(49,963
)
 
$
1,283,494

 
$
(50,145
)
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, 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 June 30, 2014, approximately $143 million, or 97%, of the ARCs were rated above investment grade, with approximately $6 million, or 4%, AAA rated and $102 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 $145 million, or 99%, of the student loans underlying the ARCs have principal payments that are guaranteed by the federal government.
During the six months ended 2014, the Corporation sold ARCs with a total book value of $11.9 million, with no gain or loss upon sale. As of June 30, 2014, all ARCs were current and making scheduled interest payments. Based on management’s evaluations, ARCs with a fair value of $146.9 million were not subject to any other-than-temporary impairment charges as of June 30, 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,

14

the Corporation does not consider those investments with unrealized holding losses as of June 30, 2014 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, 2014
 
December 31, 2013
 
Amortized
cost
 
Estimated
fair value
 
Amortized
cost
 
Estimated
fair value
 
(in thousands)
Single-issuer trust preferred securities
$
47,524

 
$
43,186

 
$
47,481

 
$
40,531

Subordinated debt
47,467

 
50,616

 
47,405

 
50,327

Pooled trust preferred securities
2,067

 
4,275

 
2,997

 
5,306

Corporate debt securities issued by financial institutions
97,058

 
98,077

 
97,883

 
96,164

Other corporate debt securities
2,576

 
2,576

 
2,585

 
2,585

Available for sale corporate debt securities
$
99,634

 
$
100,653

 
$
100,468

 
$
98,749


The Corporation’s investments in single-issuer trust preferred securities had an unrealized loss of $4.3 million at June 30, 2014. The Corporation did not record any other-than-temporary impairment charges for single-issuer trust preferred securities during the three or six months ended June 30, 2014 or 2013. Six of the Corporation's 20 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 $12.1 million at June 30, 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 June 30, 2014 were not rated by any ratings agency.
During the three and six months ended June 30, 2014, the Corporation sold two pooled trust preferred securities with a total amortized cost of $728,000, for a gain of $1.1 million. As of June 30, 2014, all six of the Corporation's pooled trust preferred securities, with an amortized cost of $2.1 million and an estimated fair value of $4.3 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 $100.7 million were not subject to any other-than-temporary impairment charges as of June 30, 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 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.


15

NOTE E – Loans and Allowance for Credit Losses

Loans, Net of Unearned Income
Loans, net of unearned income are summarized as follows:
 
June 30,
2014
 
December 31, 2013
 
(in thousands)
Real-estate - commercial mortgage
$
5,128,734

 
$
5,101,922

Commercial - industrial, financial and agricultural
3,601,721

 
3,628,420

Real-estate - home equity
1,730,497

 
1,764,197

Real-estate - residential mortgage
1,361,976

 
1,337,380

Real-estate - construction
634,018

 
573,672

Consumer
280,557

 
283,124

Leasing and other
109,573

 
99,256

Overdrafts
3,251

 
4,045

Loans, gross of unearned income
12,850,327

 
12,792,016

Unearned income
(10,816
)
 
(9,796
)
Loans, net of unearned income
$
12,839,511

 
$
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 FASB's 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,
2014
 
December 31,
2013
 
(in thousands)
Allowance for loan losses
$
191,685

 
$
202,780

Reserve for unfunded lending commitments
1,757

 
2,137

Allowance for credit losses
$
193,442

 
$
204,917


16

The following table presents the activity in the allowance for credit losses:
 
Three months ended June 30
 
Six months ended June 30
 
2014
 
2013
 
2014
 
2013
 
(in thousands)
Balance at beginning of period
$
199,006

 
$
221,527

 
$
204,917

 
$
225,439

Loans charged off
(11,476
)
 
(21,383
)
 
(21,744
)
 
(43,489
)
Recoveries of loans previously charged off
2,412

 
3,982

 
4,269

 
7,176

Net loans charged off
(9,064
)
 
(17,401
)
 
(17,475
)
 
(36,313
)
Provision for credit losses
3,500

 
13,500

 
6,000

 
28,500

Balance at end of period
$
193,442

 
$
217,626

 
$
193,442

 
$
217,626


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, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at March 31, 2014
$
53,757

 
$
50,563

 
$
32,460

 
$
33,329

 
$
9,842

 
$
3,324

 
$
2,011

 
$
11,803

 
$
197,089

Loans charged off
(2,141
)
 
(5,512
)
 
(1,234
)
 
(1,089
)
 
(218
)
 
(449
)
 
(833
)
 
—

 
(11,476
)
Recoveries of loans previously charged off
430

 
775

 
177

 
108

 
158

 
402

 
362

 
—

 
2,412

Net loans charged off
(1,711
)
 
(4,737
)
 
(1,057
)
 
(981
)
 
(60
)
 
(47
)
 
(471
)
 
—

 
(9,064
)
Provision for loan losses (1)
(2,204
)
 
3,258

 
638

 
396

 
1,549

 
29

 
311

 
(317
)
 
3,660

Balance at June 30, 2014
$
49,842

 
$
49,084

 
$
32,041

 
$
32,744

 
$
11,331

 
$
3,306

 
$
1,851

 
$
11,486

 
$
191,685

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

Six months ended June 30, 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
(3,527
)
 
(10,637
)
 
(2,885
)
 
(1,935
)
 
(432
)
 
(1,200
)
 
(1,128
)
 
—

 
(21,744
)
Recoveries of loans previously charged off
474

 
1,519

 
533

 
224

 
382

 
611

 
526