

NOTE C – INVESTMENT SECURITIES

The following tables present the amortized cost and estimated fair values of investment securities as of December 31:



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(in thousands)
2012 Held to Maturity
Mortgage-backed securities	$	292	$	27	$	—		$	319

2012 Available for Sale
Equity securities	$	118,465	$	5,016	$	(918	)	$	122,563
U.S. Government securities	325		—		—			325
U.S. Government sponsored agency securities	2,376		21		—			2,397
State and municipal securities	301,842		13,763		(86		)	315,519
Corporate debt securities	112,162		7,858		(7,178		)	112,842
Collateralized mortgage obligations	1,195,234		16,008		(123		)	1,211,119
Mortgage-backed securities	847,790		31,831		—			879,621
Auction rate securities	174,026		—		(24,687		)	149,339
	$	2,752,220	$	74,497	$	(32,992	)	$	2,793,725
2011 Held to Maturity
U.S. Government sponsored agency securities	$	5,987	$	—	$	(14	)	$	5,973
State and municipal securities	179		—		—			179
Mortgage-backed securities	503		44		—			547
	$	6,669	$	44	$	(14	)	$	6,699
2011 Available for Sale
Equity securities	$	117,486	$	2,383	$	(2,819	)	$	117,050
U.S. Government securities	334		—		—			334
U.S. Government sponsored agency securities	3,987		87		(1		)	4,073
State and municipal securities	306,186		15,832		—			322,018
Corporate debt securities	132,855		4,979		(14,528		)	123,306
Collateralized mortgage obligations	982,851		19,186		(828		)	1,001,209
Mortgage-backed securities	848,675		31,837		(415		)	880,097
Auction rate securities	240,852		120		(15,761		)	225,211
	$	2,633,226	$	74,424	$	(34,352	)	$	2,673,298

Securities carried at $1.8 billion as of December 31, 2012 and December 31, 2011 were pledged as collateral to secure public and trust deposits and customer repurchase agreements.

Available for sale equity securities include restricted investment securities issued by the Federal Home Loan Bank (FHLB) and the Federal Reserve Bank totaling $71.7 million and $82.5 million as of December 31, 2012 and 2011, respectively, common stocks of financial institutions ($44.2 million at December 31, 2012 and $27.9 million at December 31, 2011) and other equity investments ($6.7 million at December 31, 2012 and 2011).

As of December 31, 2012, the financial institutions stock portfolio had a cost basis of $40.1 million and a fair value of $44.2 million. During 2012, the Corporation entered into an agreement with a private investor to purchase approximately 7% of the outstanding common shares in a single financial institution as a passive investment. As of December 31, 2012, the Corporation's total investment in the common stock of that financial institution had a cost basis of $20.0 million and a fair value of $21.6 million. This investment accounted for approximately 50% of the Corporation's investments in the common stocks of publicly traded financial institutions. No other investment within the Corporation's financial institutions stock portfolio exceeded 5% of the portfolio's fair value.

The amortized cost and estimated fair value of debt securities as of December 31, 2012, 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.



	Held to Maturity				Available for Sale
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
	(in thousands)
Due in one year or less	$	—	$	—	$	40,009	$	40,066
Due from one year to five years	—		—		60,710		65,006
Due from five years to ten years	—		—		176,212		187,333
Due after ten years	—		—		313,800		288,017
	—		—		590,731		580,422
Collateralized mortgage obligations	—		—		1,195,234		1,211,119
Mortgage-backed securities	292		319		847,790		879,621
	$	292	$	319	$	2,633,755	$	2,671,162

The following table presents information related to gains and losses on the sales of equity and debt securities, and losses recognized for other-than-temporary impairment of investments:



	Gross Realized Gains		Gross Realized Losses			Other- than- temporary Impairment Losses			Net Gains (Losses)
	(in thousands)
2012:
Equity securities	$	1,215	$	—		$	(356	)	$	859
Debt securities	2,620		—			(453		)	2,167
Total	$	3,835	$	—		$	(809	)	$	3,026
2011:
Equity securities	$	835	$	—		$	(1,212	)	$	(377	)
Debt securities	6,655		(19		)	(1,698		)	4,938
Total	$	7,490	$	(19	)	$	(2,910	)	$	4,561
2010:
Equity securities	$	2,424	$	(706	)	$	(1,982	)	$	(264	)
Debt securities	13,005		(71		)	(11,969		)	965
Total	$	15,429	$	(777	)	$	(13,951	)	$	701

The following table presents a summary of other-than-temporary impairment charges recorded as components of investment securities gains on the consolidated statements of income, by investment security type:



	2012		2011		2010
	(in thousands)
Equity securities - financial institution stocks	$	356	$	1,212	$	1,982
Pooled trust preferred securities	19		1,406		11,969
Auction rate securities	434		292		—
Total debt securities	453		1,698		11,969
Total other-than-temporary impairment charges	$	809	$	2,910	$	13,951

The $356,000 other-than-temporary impairment charge related to financial institutions stocks in 2012 was due to the severity and duration of the declines in fair values of certain bank stock holdings, in conjunction with management’s evaluation of the near-term prospects of each specific issuer. As of December 31, 2012, after other-than-temporary impairment charges, the financial institution stock portfolio had an adjusted cost basis of $40.1 million and a fair value of $44.2 million.

The credit related other-than-temporary impairment charges for debt securities during 2012 included $19,000 for investments in pooled trust preferred securities issued by financial institutions and $434,000 for investments in student loan auction rate securities, also known as auction rate certificates (ARCs). The credit related other-than-temporary impairment charges for debt securities were determined based on expected cash flows models.

The following table presents a summary of the cumulative credit related other-than-temporary impairment charges, recognized as components of earnings, for debt securities still held by the Corporation at December 31:



	2012			2011			2010
	(in thousands)
Balance of cumulative credit losses on debt securities, beginning of year	$	(22,781	)	$	(27,560	)	$	(15,612	)
Additions for credit losses recorded which were not previously recognized as components of earnings	(453		)	(1,698		)	(11,969		)
Reductions for securities sold	—			6,400			—
Reductions for increases in cash flows expected to be collected that are recognized over the remaining life of the security	155			77			21
Balance of cumulative credit losses on debt securities, end of year	$	(23,079	)	$	(22,781	)	$	(27,560	)

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, as of December 31, 2012:



	Less Than 12 months					12 Months or Longer					Total
	Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses
	(in thousands)
State and municipal securities	$	9,441	$	(86	)	$	—	$	—		$	9,441	$	(86	)
Corporate debt securities	—		—			44,877		(7,178		)	44,877		(7,178		)
Collateralized mortgage obligations	50,274		(67		)	13,058		(56		)	63,332		(123		)
Auction rate securities	12,303		(717		)	137,035		(23,970		)	149,338		(24,687		)
Total debt securities	72,018		(870		)	194,970		(31,204		)	266,988		(32,074		)
Equity securities	2,146		(199		)	5,508		(719		)	7,654		(918		)
	$	74,164	$	(1,069	)	$	200,478	$	(31,923	)	$	274,642	$	(32,992	)

The Corporation’s mortgage-backed securities and collateralized mortgage obligations 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 collateralized mortgage obligations 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 those investments to be other-than-temporarily impaired as of December 31, 2012.

The unrealized holding losses on ARCs are attributable to liquidity issues resulting from the failure of periodic auctions. Fulton Financial Advisors (FFA), the investment management and trust division of the Corporation’s Fulton Bank, N.A. subsidiary, held ARCs for some of its customers’ accounts. FFA had previously purchased ARCs for customers as short-term investments with fair values that could be derived based on periodic auctions under normal market conditions. During 2009 and 2010, the Corporation purchased ARCs from customers due to the failure of these periodic auctions, which made these previously short-term investments illiquid.

As of December 31, 2012, approximately $138 million, or 93%, of the ARCs were rated above investment grade, with approximately $8 million, or 5%, AAA rated and $96 million, or 64%, AA rated. Approximately $11 million, or 7%, of ARCs were either not rated or rated below investment grade by at least one ratings agency. Of this amount, approximately $8 million, or 73%, of the loans underlying these ARCs have principal payments which are guaranteed by the federal government. In total, approximately $145 million, or 98%, of the loans underlying the ARCs have principal payments which are guaranteed by the federal government. At December 31, 2012, all ARCs were current and making scheduled interest payments. 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 December 31, 2012.

During the year ended December 31, 2012, the Corporation recorded $434,000 of other-than-temporary impairment charges for two individual ARCs by the same issuer based on an expected cash flow model. These other-than-temporarily impaired ARCs have principal payments supported by non-guaranteed private student loans, as opposed to federally guaranteed student loans.

As noted above, for 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 December 31, 2012 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 values of corporate debt securities as of December 31:



	2012				2011
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
	(in thousands)
Single-issuer trust preferred securities	$	56,834	$	51,656	$	83,899	$	74,365
Subordinated debt	47,286		51,747		40,184		41,296
Pooled trust preferred securities	5,530		6,927		6,236		5,109
Corporate debt securities issued by financial institutions	109,650		110,330		130,319		120,770
Other corporate debt securities	2,512		2,512		2,536		2,536
Available for sale corporate debt securities	$	112,162	$	112,842	$	132,855	$	123,306

The Corporation’s investments in single-issuer trust preferred securities had an unrealized loss of $5.2 million as of December 31, 2012. The Corporation did not record any other-than-temporary impairment charges for single-issuer trust preferred securities in 2012, 2011 or 2010. The Corporation held eight single-issuer trust preferred securities that were rated below investment grade by at least one ratings agency, with an amortized cost of $22.9 million and an estimated fair value of $22.3 million as of December 31, 2012. The majority of the single-issuer trust preferred securities rated below investment grade were rated BB or Ba. Single-issuer trust preferred securities with an amortized cost of $4.7 million and an estimated fair value of $3.4 million as of December 31, 2012 were not rated by any ratings agency.

The Corporation held ten pooled trust preferred securities as of December 31, 2012. Nine of these securities, with an amortized cost of $5.4 million and an estimated fair value of $6.8 million, were rated below investment grade by at least one ratings agency, with ratings ranging from C to Ca. For each of the nine pooled trust preferred securities rated below investment grade, 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 flow model. The most significant input to the expected cash flow 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 asset 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 $112.8 million were not subject to any additional other-than-temporary impairment charges as of December 31, 2012. 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 maturity.