Document


 
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, 2016, 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 –173,060,000 shares outstanding as of July 29, 2016.

1


FULTON FINANCIAL CORPORATION
FORM 10-Q FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2016
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,
2016
 
December 31,
2015
 
(unaudited)
 
ASSETS
 
 
 
Cash and due from banks
$
84,647

 
$
101,120

Interest-bearing deposits with other banks
348,232

 
230,300

Federal Reserve Bank and Federal Home Loan Bank stock
59,854

 
62,216

Loans held for sale
34,330

 
16,886

Available for sale investment securities
2,529,724

 
2,484,773

Loans, net of unearned income
14,155,159

 
13,838,602

Less: Allowance for loan losses
(162,546
)
 
(169,054
)
Net Loans
13,992,613

 
13,669,548

Premises and equipment
228,861

 
225,535

Accrued interest receivable
43,316

 
42,767

Goodwill and intangible assets
531,556

 
531,556

Other assets
626,902

 
550,017

Total Assets
$
18,480,035

 
$
17,914,718

LIABILITIES
 
 
 
Deposits:
 
 
 
Noninterest-bearing
$
4,125,375

 
$
3,948,114

Interest-bearing
10,167,189

 
10,184,203

Total Deposits
14,292,564

 
14,132,317

Short-term borrowings:
 
 
 
Federal funds purchased
449,184

 
197,235

Other short-term borrowings
273,030

 
300,428

Total Short-Term Borrowings
722,214

 
497,663

Accrued interest payable
8,336

 
10,724

Other liabilities
384,372

 
282,578

Federal Home Loan Bank advances and long-term debt
965,552

 
949,542

Total Liabilities
16,373,038

 
15,872,824

SHAREHOLDERS’ EQUITY
 
 
 
Common stock, $2.50 par value, 600 million shares authorized, 219.0 million shares issued in 2016 and 218.9 million shares issued in 2015
547,530

 
547,141

Additional paid-in capital
1,455,351

 
1,450,690

Retained earnings
686,635

 
641,588

Accumulated other comprehensive income (loss)
7,689

 
(22,017
)
Treasury stock, at cost, 45.9 million shares in 2016 and 44.7 million shares in 2015
(590,208
)
 
(575,508
)
Total Shareholders’ Equity
2,106,997

 
2,041,894

Total Liabilities and Shareholders’ Equity
$
18,480,035

 
$
17,914,718

 
 
 
 
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
 
2016
 
2015
 
2016
 
2015
INTEREST INCOME
 
 
 
 
 
 
 
Loans, including fees
$
134,643

 
$
129,910

 
$
268,722

 
$
259,687

Investment securities:
 
 
 
 
 
 
 
Taxable
11,159

 
10,944

 
23,162

 
22,226

Tax-exempt
2,320

 
1,881

 
4,360

 
3,968

Dividends
135

 
296

 
295

 
644

Loans held for sale
188

 
265

 
319

 
438

Other interest income
864

 
933

 
1,762

 
3,038

Total Interest Income
149,309

 
144,229

 
298,620

 
290,001

INTEREST EXPENSE
 
 
 
 
 
 
 
Deposits
10,887

 
10,053

 
21,614

 
19,876

Short-term borrowings
217

 
103

 
485

 
180

Long-term debt
9,289

 
11,153

 
18,551

 
23,444

Total Interest Expense
20,393

 
21,309

 
40,650

 
43,500

Net Interest Income
128,916

 
122,920

 
257,970

 
246,501

Provision for credit losses
2,511

 
2,200

 
4,041

 
(1,500
)
Net Interest Income After Provision for Credit Losses
126,405

 
120,720

 
253,929

 
248,001

NON-INTEREST INCOME
 
 
 
 
 
 
 
Other service charges and fees
12,983

 
10,988

 
23,733

 
20,351

Service charges on deposit accounts
12,896

 
12,637

 
25,454

 
24,206

Investment management and trust services
11,247

 
11,011

 
22,235

 
21,900

Mortgage banking income
3,897

 
5,339

 
7,927

 
10,027

Investment securities gains, net
76

 
2,415

 
1,023

 
6,560

Other
5,038

 
4,099

 
8,902

 
8,182

Total Non-Interest Income
46,137

 
46,489

 
89,274

 
91,226

NON-INTEREST EXPENSE
 
 
 
 
 
 
 
Salaries and employee benefits
70,029

 
65,067

 
139,401

 
130,057

Net occupancy expense
11,811

 
11,809

 
24,031

 
25,501

Other outside services
5,508

 
8,125

 
11,564

 
13,875

Data processing
5,476

 
4,894

 
10,876

 
9,662

Software
3,953

 
3,376

 
7,874

 
6,694

Professional fees
3,353

 
2,731

 
5,686

 
5,602

FDIC insurance expense
2,960

 
2,885

 
5,909

 
5,707

Equipment expense
2,872

 
3,335

 
6,243

 
7,293

Supplies and postage
2,706

 
2,726

 
5,285

 
5,095

Marketing
1,916

 
2,235

 
3,540

 
3,468

Telecommunications
1,459

 
1,617

 
2,947

 
3,333

Operating risk loss
986

 
674

 
1,526

 
1,501

Other real estate owned and repossession expense
365

 
129

 
1,003

 
1,491

Intangible amortization
—

 
106

 
—

 
236

Other
8,243

 
8,645

 
16,165

 
17,317

Total Non-Interest Expense
121,637

 
118,354

 
242,050

 
236,832

Income Before Income Taxes
50,905

 
48,855

 
101,153

 
102,395

Income taxes
11,155

 
12,175

 
23,146

 
25,679

Net Income
$
39,750

 
$
36,680

 
$
78,007

 
$
76,716

 
 
 
 
 
 
 
 
PER SHARE:
 
 
 
 
 
 
 
Net Income (Basic)
$
0.23

 
$
0.21

 
$
0.45

 
$
0.43

Net Income (Diluted)
0.23

 
0.21

 
0.45

 
0.43

Cash Dividends
0.10

 
0.09

 
0.19

 
0.18

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
 
2016
 
2015
 
2016
 
2015
 
 
Net Income
$
39,750

 
$
36,680

 
$
78,007

 
$
76,716

Other Comprehensive Income (Loss), net of tax:
 
 
 
 
 
 
 
Unrealized gain (loss) on securities
12,839

 
(12,008
)
 
29,865

 
(2,016
)
Reclassification adjustment for securities gains included in net income
(49
)
 
(1,569
)
 
(665
)
 
(4,264
)
Non-credit related unrealized gain on other-than-temporarily impaired debt securities
—

 
—

 
—

 
125

Amortization of unrealized loss on derivative financial instruments
4

 
34

 
8

 
68

Amortization of net unrecognized pension and postretirement items
32

 
466

 
498

 
932

Other Comprehensive Income (Loss)
12,826

 
(13,077
)
 
29,706

 
(5,155
)
Total Comprehensive Income
$
52,576

 
$
23,603

 
$
107,713

 
$
71,561

 
 
 
 
 
 
 
 
See Notes to Consolidated Financial Statements
 
 
 
 
 
 
 


5



CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2016 AND 2015
 
(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, 2015
174,176

 
$
547,141

 
$
1,450,690

 
$
641,588

 
$
(22,017
)
 
$
(575,508
)
 
$
2,041,894

Net income

 

 

 
78,007

 

 

 
78,007

Other comprehensive income

 

 

 

 
29,706

 

 
29,706

Stock issued, including related tax benefits
273

 
389

 
1,405

 

 

 
1,554

 
3,348

Stock-based compensation awards

 

 
3,256

 

 

 

 
3,256

Acquisition of treasury stock
(1,310
)
 
 
 
 
 
 
 
 
 
(16,254
)
 
(16,254
)
Common stock cash dividends - $0.19 per share

 

 

 
(32,960
)
 

 

 
(32,960
)
Balance at June 30, 2016
173,139

 
$
547,530

 
$
1,455,351

 
$
686,635

 
$
7,689

 
$
(590,208
)
 
$
2,106,997

 
 
 
 
 
 
 
 
 
 
 
 
 
 
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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
See Notes to Consolidated Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 

6


CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
(in thousands)
 
Six months ended June 30
 
2016
 
2015
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net Income
$
78,007

 
$
76,716

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for credit losses
4,041

 
(1,500
)
Depreciation and amortization of premises and equipment
13,804

 
13,920

Net amortization of investment securities premiums
4,647

 
3,288

Investment securities gains, net
(1,023
)
 
(6,560
)
Gain on sales of mortgage loans held for sale
(7,110
)
 
(7,961
)
Proceeds from sales of mortgage loans held for sale
304,516

 
406,703

Originations of mortgage loans held for sale
(314,850
)
 
(415,200
)
Amortization of intangible assets
—

 
236

Amortization of issuance costs on long-term debt
193

 
279

Stock-based compensation
3,256

 
2,838

Excess tax benefits from stock-based compensation
(28
)
 
(63
)
(Increase) decrease in accrued interest receivable
(549
)
 
625

(Increase) decrease in other assets
(18,268
)
 
10,181

Decrease in accrued interest payable
(2,388
)
 
(2,873
)
Increase (decrease) in other liabilities
9,866

 
(3,322
)
Total adjustments
(3,893
)
 
591

Net cash provided by operating activities
74,114

 
77,307

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Proceeds from sales of securities available for sale
84,972

 
18,815

Proceeds from maturities of securities available for sale
282,832

 
205,620

Purchase of securities available for sale
(355,220
)
 
(346,322
)
(Increase) decrease in short-term investments
(115,570
)
 
35,759

Net increase in loans
(326,902
)
 
(147,492
)
Net purchases of premises and equipment
(17,130
)
 
(14,687
)
Net cash used in investing activities
(447,018
)
 
(248,307
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Net increase in demand and savings deposits
202,552

 
205,901

Net decrease in time deposits
(42,305
)
 
(67,698
)
Increase in short-term borrowings
224,551

 
79,316

Additions to long-term debt
16,000

 
148,099

Repayments of long-term debt
(183
)
 
(155,150
)
Net proceeds from issuance of common stock
3,320

 
4,632

Excess tax benefits from stock-based compensation
28

 
63

Dividends paid
(31,278
)
 
(30,397
)
Acquisition of treasury stock
(16,254
)
 
(19,013
)
Net cash provided by financing activities
356,431

 
165,753

Net Decrease in Cash and Due From Banks
(16,473
)
 
(5,247
)
Cash and Due From Banks at Beginning of Period
101,120

 
105,702

Cash and Due From Banks at End of Period
$
84,647

 
$
100,455

Supplemental Disclosures of Cash Flow Information:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
43,038

 
$
46,373

Income taxes
9,087

 
11,051

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, 2015. Operating results for the three and six months ended June 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016. The Corporation evaluates subsequent events through the date of filing of this Form 10-Q with the Securities and Exchange Commission ("SEC").

Recently Issued Accounting Standards

In May 2014, the Financial Accounting Standards Board ("FASB") issued ASC Update 2014-09, "Revenue from Contracts with Customers." This standards update establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific 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. The standard applies to all contracts with customers, except those that are within the scope of other topics in the FASB ASC. The standard also requires significantly expanded disclosures about revenue recognition. During the first half of 2016, the FASB issued amendments to this standard (ASC Updates 2016-08, 2016-10, 2016-11 and 2016-12). These amendments provide further clarification to the standard. For public business entities, ASC Update 2014-09 is effective for interim and annual reporting periods beginning after December 15, 2017. Early application is not permitted. For the Corporation, this standards update is effective with its March 31, 2018 quarterly report on Form 10-Q. The Corporation is currently evaluating the impact of the adoption of ASC Update 2014-09 on its consolidated financial statements.

In January 2016, the FASB issued ASC Update 2016-01, "Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities." ASC Update 2016-01 provides guidance regarding the income statement impact of equity investments held by an entity and the recognition of changes in fair value of financial liabilities when the fair value option is elected. ASC Update 2016-01 is effective for public business entities' annual and interim reporting periods beginning after December 15, 2017, with earlier adoption permitted. The Corporation intends to adopt this standards update effective with its March 31, 2018 quarterly report on Form 10-Q and does not expect the adoption of ASC Update 2016-01 to have a material impact on its consolidated financial statements.

In February 2016, the FASB issued ASC Update 2016-02, "Leases." This standards update states that a lessee should recognize the assets and liabilities that arise from all leases with a term greater than 12 months. The core principle requires the lessee to recognize a liability to make lease payments and a "right-of-use" asset. The accounting applied by the lessor is relatively unchanged. The standards update also requires expanded qualitative and quantitative disclosures. For public business entities, ASC Update 2016-02 is effective for interim and annual reporting periods beginning after December 15, 2018. ASC Update 2016-02 mandates a modified retrospective transition for all entities. Early application is permitted. For the Corporation, this standards update is effective with its March 31, 2019 quarterly report on Form 10-Q. The Corporation is currently evaluating the impact of the adoption of ASC Update 2016-02 on its consolidated financial statements.

In March 2016, the FASB issued ASC Update 2016-09, "Stock Compensation: Improvements to Employee Share-Based Payment Accounting." The purpose of this standards update is to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liability, and classification on the statement of cash flows. ASC Update 2016-09 is effective for interim and annual reporting periods beginning after December 15, 2016. Early application is 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 adoption of ASC Update 2016-09 on its consolidated financial statements.


8


In June 2016, the FASB issued ASC Update 2016-13, "Financial Instruments - Credit Losses." The new impairment model prescribed by this standards update is a single impairment model for all financial assets (i.e., loans and investments). The recognition of credit losses would be based on an entity’s current estimate of expected losses (referred to as the Current Expected Credit Loss model, or "CECL"), as opposed to recognition of losses only when they are probable (current practice). ASC Update 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019. Early adoption is permitted. For the Corporation, this standards update is effective with its March 31, 2020 quarterly report on Form 10-Q. The Corporation is currently evaluating the impact of the adoption of ASC Update 2016-13 on its consolidated financial statements.

Reclassifications

Certain amounts in the 2015 consolidated financial statements and notes have been reclassified to conform to the 2016 presentation.

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
 
2016
 
2015
 
2016
 
2015
 
(in thousands)
Weighted average shares outstanding (basic)
173,394

 
176,433

 
173,363

 
177,446

Impact of common stock equivalents
924

 
1,098

 
1,004

 
1,042

Weighted average shares outstanding (diluted)
174,318

 
177,531

 
174,367

 
178,488

For the three and six months ended June 30, 2016, 802,000 and 844,000 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, 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.

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, 2016
 
 
 
 
 
Unrealized gain on securities
$
19,753

 
$
(6,914
)
 
$
12,839

Reclassification adjustment for securities gains included in net income (1)
(76
)
 
27

 
(49
)
Amortization of unrealized loss on derivative financial instruments (2)
6

 
(2
)
 
4

Amortization of net unrecognized pension and postretirement items (3)
49

 
(17
)
 
32

Total Other Comprehensive Income
$
19,732

 
$
(6,906
)
 
$
12,826

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
)
Amortization of unrealized loss on derivative financial instruments(2)
52

 
(18
)
 
34

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

 
(251
)
 
466

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

 
$
(13,077
)
 
 
 
 
 
 
Six months ended June 30, 2016
 
 
 
 
 
Unrealized gain on securities
$
45,946

 
$
(16,081
)
 
$
29,865

Reclassification adjustment for securities gains included in net income (1)
(1,023
)
 
358

 
(665
)
Amortization of unrealized loss on derivative financial instruments (2)
12

 
(4
)
 
8

Amortization of net unrecognized pension and postretirement items (3)
766

 
(268
)
 
498

Total Other Comprehensive Income
$
45,701

 
$
(15,995
)
 
$
29,706

 
 
 
 
 
 
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 on other-than-temporarily impaired debt securities
192

 
(67
)
 
125

Amortization of unrealized loss on derivative financial instruments (2)
104

 
(36
)
 
68

Amortization of net unrecognized pension and postretirement items (3)
1,434

 
(502
)
 
932

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

 
$
(5,155
)

(1)
Amounts reclassified out of accumulated other comprehensive income. Before-tax amounts included in "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 in "Interest expense" on the consolidated statements of income.
(3)
Amounts reclassified out of accumulated other comprehensive income. Before-tax amounts included in "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, 2016
 
 
 
 
 
 
 
 
 
Balance at March 31, 2016
$
9,911

 
$
458

 
$
(11
)
 
$
(15,495
)
 
$
(5,137
)
Other comprehensive income before reclassifications
12,839

 
—

 
—

 
—

 
12,839

Amounts reclassified from accumulated other comprehensive income (loss)
(49
)
 
—

 
4

 
32

 
(13
)
Balance at June 30, 2016
$
22,701

 
$
458

 
$
(7
)
 
$
(15,463
)
 
$
7,689

Three months ended June 30, 2015

 

 
 
 

 

Balance at March 31, 2015
$
14,311

 
$
440

 
$
(2,512
)
 
$
(22,039
)
 
$
(9,800
)
Other comprehensive income 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
)
 
 
 
 
 
 
 
 
 
 
Six months ended June 30, 2016
 
 
 
 
 
 
 
 
 
Balance at December 31, 2015
$
(6,499
)
 
$
458

 
$
(15
)
 
$
(15,961
)
 
$
(22,017
)
Other comprehensive income before reclassifications
29,865

 
—

 
—

 
—

 
29,865

Amounts reclassified from accumulated other comprehensive income (loss)
(665
)
 
—

 
8

 
498

 
(159
)
Balance at June 30, 2016
$
22,701

 
$
458

 
$
(7
)
 
$
(15,463
)
 
$
7,689

Six months ended June 30, 2015
 
 
 
 
 
 
 
 
 
Balance at December 31, 2014
$
5,980

 
$
1,349

 
$
(2,546
)
 
$
(22,505
)
 
$
(17,722
)
Other comprehensive income 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
)


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, 2016
 
 
 
 
 
 
 
U.S. Government sponsored agency securities
$
143

 
$
3

 
$
—

 
$
146

State and municipal securities
333,246

 
12,101

 
—

 
345,347

Corporate debt securities
95,419

 
3,001

 
(6,873
)
 
91,547

Collateralized mortgage obligations
701,853

 
5,951

 
(1,458
)
 
706,346

Mortgage-backed securities
1,242,267

 
25,501

 
(5
)
 
1,267,763

Auction rate securities
106,949

 
—

 
(9,063
)
 
97,886

   Total debt securities
2,479,877

 
46,557

 
(17,399
)
 
2,509,035

Equity securities
14,210

 
6,493

 
(14
)
 
20,689

   Total
$
2,494,087

 
$
53,050

 
$
(17,413
)
 
$
2,529,724

 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
 
(in thousands)
December 31, 2015
 
 
 
 
 
 
 
U.S. Government sponsored agency securities
$
25,154

 
$
35

 
$
(53
)
 
$
25,136

State and municipal securities
256,746

 
6,019

 
—

 
262,765

Corporate debt securities
100,336

 
2,695

 
(6,076
)
 
96,955

Collateralized mortgage obligations
835,439

 
3,042

 
(16,972
)
 
821,509

Mortgage-backed securities
1,154,935

 
10,104

 
(6,204
)
 
1,158,835

Auction rate securities
106,772

 
—

 
(8,713
)
 
98,059

   Total debt securities
2,479,382

 
21,895

 
(38,018
)
 
2,463,259

Equity securities
14,677

 
6,845

 
(8
)
 
21,514

   Total
$
2,494,059

 
$
28,740

 
$
(38,026
)
 
$
2,484,773

Securities carried at $1.7 billion as of June 30, 2016 and December 31, 2015 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 $19.8 million at June 30, 2016 and $20.6 million at December 31, 2015) and other equity investments (estimated fair value of $895,000 at June 30, 2016 and $914,000 at December 31, 2015).
As of June 30, 2016, the financial institutions stock portfolio had a cost basis of $13.4 million and an estimated fair value of $19.8 million, including an investment in a single financial institution with a cost basis of $7.4 million and an estimated fair value of $10.4 million. The estimated fair value of this investment accounted for 52.5% of the estimated fair value of the Corporation's investments in the common stocks of publicly traded financial institutions. No other investment in a single financial institution in the financial institutions stock portfolio exceeded 10% of the portfolio's estimated fair value.

12


The amortized cost and estimated fair values of debt securities as of June 30, 2016, 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
 
$
55,965

 
$
56,628

Due from one year to five years
 
44,833

 
46,408

Due from five years to ten years
 
94,787

 
97,933

Due after ten years
 
340,172

 
333,957

 
 
535,757

 
534,926

Collateralized mortgage obligations
 
701,853

 
706,346

Mortgage-backed securities
 
1,242,267

 
1,267,763

  Total debt securities
 
$
2,479,877

 
$
2,509,035

The following table presents information related to the gross realized gains and losses on the sales of equity and debt securities:
 
Gross
Realized
Gains
 
Gross
Realized
Losses
 
Net Gains (Losses)
Three months ended June 30, 2016
(in thousands)
Equity securities
$
4

 
$
(10
)
 
$
(6
)
Debt securities
108

 
(26
)
 
82

Total
$
112

 
$
(36
)
 
$
76

Three months ended June 30, 2015
 
 
 
 
 
Equity securities
$
2,290

 
$
—

 
$
2,290

Debt securities
125

 
—

 
125

Total
$
2,415

 
$
—

 
$
2,415

 
 
 
 
 
 
Six months ended June 30, 2016
 
 
 
 
 
Equity securities
$
737

 
$
(10
)
 
$
727

Debt securities
322

 
(26
)
 
296

Total
$
1,059

 
$
(36
)
 
$
1,023

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

 
$
—

 
$
4,260

Debt securities
2,300

 
—

 
2,300

Total
$
6,560

 
$
—

 
$
6,560


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, 2016 and 2015:
 
Three months ended June 30
 
Six months ended June 30
 
2016
 
2015
 
2016
 
2015
 
(in thousands)
Balance of cumulative credit losses on debt securities, beginning of period
$
(11,510
)
 
$
(12,302
)
 
$
(11,510
)
 
$
(16,242
)
Reductions for securities sold during the period
—

 
792

 
—

 
4,730

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

 
—

 
—

 
2

Balance of cumulative credit losses on debt securities, end of period
$
(11,510
)
 
$
(11,510
)
 
$
(11,510
)
 
$
(11,510
)

13


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, 2016:
 
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)
Corporate debt securities
$
—

 
$
—

 
$
32,186

 
$
(6,873
)
 
$
32,186

 
$
(6,873
)
Collateralized mortgage obligations
21,695

 
(17
)
 
292,954

 
(1,441
)
 
314,649

 
(1,458
)
Mortgage-backed securities
—

 
—

 
11,569

 
(5
)
 
11,569

 
(5
)
Auction rate securities
—

 
—

 
97,886

 
(9,063
)
 
97,886

 
(9,063
)
Total debt securities
21,695

 
(17
)
 
434,595

 
(17,382
)
 
456,290

 
(17,399
)
Equity securities
681

 
(14
)
 
—

 
—

 
681

 
(14
)
 
$
22,376

 
$
(31
)
 
$
434,595

 
$
(17,382
)
 
$
456,971

 
$
(17,413
)
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, 2016.
As of June 30, 2016, all of the auction rate securities (auction rate certificates, or "ARCs"), were rated above investment grade. All of the loans underlying the ARCs have principal payments which are guaranteed by the federal government. As of June 30, 2016, 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 June 30, 2016. 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, 2016 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, 2016
 
December 31, 2015
 
Amortized
cost
 
Estimated
fair value
 
Amortized
cost
 
Estimated
fair value
 
(in thousands)
Single-issuer trust preferred securities
$
43,697

 
$
37,461

 
$
44,648

 
$
39,106

Subordinated debt
29,662

 
30,708

 
39,610

 
40,779

Senior debt
18,040

 
18,652

 
12,043

 
12,329

Pooled trust preferred securities
—

 
706

 
—

 
706

Corporate debt securities issued by financial institutions
91,399

 
87,527

 
96,301

 
92,920

Other corporate debt securities
4,020

 
4,020

 
4,035

 
4,035

Available for sale corporate debt securities
$
95,419

 
$
91,547

 
$
100,336

 
$
96,955


Single-issuer trust preferred securities had an unrealized loss of $6.2 million at June 30, 2016. Six of the 19 single-issuer trust preferred securities were rated below investment grade by at least one ratings agency, with an amortized cost of $11.5 million and an estimated fair value of $9.5 million at June 30, 2016. 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 $2.4 million at June 30, 2016 were not rated by any ratings agency.

14


Based on management’s evaluations, corporate debt securities with a fair value of $91.5 million were not subject to any other-than-temporary impairment charges as of June 30, 2016. 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.

NOTE 5 – Loans and Allowance for Credit Losses

Loans, Net of Unearned Income
Loans, net of unearned income are summarized as follows:
 
June 30,
2016
 
December 31, 2015
 
(in thousands)
Real-estate - commercial mortgage
$
5,635,347

 
$
5,462,330

Commercial - industrial, financial and agricultural
4,099,177

 
4,088,962

Real-estate - home equity
1,647,319

 
1,684,439

Real-estate - residential mortgage
1,447,292

 
1,376,160

Real-estate - construction
853,699

 
799,988

Consumer
278,071

 
268,588

Leasing and other
208,602

 
170,914

Overdrafts
3,214

 
2,737

Loans, gross of unearned income
14,172,721

 
13,854,118

Unearned income
(17,562
)
 
(15,516
)
Loans, net of unearned income
$
14,155,159

 
$
13,838,602


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 sheets. 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,
2016
 
December 31,
2015
 
(in thousands)
Allowance for loan losses
$
162,546

 
$
169,054

Reserve for unfunded lending commitments
2,562

 
2,358

Allowance for credit losses
$
165,108

 
$
171,412



15


The following table presents the activity in the allowance for credit losses:
 
Three months ended June 30
 
Six months ended June 30
 
2016
 
2015
 
2016
 
2015
 
(in thousands)
Balance at beginning of period
$
166,065

 
$
179,658

 
$
171,412

 
$
185,931

Loans charged off
(10,746
)
 
(15,372
)
 
(21,901
)
 
(21,136
)
Recoveries of loans previously charged off
7,278

 
2,967

 
11,556

 
6,158

Net loans charged off
(3,468
)
 
(12,405
)
 
(10,345
)
 
(14,978
)
Provision for credit losses
2,511

 
2,200

 
4,041

 
(1,500
)
Balance at end of period
$
165,108

 
$
169,453

 
$
165,108

 
$
169,453


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, other
and
overdrafts
 
Unallocated
 
Total
 
(in thousands)
Three months ended June 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at March 31, 2016
$
48,311

 
$
54,333

 
$
22,524

 
$
19,928

 
$
6,282

 
$
2,324

 
$
2,974

 
$
7,165

 
$
163,841

Loans charged off
(1,474
)
 
(4,625
)
 
(1,045
)
 
(340
)
 
(742
)
 
(569
)
 
(1,951
)
 
—

 
(10,746
)
Recoveries of loans previously charged off
1,367

 
2,931

 
350

 
420

 
1,563

 
539

 
108

 
—

 
7,278

Net loans charged off
(107
)
 
(1,694
)
 
(695
)
 
80

 
821

 
(30
)
 
(1,843
)
 
—

 
(3,468
)
Provision for loan losses (1)
(4,464
)
 
(884
)
 
4,341

 
1,218

 
(1,331
)
 
690

 
1,387

 
1,216

 
2,173

Balance at June 30, 2016
$
43,740

 
$
51,755

 
$
26,170

 
$
21,226

 
$
5,772

 
$
2,984

 
$
2,518

 
$
8,381

 
$
162,546

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

Six months ended June 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2015
$
47,866

 
$
57,098

 
$
22,405

 
$
21,375

 
$
6,529

 
$
2,585

 
$
2,468

 
$
8,728

 
$
169,054

Loans charged off
(2,056
)
 
(10,813
)
 
(2,586
)
 
(1,408
)
 
(1,068
)
 
(1,576
)
 
(2,394
)
 
—

 
(21,901
)
Recoveries of loans previously charged off
2,192

 
5,250

 
688

 
556

 
1,946

 
735

 
189

 
—

 
11,556

Net loans charged off
136

 
(5,563
)
 
(1,898
)
 
(852
)
 
878

 
(841
)
 
(2,205
)
 
—

 
(10,345
)
Provision for loan losses (1)
(4,262
)
 
220

 
5,663

 
703

 
(1,635
)
 
1,240

 
2,255

 
(347
)
 
3,837

Balance at June 30, 2016
$
43,740

 
$
51,755

 
$
26,170

 
$
21,226

 
$
5,772

 
$
2,984

 
$
2,518

 
$
8,381

 
$
162,546

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

 
$
51,378

 
$
28,271

 
$
29,072