10-Q





 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20459 

FORM 10-Q

(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 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 –174,031,000 shares outstanding as of October 30, 2015.

1





FULTON FINANCIAL CORPORATION
FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 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)
 
September 30,
2015
 
December 31,
2014
 
(unaudited)
 
ASSETS
 
 
 
Cash and due from banks
$
93,803

 
$
105,702

Interest-bearing deposits with other banks
510,943

 
358,130

Federal Reserve Bank and Federal Home Loan Bank stock
68,977

 
64,953

Loans held for sale
26,937

 
17,522

Available for sale investment securities
2,436,337

 
2,323,371

Loans, net of unearned income
13,536,361

 
13,111,716

Less: Allowance for loan losses
(167,136
)
 
(184,144
)
Net Loans
13,369,225

 
12,927,572

Premises and equipment
225,705

 
226,027

Accrued interest receivable
42,846

 
41,818

Goodwill and intangible assets
531,562

 
531,803

Other assets
531,724

 
527,869

Total Assets
$
17,838,059

 
$
17,124,767

LIABILITIES
 
 
 
Deposits:
 
 
 
Noninterest-bearing
$
3,906,228

 
$
3,640,623

Interest-bearing
10,178,166

 
9,726,883

Total Deposits
14,084,394

 
13,367,506

Short-term borrowings:
 
 
 
Federal funds purchased
5,527

 
6,219

Other short-term borrowings
426,104

 
323,500

Total Short-Term Borrowings
431,631

 
329,719

Accrued interest payable
14,727

 
18,045

Other liabilities
301,970

 
273,419

Federal Home Loan Bank advances and long-term debt
979,433

 
1,139,413

Total Liabilities
15,812,155

 
15,128,102

SHAREHOLDERS’ EQUITY
 
 
 
Common stock, $2.50 par value, 600 million shares authorized, 218.6 million shares issued in 2015 and 218.2 million shares issued in 2014
546,444

 
545,555

Additional paid-in capital
1,447,569

 
1,420,523

Retained earnings
622,237

 
558,810

Accumulated other comprehensive loss
(13,219
)
 
(17,722
)
Treasury stock, at cost, 44.8 million shares in 2015 and 39.3 million shares in 2014
(577,127
)
 
(510,501
)
Total Shareholders’ Equity
2,025,904

 
1,996,665

Total Liabilities and Shareholders’ Equity
$
17,838,059

 
$
17,124,767

 
 
 
 
See Notes to Consolidated Financial Statements
 
 
 
 

3





CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
 
(in thousands, except per-share data)
Three months ended September 30
 
Nine months ended September 30
 
2015
 
2014
 
2015
 
2014
INTEREST INCOME
 
 
 
 
 
 
 
Loans, including fees
$
131,804

 
$
133,741

 
$
391,491

 
$
397,011

Investment securities:
 
 
 
 
 
 
 
Taxable
11,252

 
12,278

 
33,478

 
37,962

Tax-exempt
1,904

 
2,219

 
5,872

 
6,865

Dividends
190

 
339

 
834

 
996

Loans held for sale
194

 
237

 
632

 
585

Other interest income
884

 
976

 
3,922

 
3,065

Total Interest Income
146,228

 
149,790

 
436,229

 
446,484

INTEREST EXPENSE
 
 
 
 
 
 
 
Deposits
10,217

 
8,998

 
30,093

 
25,579

Short-term borrowings
92

 
297

 
272

 
1,470

Long-term debt
10,225

 
11,129

 
33,669

 
32,606

Total Interest Expense
20,534

 
20,424

 
64,034

 
59,655

Net Interest Income
125,694

 
129,366

 
372,195

 
386,829

Provision for credit losses
1,000

 
3,500

 
(500
)
 
9,500

Net Interest Income After Provision for Credit Losses
124,694

 
125,866

 
372,695

 
377,329

NON-INTEREST INCOME
 
 
 
 
 
 
 
Service charges on deposit accounts
12,982

 
12,801

 
37,188

 
37,064

Investment management and trust services
11,237

 
11,120

 
33,137

 
33,417

Other service charges and fees
10,965

 
9,954

 
31,316

 
29,407

Mortgage banking income
3,864

 
4,038

 
13,891

 
13,384

Investment securities gains, net:
 
 
 
 
 
 
 
Net gains on sales of investment securities
1,730

 
99

 
8,290

 
1,223

      Net other-than-temporary impairment losses
—

 
(18
)
 
—

 
(30
)
Investment securities gains, net
1,730

 
81

 
8,290

 
1,193

Other
3,996

 
3,906

 
12,178

 
10,813

Total Non-Interest Income
44,774

 
41,900

 
136,000

 
125,278

NON-INTEREST EXPENSE
 
 
 
 
 
 
 
Salaries and employee benefits
65,308

 
62,434

 
195,365

 
185,623

Net occupancy expense
10,710

 
11,582

 
36,211

 
36,649

Other outside services
7,373

 
8,632

 
21,248

 
19,684

Loss on redemption of trust preferred securities
5,626

 
—

 
5,626

 
—

Data processing
5,105

 
4,689

 
14,767

 
12,816

Software
3,984

 
3,353

 
10,678

 
9,487

Equipment expense
3,595

 
3,307

 
10,888

 
10,269

FDIC insurance expense
2,867

 
2,882

 
8,574

 
8,186

Professional fees
2,828

 
3,252

 
8,430

 
9,715

Supplies and postage
2,708

 
2,560

 
7,803

 
7,337

Marketing
2,102

 
1,798

 
5,570

 
5,719

Telecommunications
1,587

 
1,587

 
4,920

 
5,193

Operating risk loss
1,136

 
1,242

 
2,637

 
3,786

Other real estate owned and repossession expense
1,016

 
1,303

 
2,507

 
3,034

Intangible amortization
5

 
314

 
241

 
944

Other
8,939

 
6,863

 
26,256

 
23,084

Total Non-Interest Expense
124,889

 
115,798

 
361,721

 
341,526

Income Before Income Taxes
44,579

 
51,968

 
146,974

 
161,081

Income taxes
10,328

 
13,402

 
36,007

 
41,136

Net Income
$
34,251

 
$
38,566

 
$
110,967

 
$
119,945

 
 
 
 
 
 
 
 
PER SHARE:
 
 
 
 
 
 
 
Net Income (Basic)
$
0.20

 
$
0.21

 
$
0.63

 
$
0.64

Net Income (Diluted)
0.20

 
0.21

 
0.63

 
0.64

Cash Dividends
0.09

 
0.08

 
0.27

 
0.24

See Notes to Consolidated Financial Statements
 
 
 
 
 
 
 

4






CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
 
(in thousands)
 
Three months ended September 30
 
Nine months ended September 30
 
2015
 
2014
 
2015
 
2014
 
 
Net Income
$
34,251

 
$
38,566

 
$
110,967

 
$
119,945

Other Comprehensive Income (Loss), net of tax:
 
 
 
 
 
 
 
Unrealized gain (loss) on securities
7,857

 
(3,011
)
 
5,841

 
23,912

Reclassification adjustment for postretirement amendment gains included in net income
—

 
—

 
—

 
(944
)
Reclassification adjustment for securities gains included in net income
(1,124
)
 
(52
)
 
(5,388
)
 
(775
)
Reclassification adjustment for loss on derivative financial instruments included in net income
2,456

 
—

 
2,456

 
—

Non-credit related unrealized gain on other-than-temporarily impaired debt securities
—

 
138

 
125

 
650

Amortization of unrealized loss on derivative financial instruments
3

 
34

 
71

 
102

Unrecognized postretirement income arising due to plan amendment
—

 
—

 
—

 
2,144

Amortization of net unrecognized pension and postretirement items
466

 
104

 
1,398

 
304

Other Comprehensive Income (Loss)
9,658

 
(2,787
)
 
4,503

 
25,393

Total Comprehensive Income
$
43,909

 
$
35,779

 
$
115,470

 
$
145,338

 
 
 
 
 
 
 
 
See Notes to Consolidated Financial Statements
 
 
 
 
 
 
 


5






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

 

 

 
110,967

 

 

 
110,967

Other comprehensive income

 

 

 

 
4,503

 

 
4,503

Stock issued, including related tax benefits
613

 
889

 
2,675

 

 

 
3,374

 
6,938

Stock-based compensation awards

 

 
4,371

 

 

 

 
4,371

Acquisition of treasury stock
(3,976
)
 
 
 
 
 
 
 
 
 
(50,000
)
 
(50,000
)
Settlement of accelerated stock repurchase agreement
(1,790
)
 
 
 
20,000

 
 
 
 
 
(20,000
)
 
—

Common stock cash dividends - $0.27 per share

 

 

 
(47,540
)
 

 

 
(47,540
)
Balance at September 30, 2015
173,771

 
$
546,444

 
$
1,447,569

 
$
622,237

 
$
(13,219
)
 
$
(577,127
)
 
$
2,025,904

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2013
192,652

 
$
544,568

 
$
1,432,974

 
$
463,843

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

Net income

 

 

 
119,945

 

 

 
119,945

Other comprehensive income

 

 

 

 
25,393

 

 
25,393

Stock issued, including related tax benefits
506

 
639

 
1,059

 

 

 
3,767

 
5,465

Stock-based compensation awards

 

 
4,310

 

 

 

 
4,310

Acquisition of treasury stock
(8,000
)
 
 
 
 
 
 
 
 
 
(95,255
)
 
(95,255
)
Common stock cash dividends - $0.24 per share

 

 

 
(45,039
)
 

 

 
(45,039
)
Balance at September 30, 2014
185,158

 
$
545,207

 
$
1,438,343

 
$
538,749

 
$
(11,948
)
 
$
(432,345
)
 
$
2,078,006

 
 
 
 
 
 
 
 
 
 
 
 
 
 
See Notes to Consolidated Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 

6






CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
(in thousands)
 
Nine months ended September 30
 
2015
 
2014
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net Income
$
110,967

 
$
119,945

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for credit losses
(500
)
 
9,500

Depreciation and amortization of premises and equipment
20,302

 
18,412

Net amortization of investment securities premiums
5,369

 
4,399

Net gains on sales of investment securities
(8,290
)
 
(1,193
)
Net increase in loans held for sale
(9,415
)
 
(3,861
)
Amortization of intangible assets
241

 
944

Stock-based compensation
4,371

 
4,310

Excess tax benefits from stock-based compensation
(86
)
 
(54
)
Loss on redemption of trust preferred securities
5,626

 
—

(Increase) decrease in accrued interest receivable
(1,028
)
 
493

Decrease (increase) in other assets
6,683

 
(1,909
)
(Decrease) increase in accrued interest payable
(3,318
)
 
2,207

Increase (decrease) in other liabilities
3,995

 
(5,315
)
Total adjustments
23,950

 
27,933

Net cash provided by operating activities
134,917

 
147,878

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Proceeds from sales of securities available for sale
29,309

 
15,219

Proceeds from maturities of securities available for sale
317,813

 
273,688

Purchase of securities available for sale
(444,111
)
 
(164,676
)
Increase in short-term investments
(156,837
)
 
(129,418
)
Net increase in loans
(440,681
)
 
(271,494
)
Net purchases of premises and equipment
(19,980
)
 
(16,832
)
Net cash used in investing activities
(714,487
)
 
(293,513
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Net increase in demand and savings deposits
852,611

 
768,979

Net (decrease) increase in time deposits
(135,723
)
 
73,462

Increase (decrease) in short-term borrowings
101,912

 
(693,677
)
Additions to long-term debt
347,778

 
140,000

Repayments of long-term debt
(509,606
)
 
(5,295
)
Net proceeds from issuance of common stock
6,852

 
5,411

Excess tax benefits from stock-based compensation
86

 
54

Dividends paid
(46,239
)
 
(45,638
)
Acquisition of treasury stock
(50,000
)
 
(95,255
)
Net cash provided by financing activities
567,671

 
148,041

Net (Decrease) Increase in Cash and Due From Banks
(11,899
)
 
2,406

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

 
218,540

Cash and Due From Banks at End of Period
$
93,803

 
$
220,946

Supplemental Disclosures of Cash Flow Information:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
67,352

 
$
57,448

Income taxes
9,168

 
16,632

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 nine months ended September 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 benefit, and the income tax credits earned on the investments recorded in income taxes on the consolidated income statements was $2.3 million and $2.1 million for the three months ended September 30, 2015 and 2014, respectively, and $7.1 million and $7.4 million for the nine months ended September 30, 2015 and 2014, respectively. As of September 30, 2015 and December 31, 2014, the Corporation’s tax credit investments, included in other assets on the consolidated balance sheets, totaled $164.0 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 nine months ended September 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" and updated ASC Update 2015-03 with the issuance of ASC Update 2015-15, “Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements,” in August of 2015. 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

8





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.

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 September 30
 
Nine months ended September 30
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Weighted average shares outstanding (basic)
174,338

 
186,109

 
176,399

 
187,893

Impact of common stock equivalents
1,004

 
846

 
1,029

 
970

Weighted average shares outstanding (diluted)
175,342

 
186,955

 
177,428

 
188,863

For the three and nine months ended September 30, 2015, 1.5 million and 1.8 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 nine months ended September 30, 2014, 2.5 million and 2.9 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 September 30, 2015
 
 
 
 
 
Unrealized gain on securities
$
12,088

 
$
(4,231
)
 
$
7,857

Reclassification adjustment for securities gains included in net income (1)
(1,730
)
 
606

 
(1,124
)
Reclassification adjustment for loss on derivative financial instruments included in net income (2)
3,778

 
(1,322
)
 
2,456

Amortization of unrealized loss on derivative financial instruments
5

 
(2
)
 
3

Amortization of net unrecognized pension and postretirement items (3)
717

 
(251
)
 
466

Total Other Comprehensive Income
$
14,858

 
$
(5,200
)
 
$
9,658

Three months ended September 30, 2014
 
 
 
 
 
Unrealized loss on securities
$
(4,629
)
 
$
1,618

 
$
(3,011
)
Reclassification adjustment for securities gains included in net income (1)
(81
)
 
29

 
(52
)
Non-credit related unrealized gains on other-than-temporarily impaired debt securities
212

 
(74
)
 
138

Amortization of unrealized loss on derivative financial instruments
52

 
(18
)
 
34

Amortization of net unrecognized pension and postretirement items (3)
160

 
(56
)
 
104

Total Other Comprehensive Loss
$
(4,286
)
 
$
1,499

 
$
(2,787
)
 
 
 
 
 
 
Nine months ended September 30, 2015
 
 
 
 
 
Unrealized gain on securities
$
8,987

 
$
(3,146
)
 
$
5,841

Reclassification adjustment for securities gains included in net income (1)
(8,290
)
 
2,902

 
(5,388
)
Reclassification adjustment for loss on derivative financial instruments included in net income (2)
3,778

 
(1,322
)
 
2,456

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

 
(67
)
 
125

Amortization of unrealized loss on derivative financial instruments
110

 
(39
)
 
71

Amortization of net unrecognized pension and postretirement items (3)
2,151

 
(753
)
 
1,398

Total Other Comprehensive Income
$
6,928

 
$
(2,425
)
 
$
4,503

Nine months ended September 30, 2014
 
 
 
 
 
Unrealized gain on securities
$
36,790

 
$
(12,878
)
 
$
23,912

Reclassification adjustment for securities gains included in net income (1)
(1,193
)
 
418

 
(775
)
Reclassification adjustment for postretirement gains included in net income (3)
(1,452
)
 
508

 
(944
)
Non-credit related unrealized gains (losses) on other-than-temporarily impaired debt securities
1,000

 
(350
)
 
650

Amortization of unrealized loss on derivative financial instruments
157

 
(55
)
 
102

Unrecognized pension and postretirement income
3,291

 
(1,147
)
 
2,144

Amortization of net unrecognized pension and postretirement items (3)
469

 
(165
)
 
304

Total Other Comprehensive Income
$
39,062

 
$
(13,669
)
 
$
25,393


(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)
Amount reclassified out of accumulated other comprehensive income. Before-tax amount included within "Loss on Redemption of Trust Preferred Securities" on the consolidated statements of income. See Note 15, "Long-Term Debt," for additional details.
(3)
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 September 30, 2015
 
 
 
 
 
 
 
 
 
Balance at June 30, 2015
$
830

 
$
344

 
$
(2,478
)
 
$
(21,573
)
 
$
(22,877
)
Other comprehensive loss before reclassifications
7,857

 
—

 
—

 
—

 
7,857

Amounts reclassified from accumulated other comprehensive income (loss)
(1,124
)
 
—

 
3

 
466

 
(655
)
Reclassification adjustment for loss on derivative financial instruments included in net income
—

—

—

 
2,456

—

—

 
2,456

Balance at September 30, 2015
$
7,563

 
$
344

 
$
(19
)
 
$
(21,107
)
 
$
(13,219
)
Three months ended September 30, 2014

 

 
 
 

 

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

 
$
(2,614
)
 
$
(7,401
)
 
$
(9,161
)
Other comprehensive income before reclassifications
(3,011
)


138

 
—

 
—

 
(2,873
)
Amounts reclassified from accumulated other comprehensive income (loss)
(63
)
 
11

 
34

 
104

 
86

Balance at September 30, 2014
$
(3,654
)
 
$
1,583

 
$
(2,580
)
 
$
(7,297
)
 
$
(11,948
)
 
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2015
 
 
 
 
 
 
 
 
 
Balance at December 31, 2014
$
5,980

 
$
1,349

 
$
(2,546
)
 
$
(22,505
)
 
$
(17,722
)
Other comprehensive income before reclassifications
5,841

 
125

 
—

 
—

 
5,966

Amounts reclassified from accumulated other comprehensive income (loss)
(4,258
)
 
(1,130
)
 
71

 
1,398

 
(3,919
)
Reclassification adjustment for loss on derivative financial instruments included in net income
—

 
—

 
2,456

 
—

 
2,456

Balance at September 30, 2015
$
7,563

 
$
344

 
$
(19
)
 
$
(21,107
)
 
$
(13,219
)
Nine months ended September 30, 2014
 
 
 
 
 
 
 
 
 
Balance at December 31, 2013
$
(27,510
)
 
$
1,652

 
$
(2,682
)
 
$
(8,801
)
 
$
(37,341
)
Other comprehensive income before reclassifications
23,912

 
650

 
—

 
2,144

 
26,706

Amounts reclassified from accumulated other comprehensive income (loss)
(56
)
 
(719
)
 
102

 
(640
)
 
(1,313
)
Balance at September 30, 2014
$
(3,654
)
 
$
1,583

 
$
(2,580
)
 
$
(7,297
)
 
$
(11,948
)


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)
September 30, 2015
 
 
 
 
 
 
 
Equity securities
$
16,087

 
$
7,453

 
$
(8
)
 
$
23,532

U.S. Government sponsored agency securities
48,320

 
231

 
—

 
48,551

State and municipal securities
234,868

 
5,430

 
(62
)
 
240,236

Corporate debt securities
102,297

 
2,935

 
(5,291
)
 
99,941

Collateralized mortgage obligations
879,738

 
5,638

 
(11,077
)
 
874,299

Mortgage-backed securities
1,036,193

 
16,845

 
(1,133
)
 
1,051,905

Auction rate securities
106,661

 
—

 
(8,788
)
 
97,873

 
$
2,424,164

 
$
38,532

 
$
(26,359
)
 
$
2,436,337

 
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 $1.8 billion as of September 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 $22.4 million at September 30, 2015 and $41.8 million at December 31, 2014) and other equity investments (estimated fair value of $1.1 million at September 30, 2015 and $5.8 million at December 31, 2014).
As of September 30, 2015, the financial institutions stock portfolio had a cost basis of $15.1 million and an estimated fair value of $22.4 million, including an investment in a single financial institution with a cost basis of $8.5 million and an estimated fair value of $12.8 million. The estimated fair value of this investment accounted for 57.1% 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 September 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
 
$
62,247

 
$
63,023

Due from one year to five years
 
104,989

 
107,283

Due from five years to ten years
 
132,930

 
136,571

Due after ten years
 
191,980

 
179,724

 
 
492,146

 
486,601

Collateralized mortgage obligations
 
879,738

 
874,299

Mortgage-backed securities
 
1,036,193

 
1,051,905

 
 
$
2,408,077

 
$
2,412,805

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 September 30, 2015
(in thousands)
Equity securities
$
1,730

 
$
—

 
$
—

 
$
1,730

Debt securities
—

 
—

 
—

 
—

Total
$
1,730

 
$
—

 
$
—

 
$
1,730

Three months ended September 30, 2014
 
 
 
 
 
 
 
Equity securities
$
99

 
$
—

 
$
—

 
$
99

Debt securities
—

 
—

 
(18
)
 
(18
)
Total
$
99

 
$
—

 
$
(18
)
 
$
81

 
 
 
 
 
 
 
 
Nine months ended September 30, 2015
 
 
 
 
 
 
 
Equity securities
$
5,990

 
$
—

 
$
—

 
$
5,990

Debt securities
2,300

 
—

 
—

 
2,300

Total
$
8,290

 
$
—

 
$
—

 
$
8,290

Nine months ended September 30, 2014
 
 
 
 
 
 
 
Equity securities
$
100

 
$
—

 
$
(12
)
 
$
88

Debt securities
1,446

 
(323
)
 
(18
)
 
1,105

Total
$
1,546

 
$
(323
)
 
$
(30
)
 
$
1,193










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 September 30, 2015 and 2014:
 
Three months ended September 30
 
Nine months ended September 30
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Balance of cumulative credit losses on debt securities, beginning of period
$
(11,510
)
 
$
(17,214
)
 
$
(16,242
)
 
$
(20,691
)
Additions for credit losses recorded which were not previously recognized as components of earnings
—

 
(18
)
 
—

 
(18
)
Reductions for securities sold during the period
—

 
—

 
4,730

 
3,472

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

 
—

 
2

 
5

Balance of cumulative credit losses on debt securities, end of period
$
(11,510
)
 
$
(17,232
)
 
$
(11,510
)
 
$
(17,232
)
The following table presents the gross unrealized losses and estimated fair values of investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 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
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

State and municipal securities
11,892

 
(62
)
 
—

 
—

 
11,892

 
(62
)
Corporate debt securities
7,968

 
(15
)
 
33,718

 
(5,276
)
 
41,686

 
(5,291
)
Collateralized mortgage obligations
30,723

 
(62
)
 
493,703

 
(11,015
)
 
524,426

 
(11,077
)
Mortgage-backed securities
161,097

 
(443
)
 
67,071

 
(690
)
 
228,168

 
(1,133
)
Auction rate securities
—

 
—

 
97,873

 
(8,788
)
 
97,873

 
(8,788
)
Total debt securities
211,680

 
(582
)
 
692,365

 
(25,769
)
 
904,045

 
(26,351
)
Equity securities
—

 
—

 
13

 
(8
)
 
13

 
(8
)
 
$
211,680

 
$
(582
)
 
$
692,378

 
$
(25,777
)
 
$
904,058

 
$
(26,359
)
The Corporation’s collateralized mortgage obligations and mortgage-backed securities have contractual terms that generally do not permit the issuer to settle the securities at a price less than the amortized cost of the investment. Because the decline in market value of these securities is attributable to changes in interest rates and not credit quality, and because the Corporation does not have the intent to sell and does not believe it will more likely than not be required to sell any of these securities prior to a recovery of their fair value to amortized cost, the Corporation does not consider these investments to be other-than-temporarily impaired as of September 30, 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 September 30, 2015, all of the ARCs were rated above investment grade, with approximately $5.4 million, or 6%, "AAA" rated and $92.4 million, or 94%, "AA" rated. All of the loans underlying the ARCs have principal payments which are guaranteed by the federal government.
As of September 30, 2015, all ARCs were current and making scheduled interest payments. Based on management’s evaluations, ARCs with an estimated fair value of $97.9 million were not subject to any other-than-temporary impairment charges as of September 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,

14





the Corporation does not consider those investments with unrealized holding losses as of September 30, 2015 to be other-than-temporarily impaired.
The majority of the Corporation's available for sale corporate debt securities are issued by financial institutions. The following table presents the amortized cost and estimated fair value of corporate debt securities:
 
September 30, 2015
 
December 31, 2014
 
Amortized
cost
 
Estimated
fair value
 
Amortized
cost
 
Estimated
fair value
 
(in thousands)
Single-issuer trust preferred securities
$
46,624

 
$
41,787

 
$
47,569

 
$
42,016

Subordinated debt
51,625

 
53,576

 
47,530

 
50,023

Pooled trust preferred securities
—

 
530

 
2,010

 
4,088

Corporate debt securities issued by financial institutions
98,249

 
95,893

 
97,109

 
96,127

Other corporate debt securities
4,048

 
4,048

 
1,907

 
1,907

Available for sale corporate debt securities
$
102,297

 
$
99,941

 
$
99,016

 
$
98,034


The Corporation’s investments in single-issuer trust preferred securities had an unrealized loss of $4.8 million at September 30, 2015. The Corporation did not record any other-than-temporary impairment charges for single-issuer trust preferred securities during the three or nine months ended September 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 $13.2 million at September 30, 2015. All of the single-issuer trust preferred securities rated below investment grade were rated "BB" or "Ba". Two single-issuer trust preferred securities with an amortized cost of $3.7 million and an estimated fair value of $2.7 million at September 30, 2015 were not rated by any ratings agency.
During the nine months ended September 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 September 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 $99.9 million were not subject to any other-than-temporary impairment charges as of September 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:
 
September 30,
2015
 
December 31, 2014
 
(in thousands)
Real-estate - commercial mortgage
$
5,339,928

 
$
5,197,155

Commercial - industrial, financial and agricultural
3,929,908

 
3,725,567

Real-estate - home equity
1,693,649

 
1,736,688

Real-estate - residential mortgage
1,382,085

 
1,377,068

Real-estate - construction
769,565

 
690,601

Consumer
271,696

 
265,431

Leasing and other
161,911

 
127,562

Overdrafts
2,614

 
4,021

Loans, gross of unearned income
13,551,356

 
13,124,093

Unearned income
(14,995
)
 
(12,377
)
Loans, net of unearned income
$
13,536,361

 
$
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:
 
September 30,
2015
 
December 31,
2014
 
(in thousands)
Allowance for loan losses
$
167,136

 
$
184,144

Reserve for unfunded lending commitments
2,259

 
1,787

Allowance for credit losses
$
169,395

 
$
185,931







16





The following table presents the activity in the allowance for credit losses:
 
Three months ended September 30
 
Nine months ended September 30
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Balance at beginning of period
$
169,453

 
$
193,442

 
$
185,931

 
$
204,917

Loans charged off
(5,561
)
 
(9,604
)
 
(26,697
)
 
(31,348
)
Recoveries of loans previously charged off
4,503

 
3,770

 
10,661

 
8,039

Net loans charged off
(1,058
)
 
(5,834
)
 
(16,036
)
 
(23,309
)
Provision for credit losses
1,000

 
3,500

 
(500
)
 
9,500

Balance at end of period
$
169,395

 
$
191,108

 
$
169,395

 
$
191,108


The following table presents the activity in the allowance for loan losses by portfolio segment:
 
Real Estate -
Commercial
Mortgage
 
Commercial -
Industrial,
Financial and
Agricultural
 
Real Estate -
Home
Equity
 
Real Estate -
Residential
Mortgage
 
Real Estate -
Construction
 
Consumer
 
Leasing
and other
and
overdrafts
 
Unallocated
 
Total
 
(in thousands)
Three months ended September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at June 30, 2015
$
50,680

 
$
49,170

 
$
22,506

 
$
22,787

 
$
7,749

 
$
2,608

 
$
1,615

 
$
10,370

 
$
167,485

Loans charged off
(660
)
 
(1,640
)
 
(940
)
 
(1,035
)
 
(114
)
 
(650
)
 
(522
)
 
—

 
(5,561
)
Recoveries of loans previously charged off
842

 
1,598

 
304

 
201

 
898

 
314

 
346

 
—

 
4,503

Net loans charged off
182

 
(42
)
 
(636
)
 
(834
)
 
784

 
(336
)
 
(176
)
 
—

 
(1,058
)
Provision for loan losses (1)
825

 
(405
)
 
180

 
(609
)
 
(964
)
 
282

 
223

 
1,177

 
709

Balance at September 30, 2015
$
51,687

 
$
48,723

 
$
22,050

 
$
21,344

 
$
7,569

 
$
2,554

 
$
1,662

 
$
11,547

 
$
167,136

Three months ended September 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at June 30, 2014
$
49,842

 
$
49,084

 
$
32,041

 
$
32,744

 
$
11,331

 
$
3,306

 
$
1,851

 
$
11,486

 
$
191,685

Loans charged off
(1,557
)
 
(5,167
)
 
(1,492
)
 
(231
)
 
(313
)
 
(538
)
 
(306
)
 
—

 
(9,604
)
Recoveries of loans previously charged off
1,167

 
1,013

 
336

 
95

 
470

 
448

 
241

 
—

 
3,770

Net loans charged off
(390
)
 
(4,154
)
 
(1,156
)
 
(136
)
 
157

 
(90
)
 
(65
)
 
—

 
(5,834
)
Provision for loan losses (1)
(278
)
 
6,110

 
406

 
397

 
(312
)
 
244

 
180

 
(3,121
)
 
3,626

Balance at September 30, 2014
$
49,174

 
$
51,040