FULT 6.30.2015 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, 2015, 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 checkmark 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 checkmark 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 checkmark 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 checkmark 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 –174,944,000 shares outstanding as of July 31, 2015.

1

FULTON FINANCIAL CORPORATION
FORM 10-Q FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2015
INDEX
 
Description
Page
 
 
 
PART I. FINANCIAL INFORMATION
 
 
 
 
 
 
 
 
(a)
 
 
 
(b)
 
 
 
(c)
 
 
 
(d)
 
 
 
(e)
 
 
 
(f)
 
 
 
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 4. Mine Safety Disclosures
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2



Item 1. Financial Statements
 

CONSOLIDATED BALANCE SHEETS 
 
(in thousands, except per-share data)
 
June 30,
2015
 
December 31,
2014
 
(unaudited)
 
ASSETS
 
 
 
Cash and due from banks
$
100,455

 
$
105,702

Interest-bearing deposits with other banks
322,218

 
358,130

Federal Reserve Bank and Federal Home Loan Bank stock
65,106

 
64,953

Loans held for sale
33,980

 
17,522

Available for sale investment securities
2,440,492

 
2,323,371

Loans, net of unearned income
13,244,230

 
13,111,716

Less: Allowance for loan losses
(167,485
)
 
(184,144
)
Net Loans
13,076,745

 
12,927,572

Premises and equipment
226,794

 
226,027

Accrued interest receivable
41,193

 
41,818

Goodwill and intangible assets
531,567

 
531,803

Other assets
526,923

 
527,869

Total Assets
$
17,365,473

 
$
17,124,767

LIABILITIES
 
 
 
Deposits:
 
 
 
Noninterest-bearing
$
3,805,165

 
$
3,640,623

Interest-bearing
9,700,544

 
9,726,883

Total Deposits
13,505,709

 
13,367,506

Short-term borrowings:
 
 
 
Federal funds purchased
5,058

 
6,219

Other short-term borrowings
403,977

 
323,500

Total Short-Term Borrowings
409,035

 
329,719

Accrued interest payable
15,172

 
18,045

Other liabilities
278,099

 
273,419

Federal Home Loan Bank advances and long-term debt
1,132,641

 
1,139,413

Total Liabilities
15,340,656

 
15,128,102

SHAREHOLDERS’ EQUITY
 
 
 
Common stock, $2.50 par value, 600 million shares authorized, 218.5 million shares issued in 2015 and 218.2 million shares issued in 2014
546,219

 
545,555

Additional paid-in capital
1,445,315

 
1,420,523

Retained earnings
603,597

 
558,810

Accumulated other comprehensive loss
(22,877
)
 
(17,722
)
Treasury stock, at cost, 42.5 million shares in 2015 and 39.3 million shares in 2014
(547,437
)
 
(510,501
)
Total Shareholders’ Equity
2,024,817

 
1,996,665

Total Liabilities and Shareholders’ Equity
$
17,365,473

 
$
17,124,767

 
 
 
 
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
 
2015
 
2014
 
2015
 
2014
INTEREST INCOME
 
 
 
 
 
 
 
Loans, including fees
$
129,910

 
$
131,440

 
$
259,687

 
$
263,270

Investment securities:
 
 
 
 
 
 
 
Taxable
10,944

 
12,418

 
22,226

 
25,684

Tax-exempt
1,881

 
2,298

 
3,968

 
4,646

Dividends
296

 
325

 
644

 
657

Loans held for sale
265

 
214

 
438

 
348

Other interest income
933

 
1,207

 
3,038

 
2,089

Total Interest Income
144,229

 
147,902

 
290,001

 
296,694

INTEREST EXPENSE
 
 
 
 
 
 
 
Deposits
10,053

 
8,685

 
19,876

 
16,581

Short-term borrowings
103

 
540

 
180

 
1,173

Long-term debt
11,153

 
10,779

 
23,444

 
21,477

Total Interest Expense
21,309

 
20,004

 
43,500

 
39,231

Net Interest Income
122,920

 
127,898

 
246,501

 
257,463

Provision for credit losses
2,200

 
3,500

 
(1,500
)
 
6,000

Net Interest Income After Provision for Credit Losses
120,720

 
124,398

 
248,001

 
251,463

NON-INTEREST INCOME
 
 
 
 
 
 
 
Service charges on deposit accounts
12,637

 
12,552

 
24,206

 
24,263

Investment management and trust services
11,011

 
11,339

 
21,900

 
22,297

Other service charges and fees
10,988

 
10,526

 
20,351

 
19,453

Mortgage banking income
5,339

 
5,741

 
10,027

 
9,346

Investment securities gains, net:
 
 
 
 
 
 
 
Net gains on sales of investment securities
2,415

 
1,124

 
6,560

 
1,124

Other-than-temporary impairment losses
—

 
(12
)
 
—

 
(12
)
Investment securities gains, net
2,415

 
1,112

 
6,560

 
1,112

Other
4,099

 
3,602

 
8,182

 
6,907

Total Non-Interest Income
46,489

 
44,872

 
91,226

 
83,378

NON-INTEREST EXPENSE
 
 
 
 
 
 
 
Salaries and employee benefits
65,067

 
63,623

 
130,057

 
123,189

Net occupancy expense
11,809

 
11,464

 
25,501

 
25,067

Other outside services
8,125

 
7,240

 
13,875

 
11,052

Data processing
4,894

 
4,331

 
9,662

 
8,127

Software
3,376

 
3,209

 
6,694

 
6,134

Equipment expense
3,335

 
3,360

 
7,293

 
6,962

FDIC insurance expense
2,885

 
2,615

 
5,707

 
5,304

Professional fees
2,731

 
3,559

 
5,602

 
6,463

Supplies and postage
2,726

 
2,451

 
5,095

 
4,777

Marketing
2,235

 
2,337

 
3,468

 
3,921

Telecommunications
1,617

 
1,787

 
3,333

 
3,606

Operating risk loss
674

 
716

 
1,501

 
2,544

Other real estate owned and repossession expense
129

 
748

 
1,491

 
1,731

Intangible amortization
106

 
315

 
236

 
630

Other
8,645

 
8,419

 
17,317

 
16,221

Total Non-Interest Expense
118,354

 
116,174

 
236,832

 
225,728

Income Before Income Taxes
48,855

 
53,096

 
102,395

 
109,113

Income taxes
12,175

 
13,500

 
25,679

 
27,734

Net Income
$
36,680

 
$
39,596

 
$
76,716

 
$
81,379

 
 
 
 
 
 
 
 
PER SHARE:
 
 
 
 
 
 
 
Net Income (Basic)
$
0.21

 
$
0.21

 
$
0.43

 
$
0.43

Net Income (Diluted)
0.21

 
0.21

 
0.43

 
0.43

Cash Dividends
0.09

 
0.08

 
0.18

 
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
 
2015
 
2014
 
2015
 
2014
 
 
Net Income
$
36,680

 
$
39,596

 
$
76,716

 
$
81,379

Other Comprehensive Income (Loss), net of tax:
 
 
 
 
 
 
 
Unrealized gain (loss) on securities
(12,008
)
 
12,990

 
(2,016
)
 
26,923

Reclassification adjustment for postretirement amendment gains included in net income
—

 
—

 
—

 
(944
)
Reclassification adjustment for securities gains included in net income
(1,569
)
 
(723
)
 
(4,264
)
 
(723
)
Non-credit related unrealized gain on other-than-temporarily impaired debt securities
—

 
323

 
125

 
512

Unrealized gain on derivative financial instruments
34

 
34

 
68

 
68

Unrecognized postretirement income arising due to plan amendment
—

 
—

 
—

 
2,144

Amortization of net unrecognized pension and postretirement items
466

 
104

 
932

 
200

Other Comprehensive Income (Loss)
(13,077
)
 
12,728

 
(5,155
)
 
28,180

Total Comprehensive Income
$
23,603

 
$
52,324

 
$
71,561

 
$
109,559

 
 
 
 
 
 
 
 
See Notes to Consolidated Financial Statements
 
 
 
 
 
 
 


5


CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2015 AND 2014
 
(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, 2014
178,924

 
$
545,555

 
$
1,420,523

 
$
558,810

 
$
(17,722
)
 
$
(510,501
)
 
$
1,996,665

Net income

 

 

 
76,716

 

 

 
76,716

Other comprehensive loss

 

 

 

 
(5,155
)
 

 
(5,155
)
Stock issued, including related tax benefits
423

 
664

 
1,954

 

 

 
2,077

 
4,695

Stock-based compensation awards

 

 
2,838

 

 

 

 
2,838

Acquisition of treasury stock
(1,538
)
 
 
 
 
 
 
 
 
 
(19,013
)
 
(19,013
)
Settlement of accelerated stock repurchase agreement
(1,790
)
 
 
 
20,000

 
 
 
 
 
(20,000
)
 
—

Common stock cash dividends - $0.18 per share

 

 

 
(31,929
)
 

 

 
(31,929
)
Balance at June 30, 2015
176,019

 
$
546,219

 
$
1,445,315

 
$
603,597

 
$
(22,877
)
 
$
(547,437
)
 
$
2,024,817

 
 
 
 
 
 
 
 
 
 
 
 
 
 
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

 

 

 

 
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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
See Notes to Consolidated Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 

6


CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
(in thousands)
 
Six months ended June 30
 
2015
 
2014
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net Income
$
76,716

 
$
81,379

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for credit losses
(1,500
)
 
6,000

Depreciation and amortization of premises and equipment
13,920

 
12,354

Net amortization of investment securities premiums
3,288

 
2,908

Net gains on sales of investment securities
(6,560
)
 
(1,112
)
Net increase in loans held for sale
(16,458
)
 
(14,728
)
Amortization of intangible assets
236

 
630

Stock-based compensation
2,838

 
3,022

Excess tax benefits from stock-based compensation
(63
)
 
(52
)
Decrease in accrued interest receivable
625

 
1,921

Decrease (increase) in other assets
9,818

 
(3,039
)
(Decrease) increase in accrued interest payable
(2,873
)
 
1,429

(Decrease) increase in other liabilities
(2,959
)
 
3,646

Total adjustments
312

 
12,979

Net cash provided by operating activities
77,028

 
94,358

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Proceeds from sales of securities available for sale
18,815

 
15,189

Proceeds from maturities of securities available for sale
205,620

 
174,619

Purchase of securities available for sale
(346,322
)
 
(60,952
)
Decrease (increase) in short-term investments
35,759

 
(57,357
)
Net increase in loans
(147,492
)
 
(74,766
)
Net purchases of premises and equipment
(14,687
)
 
(11,501
)
Net cash used in investing activities
(248,307
)
 
(14,768
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Net increase in demand and savings deposits
205,901

 
104,390

Net (decrease) increase in time deposits
(67,698
)
 
98,083

Increase (decrease) in short-term borrowings
79,316

 
(250,322
)
Additions to long-term debt
148,099

 
90,000

Repayments of long-term debt
(154,871
)
 
(5,189
)
Net proceeds from issuance of common stock
4,632

 
4,018

Excess tax benefits from stock-based compensation
63

 
52

Dividends paid
(30,397
)
 
(30,521
)
Acquisition of treasury stock
(19,013
)
 
(49,804
)
Net cash provided by (used in) financing activities
166,032

 
(39,293
)
Net (Decrease) Increase in Cash and Due From Banks
(5,247
)
 
40,297

Cash and Due From Banks at Beginning of Period
105,702

 
218,540

Cash and Due From Banks at End of Period
$
100,455

 
$
258,837

Supplemental Disclosures of Cash Flow Information:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
46,373

 
$
37,802

Income taxes
11,051

 
16,407

See Notes to Consolidated Financial Statements
 
 
 
 

7

FULTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
NOTE 1 – 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. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2014. Operating results for the three and six months ended June 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015. The Corporation evaluates subsequent events through the date of filing of this Form 10-Q with the Securities and Exchange Commission ("SEC").

Recent Accounting Standards

Effective January 1, 2015, the Corporation adopted the Financial Accounting Standards Board's ("FASB") Accounting Standards Codification ("ASC") Update 2014-01, "Accounting for Investments in Qualified Affordable Housing Projects." ASC Update 2014-01 provides guidance on accounting for investments made by a reporting entity in flow-through limited liability entities that manage or invest in affordable housing projects that qualify for the low income housing tax credit. The Corporation has made certain investments in partnerships that generate tax credits under various federal programs which promote investment in low and moderate income housing and local economic development. The net income tax benefit associated with these investments, which consists of the amortization of the investments net of tax benefits, and the income tax credits earned on the investments recorded in income taxes on the consolidated income statements was $2.4 million and $2.8 million for the three months ended June 30, 2015 and 2014, respectively and $4.8 million and $5.3 million for the six months ended June 30, 2015 and 2014, respectively. As of June 30, 2015 and December 31, 2014, the Corporation’s tax credit investments, included in other assets on the consolidated balance sheets, totaled $156.8 million and $155.6 million, respectively. The adoption of this ASC update did not have a material impact on the Corporation's consolidated financial statements for the three or six months ended June 30, 2015 or 2014.

In February 2015, the FASB issued ASC Update 2015-02, "Consolidation: Amendments to the Consolidation Analysis." ASC Update 2015-02 changes the way reporting enterprises evaluate whether: (a) they should consolidate limited partnerships and similar entities, (b) fees paid to a decision maker or service provider are variable interests in a variable interest entity ("VIE"), and (c) variable interests in a VIE held by related parties of the reporting enterprise require the reporting enterprise to consolidate the VIE. ASC Update 2015-02 is effective for public business entities' annual and interim reporting periods beginning after December 15, 2015, with earlier adoption permitted. The Corporation intends to adopt this standards update effective with its March 31, 2016 quarterly report on Form 10-Q, and does not expect the adoption of ASC Update 2015-02 to have a material impact on its consolidated financial statements.

In April 2015, the FASB issued ASC Update 2015-03, "Interest - Imputation of Interest." ASC Update 2015-03 simplifies the presentation of debt issuances costs. Debt issuance costs related to a recognized debt liability will be presented on the balance sheet as a direct deduction from the debt liability, similar to the presentation of debt discounts. Under current U.S. GAAP, debt issuance costs are reported on the balance sheet as assets. The costs will continue to be amortized to interest expense using the effective interest method. ASC Update 2015-03 is effective for public business entities' annual and interim reporting periods beginning after December 15, 2015, with earlier adoption permitted. The Corporation intends to adopt this standards update effective with its March 31, 2016 quarterly report on Form 10-Q and does not expect the adoption of ASC Update 2015-03 to have a material impact on its consolidated financial statements.

In April 2015, the FASB issued ASC Update 2015-05, "Customer's Accounting for Fees Paid in a Cloud Computing Arrangement." ASC Update 2015-05 provides explicit guidance to determine when a customer's fees paid in a cloud computing arrangement is for the acquisition of software licenses, services, or both. ASC Update 2015-05 is effective for public business entities' annual and interim reporting periods beginning after December 15, 2015, with earlier adoption permitted. The Corporation intends to adopt this standards update effective with its March 31, 2016 quarterly report on Form 10-Q and does not expect the adoption of ASC Update 2015-05 to have a material impact on its consolidated financial statements.


8


NOTE 2 – 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
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Weighted average shares outstanding (basic)
176,433

 
188,139

 
177,446

 
188,799

Impact of common stock equivalents
1,098

 
1,043

 
1,042

 
1,033

Weighted average shares outstanding (diluted)
177,531

 
189,182

 
178,488

 
189,832

For the three and six months ended June 30, 2015, 1.8 million and 2.0 million 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, 2014, 3.3 million and 3.2 million stock options, respectively, were excluded from the diluted net income per share computation as their effect would have been anti-dilutive.


9

NOTE 3 – Accumulated Other Comprehensive Income
The following table presents changes in other comprehensive income: 
 
Before-Tax Amount
 
Tax Effect
 
Net of Tax Amount
 
(in thousands)
Three months ended June 30, 2015
 
 
 
 
 
Unrealized loss on securities
$
(18,474
)
 
$
6,466

 
$
(12,008
)
Reclassification adjustment for securities gains included in net income (1)
(2,413
)
 
844

 
(1,569
)
Unrealized gain on derivative financial instruments
52

 
(18
)
 
34

Amortization of net unrecognized pension and postretirement items (2)
717

 
(251
)
 
466

Total Other Comprehensive Loss
$
(20,118
)
 
$
7,041

 
$
(13,077
)
Three months ended June 30, 2014
 
 
 
 
 
Unrealized gain 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 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
$
19,581

 
$
(6,853
)
 
$
12,728

 
 
 
 
 
 
Six months ended June 30, 2015
 
 
 
 
 
Unrealized loss on securities
$
(3,103
)
 
$
1,087

 
$
(2,016
)
Reclassification adjustment for securities gains included in net income (1)
(6,558
)
 
2,294

 
(4,264
)
Non-credit related unrealized gains (losses) on other-than-temporarily impaired debt securities
192

 
(67
)
 
125

Unrealized gain on derivative financial instruments
104

 
(36
)
 
68

Amortization of net unrecognized pension and postretirement items (2)
1,434

 
(502
)
 
932

Total Other Comprehensive Loss
$
(7,931
)
 
$
2,776

 
$
(5,155
)
Six months ended June 30, 2014
 
 
 
 
 
Unrealized gain 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
$
43,348

 
$
(15,168
)
 
$
28,180


(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 4, "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 8, "Employee Benefit Plans," for additional details.







10

The following table presents changes in each component of accumulated other comprehensive income, 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, 2015
 
 
 
 
 
 
 
 
 
Balance at March 31, 2015
$
14,311

 
$
440

 
$
(2,512
)
 
$
(22,039
)
 
$
(9,800
)
Other comprehensive loss before reclassifications
(12,008
)
 
—

 
—

 
—

 
(12,008
)
Amounts reclassified from accumulated other comprehensive income (loss)
(1,473
)
 
(96
)
 
34

 
466

 
(1,069
)
Balance at June 30, 2015
$
830

 
$
344

 
$
(2,478
)
 
$
(21,573
)
 
$
(22,877
)
Three months ended June 30, 2014

 

 
 
 

 

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

 
$
(2,648
)
 
$
(7,505
)
 
$
(21,889
)
Other comprehensive income 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
)
 
 
 
 
 
 
 
 
 
 
Six months ended June 30, 2015
 
 
 
 
 
 
 
 
 
Balance at December 31, 2014
$
5,980

 
$
1,349

 
$
(2,546
)
 
$
(22,505
)
 
$
(17,722
)
Other comprehensive income (loss) before reclassifications
(2,016
)
 
125

 
—

 
—

 
(1,891
)
Amounts reclassified from accumulated other comprehensive income (loss)
(3,134
)
 
(1,130
)
 
68

 
932

 
(3,264
)
Balance at June 30, 2015
$
830

 
$
344

 
$
(2,478
)
 
$
(21,573
)
 
$
(22,877
)
Six months ended June 30, 2014
 
 
 
 
 
 
 
 
 
Balance at December 31, 2013
$
(27,510
)
 
$
1,652

 
$
(2,682
)
 
$
(8,801
)
 
$
(37,341
)
Other comprehensive income 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
)


11

NOTE 4 – 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, 2015
 
 
 
 
 
 
 
Equity securities
$
23,981

 
$
9,072

 
$
(12
)
 
$
33,041

U.S. Government sponsored agency securities
48,333

 
57

 
(130
)
 
48,260

State and municipal securities
231,592

 
5,312

 
(387
)
 
236,517

Corporate debt securities
98,756

 
3,183

 
(4,767
)
 
97,172

Collateralized mortgage obligations
931,093

 
4,932

 
(17,793
)
 
918,232

Mortgage-backed securities
998,418

 
14,112

 
(3,866
)
 
1,008,664

Auction rate securities
106,504

 
—

 
(7,898
)
 
98,606

 
$
2,438,677

 
$
36,668

 
$
(34,853
)
 
$
2,440,492

 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
 
(in thousands)
December 31, 2014
 
 
 
 
 
 
 
Equity securities
$
33,469

 
$
14,167

 
$
(13
)
 
$
47,623

U.S. Government securities
200

 
—

 
—

 
200

U.S. Government sponsored agency securities
209

 
5

 
—

 
214

State and municipal securities
238,250

 
7,231

 
(266
)
 
245,215

Corporate debt securities
99,016

 
5,126

 
(6,108
)
 
98,034

Collateralized mortgage obligations
917,395

 
5,705

 
(20,787
)
 
902,313

Mortgage-backed securities
914,797

 
16,978

 
(2,944
)
 
928,831

Auction rate securities
108,751

 
—

 
(7,810
)
 
100,941

 
$
2,312,087

 
$
49,212

 
$
(37,928
)
 
$
2,323,371

Securities carried at $1.6 billion as of June 30, 2015 and $1.7 billion as of December 31, 2014 were pledged as collateral to secure public and trust deposits and customer repurchase agreements.
Equity securities include common stocks of financial institutions (estimated fair value of $27.2 million at June 30, 2015 and $41.8 million at December 31, 2014) and other equity investments (estimated fair value of $5.8 million at both June 30, 2015 and December 31, 2014).
As of June 30, 2015, the financial institutions stock portfolio had a cost basis of $18.2 million and an estimated fair value of $27.2 million, including an investment in a single financial institution with a cost basis of $10.7 million and an estimated fair value of $15.7 million. The estimated fair value of this investment accounted for 57.7% of the estimated 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 estimated fair value.

12

The amortized cost and estimated fair values of debt securities as of June 30, 2015, 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
 
$
57,382

 
$
58,372

Due from one year to five years
 
104,022

 
106,663

Due from five years to ten years
 
148,682

 
151,430

Due after ten years
 
175,099

 
164,090

 
 
485,185

 
480,555

Collateralized mortgage obligations
 
931,093

 
918,232

Mortgage-backed securities
 
998,418

 
1,008,664

 
 
$
2,414,696

 
$
2,407,451

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, 2015
(in thousands)
Equity securities
$
2,290

 
$
—

 
$
—

 
$
2,290

Debt securities
125

 
—

 
—

 
125

Total
$
2,415

 
$
—

 
$
—

 
$
2,415

Three months ended June 30, 2014
 
 
 
 
 
 
 
Equity securities
$
—

 
$
—

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

 
—

 
—

 
1,124

Total
$
1,124

 
$
—

 
$
(12
)
 
$
1,112

 
 
 
 
 
 
 
 
Six months ended June 30, 2015
 
 
 
 
 
 
 
Equity securities
$
4,260

 
$
—

 
$
—

 
$
4,260

Debt securities
2,300

 
—

 
—

 
2,300

Total
$
6,560

 
$
—

 
$
—

 
$
6,560

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










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, 2015 and 2014:
 
Three months ended June 30
 
Six months ended June 30
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Balance of cumulative credit losses on debt securities, beginning of period
$
(12,302
)
 
$
(19,961
)
 
$
(16,242
)
 
$
(20,691
)
Reductions for securities sold during the period
792

 
2,746

 
4,730

 
3,472

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

 
1

 
2

 
5

Balance of cumulative credit losses on debt securities, end of period
$
(11,510
)
 
$
(17,214
)
 
$
(11,510
)
 
$
(17,214
)
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, 2015:
 
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
$
28,051

 
$
(130
)
 
$
—

 
$
—

 
$
28,051

 
$
(130
)
State and municipal securities
34,107

 
(387
)
 
—

 
—

 
34,107

 
(387
)
Corporate debt securities
7,965

 
(13
)
 
35,229

 
(4,754
)
 
43,194

 
(4,767
)
Collateralized mortgage obligations
95,315

 
(651
)
 
517,338

 
(17,142
)
 
612,653

 
(17,793
)
Mortgage-backed securities
306,980

 
(2,498
)
 
69,029

 
(1,368
)
 
376,009

 
(3,866
)
Auction rate securities
—

 
—

 
98,606

 
(7,898
)
 
98,606

 
(7,898
)
Total debt securities
472,418

 
(3,679
)
 
720,202

 
(31,162
)
 
1,192,620

 
(34,841
)
Equity securities
—

 
—

 
78

 
(12
)
 
78

 
(12
)
 
$
472,418

 
$
(3,679
)
 
$
720,280

 
$
(31,174
)
 
$
1,192,698

 
$
(34,853
)
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, 2015.
The unrealized holding losses on auction rate securities (auction rate certificates, or "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, 2015, all of the ARCs were rated above investment grade, with approximately $6 million, or 6%, "AAA" rated and $93 million, or 94%, "AA" rated. All of the loans underlying the ARCs have principal payments which are guaranteed by the federal government.
As of June 30, 2015, all ARCs were current and making scheduled interest payments. Based on management’s evaluations, ARCs with an estimated fair value of $98.6 million were not subject to any other-than-temporary impairment charges as of June 30, 2015. 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 June 30, 2015 to be other-than-temporarily impaired.

14

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, 2015
 
December 31, 2014
 
Amortized
cost
 
Estimated
fair value
 
Amortized
cost
 
Estimated
fair value
 
(in thousands)
Single-issuer trust preferred securities
$
47,613

 
$
43,378

 
$
47,569

 
$
42,016

Subordinated debt
47,595

 
49,716

 
47,530

 
50,023

Pooled trust preferred securities
—

 
530

 
2,010

 
4,088

Corporate debt securities issued by financial institutions
95,208

 
93,624

 
97,109

 
96,127

Other corporate debt securities
3,548

 
3,548

 
1,907

 
1,907

Available for sale corporate debt securities
$
98,756

 
$
97,172

 
$
99,016

 
$
98,034


The Corporation’s investments in single-issuer trust preferred securities had an unrealized loss of $4.2 million at June 30, 2015. 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, 2015 or 2014. Seven of the Corporation's 19 single-issuer trust preferred securities were rated below investment grade by at least one ratings agency, with an amortized cost of $14.5 million and an estimated fair value of $13.1 million at June 30, 2015. 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, 2015 were not rated by any ratings agency.
During the six months ended June 30, 2015, the Corporation sold three pooled trust preferred securities with a total amortized cost of $1.9 million, for a gain of $2.3 million. As of June 30, 2015, both of the Corporation's remaining pooled trust preferred securities, with an amortized cost of $0 and an estimated fair value of $530,000, 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 $97.2 million were not subject to any other-than-temporary impairment charges as of June 30, 2015. 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.


15

NOTE 5 – Loans and Allowance for Credit Losses

Loans, Net of Unearned Income
Loans, net of unearned income are summarized as follows:
 
June 30,
2015
 
December 31, 2014
 
(in thousands)
Real-estate - commercial mortgage
$
5,237,800

 
$
5,197,155

Commercial - industrial, financial and agricultural
3,806,699

 
3,725,567

Real-estate - home equity
1,689,688

 
1,736,688

Real-estate - residential mortgage
1,369,103

 
1,377,068

Real-estate - construction
731,925

 
690,601

Consumer
272,494

 
265,431

Leasing and other
147,960

 
127,562

Overdrafts
2,642

 
4,021

Loans, gross of unearned income
13,258,311

 
13,124,093

Unearned income
(14,081
)
 
(12,377
)
Loans, net of unearned income
$
13,244,230

 
$
13,111,716


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. Commercial loans 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,
2015
 
December 31,
2014
 
(in thousands)
Allowance for loan losses
$
167,485

 
$
184,144

Reserve for unfunded lending commitments
1,968

 
1,787

Allowance for credit losses
$
169,453

 
$
185,931







16

The following table presents the activity in the allowance for credit losses:
 
Three months ended June 30
 
Six months ended June 30
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Balance at beginning of period
$
179,658

 
$
199,006

 
$
185,931

 
$
204,917

Loans charged off
(15,372
)
 
(11,476
)
 
(21,136
)
 
(21,744
)
Recoveries of loans previously charged off
2,967

 
2,412

 
6,158

 
4,269

Net loans charged off
(12,405
)
 
(9,064
)
 
(14,978
)
 
(17,475
)
Provision for credit losses
2,200

 
3,500

 
(1,500
)
 
6,000

Balance at end of period
$
169,453

 
$
193,442

 
$
169,453

 
$
193,442


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, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at March 31, 2015
$
52,860

 
$
57,150

 
$
23,481

 
$
23,235

 
$
8,487

 
$
2,527

 
$
1,653

 
$
8,308

 
$
177,701

Loans charged off
(1,642
)
 
(11,166
)
 
(870
)
 
(783
)
 
(87
)
 
(357
)
 
(467
)
 
—

 
(15,372
)
Recoveries of loans previously charged off
451

 
1,471

 
189

 
187

 
231

 
368

 
70

 
—

 
2,967

Net loans charged off
(1,191
)
 
(9,695
)
 
(681
)
 
(596
)
 
144

 
11

 
(397
)
 
—

 
(12,405
)
Provision for loan losses (1)
(989
)
 
1,715

 
(294
)
 
148

 
(882
)
 
70

 
359

 
2,062

 
2,189

Balance at June 30, 2015
$
50,680

 
$
49,170

 
$
22,506

 
$
22,787

 
$
7,749

 
$
2,608

 
$
1,615

 
$
10,370

 
$
167,485

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

Six months ended June 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2014
$
53,493

 
$
51,378

 
$
28,271

 
$
29,072

 
$
9,756

 
$
3,015

 
$
1,799

 
$
7,360

 
$
184,144

Loans charged off
(2,351
)
 
(13,029
)
 
(1,638
)
 
(2,064
)
 
(87
)
 
(1,137
)
 
(830
)
 
—

 
(21,136
)
Recoveries of loans previously charged off
887

 
2,257

 
440

 
346

 
1,378

 
609

 
241

 
—