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

FORM 10-Q

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

For the quarterly period ended March 31,June 30, 2014, or

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to              

Commission File No. 0-10587
FULTON FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter) 
PENNSYLVANIA 23-2195389
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
   
One Penn Square, P.O. Box 4887, Lancaster, Pennsylvania 17604
(Address of principal executive offices) (Zip Code)

(717) 291-2411
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý  Accelerated filer ¨
Non-accelerated filer ¨  Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý

APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
Common Stock, $2.50 Par Value – 188,969,000–187,792,000 shares outstanding as of April 30,July 31, 2014.

1


FULTON FINANCIAL CORPORATION
FORM 10-Q FOR THE THREE AND SIX MONTHS ENDED MARCH 31,JUNE 30, 2014
INDEX
 
Description Page
    
PART I. FINANCIAL INFORMATION 
    
 
    
(a)
Consolidated Balance Sheets - March 31,June 30, 2014 and December 31, 2013
    
(b)
    
(c)
    
(d)
    
(e)
    
(f)
    
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
    
    
    
 
    
    
    
    
    
    
    
    
    
    

2




Item 1. Financial Statements
 
FULTON FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS 
 
(in thousands, except per-share data)
March 31,
2014
 December 31,
2013
June 30,
2014
 December 31,
2013
(unaudited) (unaudited) 
ASSETS      
Cash and due from banks$260,389
 $218,540
$258,837
 $218,540
Interest-bearing deposits with other banks225,428
 163,988
222,894
 163,988
Federal Reserve Bank and Federal Home Loan Bank stock81,634
 84,173
82,624
 84,173
Loans held for sale24,417
 21,351
36,079
 21,351
Available for sale investment securities2,501,198
 2,568,434
2,497,776
 2,568,434
Loans, net of unearned income12,733,792
 12,782,220
12,839,511
 12,782,220
Less: Allowance for loan losses(197,089) (202,780)(191,685) (202,780)
Net Loans12,536,703
 12,579,440
12,647,826
 12,579,440
Premises and equipment225,647
 226,021
225,168
 226,021
Accrued interest receivable43,376
 44,037
42,116
 44,037
Goodwill and intangible assets532,747
 533,076
532,432
 533,076
Other assets480,350
 495,574
487,887
 495,574
Total Assets$16,911,889
 $16,934,634
$17,033,639
 $16,934,634
LIABILITIES      
Deposits:      
Noninterest-bearing$3,359,900
 $3,283,172
$3,484,125
 $3,283,172
Interest-bearing9,310,017
 9,208,014
9,209,534
 9,208,014
Total Deposits12,669,917
 12,491,186
12,693,659
 12,491,186
Short-term borrowings:      
Federal funds purchased361,098
 582,436
384,011
 582,436
Other short-term borrowings708,586
 676,193
624,296
 676,193
Total Short-Term Borrowings1,069,684
 1,258,629
1,008,307
 1,258,629
Accrued interest payable16,972
 15,218
16,647
 15,218
Other liabilities213,136
 222,830
246,831
 222,830
Federal Home Loan Bank advances and long-term debt883,461
 883,584
968,395
 883,584
Total Liabilities14,853,170
 14,871,447
14,933,839
 14,871,447
SHAREHOLDERS’ EQUITY      
Common stock, $2.50 par value, 600 million shares authorized, 217.9 million shares issued in 2014 and 217.8 million shares issued in 2013544,821
 544,568
Common stock, $2.50 par value, 600 million shares authorized, 218.0 million shares issued in 2014 and 217.8 million shares issued in 2013545,066
 544,568
Additional paid-in capital1,434,546
 1,432,974
1,436,759
 1,432,974
Retained earnings490,517
 463,843
514,988
 463,843
Accumulated other comprehensive loss(21,889) (37,341)(9,161) (37,341)
Treasury stock, at cost, 29.1 million shares in 2014 and 25.2 million shares in 2013(389,276) (340,857)
Treasury stock, at cost, 29.0 million shares in 2014 and 25.2 million shares in 2013(387,852) (340,857)
Total Shareholders’ Equity2,058,719
 2,063,187
2,099,800
 2,063,187
Total Liabilities and Shareholders’ Equity$16,911,889
 $16,934,634
$17,033,639
 $16,934,634
      
See Notes to Consolidated Financial Statements      
 

3


FULTON FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
 
(in thousands, except per-share data)Three months ended March 31Three months ended June 30 Six months ended June 30
2014 20132014 2013 2014 2013
INTEREST INCOME          
Loans, including fees$131,830
 $134,130
$131,440
 $135,032
 $263,270
 $269,162
Investment securities:          
Taxable13,266
 13,397
12,418
 14,516
 25,684
 27,913
Tax-exempt2,348
 2,481
2,298
 2,343
 4,646
 4,824
Dividends332
 390
325
 364
 657
 754
Loans held for sale134
 495
214
 384
 348
 879
Other interest income882
 429
1,207
 439
 2,089
 868
Total Interest Income148,792
 151,322
147,902
 153,078
 296,694
 304,400
INTEREST EXPENSE          
Deposits7,896
 10,401
8,685
 9,498
 16,581
 19,899
Short-term borrowings633
 509
540
 700
 1,173
 1,209
Long-term debt10,698
 10,768
10,779
 10,815
 21,477
 21,583
Total Interest Expense19,227
 21,678
20,004
 21,013
 39,231
 42,691
Net Interest Income129,565
 129,644
127,898
 132,065
 257,463
 261,709
Provision for credit losses2,500
 15,000
3,500
 13,500
 6,000
 28,500
Net Interest Income After Provision for Credit Losses127,065
 114,644
124,398
 118,565
 251,463
 233,209
NON-INTEREST INCOME          
Service charges on deposit accounts11,711
 14,111
12,552
 14,651
 24,263
 28,762
Investment management and trust services10,958
 10,096
11,339
 10,601
 22,297
 20,697
Other service charges and fees8,927
 8,510
10,526
 9,508
 19,453
 18,018
Mortgage banking income3,605
 8,173
5,741
 10,997
 9,346
 19,170
Other3,305
 3,896
3,602
 3,694
 6,907
 7,590
Investment securities gains, net:       
Net gains on sales of investment securities1,124
 2,892
 1,124
 5,365
Other-than-temporary impairment losses(12) (27) (12) (27)
Investment securities gains, net
 2,473
1,112
 2,865
 1,112
 5,338
Total Non-Interest Income38,506
 47,259
44,872
 52,316
 83,378
 99,575
NON-INTEREST EXPENSE          
Salaries and employee benefits59,566
 61,212
63,623
 63,490
 123,189
 124,702
Net occupancy expense13,603
 11,844
11,464
 11,447
 25,067
 23,291
Other outside services3,812
 2,860
7,240
 5,315
 11,052
 8,175
Data processing3,796
 3,903
4,331
 4,509
 8,127
 8,412
Professional fees3,559
 3,395
 6,463
 6,442
Equipment expense3,602
 3,908
3,360
 3,893
 6,962
 7,801
Software2,925
 2,748
3,209
 3,094
 6,134
 5,842
Professional fees2,904
 3,047
FDIC insurance expense2,689
 2,847
2,615
 3,001
 5,304
 5,848
Operating risk loss1,828
 1,766
Marketing1,584
 1,872
2,337
 1,922
 3,921
 3,794
Other real estate owned and repossession expense983
 2,854
748
 1,941
 1,731
 4,795
Operating risk loss716
 1,860
 2,544
 3,626
Intangible amortization315
 534
315
 535
 630
 1,069
Other11,947
 11,541
12,657
 12,728
 24,604
 24,269
Total Non-Interest Expense109,554
 110,936
116,174
 117,130
 225,728
 228,066
Income Before Income Taxes56,017
 50,967
53,096
 53,751
 109,113
 104,718
Income taxes14,234
 11,740
13,500
 13,169
 27,734
 24,909
Net Income$41,783
 $39,227
$39,596
 $40,582
 $81,379
 $79,809
          
PER SHARE:          
Net Income (Basic)$0.22
 $0.20
$0.21
 $0.21
 $0.43
 $0.41
Net Income (Diluted)0.22
 0.20
0.21
 0.21
 0.43
 0.41
Cash Dividends0.08
 0.08
0.08
 0.08
 0.16
 0.16
See Notes to Consolidated Financial Statements          

4


FULTON FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
 
(in thousands)
Three months ended March 31Three months ended June 30 Six months ended June 30
2014 20132014 2013 2014 2013
  
Net Income$41,783
 $39,227
$39,596
 $40,582
 $81,379
 $79,809
Other Comprehensive Income (Loss), net of tax:          
Unrealized gain on securities13,933
 125
Reclassification adjustment for postretirement amendment gains and securities gains included in net income(944) (1,608)
Unrealized gain (loss) on securities12,990
 (36,958) 26,923
 (36,833)
Reclassification adjustment for postretirement amendment gains included in net income
 
 (944) 
Reclassification adjustment for securities gains included in net income(723) (1,862) (723) (3,470)
Non-credit related unrealized gain on other-than-temporarily impaired debt securities189
 1,083
323
 355
 512
 1,438
Unrealized gain on derivative financial instruments34
 34
34
 34
 68
 68
Unrecognized pension and postretirement income2,144
 

 
 2,144
 
Amortization of net unrecognized pension and postretirement items96
 328
104
 328
 200
 656
Other Comprehensive Income (Loss)15,452
 (38)12,728
 (38,103) 28,180
 (38,141)
Total Comprehensive Income$57,235
 $39,189
$52,324
 $2,479
 $109,559
 $41,668
          
See Notes to Consolidated Financial Statements          


5


FULTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)
THREESIX MONTHS ENDED MARCH 31,JUNE 30, 2014 AND 2013
 
(in thousands, except per-share data)
Common Stock   
Retained
Earnings
   
Treasury
Stock
 TotalCommon Stock   
Retained
Earnings
   
Treasury
Stock
 Total
Shares
Outstanding
 Amount 
Additional Paid-in
Capital
 
Accumulated
Other Comprehensive
Income (Loss)
 
Shares
Outstanding
 Amount 
Additional Paid-in
Capital
 
Accumulated
Other Comprehensive
Income (Loss)
 
  
Balance at December 31, 2013192,652
 $544,568
 $1,432,974
 $463,843
 $(37,341) $(340,857) $2,063,187
192,652
 $544,568
 $1,432,974
 $463,843
 $(37,341) $(340,857) $2,063,187
Net income
 
 
 41,783
 
 
 41,783

 
 
 81,379
 
 
 81,379
Other comprehensive income (loss)
 
 
 
 15,452
 
 15,452

 
 
 
 28,180
 
 28,180
Stock issued, including related tax benefits198
 253
 539
 
 
 1,385
 2,177
381
 498
 763
 
 
 2,809
 4,070
Stock-based compensation awards
 
 1,033
 
 
 
 1,033

 
 3,022
 
 
 
 3,022
Acquisition of treasury stock(4,000)         (49,804) (49,804)(4,000)         (49,804) (49,804)
Common stock cash dividends - $0.08 per share
 
 
 (15,109) 
 
 (15,109)
Balance at March 31, 2014188,850
 $544,821
 $1,434,546
 $490,517
 $(21,889) $(389,276) $2,058,719
Common stock cash dividends - $0.16 per share
 
 
 (30,234) 
 
 (30,234)
Balance at June 30, 2014189,033
 $545,066
 $1,436,759
 $514,988
 $(9,161) $(387,852) $2,099,800
                          
Balance at December 31, 2012199,225
 $542,093
 $1,426,267
 $363,937
 $5,675
 $(256,316) $2,081,656
199,225
 $542,093
 $1,426,267
 $363,937
 $5,675
 $(256,316) $2,081,656
Net income
 
 
 39,227
 
 
 39,227

 
 
 79,809
 
 
 79,809
Other comprehensive income (loss)
 
 
 
 (38) 
 (38)
 
 
 
 (38,141) 
 (38,141)
Stock issued, including related tax benefits297
 393
 196
 
 
 2,146
 2,735
854
 1,544
 (455) 
 
 3,586
 4,675
Stock-based compensation awards
 
 847
 
 
 
 847

 
 3,207
 
 
 
 3,207
Acquisition of treasury stock(4,246)         (47,046) (47,046)(6,421)         (71,337) (71,337)
Common stock cash dividends - $0.08 per share
 
 
 (15,618) 
 
 (15,618)
Balance at March 31, 2013195,276
 $542,486
 $1,427,310
 $387,546
 $5,637
 $(301,216) $2,061,763
Common stock cash dividends - $0.16 per share
 
 
 (31,137) 
 
 (31,137)
Balance at June 30, 2013193,658
 $543,637
 $1,429,019
 $412,609
 $(32,466) $(324,067) $2,028,732
                          
See Notes to Consolidated Financial Statements                          
 

6


FULTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
(in thousands)
Three months ended March 31Six months ended June 30
2014 20132014 2013
CASH FLOWS FROM OPERATING ACTIVITIES:      
Net Income$41,783
 $39,227
$81,379
 $79,809
Adjustments to reconcile net income to net cash provided by operating activities:
 

 
Provision for credit losses2,500
 15,000
6,000
 28,500
Depreciation and amortization of premises and equipment6,629
 6,171
12,354
 12,577
Net amortization of investment securities premiums1,435
 3,846
2,908
 6,099
Investment securities gains, net
 (2,473)(1,112) (5,338)
Net (increase) decrease in loans held for sale(3,066) 4,854
(14,728) 6,990
Amortization of intangible assets315
 534
630
 1,069
Stock-based compensation1,033
 847
3,022
 3,207
Excess tax benefits from stock-based compensation(25) (88)(52) (148)
Decrease (increase) in accrued interest receivable661
 (1,699)
Decrease in other assets7,271
 7,074
Increase in accrued interest payable1,754
 2,063
Decrease in accrued interest receivable1,921
 73
(Increase) decrease in other assets(3,039) 21,847
Increase (decrease) in accrued interest payable1,429
 (1,622)
Increase (decrease) in other liabilities182
 (11,713)3,646
 (10,782)
Total adjustments18,689
 24,416
12,979
 62,472
Net cash provided by operating activities60,472
 63,643
94,358
 142,281
CASH FLOWS FROM INVESTING ACTIVITIES:      
Proceeds from sales of securities available for sale12,548
 56,896
15,189
 172,931
Proceeds from maturities of securities held to maturity
 35

 65
Proceeds from maturities of securities available for sale79,045
 199,910
174,619
 381,807
Purchase of securities available for sale(11,700) (334,660)(60,952) (647,141)
(Increase) decrease in short-term investments(58,901) 73,275
(57,357) 19,561
Net decrease (increase) in loans40,017
 (249,229)
Net increase in loans(74,766) (534,760)
Net purchases of premises and equipment(6,255) (5,202)(11,501) (9,272)
Net cash provided by (used in) investing activities54,754
 (258,975)
Net cash used in investing activities(14,768) (616,809)
CASH FLOWS FROM FINANCING ACTIVITIES:      
Net increase in demand and savings deposits94,093
 19,339
104,390
 55,058
Net increase (decrease) in time deposits84,638
 (115,042)98,083
 (281,412)
(Decrease) increase in short-term borrowings(188,945) 258,567
(250,322) 751,919
Additions to long-term debt90,000
 
Repayments of long-term debt(123) (5,042)(5,189) (5,086)
Net proceeds from issuance of common stock2,152
 2,647
4,018
 4,527
Excess tax benefits from stock-based compensation25
 88
52
 148
Dividends paid(15,413) 
(30,521) (15,645)
Acquisition of treasury stock(49,804) (47,046)(49,804) (71,337)
Net cash (used in) provided by financing activities(73,377) 113,511
(39,293) 438,172
Net Increase (Decrease) in Cash and Due From Banks41,849
 (81,821)40,297
 (36,356)
Cash and Due From Banks at Beginning of Period218,540
 256,300
218,540
 256,300
Cash and Due From Banks at End of Period$260,389
 $174,479
$258,837
 $219,944
Supplemental Disclosures of Cash Flow Information:      
Cash paid during the period for:      
Interest$17,473
 $19,615
$37,802
 $44,313
Income taxes631
 5,086
16,407
 24,336
See Notes to Consolidated Financial Statements      
 
7


FULTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
NOTE A – Basis of Presentation

The accompanying unaudited consolidated financial statements of Fulton Financial Corporation (the Corporation) have been prepared in conformity with U.S. generally accepted accounting principles (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the amounts of assets and liabilities as of the date of the financial statements as well as revenues and expenses during the period. Actual results could differ from those estimates. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended March 31,June 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. The Corporation evaluates subsequent events through the filing date of this Form 10-Q with the Securities and Exchange Commission (SEC).

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

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

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

Reclassifications

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


8


NOTE B – Net Income Per Share
Basic net income per share is calculated as net income divided by the weighted average number of shares outstanding.
Diluted net income per share is calculated as net income divided by the weighted average number of shares outstanding plus the incremental number of shares added as a result of converting common stock equivalents, calculated using the treasury stock method. The Corporation’s common stock equivalents consist of outstanding stock options, restricted stock, restricted stock units (RSUs) and performance-based restricted stock.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 March 31Three months ended June 30 Six months ended June 30
2014 20132014 2013 2014 2013
(in thousands)(in thousands)
Weighted average shares outstanding (basic)189,467
 196,299
188,139
 193,273
 188,799
 194,777
Effect of dilutive securities1,022
 918
Impact of common stock equivalents1,043
 1,073
 1,033
 996
Weighted average shares outstanding (diluted)190,489
 197,217
189,182
 194,346
 189,832
 195,773
For the three and six months ended March 31,June 30, 2014, 3.3 million and March 31,3.2 million shares issuable under stock options, respectively, were excluded from the diluted net income per share computation as their effect would have been anti-dilutive. For the three and six months ended June 30, 2013, 3.14.3 million and 3.74.0 million shares issuable under stock options, respectively, were excluded from the diluted net income per share computation as their effect would have been anti-dilutive.


89


NOTE C – Accumulated Other Comprehensive Income (Loss)
The following table presents changes in other comprehensive income (loss): 
Before-Tax Amount Tax Effect Net of Tax AmountBefore-Tax Amount Tax Effect Net of Tax Amount
(in thousands)(in thousands)
Three months ended March 31, 2014     
Three months ended June 30, 2014     
Unrealized gain (loss) on securities$21,435
 $(7,502) $13,933
$19,984
 $(6,994) $12,990
Reclassification adjustment for postretirement gains included in net income (1)(1,452) 508
 (944)
Reclassification adjustment for securities gains included in net income (1)(1,112) 389
 (723)
Non-credit related unrealized gains (losses) on other-than-temporarily impaired debt securities497
 (174) 323
Unrealized gain on derivative financial instruments52
 (18) 34
Amortization of net unrecognized pension and postretirement items (2)160
 (56) 104
Total Other Comprehensive Income (Loss)$19,581
 $(6,853) $12,728
Three months ended June 30, 2013     
Unrealized gain (loss) on securities$(56,858) $19,900
 $(36,958)
Reclassification adjustment for securities gains included in net income (1)(2,865) 1,003
 (1,862)
Non-credit related unrealized gains (losses) on other-than-temporarily impaired debt securities546
 (191) 355
Unrealized gain on derivative financial instruments52
 (18) 34
Amortization of net unrecognized pension and postretirement items (2)505
 (177) 328
Total Other Comprehensive Income (Loss)$(58,620) $20,517
 $(38,103)
     
Six months ended June 30, 2014     
Unrealized gain (loss) on securities$41,419
 $(14,496) $26,923
Reclassification adjustment for securities gains included in net income (1)(1,112) 389
 (723)
Reclassification adjustment for postretirement gains included in net income (2)(1,452) 508
 (944)
Non-credit related unrealized gains (losses) on other-than-temporarily impaired debt securities291
 (102) 189
788
 (276) 512
Unrealized gain on derivative financial instruments52
 (18) 34
105
 (37) 68
Unrecognized pension and postretirement income3,291
 (1,147) 2,144
3,291
 (1,147) 2,144
Amortization of net unrecognized pension and postretirement items (1)149
 (53) 96
Amortization of net unrecognized pension and postretirement items (2)309
 (109) 200
Total Other Comprehensive Income (Loss)$23,766
 $(8,314) $15,452
$43,348
 $(15,168) $28,180
Three months ended March 31, 2013     
Six months ended June 30, 2013     
Unrealized gain (loss) on securities$192
 $(67) $125
$(56,666) $19,833
 $(36,833)
Reclassification adjustment for securities gains included in net income (2)(2,473) 865
 (1,608)
Reclassification adjustment for securities gains included in net income (1)(5,338) 1,868
 (3,470)
Non-credit related unrealized gains (losses) on other-than-temporarily impaired debt securities1,666
 (583) 1,083
2,212
 (774) 1,438
Unrealized gain on derivative financial instruments54
 (20) 34
105
 (37) 68
Amortization of net unrecognized pension and postretirement items (1)505
 (177) 328
Amortization of net unrecognized pension and postretirement items (2)1,010
 (354) 656
Total Other Comprehensive Income (Loss)$(56) $18
 $(38)$(58,677) $20,536
 $(38,141)

(1)Amounts reclassified out of accumulated other comprehensive income. Before-tax amounts included within "Investment securities gains, net" on the consolidated statements of income. See Note D, "Investment Securities," for additional details.
(2)Amounts reclassified out of accumulated other comprehensive income. Before-tax amounts included within "Salaries and employee benefits" on the consolidated statements of income. See Note H, "Employee Benefit Plans," for additional details.
(2)Amounts reclassified out of accumulated other comprehensive income. Before-tax amounts included within "Investment securities gains, net" on the consolidated statements of income. See Note D, "Investment Securities," for additional details.

10


The following table presents changes in each component of accumulated other comprehensive income (loss), net of tax: 
Unrealized Gains (Losses) on Investment Securities Not Other-Than-Temporarily Impaired Unrealized Non-Credit Gains (Losses) on Other-Than-Temporarily Impaired Debt Securities Unrealized Effective Portions of Losses on Forward-Starting Interest Rate Swaps Unrecognized Pension and Postretirement Plan Income (Costs) TotalUnrealized 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)(in thousands)
Three months ended March 31, 2014         
Three months ended June 30, 2014         
Balance at March 31, 2014$(13,577) $1,841
 $(2,648) $(7,505) $(21,889)
Other comprehensive income (loss) before reclassifications12,990
 323
 
 
 13,313
Amounts reclassified from accumulated other comprehensive income (loss)7
 (730) 34
 104
 (585)
Balance at June 30, 2014$(580) $1,434
 $(2,614) $(7,401) $(9,161)
Three months ended June 30, 2013
 
   
 
Balance at March 31, 2013$24,878
 $1,696
 $(2,784) $(18,153) $5,637
Other comprehensive income (loss) before reclassifications(36,958)
355
 
 
 (36,603)
Amounts reclassified from accumulated other comprehensive income (loss)(861) (1,001) 34
 328
 (1,500)
Balance at June 30, 2013$(12,941) $1,050
 $(2,750) $(17,825) $(32,466)
         
Six months ended June 30, 2014         
Balance at December 31, 2013$(27,510) $1,652
 $(2,682) $(8,801) $(37,341)$(27,510) $1,652
 $(2,682) $(8,801) $(37,341)
Other comprehensive income (loss) before reclassifications13,933
 189
 
 2,144
 16,266
26,923
 512
 
 2,144
 29,579
Amounts reclassified from accumulated other comprehensive income (loss)
 
 34
 (848) (814)7
 (730) 68
 (744) (1,399)
Balance at March 31, 2014$(13,577) $1,841
 $(2,648) $(7,505) $(21,889)
Three months ended March 31, 2013
 
   
 
Balance at June 30, 2014$(580) $1,434
 $(2,614) $(7,401) $(9,161)
Six months ended June 30, 2013         
Balance at December 31, 2012$26,361
 $613
 $(2,818) $(18,481) $5,675
$26,361
 $613
 $(2,818) $(18,481) $5,675
Other comprehensive income (loss) before reclassifications125
 1,083
 
 
 1,208
(36,833) 1,438
 
 
 (35,395)
Amounts reclassified from accumulated other comprehensive income (loss)(1,608) 
 34
 328
 (1,246)(2,469) (1,001) 68
 656
 (2,746)
Balance at March 31, 2013$24,878
 $1,696
 $(2,784) $(18,153) $5,637
Balance at June 30, 2013$(12,941) $1,050
 $(2,750) $(17,825) $(32,466)


911


NOTE D – Investment Securities
The following table presents the amortized cost and estimated fair values of investment securities, which were all classified as available for sale:
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
(in thousands)(in thousands)
March 31, 2014       
June 30, 2014       
Equity securities$34,231
 $11,524
 $(21) $45,734
$34,275
 $11,987
 $(14) $46,248
U.S. Government securities526
 
 
 526
525
 
 
 525
U.S. Government sponsored agency securities275
 6
 (1) 280
254
 6
 
 260
State and municipal securities278,019
 7,190
 (1,756) 283,453
262,368
 8,244
 (789) 269,823
Corporate debt securities100,348
 6,292
 (6,088) 100,552
99,634
 5,881
 (4,862) 100,653
Collateralized mortgage obligations1,031,968
 7,638
 (32,869) 1,006,737
1,022,728
 8,224
 (28,221) 1,002,731
Mortgage-backed securities914,502
 13,582
 (11,881) 916,203
918,210
 17,121
 (4,726) 930,605
Auction rate securities159,379
 2
 (11,668) 147,713
158,463
 1
 (11,533) 146,931
$2,519,248
 $46,234
 $(64,284) $2,501,198
$2,496,457
 $51,464
 $(50,145) $2,497,776
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
 (in thousands)
December 31, 2013       
Equity securities$33,922
 $12,355
 $(76) $46,201
U.S. Government securities525
 
 
 525
U.S. Government sponsored agency securities720
 7
 (1) 726
State and municipal securities281,810
 6,483
 (3,444) 284,849
Corporate debt securities100,468
 5,685
 (7,404) 98,749
Collateralized mortgage obligations1,069,138
 8,036
 (44,776) 1,032,398
Mortgage-backed securities949,328
 13,881
 (17,497) 945,712
Auction rate securities172,299
 234
 (13,259) 159,274
 $2,608,210
 $46,681
 $(86,457) $2,568,434
Securities carried at $1.8 billion as of March 31,June 30, 2014 and $1.7$1.7 billion as of December 31, 2013 were pledged as collateral to secure public and trust deposits and customer repurchase agreements.
Equity securities include common stocks of financial institutions ($39.840.2 million at March 31,June 30, 2014 and $40.6 million at December 31, 2013) and other equity investments ($5.96.0 million at March 31,June 30, 2014 and $5.6 million at December 31, 2013).
As of March 31,June 30, 2014, the financial institutions stock portfolio had a cost basis of $28.5 million and a fair value of $39.840.2 million, including an investment in a single financial institution with a cost basis of $20.0 million and a fair value of $27.928.2 million. The fair value of this investment accounted for 70.1%70.2% of the fair value of the Corporation's investments in the common stocks of publicly traded financial institutions. No other investment within the financial institutions stock portfolio exceeded 5% of the portfolio's fair value.

1012


The amortized cost and estimated fair values of debt securities as of March 31,June 30, 2014, by contractual maturity, are shown in the following table. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
 Amortized
Cost
 Estimated
Fair Value
 Amortized
Cost
 Estimated
Fair Value
(in thousands)(in thousands)
Due in one year or less $30,424
 $30,517
 $20,164
 $20,226
Due from one year to five years 67,544
 71,350
 71,674
 75,583
Due from five years to ten years 199,377
 203,240
 194,644
 200,454
Due after ten years 241,202
 227,417
 234,762
 221,929
 538,547
 532,524
 521,244
 518,192
Collateralized mortgage obligations 1,022,728
 1,002,731
Mortgage-backed securities 914,502
 916,203
 918,210
 930,605
Collateralized mortgage obligations 1,031,968
 1,006,737
 $2,485,017
 $2,455,464
 $2,462,182
 $2,451,528
There were no losses recognized for the other-than-temporary impairment of investments during the three months ended March 31, 2014 and 2013. 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 GainsGross
Realized
Gains
 Gross
Realized
Losses
 Other-than-
temporary
Impairment
Losses
 Net Gains (Losses)
Three months ended March 31, 2014(in thousands)
Three months ended June 30, 2014(in thousands)
Equity securities$1
 $
 $1
$
 $
 $(12) $(12)
Debt securities322
 (323) (1)1,124
 
 
 1,124
Total$323
 $(323) $
$1,124
 $
 $(12) $1,112
Three months ended March 31, 2013     
Three months ended June 30, 2013       
Equity securities$1,139
 $
 $1,139
$1,083
 $(28) $(27) $1,028
Debt securities1,334
 
 1,334
1,837
 
 
 1,837
Total$2,473
 $
 $2,473
$2,920
 $(28) $(27) $2,865
       
Six months ended June 30, 2014       
Equity securities$1
 $
 $(12) $(11)
Debt securities1,446
 (323) 
 1,123
Total$1,447
 $(323) $(12) $1,112
Six months ended June 30, 2013       
Equity securities$2,222
 $(28) $(27) $2,167
Debt securities3,171
 
 
 3,171
Total$5,393
 $(28) $(27) $5,338

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





13


The following table presents a summary of the cumulative credit related other-than-temporary impairment charges, recognized as components of earnings, for debt securities held by the Corporation at March 31,June 30, 2014 and 2013:
Three months ended March 31Three months ended June 30 Six months ended June 30
2014 20132014 2013 2014 2013
(in thousands)(in thousands)
Balance of cumulative credit losses on debt securities, beginning of period$(20,691) $(23,079)$(19,961) $(23,079) $(20,691) $(23,079)
Reductions for securities sold during the period2,746
 2,468
 3,472
 2,468
Reductions for increases in cash flows expected to be collected that are recognized over the remaining life of the security4
 
1
 4
 5
 4
Balance of cumulative credit losses on debt securities, end of period$(20,687) $(23,079)$(17,214) $(20,607) $(17,214) $(20,607)

11


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 March 31,June 30, 2014:
Less than 12 months 12 months or longer TotalLess than 12 months 12 months or longer Total
Estimated
Fair Value
 
Unrealized
Losses
 
Estimated
Fair Value
 
Unrealized
Losses
 
Estimated
Fair Value
 
Unrealized
Losses
Estimated
Fair Value
 
Unrealized
Losses
 
Estimated
Fair Value
 
Unrealized
Losses
 
Estimated
Fair Value
 
Unrealized
Losses
(in thousands)(in thousands)
U.S. Government sponsored agency securities$
 $
 $50
 $(1) $50
 $(1)
State and municipal securities50,286
 (1,510) 3,996
 (246) 54,282
 (1,756)$8,531
 $(39) $34,089
 $(750) $42,620
 $(789)
Corporate debt securities3,939
 (58) 38,804
 (6,030) 42,743
 (6,088)
 
 42,995
 (4,862) 42,995
 (4,862)
Collateralized mortgage obligations416,584
 (13,921) 313,758
 (18,948) 730,342
 (32,869)33,465
 (97) 677,357
 (28,124) 710,822
 (28,221)
Mortgage-backed securities621,165
 (11,881) 
 
 621,165
 (11,881)37,304
 (45) 302,835
 (4,681) 340,139
 (4,726)
Auction rate securities
 
 147,619
 (11,668) 147,619
 (11,668)
 
 146,839
 (11,533) 146,839
 (11,533)
Total debt securities1,091,974
 (27,370) 504,227
 (36,893) 1,596,201
 (64,263)79,300
 (181) 1,204,115
 (49,950) 1,283,415
 (50,131)
Equity securities3
 (1) 118
 (20) 121
 (21)2
 (1) 77
 (13) 79
 (14)
$1,091,977
 $(27,371) $504,345
 $(36,913) $1,596,322
 $(64,284)$79,302
 $(182) $1,204,192
 $(49,963) $1,283,494
 $(50,145)
The Corporation’s collateralized mortgage obligations and mortgage-backed securities have contractual terms that generally do not permit the issuer to settle the securities at a price less than the amortized cost of the investment. Because the decline in market value of these securities is attributable to changes in interest rates and not credit quality, and because the Corporation does not have the intent to sell and does not believe it will more likely than not be required to sell any of these securities prior to a recovery of their fair value to amortized cost, the Corporation does not consider these investments to be other-than-temporarily impaired as of March 31,June 30, 2014.
The unrealized holding losses on auction rate securities, or auction rate certificates (ARCs), are attributable to liquidity issues resulting from the failure of periodic auctions. The Corporation had previously purchased ARCs for investment management and trust customers as short-term investments with fair values that could be derived based on periodic auctions under normal market conditions. During 2008 and 2009, the Corporation purchased ARCs from these customers due to the failure of these periodic auctions, which made these previously short-term investments illiquid.
As of March 31,June 30, 2014, approximately $143 million, or 97%, of the ARCs were rated above investment grade, with approximately $6 million, or 4%, AAA rated and $103102 million, or 70%, AA rated. Approximately $4 million, or 3%, of ARCs were either not rated or rated below investment grade by at least one ratings agency. Of this amount, approximately $3 million, or 59%, of the student loans underlying these ARCs have principal payments which are guaranteed by the federal government. In total, approximately $146145 million, or 99%, of the student loans underlying the ARCs have principal payments that are guaranteed by the federal government.
During the first quarter ofsix months ended 2014, the Corporation sold ARCs with a total book value of $11.9$11.9 million, with no gain or loss upon sale. As of March 31,June 30, 2014, all ARCs were current and making scheduled interest payments. Based on management’s evaluations, ARCs with a fair value of $147.7146.9 million were not subject to any other-than-temporary impairment charges as of March 31,June 30, 2014. The Corporation does not have the intent to sell and does not believe it will more likely than not be required to sell any of these securities prior to a recovery of their fair value to amortized cost, which may be at maturity.
For its investments in equity securities, particularly its investments in stocks of financial institutions, management evaluates the near-term prospects of the issuers in relation to the severity and duration of the impairment. Based on that evaluation and the Corporation’s ability and intent to hold those investments for a reasonable period of time sufficient for a recovery of fair value,

14


the Corporation does not consider those investments with unrealized holding losses as of March 31,June 30, 2014 to be other-than-temporarily impaired.

12


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:
March 31, 2014 December 31, 2013June 30, 2014 December 31, 2013
Amortized
cost
 
Estimated
fair value
 
Amortized
cost
 
Estimated
fair value
Amortized
cost
 
Estimated
fair value
 
Amortized
cost
 
Estimated
fair value
(in thousands)(in thousands)
Single-issuer trust preferred securities$47,502
 $41,879
 $47,481
 $40,531
$47,524
 $43,186
 $47,481
 $40,531
Subordinated debt47,436
 50,429
 47,405
 50,327
47,467
 50,616
 47,405
 50,327
Pooled trust preferred securities2,825
 5,659
 2,997
 5,306
2,067
 4,275
 2,997
 5,306
Corporate debt securities issued by financial institutions97,763
 97,967
 97,883
 96,164
97,058
 98,077
 97,883
 96,164
Other corporate debt securities2,585
 2,585
 2,585
 2,585
2,576
 2,576
 2,585
 2,585
Available for sale corporate debt securities$100,348
 $100,552
 $100,468
 $98,749
$99,634
 $100,653
 $100,468
 $98,749

The Corporation’s investments in single-issuer trust preferred securities had an unrealized loss of $5.64.3 million at March 31,June 30, 2014. The Corporation did not record any other-than-temporary impairment charges for single-issuer trust preferred securities during the three or threesix months ended March 31,June 30, 2014 or 2013.Six of the Corporation's 2220 single-issuer trust preferred securities were rated below investment grade by at least one ratings agency, with an amortized cost of $13.5 million and an estimated fair value of $11.712.1 million at March 31,June 30, 2014. All of the single-issuer trust preferred securities rated below investment grade were rated BB or Ba.Three single-issuer trust preferred securities with an amortized cost of $4.7 million and an estimated fair value of $3.8 million at March 31,June 30, 2014 were not rated by any ratings agency.
During the three and six months ended June 30, 2014, the Corporation sold two pooled trust preferred securities with a total amortized cost of $728,000, for a gain of $1.1 million. As of March 31,June 30, 2014, all eightsix of the Corporation's pooled trust preferred securities, with an amortized cost of $2.82.1 million and an estimated fair value of $5.74.3 million, were rated below investment grade by at least one ratings agency, with ratings ranging from C to Ca. The class of securities held by the Corporation was below the most senior tranche, with the Corporation’s interests being subordinate to other investors in the pool. The Corporation determines the fair value of pooled trust preferred securities based on quotes provided by third-party brokers.
The amortized cost of pooled trust preferred securities is the purchase price of the securities, net of cumulative credit related other-than-temporary impairment charges, determined using an expected cash flows model. The most significant input to the expected cash flows model is the expected payment deferral rate for each pooled trust preferred security. The Corporation evaluates the financial metrics, such as capital ratios and non-performing assets ratios, of the individual financial institution issuers that comprise each pooled trust preferred security to estimate its expected deferral rate.
Based on management’s evaluations, corporate debt securities with a fair value of $100.6100.7 million were not subject to any additional other-than-temporary impairment charges as of March 31,June 30, 2014. The Corporation does not have the intent to sell and does not believe it will more likely than not be required to sell any of these securities prior to a recovery of their fair value to amortized cost, which may be at maturity.
As mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), in December 2013, five regulatory bodies issued final rulings (Final Rules) implementing certain prohibitions and restrictions on the ability of a banking entity and non-bank financial company supervised by the Federal Reserve Board to engage in proprietary trading and have certain ownership interests in, or relationships with, a "covered fund" (the so-called "Volcker Rule"). The Final Rules generally treat as a covered fund any entity that would be an investment company under the Investment Company Act of 1940 (1940 Act) but for the application of the exemptions from SEC registration set forth in Section 3(c)(1) (fewer than 100 beneficial owners) or Section 3(c)(7) (qualified purchasers) of the 1940 Act. The Final Rules also require regulated entities to establish an internal compliance program that is consistent with the extent to which it engages in activities covered by the Volcker Rule, which must include making regular reports about those activities to regulators. Although the Final Rules provide some tiering of compliance and reporting obligations based on size, the fundamental prohibitions of the Volcker Rule apply to banking entities of any size, including the Corporation. Banking entities have until July 21, 2015 to conform their activities and investments to the requirements of the Final Rules. While the Corporation does not engage in proprietary trading or in any other activities prohibited by the Final Rules, the Corporation will continue to evaluate whether any of its investments that fall within the definition of a "covered fund" and would need to be disposed of by July 21, 2015. However, based on the Corporation's evaluation to date, it does not currently expect the Final Rules will have a material effect on its business, financial condition or results of operations.


1315


NOTE E – Loans and Allowance for Credit Losses

Loans, Net of Unearned Income
Loans, net of unearned income are summarized as follows:
March 31, 2014 December 31, 2013June 30,
2014
 December 31, 2013
(in thousands)(in thousands)
Real-estate - commercial mortgage$5,137,454
 $5,101,922
$5,128,734
 $5,101,922
Commercial - industrial, financial and agricultural3,574,130
 3,628,420
3,601,721
 3,628,420
Real-estate - home equity1,740,496
 1,764,197
1,730,497
 1,764,197
Real-estate - residential mortgage1,331,465
 1,337,380
1,361,976
 1,337,380
Real-estate - construction584,217
 573,672
634,018
 573,672
Consumer270,021
 283,124
280,557
 283,124
Leasing and other103,192
 99,256
109,573
 99,256
Overdrafts3,034
 4,045
3,251
 4,045
Loans, gross of unearned income12,744,009
 12,792,016
12,850,327
 12,792,016
Unearned income(10,217) (9,796)(10,816) (9,796)
Loans, net of unearned income$12,733,792
 $12,782,220
$12,839,511
 $12,782,220

Allowance for Credit Losses
The allowance for credit losses consists of the allowance for loan losses and the reserve for unfunded lending commitments. The allowance for loan losses represents management’s estimate of incurred losses in the loan portfolio as of the balance sheet date and is recorded as a reduction to loans. The reserve for unfunded lending commitments represents management’s estimate of incurred losses in its unfunded loan commitments and is recorded in other liabilities on the consolidated balance sheet. The allowance for credit losses is increased by charges to expense, through the provision for credit losses, and decreased by charge-offs, net of recoveries.
The Corporation’s allowance for credit losses includes: (1) specific allowances allocated to loans evaluated for impairment under the Financial Accounting Standards Board’s (FASB) Accounting Standards Codification (ASC)FASB's ASC Section 310-10-35; and (2) allowances calculated for pools of loans measured for impairment under FASB ASC Subtopic 450-20.
The Corporation segments its loan portfolio by general loan type, or "portfolio segments," as presented in the table under the heading, "Loans, Net of Unearned Income," above. Certain portfolio segments are further disaggregated and evaluated collectively for impairment based on "class segments," which are largely based on the type of collateral underlying each loan. For commercial loans, class segments include loans secured by collateral and unsecured loans. Construction loan class segments include loans secured by commercial real estate, loans to commercial borrowers secured by residential real estate and loans to individuals secured by residential real estate. Consumer loan class segments include direct consumer installment loans and indirect automobile loans.
The following table presents the components of the allowance for credit losses:
March 31,
2014
 December 31,
2013
June 30,
2014
 December 31,
2013
(in thousands)(in thousands)
Allowance for loan losses$197,089
 $202,780
$191,685
 $202,780
Reserve for unfunded lending commitments1,917
 2,137
1,757
 2,137
Allowance for credit losses$199,006
 $204,917
$193,442
 $204,917

1416


The following table presents the activity in the allowance for credit losses:
Three months ended March 31Three months ended June 30 Six months ended June 30
2014 20132014 2013 2014 2013
(in thousands)(in thousands)
Balance at beginning of period$204,917
 $225,439
$199,006
 $221,527
 $204,917
 $225,439
Loans charged off(10,268) (22,106)(11,476) (21,383) (21,744) (43,489)
Recoveries of loans previously charged off1,857
 3,194
2,412
 3,982
 4,269
 7,176
Net loans charged off(8,411) (18,912)(9,064) (17,401) (17,475) (36,313)
Provision for credit losses2,500
 15,000
3,500
 13,500
 6,000
 28,500
Balance at end of period$199,006
 $221,527
$193,442
 $217,626
 $193,442
 $217,626

The following table presents the activity in the allowance for loan losses by portfolio segment:
Real Estate -
Commercial
Mortgage
 
Commercial -
Industrial,
Financial and
Agricultural
 
Real Estate -
Home
Equity
 
Real Estate -
Residential
Mortgage
 
Real Estate -
Construction
 Consumer 
Leasing
and other
and
overdrafts
 Unallocated Total
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)(in thousands)
Three months ended March 31, 2014                 
Three months ended June 30, 2014                 
Balance at March 31, 2014$53,757
 $50,563
 $32,460
 $33,329
 $9,842
 $3,324
 $2,011
 $11,803
 $197,089
Loans charged off(2,141) (5,512) (1,234) (1,089) (218) (449) (833) 
 (11,476)
Recoveries of loans previously charged off430
 775
 177
 108
 158
 402
 362
 
 2,412
Net loans charged off(1,711) (4,737) (1,057) (981) (60) (47) (471) 
 (9,064)
Provision for loan losses (1)(2,204) 3,258
 638
 396
 1,549
 29
 311
 (317) 3,660
Balance at June 30, 2014$49,842
 $49,084
 $32,041
 $32,744
 $11,331
 $3,306
 $1,851
 $11,486
 $191,685
Three months ended June 30, 2013                 
Balance at March 31, 2013$63,985
 $56,672
 $23,701
 $33,484
 $16,004
 $2,286
 $2,787
 $21,122
 $220,041
Loans charged off(5,193) (5,960) (1,966) (4,465) (2,597) (433) (769) 
 (21,383)
Recoveries of loans previously charged off1,505
 756
 192
 116
 744
 406
 263
 
 3,982
Net loans charged off(3,688) (5,204) (1,774) (4,349) (1,853) (27) (506) 
 (17,401)
Provision for loan losses (1)(1,601) 6,089
 3,809
 3,549
 320
 238
 644
 743
 13,791
Balance at June 30, 2013$58,696
 $57,557
 $25,736
 $32,684
 $14,471
 $2,497
 $2,925
 $21,865
 $216,431
Six months ended June 30, 2014                 
Balance at December 31, 2013$55,659
 $50,330
 $28,222
 $33,082
 $12,649
 $3,260
 $3,370
 $16,208
 $202,780
$55,659
 $50,330
 $28,222
 $33,082
 $12,649
 $3,260
 $3,370
 $16,208
 $202,780
Loans charged off(1,386) (5,125) (1,651) (846) (214) (751) (295) 
 (10,268)(3,527) (10,637) (2,885) (1,935) (432) (1,200) (1,128) 
 (21,744)
Recoveries of loans previously charged off44
 744
 356
 116
 224
 209
 164
 
 1,857
474
 1,519
 533
 224
 382
 611
 526
 
 4,269
Net loans charged off(1,342) (4,381) (1,295) (730) 10
 (542) (131) 
 (8,411)(3,053) (9,118) (2,352) (1,711) (50) (589) (602) 
 (17,475)
Provision for loan losses (1)(560) 4,614
 5,533
 977
 (2,817) 606
 (1,228) (4,405) 2,720
(2,764) 7,872
 6,171
 1,373
 (1,268) 635
 (917) (4,722) 6,380
Balance at March 31, 2014$53,757
 $50,563
 $32,460
 $33,329
 $9,842
 $3,324
 $2,011
 $11,803
 $197,089
Three months ended March 31, 2013                 
Balance at June 30, 2014$49,842
 $49,084
 $32,041
 $32,744
 $11,331
 $3,306
 $1,851
 $11,486
 $191,685
Six months ended June 30, 2013             



Balance at December 31, 2012$62,928
 $60,205
 $22,776
 $34,536
 $17,287
 $2,367
 $2,752
 $21,052
 $223,903
$62,928
 $60,205
 $22,776
 $34,536
 $17,287
 $2,367
 $2,752
 $21,052
 $223,903
Loans charged off(4,133) (9,502) (2,404) (3,050) (1,986) (550) (481) 
 (22,106)(9,326) (15,462) (4,370) (7,515) (4,583) (983) (1,250) 
 (43,489)
Recoveries of loans previously charged off1,064
 379
 331
 81
 671
 506
 162
 
 3,194
2,569
 1,135
 523
 197
 1,415
 912
 425
 
 7,176
Net loans charged off(3,069) (9,123) (2,073) (2,969) (1,315) (44) (319) 
 (18,912)(6,757) (14,327) (3,847) (7,318) (3,168) (71) (825) 
 (36,313)
Provision for loan losses (1)4,126
 5,590
 2,998
 1,917
 32
 (37) 354
 70
 15,050
2,525
 11,679
 6,807
 5,466
 352
 201
 998
 813
 28,841
Balance at March 31, 2013$63,985
 $56,672
 $23,701
 $33,484
 $16,004
 $2,286
 $2,787
 $21,122
 $220,041
Balance at June 30, 2013$58,696
 $57,557
 $25,736
 $32,684
 $14,471
 $2,497
 $2,925
 $21,865
 $216,431

(1)
The provision for loan losses excluded a $220,000160,000 and $380,000 decrease, respectively, in the reserve for unfunded lending commitments for the three and sixmonths ended March 31,June 30, 2014 and excluded a $50,000291,000 and $341,000 decrease, respectively, in the reserve for unfunded lending commitments for the three and sixmonths ended March 31,June 30, 2013. The total provision for credit losses, comprised of allocations for both funded and unfunded loans, was $2.53.5 million and $6.0 million, respectively, for the three and sixmonths ended March 31,June 30, 2014 and $15.013.5 million and $28.5 million, respectively, for the three and sixmonths ended March 31,June 30, 2013.

1517


The following table presents loans, net of unearned income and their related 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
(1)
 Total
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
(1)
 Total
(in thousands)(in thousands)
Allowance for loan losses at March 31, 2014              
Allowance for loan losses at June 30, 2014:Allowance for loan losses at June 30, 2014:              
Measured for impairment under FASB ASC Subtopic 450-20$37,363
 $36,859
 $22,969
 $11,618
 $7,256
 $3,309
 $2,011
 $11,803
 $133,188
$33,388
 $36,603
 $22,234
 $11,450
 $7,163
 $3,285
 $1,851
 $11,486
 $127,460
Evaluated for impairment under FASB ASC Section 310-10-3516,394
 13,704
 9,491
 21,711
 2,586
 15
 
 N/A
 63,901
16,454
 12,481
 9,807
 21,294
 4,168
 21
 
 N/A
 64,225
$53,757
 $50,563
 $32,460
 $33,329
 $9,842
 $3,324
 $2,011
 $11,803
 $197,089
$49,842
 $49,084
 $32,041
 $32,744
 $11,331
 $3,306
 $1,851
 $11,486
 $191,685
                                  
Loans, net of unearned income at March 31, 2014              
Loans, net of unearned income at June 30, 2014:Loans, net of unearned income at June 30, 2014:              
Measured for impairment under FASB ASC Subtopic 450-20$5,075,556
 $3,528,857
 $1,726,342
 $1,279,783
 $555,852
 $270,004
 $96,009
 N/A
 $12,532,403
$5,067,400
 $3,558,788
 $1,715,953
 $1,309,739
 $606,221
 $280,534
 $102,008
 N/A
 $12,640,643
Evaluated for impairment under FASB ASC Section 310-10-3561,898
 45,273
 14,154
 51,682
 28,365
 17
 
 N/A
 201,389
61,334
 42,933
 14,544
 52,237
 27,797
 23
 
 N/A
 198,868
$5,137,454
 $3,574,130
 $1,740,496
 $1,331,465
 $584,217
 $270,021
 $96,009
 N/A
 $12,733,792
$5,128,734
 $3,601,721
 $1,730,497
 $1,361,976
 $634,018
 $280,557
 $102,008
 N/A
 $12,839,511
                                  
Allowance for loan losses at March 31, 2013              
Allowance for loan losses at June 30, 2013:Allowance for loan losses at June 30, 2013:              
Measured for impairment under FASB ASC Subtopic 450-20$40,920
 $38,988
 $14,947
 $10,075
 $8,838
 $2,271
 $2,758
 $21,122
 $139,919
$43,405
 $42,354
 $16,114
 $9,841
 $9,572
 $2,479
 $2,925
 $21,865
 $148,555
Evaluated for impairment under FASB ASC Section 310-10-3523,065
 17,684
 8,754
 23,409
 7,166
 15
 29
 N/A
 80,122
15,291
 15,203
 9,622
 22,843
 4,899
 18
 
 N/A
 67,876
$63,985
 $56,672
 $23,701
 $33,484
 $16,004
 $2,286
 $2,787
 $21,122
 $220,041
$58,696
 $57,557
 $25,736
 $32,684
 $14,471
 $2,497
 $2,925
 $21,865
 $216,431
                                  
Loans, net of unearned income at March 31, 2013              
Loans, net of unearned income at June 30, 2013:Loans, net of unearned income at June 30, 2013:              
Measured for impairment under FASB ASC Subtopic 450-20$4,646,355
 $3,591,753
 $1,675,577
 $1,247,976
 $554,757
 $309,120
 $89,195
 N/A
 $12,114,733
$4,788,274
 $3,649,857
 $1,745,208
 $1,259,558
 $572,537
 $300,212
 $91,402
 N/A
 $12,407,048
Evaluated for impairment under FASB ASC Section 310-10-3583,575
 66,730
 13,869
 55,478
 42,840
 18
 45
 N/A
 262,555
68,642
 63,117
 15,060
 53,787
 37,743
 21
 
 N/A
 238,370
$4,729,930
 $3,658,483
 $1,689,446
 $1,303,454
 $597,597
 $309,138
 $89,240
 N/A
 $12,377,288
$4,856,916
 $3,712,974
 $1,760,268
 $1,313,345
 $610,280
 $300,233
 $91,402
 N/A
 $12,645,418
 
(1)
The unallocated allowance, which was approximately 6% and 10% of the total allowance for credit losses as of March 31,June 30, 2014 and March 31,June 30, 2013, respectively, was, in the opinion of management, reasonable and appropriate given that the estimates used in the allocation process are inherently imprecise.
N/A – Not applicable.
In March 2013, the Corporation sold $9.9 million of non-accrual commercial mortgage, commercial and construction loans to an investor, resulting in a total increase to charge-offs of $5.2 million during the three months ended March 31, 2013, as detailed in the following table.
 Real Estate - Commercial mortgage Commercial - industrial, financial and agricultural Real Estate - Construction Total
 (in thousands)
Unpaid principal balance of loans sold$7,690
 $4,730
 $740
 $13,160
Charge-offs prior to sale(2,420) (710) (150) (3,280)
Net recorded investment in loans sold5,270
 4,020
 590
 9,880
Proceeds from sale, net of selling expenses2,770
 1,730
 140
 4,640
Total charge-off upon sale$(2,500) $(2,290) $(450) $(5,240)
        
Existing allocation for credit losses on sold loans$(2,870) $(1,960) $(300) $(5,130)

Impaired Loans
A loan is considered to be impaired if it is probable that all amounts will not be collected according to the contractual terms of the loan agreement. Impaired loans consist of all loans on non-accrual status and accruing troubled debt restructurings (TDRs). An allowance for loan losses is established for an impaired loan if its carrying value exceeds its estimated fair value. Impaired loans to borrowers with total outstanding commitments greater than or equal to $1.0 million are evaluated individually for impairment. Impaired loans to borrowers with total outstanding commitments less than $1.0 million are pooled and measured for impairment collectively. All loans evaluated for impairment under FASB ASC Section 310-10-35 are measured for losses on a quarterly basis. As of March 31,June 30, 2014 and December 31, 2013, substantially all of the Corporation’s individually evaluated impaired loans with total outstanding balances greater than or equal to $1.0 million were measured based on the estimated fair value of each loan’s collateral. Collateral

16


could be in the form of real estate, in the case of impaired commercial mortgages and construction loans, or business assets, such as accounts receivable or inventory, in the case of commercial and industrial loans. Commercial and industrial loans may also be secured by real property.
As of March 31,June 30, 2014 and 2013, approximately79%and 73%86%, respectively, of impaired loans with principal balances greater than or equal to $1.0 million, whose primary collateral is real estate, were measured at estimated fair value using state certified third-party appraisals that had been updated within the preceding 12 months.
When updated certified appraisals are not obtained for loans to commercial borrowers evaluated for impairment under FASB ASC Section 310-10-35 that are secured by real estate, fair values are estimated based on the original appraisal values, as long as the original appraisal indicated a strong loan-to-value position and, in the opinion of the Corporation's internal loan evaluation staff, there has not been a significant deterioration in the collateral value since the original appraisal was performed. Original appraisals are typically used only when the estimated collateral value, as adjusted appropriately for the age of the appraisal, results in a current loan-to-value ratio that is lower than the Corporation's loan-to-value requirements for new loans, generally less than 70%.

18


The following table presents total impaired loans by class segment:
March 31, 2014 December 31, 2013June 30, 2014 December 31, 2013
Unpaid
Principal
Balance
 
Recorded
Investment
 
Related
Allowance
 
Unpaid
Principal
Balance
 
Recorded
Investment
 
Related
Allowance
Unpaid
Principal
Balance
 
Recorded
Investment
 
Related
Allowance
 
Unpaid
Principal
Balance
 
Recorded
Investment
 
Related
Allowance
(in thousands)(in thousands)
With no related allowance recorded:With no related allowance recorded:          With no related allowance recorded:          
Real estate - commercial mortgage$27,433
 $23,491
 $
 $28,892
 $24,494
 $
$26,692
 $22,832
 $
 $28,892
 $24,494
 $
Commercial - secured23,862
 20,867
 
 23,890
 21,383
 
27,737
 22,524
 
 23,890
 21,383
 
Real estate - home equity399
 300
 
 399
 300
 
399
 300
 
 399
 300
 
Real estate - residential mortgage317
 317
 
 
 
 
1,397
 1,397
 
 
 
 
Construction - commercial residential26,475
 20,705
 
 18,943
 13,740
 
20,920
 15,000
 
 18,943
 13,740
 
Construction - commercial2,992
 1,962
 
 2,996
 1,976
 
1,007
 874
 
 2,996
 1,976
 
81,478
 67,642
 
 75,120
 61,893
 
78,152
 62,927
 
 75,120
 61,893
 
With a related allowance recorded:With a related allowance recorded:   
 
 
 
With a related allowance recorded:   
 
 
 
Real estate - commercial mortgage47,010
 38,407
 16,394
 43,282
 35,830
 14,444
47,919
 38,502
 16,454
 43,282
 35,830
 14,444
Commercial - secured36,309
 23,765
 13,232
 34,267
 22,324
 13,315
28,337
 19,537
 11,844
 34,267
 22,324
 13,315
Commercial - unsecured693
 641
 472
 1,113
 1,048
 752
930
 872
 637
 1,113
 1,048
 752
Real estate - home equity19,420
 13,854
 9,491
 20,383
 14,337
 9,059
20,019
 14,244
 9,807
 20,383
 14,337
 9,059
Real estate - residential mortgage61,733
 51,365
 21,711
 63,682
 51,097
 21,745
61,525
 50,840
 21,294
 63,682
 51,097
 21,745
Construction - commercial residential15,753
 4,963
 2,212
 25,769
 14,579
 3,493
20,866
 10,388
 3,786
 25,769
 14,579
 3,493
Construction - commercial481
 191
 76
 485
 195
 77
2,458
 1,254
 239
 485
 195
 77
Construction - other718
 544
 298
 719
 548
 301
452
 281
 143
 719
 548
 301
Consumer - direct15
 15
 13
 11
 11
 10
17
 17
 16
 11
 11
 10
Consumer - indirect15
 2
 2
 2
 2
 2
6
 6
 5
 2
 2
 2
182,147
 133,747
 63,901
 189,713
 139,971
 63,198
182,529
 135,941
 64,225
 189,713
 139,971
 63,198
Total$263,625
 $201,389
 $63,901
 $264,833
 $201,864
 $63,198
$260,681
 $198,868
 $64,225
 $264,833
 $201,864
 $63,198
As of March 31,June 30, 2014 and December 31, 2013, there were $67.662.9 million and $61.9 million, respectively, of impaired loans that did not have a related allowance for loan loss. The estimated fair values of the collateral for these loans exceeded their carrying amount, or they were previously charged down to realizable collateral values. Accordingly, no specific valuation allowance was considered to be necessary.

1719


The following table presents average impaired loans by class segment:
Three months ended March 31Three months ended June 30 Six months ended June 30
2014 20132014 2013 2014 2013
Average
Recorded
Investment
 Interest
Income
Recognized (1)
 Average
Recorded
Investment
 Interest
Income
Recognized (1)
Average
Recorded
Investment
 Interest
Income
Recognized (1)
 Average
Recorded
Investment
 Interest
Income
Recognized (1)
 Average
Recorded
Investment
 Interest
Income
Recognized (1)
 Average
Recorded
Investment
 Interest
Income
Recognized (1)
(in thousands)(in thousands)
With no related allowance recorded:                      
Real estate - commercial mortgage$23,993
 $86
 $32,140
 $160
$23,162
 $80
 $30,107
 $125
 $23,606
 $166
 $31,467
 281
Commercial - secured21,125
 35
 31,413
 34
21,695
 34
 35,668
 50
 21,591
 69
 33,816
 82
Commercial - unsecured
 
 66
 

 
 
 
 
 
 44
 
Real estate - home equity300
 
 205
 1
300
 1
 205
 
 300
 1
 237
 1
Real estate - residential mortgage159
 1
 991
 12
857
 5
 1,494
 9
 571
 6
 1,158
 21
Construction - commercial residential17,223
 60
 22,650
 63
17,853
 62
 22,267
 71
 16,482
 122
 22,694
 134
Construction - commercial1,969
 
 4,979
 2
1,418
 
 3,151
 
 1,604
 
 3,995
 2
64,769
 182
 92,444
 272
65,285
 182
 92,892
 255
 64,154
 364
 93,411
 521
With a related allowance recorded:                      
Real estate - commercial mortgage37,119
 132
 54,464
 221
38,455
 132
 46,002
 190
 37,580
 264
 49,149
 405
Commercial - secured23,045
 38
 35,864
 43
21,652
 33
 27,917
 39
 21,876
 71
 31,649
 81
Commercial - unsecured845
 1
 1,743
 2
757
 1
 1,339
 1
 854
 2
 1,587
 3
Real estate - home equity14,096
 20
 13,301
 16
14,049
 28
 14,260
 16
 14,145
 48
 13,787
 32
Real estate - residential mortgage51,231
 294
 53,797
 339
51,153
 300
 53,222
 309
 51,134
 594
 53,351
 634
Construction - commercial residential9,771
 35
 11,496
 42
7,676
 27
 12,458
 40
 9,977
 62
 11,582
 82
Construction - commercial193
 
 2,758
 3
723
 
 1,921
 
 547
 
 2,064
 3
Construction - other546
 
 533
 1
413
 
 496
 
 458
 
 523
 1
Consumer - direct13
 
 24
 
16
 
 18
 
 14
 
 22
 
Consumer - indirect2
 
 
 
4
 
 2
 
 3
 
 1
 
Leasing and other and overdrafts
 
 28
 

 
 23
 
 
 
 18
 
136,861
 520
 174,008
 667
134,898
 521
 157,658
 595
 136,588
 1,041
 163,733
 1,241
Total$201,630
 $702
 $266,452
 $939
$200,183
 $703
 $250,550
 $850
 $200,742
 $1,405
 $257,144
 1,762
                      
(1)
All impaired loans, excluding accruing TDRs, were non-accrual loans. Interest income recognized for the three and sixmonths ended March 31,June 30, 2014 and 2013 represents amounts earned on accruing TDRs.



1820


Credit Quality Indicators and Non-performing Assets
The following table presents internal credit risk ratings for real estate - commercial mortgages, commercial - secured loans, commercial - unsecured loans, commercial mortgages, construction - commercial residential loans and construction - commercial loans:
Pass Special Mention Substandard or Lower TotalPass Special Mention Substandard or Lower Total
March 31, 2014 December 31, 2013 March 31, 2014 December 31, 2013 March 31, 2014 December 31, 2013 March 31, 2014 December 31, 2013June 30, 2014 December 31, 2013 June 30, 2014 December 31, 2013 June 30, 2014 December 31, 2013 June 30, 2014 December 31, 2013
(dollars in thousands)(dollars in thousands)
Real estate - commercial mortgage$4,833,982
 $4,763,987
 $122,929
 $141,013
 $180,543
 $196,922
 $5,137,454
 $5,101,922
$4,850,227
 $4,763,987
 $115,220
 $141,013
 $163,287
 $196,922
 $5,128,734
 $5,101,922
Commercial - secured3,109,539
 3,167,168
 137,176
 111,613
 128,326
 125,382
 3,375,041
 3,404,163
3,145,100
 3,167,168
 128,824
 111,613
 126,790
 125,382
 3,400,714
 3,404,163
Commercial -unsecured183,734
 209,836
 10,369
 11,666
 4,986
 2,755
 199,089
 224,257
Commercial - unsecured172,054
 209,836
 23,681
 11,666
 5,272
 2,755
 201,007
 224,257
Total commercial - industrial, financial and agricultural3,293,273
 3,377,004
 147,545
 123,279
 133,312
 128,137
 3,574,130
 3,628,420
3,317,154
 3,377,004
 152,505
 123,279
 132,062
 128,137
 3,601,721
 3,628,420
Construction - commercial residential153,495
 146,041
 29,556
 31,522
 46,490
 57,806
 229,541
 235,369
154,366
 146,041
 28,412
 31,522
 47,031
 57,806
 229,809
 235,369
Construction - commercial274,037
 258,441
 2,915
 2,932
 6,144
 8,124
 283,096
 269,497
327,310
 258,441
 1,470
 2,932
 6,415
 8,124
 335,195
 269,497
Total construction (excluding Construction - other)427,532
 404,482
 32,471
 34,454
 52,634
 65,930
 512,637
 504,866
481,676
 404,482
 29,882
 34,454
 53,446
 65,930
 565,004
 504,866
$8,554,787
 $8,545,473
 $302,945
 $298,746
 $366,489
 $390,989
 $9,224,221
 $9,235,208
$8,649,057
 $8,545,473
 $297,607
 $298,746
 $348,795
 $390,989
 $9,295,459
 $9,235,208
% of Total92.7% 92.6% 3.3% 3.2% 4.0% 4.2% 100.0% 100.0%93.0% 92.6% 3.2% 3.2% 3.8% 4.2% 100.0% 100.0%

The following is a summary of the Corporation's internal risk rating categories:
Pass: These loans do not currently pose undue credit risk and can range from the highest to average quality, depending on the degree of potential risk.
Special Mention: These loans constitute an undue and unwarranted credit risk, but not to a point of justifying a classification of substandard. Loans in this category are currently acceptable, but are nevertheless potentially weak.
Substandard or Lower: These loans are inadequately protected by current sound worth and paying capacity of the borrower. There exists a well-defined weakness or weaknesses that jeopardize the normal repayment of the debt.

The Corporation believes that internal risk ratings are the most relevant credit quality indicator for the class segments presented above. The migration of loans through the various internal risk rating categories is a significant component of the allowance for credit loss methodology, which bases the probability of default on this migration. Assigning risk ratings involves judgment. Risk ratings are initially assigned to loans by loan officers and are reviewed on a regular basis by credit administration staff. The Corporation's loan review officers provide a separate assessment of risk rating accuracy. Ratings may be changed based on the ongoing monitoring procedures performed by loan officers or credit administration staff, or if specific loan review activities identify a deterioration or an improvement in the loan. The risk rating process allows management to identify riskier credits in a timely manner and to allocate resources to managing troubled accounts.

The Corporation does not assign internal risk ratings to smaller balance, homogeneous loans, such as home equity, residential mortgage, consumer, leasing and other and construction loans to individuals secured by residential real estate. For these loans, the most relevant credit quality indicator is delinquency status. The migration of these loans through the various delinquency status categories is a significant component of the allowance for credit losses methodology, which bases the probability of default on this migration.


1921


The following table presents a summary of delinquency and non-performing status for home equity, real estate - residential mortgages, construction loans to individuals and consumer, leasing and other loans by class segment:
Performing Delinquent (1) Non-performing (2) TotalPerforming Delinquent (1) Non-performing (2) Total
March 31, 2014 December 31, 2013 March 31, 2014 December 31, 2013 March 31, 2014 December 31, 2013 March 31, 2014 December 31, 2013June 30, 2014 December 31, 2013 June 30, 2014 December 31, 2013 June 30, 2014 December 31, 2013 June 30, 2014 December 31, 2013
(dollars in thousands)(dollars in thousands)
Real estate - home equity$1,711,430
 $1,731,185
 $11,978
 $16,029
 $17,088
 $16,983
 $1,740,496
 $1,764,197
$1,702,554
 $1,731,185
 $11,849
 $16,029
 $16,094
 $16,983
 $1,730,497
 $1,764,197
Real estate - residential mortgage1,281,854
 1,282,754
 20,306
 23,279
 29,305
 31,347
 1,331,465
 1,337,380
1,309,813
 1,282,754
 24,276
 23,279
 27,887
 31,347
 1,361,976
 1,337,380
Construction - other70,096
 68,258
 940
 
 544
 548
 71,580
 68,806
68,584
 68,258
 149
 
 281
 548
 69,014
 68,806
Consumer - direct116,748
 126,666
 3,634
 3,586
 2,872
 2,391
 123,254
 132,643
123,483
 126,666
 3,324
 3,586
 2,765
 2,391
 129,572
 132,643
Consumer - indirect144,220
 147,017
 2,420
 3,312
 127
 152
 146,767
 150,481
148,841
 147,017
 2,084
 3,312
 60
 152
 150,985
 150,481
Total consumer260,968
 273,683
 6,054
 6,898
 2,999
 2,543
 270,021
 283,124
272,324
 273,683
 5,408
 6,898
 2,825
 2,543
 280,557
 283,124
Leasing and other and overdrafts95,141
 92,876
 794
 581
 74
 48
 96,009
 93,505
101,415
 92,876
 533
 581
 60
 48
 102,008
 93,505
$3,419,489
 $3,448,756
 $40,072
 $46,787
 $50,010
 $51,469
 $3,509,571
 $3,547,012
$3,454,690
 $3,448,756
 $42,215
 $46,787
 $47,147
 $51,469
 $3,544,052
 $3,547,012
% of Total97.4%
97.2%
1.2%
1.3%
1.4%
1.5%
100.0%
100.0%97.5%
97.2%
1.2%
1.3%
1.3%
1.5%
100.0%
100.0%

(1)
Includes all accruing loans 31 days to 89 days past due.
(2)
Includes all accruing loans 90 days or more past due and all non-accrual loans.
The following table presents non-performing assets:
March 31,
2014
 December 31,
2013
June 30,
2014
 December 31,
2013
(in thousands)(in thousands)
Non-accrual loans$133,705
 $133,753
$129,934
 $133,753
Accruing loans greater than 90 days past due21,225
 20,524
19,378
 20,524
Total non-performing loans154,930
 154,277
149,312
 154,277
Other real estate owned (OREO)15,300
 15,052
13,482
 15,052
Total non-performing assets$170,230
 $169,329
$162,794
 $169,329
The following table presents TDRs, by class segment:
March 31,
2014
 December 31,
2013
June 30,
2014
 December 31,
2013
(in thousands)(in thousands)
Real-estate - residential mortgage$30,363
 $28,815
$31,184
 $28,815
Real-estate - commercial mortgage19,514
 19,758
19,398
 19,758
Construction - commercial residential8,430
 10,117
8,561
 10,117
Commercial - secured6,674
 7,933
6,876
 7,933
Real estate - home equity2,606
 1,365
2,815
 1,365
Commercial - unsecured81
 112
77
 112
Consumer - direct15
 11
17
 11
Consumer - indirect1
 
6
 
Total accruing TDRs67,684
 68,111
68,934
 68,111
Non-accrual TDRs (1)27,487
 30,209
25,526
 30,209
Total TDRs$95,171
 $98,320
$94,460
 $98,320
 
(1)Included within non-accrual loans in the preceding table detailing non-performing assets.

As of March 31,June 30, 2014 and December 31, 2013, there were $5.25.3 million and $9.6 million, respectively, of commitments to lend additional funds to borrowers whose loans were modified under TDRs.


2022


The following table presents TDRs, by class segment, as of March 31,June 30, 2014 and 2013 that were modified during the three and six months ended March 31,June 30, 2014 and 2013:
Three months ended March 31Three months ended June 30 Six months ended June 30
2014 20132014 2013 2014 2013
Number of Loans Recorded Investment Number of Loans Recorded InvestmentNumber of Loans Recorded Investment Number of Loans Recorded Investment Number of Loans Recorded Investment Number of Loans Recorded Investment
(dollars in thousands)(dollars in thousands)
Real estate - commercial mortgage7 $7,470
 5 $2,652
2 $2,334
 4 $2,002
 9 $9,804
 9 $4,654
Construction - commercial residential1 1,366
 2 4,487
 2 1,914
 4 5,115
Real estate - residential mortgage6 706
 28 3,966
9 1,130
 11 2,059
 15 1,836
 39 6,025
Construction - commercial residential1 548
 2 628
Real estate - home equity10 529
 17 1,180
10 334
 11 677
 20 863
 28 1,857
Commercial - secured1 143
 2 135
 1 143
 7 592
Consumer - indirect1 6
  
 4 7
  
Consumer - direct4 4
  
2 4
 9 2
 6 8
 9 2
Consumer - indirect3 1
  
Commercial - secured 
 5 457
Commercial - unsecured 
 1 15
 
  
  
 1 15
31 $9,258
 58 $8,898
Total26 $5,317
 39 $9,362
 57 $14,575
 97 $18,260

The following table presents TDRs, by class segment, as of March 31,June 30, 2014 and 2013 that were modified within the previous 12 months and had a post-modification payment default during the three six months ended March 31,June 30, 2014 and 2013. The Corporation defines a payment default as a single missed payment.
Three months ended March 31
2014 2013 2014 2013
Number of Loans Recorded Investment Number of Loans Recorded Investment Number of Loans Recorded Investment Number of Loans Recorded Investment
(dollars in thousands)(dollars in thousands)
Real estate - residential mortgage12 $2,522
 31 $5,849
 9 $1,204
 22 $4,677
Real estate - home equity14 1,432
 20 1,233
 9 777
 14 935
Construction - commercial residential1 619
 4 1,308
 1 619
 1 608
Real estate - commercial mortgage3 126
 12 6,893
 2 35
 4 2,407
Commercial - secured1 11
 6 708
 1 10
 2 381
Construction - commercial 
 1 930
31 $4,710
 74 $16,921
Consumer - direct  
 6 2
Total 22 $2,645
 49 $9,010


2123


The following table presents past due status and non-accrual loans by portfolio segment and class segment:
March 31, 2014June 30, 2014
31-59
Days Past
Due
 
60-89
Days Past
Due
 
≥ 90 Days
Past Due
and
Accruing
 
Non-
accrual
 
Total ≥ 90
Days
 
Total Past
Due
 Current Total
31-59
Days Past
Due
 
60-89
Days Past
Due
 
≥ 90 Days
Past Due
and
Accruing
 
Non-
accrual
 
Total ≥ 90
Days
 
Total Past
Due
 Current Total
(in thousands)(in thousands)
Real estate - commercial mortgage$13,290
 $4,633
 $3,492
 $42,384
 $45,876
 $63,799
 $5,073,655
 $5,137,454
$12,537
 $2,955
 $2,079
 $41,936
 $44,015
 $59,507
 $5,069,227
 $5,128,734
Commercial - secured9,370
 1,886
 308
 37,958
 38,266
 49,522
 3,325,519
 3,375,041
13,774
 2,394
 2,163
 35,185
 37,348
 53,516
 3,347,198
 3,400,714
Commercial - unsecured304
 275
 4
 560
 564
 1,143
 197,946
 199,089
564
 29
 20
 795
 815
 1,408
 199,599
 201,007
Total commercial - industrial, financial and agricultural9,674
 2,161
 312
 38,518
 38,830
 50,665
 3,523,465
 3,574,130
14,338
 2,423
 2,183
 35,980
 38,163
 54,924
 3,546,797
 3,601,721
Real estate - home equity9,347
 2,631
 5,540
 11,548
 17,088
 29,066
 1,711,430
 1,740,496
9,585
 2,264
 4,365
 11,729
 16,094
 27,943
 1,702,554
 1,730,497
Real estate - residential mortgage14,682
 5,624
 7,986
 21,319
 29,305
 49,611
 1,281,854
 1,331,465
19,339
 4,937
 6,834
 21,053
 27,887
 52,163
 1,309,813
 1,361,976
Construction - commercial residential1,352
 228
 796
 17,238
 18,034
 19,614
 209,927
 229,541
268
 219
 1,032
 16,827
 17,859
 18,346
 211,463
 229,809
Construction - commercial
 
 27
 2,153
 2,180
 2,180
 280,916
 283,096

 
 
 2,128
 2,128
 2,128
 333,067
 335,195
Construction - other940
 
 
 544
 544
 1,484
 70,096
 71,580
149
 
 
 281
 281
 430
 68,584
 69,014
Total real estate - construction2,292
 228
 823
 19,935
 20,758
 23,278
 560,939
 584,217
417
 219
 1,032
 19,236
 20,268
 20,904
 613,114
 634,018
Consumer - direct2,495
 1,139
 2,872
 
 2,872
 6,506
 116,748
 123,254
2,227
 1,097
 2,765
 
 2,765
 6,089
 123,483
 129,572
Consumer - indirect1,960
 460
 126
 1
 127
 2,547
 144,220
 146,767
1,742
 342
 60
 
 60
 2,144
 148,841
 150,985
Total consumer4,455
 1,599
 2,998
 1
 2,999
 9,053
 260,968
 270,021
3,969
 1,439
 2,825
 
 2,825
 8,233
 272,324
 280,557
Leasing and other and overdrafts331
 463
 74
 
 74
 868
 95,141
 96,009
426
 107
 60
 
 60
 593
 101,415
 102,008
$54,071
 $17,339
 $21,225
 $133,705
 $154,930
 $226,340
 $12,507,452
 $12,733,792
Total$60,611
 $14,344
 $19,378
 $129,934
 $149,312
 $224,267
 $12,615,244
 $12,839,511
December 31, 2013December 31, 2013
31-59
Days Past
Due
 
60-89
Days Past
Due
 
≥ 90 Days
Past Due
and
Accruing
 
Non-
accrual
 
Total ≥ 90
Days
 
Total Past
Due
 Current Total
31-59
Days Past
Due
 
60-89
Days Past
Due
 
≥ 90 Days
Past Due
and
Accruing
 
Non-
accrual
 
Total ≥ 90
Days
 
Total Past
Due
 Current Total
(in thousands)(in thousands)
Real estate - commercial mortgage$15,474
 $4,009
 $3,502
 $40,566
 $44,068
 $63,551
 $5,038,371
 $5,101,922
$15,474
 $4,009
 $3,502
 $40,566
 $44,068
 $63,551
 $5,038,371
 $5,101,922
Commercial - secured8,916
 1,365
 1,311
 35,774
 37,085
 47,366
 3,356,797
 3,404,163
8,916
 1,365
 1,311
 35,774
 37,085
 47,366
 3,356,797
 3,404,163
Commercial - unsecured332
 125
 
 936
 936
 1,393
 222,864
 224,257
332
 125
 
 936
 936
 1,393
 222,864
 224,257
Total commercial - industrial, financial and agricultural9,248
 1,490
 1,311
 36,710
 38,021
 48,759
 3,579,661
 3,628,420
9,248
 1,490
 1,311
 36,710
 38,021
 48,759
 3,579,661
 3,628,420
Real estate - home equity13,555
 2,474
 3,711
 13,272
 16,983
 33,012
 1,731,185
 1,764,197
13,555
 2,474
 3,711
 13,272
 16,983
 33,012
 1,731,185
 1,764,197
Real estate - residential mortgage16,969
 6,310
 9,065
 22,282
 31,347
 54,626
 1,282,754
 1,337,380
16,969
 6,310
 9,065
 22,282
 31,347
 54,626
 1,282,754
 1,337,380
Construction - commercial residential
 645
 346
 18,202
 18,548
 19,193
 216,176
 235,369

 645
 346
 18,202
 18,548
 19,193
 216,176
 235,369
Construction - commercial14
 
 
 2,171
 2,171
 2,185
 267,312
 269,497
14
 
 
 2,171
 2,171
 2,185
 267,312
 269,497
Construction - other
 
 
 548
 548
 548
 68,258
 68,806

 
 
 548
 548
 548
 68,258
 68,806
Total real estate - construction14
 645
 346
 20,921
 21,267
 21,926
 551,746
 573,672
14
 645
 346
 20,921
 21,267
 21,926
 551,746
 573,672
Consumer - direct2,091
 1,495
 2,391
 
 2,391
 5,977
 126,666
 132,643
2,091
 1,495
 2,391
 
 2,391
 5,977
 126,666
 132,643
Consumer - indirect2,864
 448
 150
 2
 152
 3,464
 147,017
 150,481
2,864
 448
 150
 2
 152
 3,464
 147,017
 150,481
Total consumer4,955
 1,943
 2,541
 2
 2,543
 9,441
 273,683
 283,124
4,955
 1,943
 2,541
 2
 2,543
 9,441
 273,683
 283,124
Leasing and other and overdrafts559
 22
 48
 
 48
 629
 92,876
 93,505
559
 22
 48
 
 48
 629
 92,876
 93,505
$60,774
 $16,893
 $20,524
 $133,753
 $154,277
 $231,944
 $12,550,276
 $12,782,220
Total$60,774
 $16,893
 $20,524
 $133,753
 $154,277
 $231,944
 $12,550,276
 $12,782,220


2224


NOTE F – Mortgage Servicing Rights
The following table summarizes the changes in mortgage servicing rights (MSRs), which are included in other assets on the consolidated balance sheets:
Three months ended
March 31
Three months ended June 30 Six months ended
June 30
2014 20132014 2013 2014 2013
(in thousands)(in thousands)
Amortized cost:          
Balance at beginning of period$42,452
 $39,737
$41,668
 $41,006
 $42,452
 $39,737
Originations of mortgage servicing rights1,115
 4,227
1,236
 3,235
 2,351
 7,462
Amortization(1,899) (2,958)(318) (2,491) (2,217) (5,449)
Balance at end of period$41,668
 $41,006
$42,586
 $41,750
 $42,586
 $41,750
          
Valuation allowance$
 $(3,680)
Valuation allowance:       
Balance at beginning of period$
 $(3,680) $
 $(3,680)
Reversals (additions)
 1,990
 
 1,990
Balance at end of period$
 $(1,690) $
 $(1,690)
          
Net MSRs at end of period$41,668
 37,326
$42,586
 $40,060
 $42,586
 $40,060
MSRs represent the economic value of existing contractual rights to service mortgage loans that have been sold. Accordingly, actual and expected prepayments of the underlying mortgage loans can impact the value of MSRs.
The Corporation estimates the fair value of its MSRs by discounting the estimated cash flows from servicing income, net of expense, over the expected life of the underlying loans at a discount rate commensurate with the risk associated with these assets. Expected life is based on the contractual terms of the loans, as adjusted for prepayment projections. No adjustment to the valuation allowance was necessary for three and six months ended June 30, 2014. Based on the results of the fair value analysis completed as of June 30, 2013, a decrease to the valuation allowance of $2.0 million was recorded for the three and six months ended June 30, 2013.
As of March 31,June 30, 2014, the estimated fair value of MSRs was $48.247.3 million, which exceeded their book value. Therefore, no increase to the valuation allowance was necessary during the three or six months ended March 31, 2014.June 30, 2014.

NOTE G – Stock-Based Compensation
The fair value of equity awards granted to employees is recognized as compensation expense over the period during which employees are required to provide service in exchange for such awards. The Corporation grants equity awards to employees, consisting of stock options, and restricted stock, RSUs and PSUs under its Amended and Restated Equity and Cash Incentive Compensation Plan (Employee Option Plan). In addition, employees may purchase stock under the Corporation’s Employee Stock Purchase Plan.
The Corporation also grants restrictedequity awards stock to non-employee members of the board of directors under its 2011 Directors’ Equity Participation Plan (Directors’ Plan). Under the Directors’ Plan, the Corporation can grant equity awards to non-employee holding company and subsidiary bank directors in the form of stock options, restricted stock or common stock.

Equity awards issued under the Employee Option Plan have historically been granted annually and become fully vested over or after a three year vesting period. Equity awards under the Directors' Plan generally vest immediately upon grant. Certain events, as defined in the Employee Option Plan and the Directors' Plan, result in the acceleration of the vesting of equity awards.

25


The following table presents compensation expense and the related tax benefits for equity awards recognized in the consolidated statements of income:
Three months ended March 31Three months ended June 30 Six months ended June 30
2014 20132014 2013 2014 2013
(in thousands)(in thousands)
Stock-based compensation expense$1,033
 $847
$1,989
 $2,360
 $3,022
 $3,207
Tax benefit(263) (224)(446) (687) (709) (911)
Stock-based compensation expense, net of tax$770
 $623
$1,543
 $1,673
 $2,313
 $2,296

Stock option fair values are estimated through the use of the Black-Scholes valuation methodology as of the date of grant. Stock options carry terms of up to ten years. The fair value of restricted stock is based on the trading price of the Corporation’s stock on the date of grant. Restricted stock awards earn dividends during the vesting period, which are forfeitable if the awards do not vest. Equity awards issued under

During the Employee Option Plan have historically been granted annuallythree and become fully vested over or after a three year vesting period. Equity awards under the Directors' Plan generally vest immediately upon grant. Certain events, as defined in the Employee Option Plan and the Directors' Plan, result in the acceleration of the vesting of equity awards. As of March 31, 2014, the Employee Option Plan had 11.0 million shares reserved for future grants through 2023. As of March 31, 2014, the Directors’ Plan had 438,000 shares reserved for future grants through 2021.

23


On April 1,six months ended June 30, 2014, the Corporation granted approximately 389,000 performance based restricted stock units (PSUs),PSUs, 289,000 stock options and 96,000 restricted stock units (RSUs)105,000 RSUs under its Employee Option Plan. The fair value of RSUs and a majority of PSUs are based on the trading price of the Corporation's stock on the date of grant. The fair value of certain PSUs are estimated through the use of the Monte Carlo valuation methodology as of the date of grant. RSUs become fully vested over or after a three year vesting period, however, certain events, as defined in the Employee Option Plan, can result in the acceleration of the vesting of RSUs. RSUs and PSUs earn dividends during the vesting period, which are forfeitable if the awards do not vest. The amount of PSUs that vest is variable based on the achievement of Corporate and individual performance measures, as defined in each grantees' award agreement. As such, the fair value of PSUs, which is recognized as compensation expense over the period during which employees are required to provide service in exchange for such awards, may vary, based on the expectations for actual performance relative to defined performance measures. As of June 30, 2014, the Employee Option Plan had 11.1 million shares reserved for future grants through 2023. During the three and six months ended June 30, 2014, the Corporation granted approximately 13,000 shares of stock under its Directors' Plan. As of June 30, 2014, the Directors’ Plan had approximately 424,000 shares reserved for future grants through 2021.

NOTE H – Employee Benefit Plans
The Corporation maintains a defined benefit pension plan (Pension Plan) for certain employees, which was curtailed effective January 1, 2008. Contributions to the Pension Plan are actuarially determined and funded annually, if required. Pension Plan assets are invested in: money markets; fixed income securities, including corporate bonds, U.S. Treasury securities and common trust funds; and equity securities, including common stocks and common stock mutual funds.
The net periodic benefit cost for the Corporation’s Pension Plan, as determined by consulting actuaries, consisted of the following components:
Three months ended
March 31
Three months ended
June 30
 Six months ended
June 30
2014 20132014 2013 2014 2013
(in thousands)(in thousands)
Service cost (1)$92
 $51
$92
 $51
 $184
 $102
Interest cost853
 772
853
 772
 1,706
 1,544
Expected return on plan assets(811) (800)(810) (800) (1,621) (1,600)
Net amortization and deferral244
 596
244
 596
 488
 1,192
Net periodic benefit cost$378
 $619
$379
 $619
 $757
 $1,238
 
(1)
The Pension Plan service cost recorded for the three and six months ended March 31,June 30, 2014 and 2013, respectively, was related to administrative costs associated with the plan and was not due to the accrual of additional participant benefits.
The Corporation currently provides medical and life insurance benefits under a postretirement benefits plan (Postretirement Plan) to certain retired full-time employees who were employees of the Corporation prior to January 1, 1998.
Effective February 1, 2014, the Corporation amended the Postretirement Plan, making all active full-time employees ineligible for benefits under this plan. As a result of this amendment, the Corporation recorded a $1.5 million gain in 2014, as determined by consulting actuaries and included as a component of salaries and employee benefits on the consolidated statements of income. The gain resulted from the recognition of the remaining pre-curtailment prior service cost prior to the amendment date as of December 31, 2013.

26


In addition, this amendment resulted in a $3.3 million decrease in the accumulated postretirement benefit obligation and a corresponding increase in unrecognized prior service cost credits.

24


The net periodic benefit (income) cost of the Corporation’s Postretirement Plan as determined by consulting actuaries, consisted of the following components, excluding the impact of the $1.5 million plan amendment gain:
Three months ended
March 31
Three months ended
June 30
 Six months ended
June 30
2014 20132014 2013 2014 2013
(in thousands)(in thousands)
Service cost(1)$15
 $57
$
 $57
 $15
 $114
Interest cost61
 81
48
 81
 109
 162
Expected return on plan assets
 
Net accretion and deferral(95) (91)(84) (91) (179) (182)
Net periodic benefit (income) cost$(19) $47
$(36) $47
 $(55) $94

(1)As a result of the plan amendment, additional participant benefits are not accrued under the Postretirement Plan after February 1, 2014. Service costs recorded after the effective date of the amendment represent administrative costs associated with the plan.
The Corporation recognizes the funded status of its Pension Plan and Postretirement Plan on the consolidated balance sheets and recognizes the change in that funded status through other comprehensive income.

NOTE I – Derivative Financial Instruments
The Corporation manages its exposure to certain interest rate and foreign currency risks through the use of derivatives. None of the Corporation's outstanding derivative contracts are designated as hedges and none are entered into for speculative purposes. Derivative instruments are carried at fair value, with changes in fair values recognized in earnings as components of non-interest income and non-interest expense on the consolidated statements of income.
Derivative contracts create counterparty credit risk with both the Corporation's customers and with institutional derivative counterparties. The Corporation manages credit risk through its credit approval processes, monitoring procedures and obtaining adequate collateral, when appropriate.the Corporation determines it is appropriate to do so.
Mortgage Banking Derivatives
In connection with its mortgage banking activities, the Corporation enters into commitments to originate certain fixed rate residential mortgage loans for customers, also referred to as interest rate locks. In addition, the Corporation enters into forward commitments for the future sales or purchases of mortgage-backed securities to or from third-party counterparties to hedge the effect of changes in interest rates on the values of both the interest rate locks and mortgage loans held for sale. Forward sales commitments may also be in the form of commitments to sell individual mortgage loans or interest rate locks at a fixed price at a future date. The amount necessary to settle each interest rate lock is based on the price that secondary market investors would pay for loans with similar characteristics, including interest rate and term, as of the date fair value is measured. Gross derivative assets and liabilities are recorded within other assets and other liabilities, respectively, on the consolidated balance sheets, with changes in fair values during the period recorded within mortgage banking income on the consolidated statements of income.
Interest Rate Swaps
The Corporation enters into interest rate swaps with certain qualifying commercial loan customers to meet their interest rate risk management needs. The Corporation simultaneously enters into interest rate swaps with dealer counterparties, with identical notional amounts and terms. The net result of these interest rate swaps is that the customer pays a fixed rate of interest and the Corporation receives a floating rate. These interest rate swaps are derivative financial instruments that are recorded at their fair values within other assets and liabilities on the consolidated balance sheets. Changes in fair value during the period are recorded within other non-interest expense on the consolidated statements of income.
Foreign Exchange Contracts
The Corporation enters into foreign exchange contracts to accommodate the needs of its customers. Foreign exchange contracts are commitments to buy or sell foreign currency on a future date at a contractual price. The Corporation offsets its foreign exchange contract exposure with customers by entering into contracts with third-party correspondent financial institutions to mitigate its exposure to fluctuations in foreign currency exchange rates. The Corporation also holds certain amounts of foreign currency with international correspondent banks. The Corporation's policy limits the total net foreign currency open positions, which includes all outstanding contracts and foreign account balances, to $500,000. Gross derivative assets and liabilities are recorded within other assets and other liabilities, respectively, on the consolidated balance sheets, with changes in fair values during the period recorded within other service charges and fees on the consolidated statements of income.

2527


The following table presents a summary of the notional amounts and fair values of derivative financial instruments:
March 31, 2014 December 31, 2013June 30, 2014 December 31, 2013
Notional
Amount
 Asset
(Liability)
Fair Value
 Notional
Amount
 Asset
(Liability)
Fair Value
Notional
Amount
 Asset
(Liability)
Fair Value
 Notional
Amount
 Asset
(Liability)
Fair Value
(in thousands)(in thousands)
Interest Rate Locks with Customers              
Positive fair values$91,145
 $1,202
 $75,217
 $867
$129,053
 $2,420
 $75,217
 $867
Negative fair values1,258
 (5) 11,393
 (59)1,180
 (20) 11,393
 (59)
Net interest rate locks with customers
 1,197
 
 808

 2,400
 
 808
Forward Commitments              
Positive fair values4,904
 2
 87,904
 1,263
1,400
 5
 87,904
 1,263
Negative fair values95,750
 (242) 2,373
 (5)124,288
 (1,748) 2,373
 (5)
Net forward commitments  (240)   1,258
  (1,743)   1,258
Interest Rate Swaps with Customers              
Positive fair values228,588
 4,955
 111,899
 2,105
318,089
 10,042
 111,899
 2,105
Negative fair values81,163
 (1,638) 105,673
 (2,993)54,098
 (590) 105,673
 (2,993)
Net interest rate swaps with customers  3,317
   (888)  9,452
   (888)
Interest Rate Swaps with Dealer Counterparties              
Positive fair values81,163
 1,638
 105,673
 2,993
54,098
 590
 105,673
 2,993
Negative fair values228,588
 (4,955) 111,899
 (2,105)318,089
 (10,042) 111,899
 (2,105)
Net interest rate swaps with dealer counterparties  (3,317)   888
  (9,452)   888
Foreign Exchange Contracts with Customers              
Positive fair values9,927
 56
 2,150
 24
5,012
 81
 2,150
 24
Negative fair values9,965
 (183) 12,775
 (343)11,088
 (103) 12,775
 (343)
Net foreign exchange contracts with customers  (127)   (319)  (22)   (319)
Foreign Exchange Contracts with Correspondent Banks              
Positive fair values15,036
 198
 17,348
 498
11,046
 144
 17,348
 498
Negative fair values4,466
 (16) 5,872
 (48)5,149
 (60) 5,872
 (48)
Net foreign exchange contracts with correspondent banks  182
   450
  84
   450
Net derivative fair value asset  $1,012
   $2,197
  $719
   $2,197

The following table presents a summary of the fair value gains and losses on derivative financial instruments:
Three months ended
March 31
Three months ended
June 30
 Six months ended
June 30
2014 20132014 2013 2014 2013
(in thousands)(in thousands)
Interest rate locks with customers$389
 $(2,538)$1,203
 $(5,886) $1,592
 $(8,424)
Forward commitments(1,498) 428
(1,503) 9,847
 (3,001) 10,275
Interest rate swaps with customers4,205
 (408)6,135
 (5,871) 10,340
 (6,279)
Interest rate swaps with dealer counterparties(4,205) 408
(6,135) 5,871
 (10,340) 6,279
Foreign exchange contracts with customers192
 460
105
 (291) 297
 169
Foreign exchange contracts with correspondent banks(268) 418
(98) 542
 (366) 960
Net fair value losses on derivative financial instruments$(1,185) $(1,232)
Net fair value gains (losses) on derivative financial instruments$(293) $4,212
 $(1,478) $2,980


2628


NOTE J – Fair Value Option
U.S. GAAP permits entities to measure many financial instruments and certain other items at fair value and requires certain disclosures for amounts for which the fair value option is applied. The Corporation has elected to measure mortgage loans held for sale at fair value to more accurately reflect the financial results of its mortgage banking activities in its consolidated financial statements. Derivative financial instruments related to these activities are also recorded at fair value, as noted within Note I, "Derivative Financial Instruments." The Corporation determines fair value for its mortgage loans held for sale based on the price that secondary market investors would pay for loans with similar characteristics, including interest rate and term, as of the date fair value is measured. Changes in fair values during the period are recorded as components of mortgage banking income on the consolidated statements of income. Interest income earned on mortgage loans held for sale is recorded within interest income on the consolidated statements of income.
The following table presents a summary of the Corporation’s mortgage loans held for sale:
 June 30,
2014
 December 31,
2013
 (in thousands)
Cost$35,085
 $21,172
Fair value36,079
 21,351
During the three and six months ended June 30, 2014, the Corporation recorded gains related to changes in fair values of mortgage loans held for sale of $518,000 and $815,000, respectively. During the three and six months ended June 30, 2013, the Corporation recorded losses related to changes in fair values of mortgage loans held for sale of $2.7 million and $3.4 million, respectively.

NOTE K – Balance Sheet Offsetting
Certain financial assets and liabilities may be eligible for offset on the consolidated balance sheets as they are subject to master netting arrangements or similar agreements. The Corporation elects to not offset assets and liabilities subject to such arrangements on the consolidated financial statements.
The Corporation is a party to interest rate swap transactions with financial institution counterparties and customers, disclosed in detail within Note I, "Derivative Financial Instruments." Under these agreements, the Corporation has the right to net settle multiple contracts with the same counterparty in the event of default on, or termination of, any one contract. Cash collateral is posted by the party with a net liability position in accordance with contract thresholds and can be used to settle the fair value of the interest rate swap agreements in the event of default.
Beginning in the first quarter of 2014, the Corporation is also a party to foreign currency exchange contracts with financial institution counterparties, under which the Corporation has the right to net settle multiple contracts with the same counterparty in the event of default on, or termination of, any one contract. As with interest rate swap contracts, cash collateral is posted by the party with a net liability position in accordance with contract thresholds and can be used to settle the fair value of the interest rate swap agreements in the event of default. For additional details, see Note I, "Derivative Financial Instruments."
The Corporation also enters into agreements with customers in which it sells securities subject to an obligation to repurchase the same or similar securities, referred to as repurchase agreements. Under these agreements, the Corporation may transfer legal control over the assets but still maintain effective control through agreements that both entitle and obligate the Corporation to repurchase the assets. Therefore, repurchase agreements are reported as secured borrowings, classified within short-term borrowings on the consolidated balance sheets, while the securities underlying the repurchase agreements remain classified with investment securities on the consolidated balance sheets. The Corporation has no intention of setting off these amounts, therefore, these repurchase agreements are not eligible for offset.












29


The following table presents the Corporation's financial instruments that are eligible for offset, and the effects of offsetting, on the consolidated balance sheets:
Gross Amounts Gross Amounts Not Offset  Gross Amounts Gross Amounts Not Offset  
Recognized  on the Consolidated  Recognized  on the Consolidated  
on the Balance Sheets  on the Balance Sheets  
Consolidated Financial Cash NetConsolidated Financial Cash Net
Balance Sheets Instruments (1) Collateral (2) AmountBalance Sheets Instruments (1) Collateral (2) Amount
(in thousands)(in thousands)
March 31, 2014       
June 30, 2014       
Interest rate swap derivative assets$6,593
 $(1,830) $
 $4,763
$10,632
 $(687) $
 $9,945
Foreign exchange derivative assets with correspondent banks198
 (16) 
 182
144
 (56) 
 88
Total$6,791
 $(1,846) $
 $4,945
$10,776
 $(743) $
 $10,033
              
Interest rate swap derivative liabilities$6,593
 $(1,830) $(3,870) $893
$10,632
 $(687) $(692) $9,253
Foreign exchange derivative liabilities with correspondent banks16
 (16) 
 
60
 (56) 
 4
Total$6,609
 $(1,846) $(3,870) $893
$10,692
 $(743) $(692) $9,257
              
December 31, 2013              
Interest rate swap derivative assets$5,098
 $(2,104) $
 $2,994
$5,098
 $(2,104) $
 $2,994
              
Interest rate swap derivative liabilities$5,098
 $(2,104) $(730) $2,264
$5,098
 $(2,104) $(730) $2,264

(1)For interest rate swap and foreign exchange derivative assets, amounts represent any derivative liability fair values that could be offset in the event of counterparty or customer default. For interest rate swap and foreign exchange derivative liabilities, amounts represent any derivative asset fair values that could be offset in the event of counterparty or customer default.
(2)Amounts represent cash collateral posted on interest rate swap transactions with financial institution counterparties. Interest rate swaps with customers are collateralized by the underlying loans to those borrowers.
  

NOTE KL – Commitments and Contingencies
Commitments
The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers.
Those financial instruments include commitments to extend credit and letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized on the Corporation’s consolidated balance sheets. Exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and letters of credit is represented by the outstanding amount of those instruments.

27


The outstanding amounts of commitments to extend credit and letters of credit were as follows:
March 31,
2014
 December 31, 2013June 30,
2014
 December 31, 2013
(in thousands)(in thousands)
Commitments to extend credit$4,258,552
 $4,379,578
$4,362,988
 $4,379,578
Standby letters of credit387,424
 391,445
369,383
 391,445
Commercial letters of credit35,404
 36,344
34,632
 36,344
The Corporation records a reserve for unfunded lending commitments, which represents management’s estimate of losses associated with unused commitments to extend credit. See Note E, "Loans and Allowance for Credit Losses," for additional details.
Residential Lending
Residential mortgages are originated and sold by the Corporation and consist primarily of conforming, prime loans sold to government sponsored agencies, such as the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). The Corporation also sells a portion of prime loans to non-government sponsored agency investors.
The Corporation provides customary representations and warranties to investors that specify, among other things, that the loans have been underwritten to the standards established by the investor. The Corporation may be required to repurchase a loan or

30


reimburse the investor for a credit loss incurred on a loan if it is determined that the representations and warranties have not been met. Such repurchases or reimbursements generally result from an underwriting or documentation deficiency. As of March 31,June 30, 2014 and December 31, 2013, total outstanding repurchase requests totaled $543,000$680,000 and $8.8 million, respectively. During the three months ended March 31,first quarter of 2014,, the Corporation entered into a settlement agreement with a secondary market investor. Under this agreement, the Corporation agreed to pay this investor $4.5 million to settle all outstanding and potential future repurchase requests under a series of specified loan purchase agreements with that secondary market investor. The result of this settlement was a reduction to outstanding repurchase requests of $7.5 million and a reduction to reserves for repurchases of $5.1 million, resulting in a $600,000 reduction of operating risk loss on the consolidated statements of income during the first quarter ofsix months ended June 30, 2014.
From 2000 to 2011, the Corporation sold loans to the Federal Home Loan Bank (FHLB)of Pittsburgh under its Mortgage Partnership Finance Program (MPF Program). No loans were sold under this program during the threesix months ended March 31,June 30, 2014 or during 2013 or 2012. The Corporation provided a "credit enhancement" for residential mortgage loans sold under the MPF Program whereby it would assume credit losses in excess of a defined "First Loss Account" (FLA) balance, up to specified amounts. The FLA is funded by the FHLBFederal Home Loan Bank of Pittsburgh based on a percentage of the outstanding principal balance of loans sold. As of March 31,June 30, 2014, the unpaid principal balance of loans sold under the MPF Program was approximately $175165 million. As of March 31,June 30, 2014 and December 31, 2013, the reserve for estimated credit losses related to loans sold under the MPF Program was $3.22.4 million and $3.62.5 million, respectively. Required reserves are calculated based on delinquency status and estimated loss rates established through the Corporation's existing allowance for credit losses methodology.
As of March 31,June 30, 2014 and December 31, 2013, the total reserve for losses on residential mortgage loans sold was $3.63.3 million and $8.6 million, respectively, including both reserves for credit losses under the MPF Program and reserves for representation and warranty exposures. Management believes that the reserves recorded as of March 31,June 30, 2014 are adequate. However, declines in collateral values, the identification of additional loans to be repurchased, or a deterioration in the credit quality of loans sold under the MPF Program could necessitate additional reserves in the future.
Regulatory Matters
In July 2014, three wholly owned banking subsidiaries of the Corporation, Fulton Bank, N.A., Swineford National Bank and FNB Bank, N.A., each entered into a Stipulation and Consent to the Issuance of a Consent Order (Consent Order) with their primary Federal bank regulatory agency, the Office of the Comptroller of the Currency relating to identified deficiencies in a centralized Bank Secrecy Act and anti-money laundering compliance program, which was designed to comply with the requirements of the Bank Secrecy Act, the USA Patriot Act of 2001 and related anti-money laundering regulations (collectively, the "BSA/AML Requirements") as disclosed by the Corporation in a Current Report on Form 8-K filed with the Securities and Exchange Commission on July 18, 2014 (Form 8-K).  The Consent Orders require, among other things, that the banking subsidiaries review, assess and take actions to strengthen and enhance their compliance programs related to the BSA/AML Requirements (BSA/AML Compliance Program). In addition, the Form 8-K disclosed that the Corporation and its wholly owned subsidiary, Lafayette Ambassador Bank (Lafayette), anticipate that they will enter into a consent cease and desist order (Cease and Desist Order) with their primary Federal bank regulatory agency, the Board of Governors of the Federal Reserve System, in the near future. It is anticipated that the Cease and Desist Order will require the Corporation and Lafayette to strengthen the BSA/AML Compliance Program and will impose requirements similar to those set forth in the Consent Orders. Further, because the Consent Orders and the anticipated Cease and Desist Order relate to the BSA/AML Compliance Program, which is operated jointly for all of the Corporation’s subsidiary banks, the Corporation anticipates that one or more of the Corporation’s other subsidiary banks may also become the subject or subjects of a regulatory enforcement action related to the BSA/AML Requirements, and the provisions of any such enforcement action may differ from those of the Consent Orders.
Other Contingencies
The Corporation and its subsidiaries are involved in various legal proceedings in the ordinary course of business of the Corporation. The Corporation periodically evaluates the possible impact of pending litigation matters based on, among other factors, the advice of counsel, available insurance coverage and recorded liabilities and reserves for probable legal liabilities and costs. In addition, from time to time, the Corporation is the subject of investigations or other forms of regulatory or governmental inquiry covering a range of possible issues and, in some cases, these may be part of similar reviews of the specified activities of other industry participants. These inquiries could lead to administrative, civil or criminal proceedings, and could possibly result in fines, penalties, restitution or the need to alter the Corporation’s business practices, and cause the Corporation to incur additional costs. The Corporation’s practice is to cooperate fully with regulatory and governmental investigations.

NOTE L – Fair Value Option
FASB ASC Subtopic 825-10 permits entities to measure many financial instruments and certain other items at fair value and requires certain disclosures for amounts forAs of the date of this report, the Corporation believes that any liabilities, individually or in the aggregate, which may result from the fair value option is applied. The Corporation has elected to measure mortgage loans held for sale at fair value to more accurately reflectfinal outcomes of pending proceedings will not have a material adverse effect on the financial condition, the operating results of its mortgage banking activities in its consolidated

2831


financial statements. Derivative financial instruments related to these activities are also recorded at fair value, as noted within Note I, "Derivative Financial Instruments." The Corporation determines fair value for its mortgage loans held for sale based onand/or the price that secondary market investors would pay for loans with similar characteristics, including interest rate and term, asliquidity of the date fair value is measured. Changes in fair values duringCorporation. However, legal proceedings are often unpredictable, and the period are recorded as componentsactual results of mortgage banking income on the consolidated statements of income. Interest income earned on mortgage loans held for sale is recorded within interest income on the consolidated statements of income.such proceedings cannot be determined with certainty.
The following table presents a summary of the Corporation’s mortgage loans held for sale:
 March 31,
2014
 December 31,
2013
 (in thousands)
Cost$23,941
 $21,172
Fair value24,417
 21,351
During the three months ended March 31, 2014, the Corporation recorded gains related to changes in fair values of mortgage loans held for sale of $297,000 and $699,000, respectively.

NOTE M – Fair Value Measurements
FASB ASC Topic 820 establishes a fair value hierarchy for the inputs to valuation techniques used to measure assets and liabilities at fair value using the following three categories (from highest to lowest priority):
Level 1 – Inputs that represent quoted prices for identical instruments in active markets.
Level 2 – Inputs that represent quoted prices for similar instruments in active markets, or quoted prices for identical instruments in non-active markets. Also includes valuation techniques whose inputs are derived principally from observable market data other than quoted prices, such as interest rates or other market-corroborated means.
Level 3 – Inputs that are largely unobservable, as little or no market data exists for the instrument being valued.
The Corporation has categorized all assets and liabilities measured at fair value on both a recurring and nonrecurring basis into the above three levels.
The following tables present summaries of the Corporation’s assets and liabilities measured at fair value on a recurring basis and reported on the consolidated balance sheets:
March 31, 2014June 30, 2014
Level 1 Level 2 Level 3 TotalLevel 1 Level 2 Level 3 Total
(in thousands)(in thousands)
Mortgage loans held for sale$
 $24,417
 $
 $24,417
$
 $36,079
 $
 $36,079
Available for sale investment securities:              
Equity securities45,734
 
 
 45,734
45,884
 364
 
 46,248
U.S. Government securities
 526
 
 526

 525
 
 525
U.S. Government sponsored agency securities
 280
 
 280

 260
 
 260
State and municipal securities
 283,453
 
 283,453

 269,823
 
 269,823
Corporate debt securities
 91,073
 9,479
 100,552

 92,558
 8,095
 100,653
Collateralized mortgage obligations
 1,006,737
 
 1,006,737

 1,002,731
 
 1,002,731
Mortgage-backed securities
 916,203
 
 916,203

 930,605
 
 930,605
Auction rate securities
 
 147,713
 147,713

 
 146,931
 146,931
Total available for sale investments45,734
 2,298,272
 157,192
 2,501,198
45,884
 2,296,866
 155,026
 2,497,776
Other assets15,943
 7,798
 
 23,741
16,306
 13,056
 
 29,362
Total assets$61,677
 $2,330,487
 $157,192
 $2,549,356
$62,190
 $2,346,001
 $155,026
 $2,563,217
Other liabilities$15,886
 $6,841
 $
 $22,727
$16,242
 $12,399
 $
 $28,641

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 December 31, 2013
 Level 1 Level 2 Level 3 Total
 (in thousands)
Mortgage loans held for sale$
 $21,351
 $
 $21,351
Available for sale investment securities:       
Equity securities46,201
 
 
 46,201
U.S. Government securities
 525
 
 525
U.S. Government sponsored agency securities
 726
 
 726
State and municipal securities
 284,849
 
 284,849
Corporate debt securities
 89,662
 9,087
 98,749
Collateralized mortgage obligations
 1,032,398
 
 1,032,398
Mortgage-backed securities
 945,712
 
 945,712
Auction rate securities
 
 159,274
 159,274
Total available for sale investments46,201
 2,353,872
 168,361
 2,568,434
Other assets15,779
 7,227
 
 23,006
Total assets$61,980
 $2,382,450
 $168,361
 $2,612,791
Other liabilities$15,648
 $5,161
 $
 $20,809

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The valuation techniques used to measure fair value for the items in the preceding tables are as follows:
Mortgage loans held for sale – This category consists of mortgage loans held for sale that the Corporation has elected to measure at fair value. Fair values as of March 31,June 30, 2014 and December 31, 2013 were measured based on the price that secondary market investors were offering for loans with similar characteristics.
Available for sale investment securities – Included within this asset category are both equity and debt securities. Level 2 available for sale debt securities are valued by a third-party pricing service commonly used in the banking industry. The pricing service uses pricing models that vary based on asset class and incorporate available market information, including quoted prices of investment securities with similar characteristics. Because many fixed income securities do not trade on a daily basis, pricing models use available information, as applicable, through processes such as benchmark yield curves, benchmarking of like securities, sector groupings, and matrix pricing.
Standard market inputs include: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data, including market research publications. For certain security types, additional inputs may be used, or some of the standard market inputs may not be applicable.

Management tests the values provided by the pricing service by obtaining securities prices from an alternative third-party source and comparing the results. This test is done for approximately 75% of the securities valued by the pricing service. Generally, differences by security in excess of 5% are researched to reconcile the difference.
Equity securities – Equity securities consist of common stocks of financial institutions ($39.840.2 million at March 31,June 30, 2014 and $40.6 million at December 31, 2013) and other equity investments ($5.96.0 million at March 31,June 30, 2014 and $5.6 million at December 31, 2013). These Level 1 investments are measured at fair value based on quoted prices for identical securities in active markets.
U.S. Government securities/U.S. Government sponsored agency securities/State and municipal securities/Collateralized mortgage obligations/Mortgage-backed securities – These debt securities are classified as Level 2 investments. Fair values are determined by a third-party pricing service, as detailed above.
Corporate debt securities – This category consists of subordinated debt issued by financial institutions ($50.450.6 million at March 31,June 30, 2014 and $50.3 million at December 31, 2013), single-issuer trust preferred securities issued by financial institutions ($41.943.2 million at March 31,June 30, 2014 and $40.5 million at December 31, 2013), pooled trust preferred securities issued by financial institutions ($5.74.3 million at March 31,June 30, 2014 and $5.3 million at December 31, 2013) and other corporate debt issued by non-financial institutions ($2.6 million at March 31,June 30, 2014 and December 31, 2013).
Level 2 investments include the Corporation’s holdings of subordinated debt, other corporate debt issued by non-financial institutions and $38.139.4 million and $36.7 million of single-issuer trust preferred securities held at March 31,June 30, 2014

30


and December 31, 2013, respectively. The fair values for these corporate debt securities are determined by a third-party pricing service, as detailed above.
Level 3 investments include the Corporation’s investments in pooled trust preferred securities and certain single-issuer trust preferred securities ($3.8 million at March 31,June 30, 2014 and December 31, 2013). The fair values of these securities were determined based on quotes provided by third-party brokers who determined fair values based predominantly on internal valuation models which were not indicative prices or binding offers. The Corporation’s third-party pricing service cannot derive fair values for these securities primarily due to inactive markets for similar investments. Level 3 values are tested by management primarily through trend analysis, by comparing current values to those reported at the end of the preceding calendar quarter, and determining if they are reasonable based on price and spread movements for this asset class.
Auction rate securities – Due to their illiquidity, ARCs are classified as Level 3 investments and are valued through the use of an expected cash flows model prepared by a third-party valuation expert. The assumptions used in preparing the expected cash flows model include estimates for coupon rates, time to maturity and market rates of return. The most significant unobservable input to the expected cash flows model is an assumed return to market liquidity sometime within the next five years. If the assumed return to market liquidity was lengthened beyond the next five years, this would result in a decrease in the fair value of these ARCs. The Corporation believes that the trusts underlying the ARCs will self-liquidate as student loans are repaid. Level 3 values are tested by management through the performance of a trend analysis of the market price and discount rate. Changes in the price and discount rates are compared to changes in market data, including bond ratings, parity ratios, balances and delinquency levels.

33


Other assets – Included within this category are the following:
Level 1 assets include mutual funds that are held in trust for employee deferred compensation plans ($15.716.1 million at March 31,June 30, 2014 and $15.3 million at December 31, 2013) and the fair value of foreign currency exchange contracts ($257,000225,000 at March 31,June 30, 2014 and $522,000 at December 31, 2013). The mutual funds and foreign exchange prices used to measure these items at fair value are based on quoted prices for identical instruments in active markets.
Level 2 assets include the fair value of mortgage banking derivatives in the form of interest rate locks and forward commitments with secondary market investors ($1.22.4 million at March 31,June 30, 2014 and $2.1 million at December 31, 2013) and the fair value of interest rate swaps ($6.610.6 million at March 31,June 30, 2014 and $5.1 million at December 31, 2013). The fair values of the Corporation’s interest rate locks, forward commitments and interest rate swaps represent the amounts that would be required to settle the derivative financial instruments at the balance sheet date. See Note I, "Derivative Financial Instruments," for additional information.
Other liabilities – Included within this category are the following:
Level 1 liabilities include employee deferred compensation liabilities which represent amounts due to employees under deferred compensation plans ($15.716.1 million at March 31,June 30, 2014 and $15.3 million at December 31, 2013) and the fair value of foreign currency exchange contracts ($199,000163,000 at March 31,June 30, 2014 and $391,000 at December 31, 2013). The fair value of these liabilities are determined in the same manner as the related assets, as described under the heading "Other assets" above.
Level 2 liabilities include the fair value of mortgage banking derivatives in the form of interest rate locks and forward commitments with secondary market investors ($247,0001.8 million at March 31,June 30, 2014 and $64,000 at December 31, 2013) and the fair value of interest rate swaps ($6.610.6 million at March 31,June 30, 2014 and $5.1 million at December 31, 2013). The fair values of these liabilities are determined in the same manner as the related assets, as described under the heading "Other assets" above.

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The following table presents the changes in the Corporation’s available for sale investment securities measured at fair value on a recurring basis using unobservable inputs (Level 3):
Three months ended June 30, 2014
Pooled Trust
Preferred
Securities
 Single-issuer
Trust Preferred
Securities
 ARCs
(in thousands)
Balance at March 31, 2014$5,659
 $3,820
 $147,713
Sales(1,394) 
 
Unrealized adjustment to fair value (1)38
 (2) 124
Settlements - calls(28) 
 (1,081)
Discount accretion (2)
 2
 175
Balance at June 30, 2014$4,275
 $3,820
 $146,931
     
Three months ended June 30, 2013
Balance at March 31, 2013$8,356
 $3,370
 $154,639
Sales(3,286) 
 
Unrealized adjustment to fair value (1)445
 297
 (172)
Settlements - calls(124) 
 (2,066)
Discount accretion (2)
 3
 191
Balance at June 30, 2013$5,391
 $3,670
 $152,592
     
Three months ended March 31, 2014Six months ended June 30, 2014
Pooled Trust
Preferred
Securities
 Single-issuer
Trust Preferred
Securities
 ARCsPooled Trust
Preferred
Securities
 Single-issuer
Trust Preferred
Securities
 ARCs
(in thousands)(in thousands)
Balance at December 31, 2013$5,306
 $3,781
 $159,274
$5,306
 $3,781
 $159,274
Sales
 
 (11,912)(1,394) 
 (11,912)
Unrealized adjustment to fair value (1)521
 38
 124
559
 36
 248
Settlements - calls(172) 
 
(200) 
 (1,081)
Discount accretion (2)4
 1
 227
4
 3
 402
Balance at March 31, 2014$5,659
 $3,820
 $147,713
Balance at June 30, 2014$4,275
 $3,820
 $146,931
          
Three months ended March 31, 2013Six months ended June 30, 2013
Balance at December 31, 2012$6,927
 $3,360
 $149,339
$6,927
 $3,360
 $149,339
Sales(3,286) 
 
Unrealized adjustment to fair value (1)1,429
 7
 5,360
1,874
 304
 5,188
Settlements - calls
 
 (342)(124) 
 (2,408)
Discount accretion (2)
 3
 282

 6
 473
Balance at March 31, 2013$8,356
 $3,370
 $154,639
Balance at June 30, 2013$5,391
 $3,670
 $152,592
     

(1)Pooled trust preferred securities, single-issuer trust preferred securities and ARCs are classified as available for sale investment securities; as such, the unrealized adjustment to fair value was recorded as an unrealized holding gain (loss) and included as a component of available for sale investment securities on the consolidated balance sheets.
(2)Included as a component of net interest income on the consolidated statements of income.




35


Certain financial assets are not measured at fair value on an ongoing basis, but are subject to fair value measurement in certain circumstances, such as upon their acquisition or when there is evidence of impairment. The following table presents the Corporation’s financial assets measured at fair value on a nonrecurring basis and reported on the Corporation’s consolidated balance sheets:
March 31, 2014June 30, 2014
Level 1 Level 2 Level 3 TotalLevel 1 Level 2 Level 3 Total
(in thousands)(in thousands)
Net loans$
 $
 $137,488
 $137,488
$
 $
 $134,643
 $134,643
Other financial assets
 
 56,968
 56,968

 
 56,068
 56,068
Total assets$
 $
 $194,456
 $194,456
$
 $
 $190,711
 $190,711
 December 31, 2013
 Level 1 Level 2 Level 3 Total
 (in thousands)
Net loans$
 $
 $138,666
 $138,666
Other financial assets
 
 57,504
 57,504
Total assets$
 $
 $196,170
 $196,170
The valuation techniques used to measure fair value for the items in the table above are as follows:
Net loans – This category consists of loans that were evaluated for impairment under FASB ASC Section 310-10-35 and have been classified as Level 3 assets. The amount shown is the balance of impaired loans, net of the related allowance for loan losses. See Note E, "Loans and Allowance for Credit Losses," for additional details.
Other financial assets – This category includes OREO ($15.313.5 million at March 31,June 30, 2014 and $15.1 million at December 31, 2013) and MSRs ($41.742.6 million at March 31,June 30, 2014 and $42.5 million at December 31, 2013), both classified as Level 3 assets.

32


Fair values for OREO were based on estimated selling prices less estimated selling costs for similar assets in active markets.
MSRs are initially recorded at fair value upon the sale of residential mortgage loans to secondary market investors. MSRs are amortized as a reduction to servicing income over the estimated lives of the underlying loans. MSRs are stratified and evaluated for impairment by comparing each stratum's carrying amount to its estimated fair value. Fair values are determined at the end of each quarter through a discounted cash flows valuation performed by a third-party valuation expert. Significant inputs to the valuation included expected net servicing income, the discount rate and the expected life of the underlying loans. Expected life is based on the contractual terms of the loans, as adjusted for prepayment projections. The weighted average annual constant prepayment rate and the weighted average discount rate used in the March 31,June 30, 2014 valuation were 11.2%12.1% and 9.1%, respectively. Management tests the reasonableness of the significant inputs to the third-party valuation in comparison to market data.
As required by FASB ASC Section 825-10-50, the following table details the book values and estimated fair values of the Corporation’s financial instruments as of March 31,June 30, 2014 and December 31, 2013. In addition, a general description of the methods and assumptions used to estimate such fair values is also provided.
Fair values of financial instruments are significantly affected by the assumptions used, principally the timing of future cash flows and discount rates. Because assumptions are inherently subjective in nature, the estimated fair values cannot be substantiated by comparison to independent market quotes and, in many cases, the estimated fair values could not necessarily be realized in an immediate sale or settlement of the instrument. The aggregate fair value amounts presented do not necessarily represent management’s estimate of the underlying value of the Corporation.

36


March 31, 2014 December 31, 2013June 30, 2014 December 31, 2013
Book Value Estimated
Fair Value
 Book Value Estimated
Fair Value
Book Value Estimated
Fair Value
 Book Value Estimated
Fair Value
(in thousands)(in thousands)
FINANCIAL ASSETS              
Cash and due from banks$260,389
 $260,389
 $218,540
 $218,540
$258,837
 $258,837
 $218,540
 $218,540
Interest-bearing deposits with other banks225,428
 225,428
 163,988
 163,988
222,894
 222,894
 163,988
 163,988
Federal Reserve Bank and Federal Home Loan Bank stock81,634
 81,634
 84,173
 84,173
82,624
 82,624
 84,173
 84,173
Loans held for sale (1)24,417
 24,417
 21,351
 21,351
36,079
 36,079
 21,351
 21,351
Available for sale investment securities (1)2,501,198
 2,501,198
 2,568,434
 2,568,434
2,497,776
 2,497,776
 2,568,434
 2,568,434
Loans, net of unearned income (1)12,733,792
 12,628,983
 12,782,220
 12,688,774
12,839,511
 12,744,881
 12,782,220
 12,688,774
Accrued interest receivable43,376
 43,376
 44,037
 44,037
42,116
 42,116
 44,037
 44,037
Other financial assets (1)149,453
 149,453
 146,933
 146,933
155,336
 155,336
 146,933
 146,933
FINANCIAL LIABILITIES              
Demand and savings deposits$9,667,357
 $9,667,357
 $9,573,264
 $9,573,264
$9,677,654
 $9,677,654
 $9,573,264
 $9,573,264
Time deposits3,002,560
 3,011,698
 2,917,922
 2,927,374
3,016,005
 3,025,680
 2,917,922
 2,927,374
Short-term borrowings1,069,684
 1,069,684
 1,258,629
 1,258,629
1,008,307
 1,008,307
 1,258,629
 1,258,629
Accrued interest payable16,972
 16,972
 15,218
 15,218
16,647
 16,647
 15,218
 15,218
Other financial liabilities (1)133,848
 133,848
 124,440
 124,440
165,358
 165,358
 124,440
 124,440
FHLB advances and long-term debt883,461
 881,197
 883,584
 875,984
Federal Home Loan Bank advances and long-term debt968,395
 964,797
 883,584
 875,984
 
(1)These financial instruments, or certain financial instruments within these categories, are measured at fair value on the Corporation’s consolidated balance sheets. Descriptions of the fair value determinations for these financial instruments are disclosed above.
For short-term financial instruments, defined as those with remaining maturities of 90 days or less, and excluding those recorded at fair value on the Corporation’s consolidated balance sheets, book value was considered to be a reasonable estimate of fair value.
The following instruments are predominantly short-term:
Assets  Liabilities
Cash and due from banks  Demand and savings deposits
Interest bearing deposits with other banks  Short-term borrowings
Accrued interest receivable  Accrued interest payable


33


Federal Reserve Bank and FHLBFederal Home Loan Bank stock represent restricted investments and are carried at cost on the consolidated balance sheets. Each of the Corporation’s subsidiary banks is a member of the Federal Home Loan Bank for the region encompassing the headquarters of the subsidiary bank.  Memberships are maintained with the Atlanta, New York and Pittsburgh regional Federal Home Loan Banks (collectively referred to as the "FHLB").
Fair values for loans and time deposits were estimated by discounting future cash flows using the current rates at which similar loans would be made to borrowers and similar deposits would be issued to customers for the same remaining maturities. Fair values estimated in this manner do not fully incorporate an exit price approach to fair value, as defined in FASB ASC Topic 820.
The fair values of FHLB advances and long-term debt were estimated by discounting the remaining contractual cash flows using a rate at which the Corporation could issue debt with similar remaining maturities as of the balance sheet date. These borrowings would be categorized within Level 2 liabilities under FASB ASC Topic 820.

NOTE N – Common Stock Repurchase PlanPlans
In October 2013,, the Corporation announced that its board of directors had approved a share repurchase program pursuant to which the Corporation was authorized to repurchase up to four4.0 million shares, or approximately 2.1% of its outstanding shares, through March 2014.2014. During the first quarter of 2014, the Corporation repurchased 4.0 million shares under this repurchase plan at an average cost of $12.45 per share, completing this repurchase program on February 19, 2014.
In May 2014, the Corporation announced that its board of directors had approved a share repurchase program pursuant to which the Corporation was authorized to repurchase up to 4.0 million shares, or approximately 2.1% of its outstanding shares, through December 31, 2014. No shares were repurchased under this repurchase plan during the three and six months ended June 30, 2014.

37



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

NOTE P – Reclassifications

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

34


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations (Management’s Discussion) relates to Fulton Financial Corporation (the Corporation), a financial holding company registered under the Bank Holding Company Act of 1956 and incorporated under the laws of the Commonwealth of Pennsylvania in 1982, and its wholly owned subsidiaries. Management’s Discussion should be read in conjunction with the consolidated financial statements and notes presented in this report.

FORWARD-LOOKING STATEMENTS

The Corporation has made, and may continue to make, certain forward-looking statements with respect to its financial condition and results of operations. Do not unduly rely on forward-looking statements. Forward-looking statements can be identified by the use of words such as "may," "should," "will," "could," "estimates," "predicts," "potential," "continue," "anticipates," "believes," "plans," "expects," "future," "intends" and similar expressions which are intended to identify forward-looking statements.          

These forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties, some of which are beyond the Corporation's control and ability to predict, that could cause actual results to differ materially from those expressed in the forward-looking statements. The Corporation undertakes no obligation, other than as required by law, to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Many factors could affect future financial results including, without limitation: 
the impact of adverse changes in the economy and real estate markets, including protracted periods of low-growth and sluggish loan demand;
increases in non-performing assets, which may require the Corporation to increase the allowance for credit losses, charge-off loans and incur elevated collection and carrying costs related to such non-performing assets;
the effecteffects of market interest rates, particularly a continuing period of low market interest rates, and relative balances of rate-sensitive assets to rate-sensitive liabilities, on net interest margin and net interest income;
capital and liquidity strategies, including the expected impact of theCorporation’s ability to comply with applicable capital and liquidity requirements imposed by(including the final U.S.finalized Basel III Capital Rules;capital standards), and the Corporation’s ability to generate capital internally or raise capital on favorable terms;
investment securities gains and losses, including other-than-temporary declines in the value of securities which may result in charges to earnings;
the impact of non-interest income growth, including the impact of potential regulatory changes;
the impact of increased regulatory scrutiny of the banking industry;
the effects of the increasing time and expense associated with regulatory compliance and risk management;
the additional time, expense and investment required to comply with, and the restrictions on potential growth and investment activities resulting from, the issuance of enforcement orders by federal bank regulatory agencies;
the Corporation’s ability to manage the uncertainty and lack of clear regulatory guidance associated with the delay in implementing many of the regulations mandated by the Dodd-Frank Act;
the impact of operational risk, i.e. the risk of loss resulting from human error, inadequate or failed internal processes and systems, outsourcing arrangements, compliance and legal risk and external events;
the Corporation’s ability to manage the level of non-interest expenses, including salaries and employee benefits expenses, operating risk losses, amortization of intangible assets and goodwill impairment; and
the effectCorporation’s ability to keep pace with technological changes and to identify and to address cyber-security risks;
the effects of competition on rates of deposit, and loan growth and net interest margin.margin; and

any damage to the Corporation’s reputation resulting from developments related to any of the items identified above.

RESULTS OF OPERATIONS

Overview and Summary Financial Results
Fulton Financial Corporation is a financial holding company comprised of six wholly owned banking subsidiaries which provide a full range of retail and commercial financial services in Pennsylvania, Delaware, Maryland, New Jersey and Virginia. The Corporation generates the majority of its revenue through net interest income, or the difference between interest earned on loans and investments and interest paid on deposits and borrowings. Growth in net interest income is dependent upon balance sheet growth and/or maintaining or increasing the net interest margin, which is net interest income (fully taxable-equivalent, or FTE) as a percentage of average interest-earning assets. The Corporation also generates revenue through fees earned on the various

38


services and products offered to its customers and through gains on sales of assets, such as loans, investments, lines of business or properties. Offsetting these revenue sources are provisions for credit losses on loans, non-interest expenses and income taxes.

3539


The following table presents a summary of the Corporation’s earnings and selected performance ratios:
As of or for the
Three months ended
March 31
As of or for the
Three months ended
June 30
 As of or for the
Six months ended
June 30
2014 20132014 2013 2014 2013
Income before income taxes (in thousands)$56,017
 $50,967
$53,096
 $53,751
 $109,113
 $104,718
Net income (in thousands)$41,783
 $39,227
$39,596
 $40,582
 $81,379
 $79,809
Diluted net income per share$0.22
 $0.20
$0.21
 $0.21
 $0.43
 $0.41
Return on average assets1.01% 0.96%0.94% 0.97% 0.97% 0.97%
Return on average equity8.21% 7.67%7.63% 7.89% 7.92% 7.78%
Net interest margin (1)3.47% 3.55%3.41% 3.52% 3.44% 3.54%
Non-performing assets to total assets1.01% 1.39%0.96% 1.23% 0.96% 1.23%
Annualized net charge-offs to average loans0.26% 0.62%0.28% 0.56% 0.27% 0.59%
 
(1)Presented on an FTE basis, using a 35% Federal tax rate and statutory interest expense disallowances. See also the “Net Interest Income” section of Management’s Discussion.
Income before income taxes for the firstsecond quarter of 2014 increased $5.1 million,decreased $655,000, or 9.9%1.2%, compared to the firstsecond quarter of 2013. For the first half of 2014, income before taxes increased $4.4 million, or 4.2%, compared to the same period in 2013. The Corporation's results for the three and six months ended March 31,June 30, 2014 in comparison to the same periodperiods in 2013 were most significantly impacted by improved asset quality, resulting in a decreasedecreases in the provision for credit losses and lower net interest income and non-interest income, due to a declinepartially offset by decreases in mortgage banking income and service charges on deposit accounts and an increase in income taxnon-interest expense.
Following is a summary of these and other noteworthy items for the firstsecond quarter of 2014:
Asset Quality - For the three and six months ended March 31,June 30, 2014, the Corporation's provision for credit losses decreased $12.5$10.0 million, or 83.3%74.1%, and $22.5 million, or 78.9%, respectively, in comparison to the same periodperiods in 2013. This decrease wasThese decreases were due to an overall improvement in asset quality.
Non-performing loans decreased $53.7$39.9 million, or 25.7%21.1%, since March 31, 2013.June 30, 2013. The total past duedelinquency rate was 1.78%1.75% as of March 31,June 30, 2014, compared to 2.30%2.18% as of March 31, 2013.June 30, 2013. Annualized net charge-offs to average loans outstanding were 0.26%0.28% for the firstsecond quarter of 2014, compared to 0.62%0.56% for the firstsecond quarter of 2013.
Net Interest Income and Net Interest Margin - For the three and six months ended March 31,June 30, 2014, net interest income was essentially unchanged, decreasing $79,000decreased $4.2 million, or 3.2%, and $4.2 million, or 1.6%, respectively, in comparison to the same periodperiods in 2013.2013. Net interest income for the first three and six months ofended June 30, 2014 was negatively impacted by net interest margin compression as yields on interest-earning assets declined more significantly than the cost of interest-bearing liabilities.liabilities in comparison to the same periods in 2013. The net interest margin for the firstsecond quarter of 2014 decreased 811 basis points, or 2.3%3.1%, in comparison to the firstsecond quarter of 2013.
The impact of2013. For the six months ended June 30, 2014, net interest margin compression was offset by growth in interest-earning assets, which increased $352.2 million,decreased 10 basis points, or 2.3%2.8%, in comparison to the firstsame period of 2013.
Partially offsetting the impact of the decreasing yields was growth in average interest-earning assets. Average interest-earning assets increased $38.9 million, or 0.3%, in the second quarter of 2013, mainly due to a $505.1 million, or 4.1%, increase in average loans. The increase in average loans for the three months ended March 31, 2014 in comparison to the first quartersame period of 2013 was, mainly due to increasesa $267.2 million, or 2.1%, increase in commercial mortgages, home equityaverage loans, and residential mortgages.partially offset by a $215.9 million, or 7.9%, decrease in investments. Average interest-earning assets during the first half of 2014 increased $194.7 million compared to the same period in 2013, primarily as a result of a $385.5 million, or 3.1%, increase in average loans, partially offset by a $201.4 million, or 7.3%, decrease in investments.
Non-interest Income - For the three and six months ended March 31,June 30, 2014, non-interest income, excluding investment securities gains, decreased $6.3$5.7 million, or 14.0%11.5%, and $12.0 million, 12.7%, respectively, in comparison to the same periodperiods in 2013. This decrease2013. The decreases in non-interest income waswere primarily due to a decreasedecreases in mortgage banking income, as a result of lower gains on sales of residential mortgages due towere impacted by lower refinancing volumes. Also contributing to the decreasedecreases in non-interest income was a declinewere declines in service charges on deposits, particularly a $2.2 million, or 29.0%, decrease in overdraft fee income.
Non-interest Expense - For the three and six months ended March 31,June 30, 2014, non-interest expense decreased $1.4$956,000, or 0.8%, and $2.3 million, or 1.2%1.0%, respectively, in comparison to the same periodperiods in 2013. This decrease was2013. These decreases were primarily driven by a $1.9 million decreasedecreases in other real estate owned (OREO) and repossession expense, due to improved asset quality, and a $1.6 million decreasedecreases in salaries and employee benefits, primarily due to lower incentive compensation expense. These decreases were operating risk losses,

40


partially offset by a $1.8 million increase in occupancy expense primarily due to higher snow removal costs and a $952,000 increaseincreases in other outside services.services as a result of consulting expense incurred primarily for risk management and regulatory compliance initiatives, as discussed under the heading, "Regulatory Compliance and Risk Management Matters" below.
During the first quarter of 2014, the Corporation implemented a series of initiatives intended to reduce non-interest expenses by approximately $8$7.0 million annually.in 2014. These initiatives resulted in implementation expenses, net of associated gains, of $980,000

36


and expense reductions of $1.0 million during the first quarter of 2014, resulting in a minimal net impact on total expenses for the first quarter of 2014.

The following table presents a summary of the Corporation's 2014 cost saving initiatives:
 Three months ended March 31, 2014 
 Implementation Expenses (Gains) Expense Reductions Estimated Expense Reductions for the Year Ending December 31, 2014
 (in thousands)
Branch consolidations$2,080
 $
 $(2,400)
Subsidiary bank management reductions and other employee compensation and benefit reductions(1,100) (1,020) (4,550)
 $980
 $(1,020) $(6,950)
Branch consolidations - Representsincluded the consolidation of 13 branches, whichstreamlining of subsidiary bank management structures and other employee compensation and benefit reductions.
The branch consolidations resulted in the transfer of deposits, employees and other branch resources to existing branch locations. During the first quarter of 2014, $2.1 million of expenses, consisting mainly of lease termination costs and the write-off of leasehold improvements, were incurredincurred. During the three and six months ended June 30, 2014, $800,000 of expense reductions were recognized as a result of these consolidations. The Corporation estimates total expense reductions for the branch consolidation.
remainder of 2014 to be $1.6 million.
Subsidiary bank management reductions and other employee compensation and benefit reductions - Represents theThe streamlining of subsidiary bank management structures throughresulted in the elimination of five subsidiary bank divisional executive positions, while other employee compensation and benefit reductions resulted in addition to the impact of changes to certain employee benefits plans, most notably an amendment to the Corporation's postretirement benefits plan (Postretirement Plan). During the first quarter of 2014, these initiatives resulted in $1.1 million of net implementation gains netwere recognized. During the three and six months ended June, 30, 2014, $1.1 million and $2.2 million, respectively, of severance expense and $1.0 millionreductions were realized as a result of cost savings due primarilythese actions. The Corporation estimates total expense reductions for the remainder of 2014 to lower salaries and employee benefits expense.

be $2.4 million.
Regulatory Compliance and Risk Management Matters - Virtually every aspect of the Corporation’s operations is subject to extensive regulation, and in recent years, a combination of financial reform legislation and heightened scrutiny by banking regulators have significantly increased expectations regarding what constitutes an effective risk and compliance management infrastructure. Bank regulators are scrutinizing banks through longer and more extensive bank examinations in both the safety and soundness and compliance areas. As previously disclosed in the Corporation's filings with the Securities and Exchange Commission, including in Item 1A, Risk Factors, of the Corporation’s most recent Annual Report on Form 10-K, the time and expense associated with regulatory compliance and risk management efforts continues to increase.

To keep pace with these heightened expectations in the compliance area overbeginning in 2012 the past several years, the Corporation which provides compliance program services for all of the Corporation's banking subsidiaries, has devoted substantial resources to improving its risk management framework and regulatory compliance programs, including those designed to comply with the requirements of the Bank Secrecy Act, the USA Patriot Act of 2001 and related anti-money laundering regulations (collectively, the “BSA Requirements”)BSA/AML Requirements). Although theThe Corporation has made substantial progress in strengthening its risk management and regulatory compliance programs, including the addition of personnel and retention of third-party consultants that specialize in strengthening compliance programs addressing the BSA/AML Requirements. However, the pace of this progress has not been consistent with current regulatory expectations, and continuing deficiencies in compliance program elements related to the BSABSA/AML Requirements have been identified at the Corporation’s banking subsidiaries, and at the Corporation.

As a result, management anticipates that certainIn July 2014, three of the Corporation’s banking subsidiaries, Fulton Bank, N.A., Swineford National Bank and the Corporation will consentFNB Bank, N.A., each entered into a Stipulation and Consent to the issuance byIssuance of a Consent Order (Consent Order) with their primary Federal banking authoritiesbank regulatory agency, the Office of formal enforcement orders ("Enforcement Orders") requiring those entitiesthe Comptroller of the Currency, relating to remedy the identified deficiencies and take other actions to strengthen theirin a centralized compliance programs related to the BSA Requirements, and potentially other areas. The Enforcement Orders, or any failure by the banking subsidiaries or the Corporationprogram (BSA/AML Compliance Program) designed to comply with the EnforcementBSA/AML Requirements, as disclosed by the Corporation in a Current Report on Form 8-K filed with the Securities and Exchange Commission on July 18, 2014 (Form 8-K). The Consent Orders require, among other things, that the banking subsidiaries in question review, assess and take actions to strengthen and enhance the BSA/AML Compliance Program. In addition, the Form 8-K disclosed that the Corporation and its wholly owned subsidiary, Lafayette Ambassador Bank (Lafayette), anticipate that they will enter into a consent cease and desist order (Cease and Desist Order) with their primary Federal bank regulatory agency, the Board of Governors of the Federal Reserve System, in the near future. It is anticipated that the Cease and Desist Order will require the Corporation and Lafayette to strengthen the BSA/AML Compliance Program and will impose requirements similar to those set forth in the Consent Orders. Further, because the Consent Orders and the anticipated Cease and Desist Order relate to the BSA/AML Compliance Program, which is operated jointly for all of the Corporation’s subsidiary banks, the Corporation anticipates that one or more of the Corporation’s other subsidiary banks may also become the subject or subjects of a regulatory enforcement action related to the BSA/AML Requirements, and the provisions of any such enforcement action may differ from those of the Consent Orders.
In addition to requiring strengthening and enhancement of the BSA/AML Compliance Program, the Consent Orders, the anticipated Cease and Desist Order and other anticipated enforcement action or actions impose certain restrictions on expansion activities of the Corporation and its subsidiary banks. Further, any failure to comply with the requirements of any of these enforcement actions involving the Corporation or its subsidiary banks could result in further enforcement actions, the imposition of material restrictions on the activities of the Corporation or its banking subsidiariessubsidiary banks, or the assessment of fines or penalties.

As previously disclosed, management acceleratedAdditional expenses and investments will be required as the Corporation further expands its effortshiring of personnel and use of outside professionals, such as consulting and legal services, and possibly for capital investments in operating systems to resolvestrengthen and

41


support the identified deficiencies and to enhanceBSA/AML Compliance Program, as well as the Corporation’s broader compliance and risk management functions at the Corporationinfrastructures. The expense and its banking subsidiaries, andcapital investment associated with all of these efforts, will continue. As an example of the importance that the Corporation's Board of Directors places on these efforts,including in March 2014, the Board reduced the amount of the annual cash incentive award paid to the Corporation's executive officers for performance during 2013 under the Corporation's Amended and Restated Equity and Cash Incentive Compensation Plan. The Board exercised its discretion to reduce awards under the Plan to provide tangible evidence of the importance the Board of Directors attaches to the need to strengthen the Corporation's

37


risk and regulatory compliance management infrastructures and to reinforce the critical importance of accelerating completion of that work to build stronger and sustainable regulatory compliance and risk management processes that will support the Corporation's strategic growth objectives.

Although management is not able to predict with certainty the outcome of these matters or the costs associated with complianceconnection with the EnforcementConsent Orders, the Enforcement Ordersanticipated Cease and Desist Order and the anticipated enforcement action or actions involving the Corporation’s other subsidiary banks, could materially affecthave a material adverse effect on the Corporation's business, financial condition orCorporation’s results of operations in future periods. Compliance with the Enforcement Orders could potentially require additional expenditures for salaries and benefits of additional personnel, outside professional services, such as consulting and legal, and for enhancing or acquiring operating systems to strengthen and support the Corporation's compliance and risk management infrastructures.




3842


Quarter Ended March 31,June 30, 2014 compared to the Quarter Ended March 31,June 30, 2013
Net Interest Income
FTEFully-taxable equivalent (FTE) net interest income decreased $69,000$4.2 million to $133.8$132.2 million in the firstsecond quarter of 2014, from $133.9$136.4 million in the firstsecond quarter of 2013. This decrease was primarily due to an 811 basis point, or 2.3%3.1%, decrease in the net interest margin, to 3.47%3.41% for the firstsecond quarter of 2014 from 3.55%3.52% for the firstsecond quarter of 2013. The following table provides a comparative average balance sheet and net interest income analysis for the firstsecond quarter of 2014 as compared to the same period in 2013. Interest income and yields are presented on an FTE basis, using a 35% Federal tax rate and statutory interest expense disallowances. The discussion following this table is based on these FTE amounts. All dollar amounts are in thousands.
Three months ended March 31Three months ended June 30
2014 20132014 2013
ASSETS
Average
Balance
 Interest (1) 
Yield/
Rate
 
Average
Balance
 Interest (1) 
Yield/
Rate
Average
Balance
 Interest (1) 
Yield/
Rate
 
Average
Balance
 Interest (1) 
Yield/
Rate
Interest-earning assets:                      
Loans, net of unearned income (2)$12,762,357
 $134,749
 4.28% $12,257,280
 $136,948
 4.53%$12,795,747
 $134,387
 4.21% $12,528,562
 $138,002
 4.42%
Taxable investment securities (3)2,257,773
 13,266
 2.35
 2,421,178
 13,397
 2.22
2,211,004
 12,418
 2.25
 2,410,004
 14,516
 2.41
Tax-exempt investment securities (3)279,278
 3,613
 5.17
 292,118
 3,814
 5.22
270,482
 3,534
 5.23
 280,508
 3,608
 5.15
Equity securities (3)33,922
 429
 5.11
 44,371
 510
 4.64
33,922
 419
 4.95
 40,778
 471
 4.63
Total investment securities2,570,973
 17,308
 2.70
 2,757,667
 17,721
 2.57
2,515,408
 16,371
 2.60
 2,731,290
 18,595
 2.72
Loans held for sale13,426
 134
 4.00
 47,885
 495
 4.14
17,540
 214
 4.87
 42,158
 384
 3.64
Other interest-earning assets258,803
 882
 1.36
 190,576
 429
 0.90
238,921
 1,207
 2.02
 226,662
 439
 0.77
Total interest-earning assets15,605,559
 153,073
 3.97% 15,253,408
 155,593
 4.13%15,567,616
 152,179
 3.92% 15,528,672
 157,420
 4.07%
Noninterest-earning assets:
 
 
 
 
 

 
 
 
 
 
Cash and due from banks199,641
 
 
 202,507
 
 
198,291
 
 
 206,090
 
 
Premises and equipment226,295
 
 
 226,466
 
 
224,586
 
 
 225,915
 
 
Other assets1,032,071
 
 
 1,071,440
 
 
1,037,654
 
 
 1,061,448
 
 
Less: Allowance for loan losses(203,201) 
 
 (227,858) 
 
(196,462) 
 
 (221,541) 
 
Total Assets$16,860,365
 
 
 $16,525,963
 
 
$16,831,685
 
 
 $16,800,584
 
 
LIABILITIES AND EQUITY                      
Interest-bearing liabilities:
 
 
 
 
 

 
 
 
 
 
Demand deposits$2,945,211
 $909
 0.13% $2,705,835
 $877
 0.13%$2,914,887
 $904
 0.12% $2,718,679
 $872
 0.13%
Savings deposits3,351,871
 1,035
 0.13
 3,334,305
 1,023
 0.12
3,355,929
 1,031
 0.12
 3,350,856
 1,016
 0.12
Time deposits2,932,456
 5,952
 0.82
 3,321,309
 8,501
 1.04
3,012,061
 6,750
 0.90
 3,169,141
 7,610
 0.96
Total interest-bearing deposits9,229,538
 7,896
 0.35
 9,361,449
 10,401
 0.45
9,282,877
 8,685
 0.38
 9,238,676
 9,498
 0.41
Short-term borrowings1,208,953
 633
 0.21
 1,032,122
 509
 0.20
1,047,684
 540
 0.21
 1,313,424
 700
 0.21
Federal Home Loan Bank advances and long-term debt883,532
 10,698
 4.88
 891,173
 10,768
 4.87
894,511
 10,779
 4.83
 889,186
 10,815
 4.87
Total interest-bearing liabilities11,322,023
 19,227
 0.69% 11,284,744
 21,678
 0.78%11,225,072
 20,004
 0.71% 11,441,286
 21,013
 0.74%
Noninterest-bearing liabilities:
 
 
 
 
 

 
 
 
 
 
Demand deposits3,243,424
 
 
 2,968,777
 
 
3,322,195
 
 
 3,116,940
 
 
Other232,004
 
 
 198,944
 
 
202,520
 
 
 179,875
 
 
Total Liabilities14,797,451
 
 
 14,452,465
 
  14,749,787
 
 
 14,738,101
 
  
Shareholders’ equity2,062,914
 
 
 2,073,498
 
 
2,081,898
 
 
 2,062,483
 
 
Total Liabilities and Shareholders’ Equity$16,860,365
 
 
 $16,525,963
 
 
$16,831,685
 
 
 $16,800,584
 
 
Net interest income/net interest margin (FTE)  133,846
 3.47%   133,915
 3.55%  132,175
 3.41%   136,407
 3.52%
Tax equivalent adjustment  (4,281)     (4,271)    (4,277)     (4,342)  
Net interest income  $129,565
     $129,644
    $127,898
     $132,065
  
(1)Includes dividends earned on equity securities.
(2)Includes non-performing loans.
(3)Balances include amortized historical cost for available for sale securities; the related unrealized holding gains (losses) are included in other assets.

3943


The following table summarizes the changes in FTE interest income and interest expense resulting from changes in average balances (volume) and changes in rates for the three months ended March 31:June 30:
2014 vs. 2013
Increase (decrease) due
to change in
2014 vs. 2013
Increase (Decrease) due
to change in
Volume Rate NetVolume Rate Net
(in thousands)(in thousands)
Interest income on:          
Loans, net of unearned income$5,513
 $(7,712) $(2,199)$2,892
 $(6,507) $(3,615)
Taxable investment securities(898) 767
 (131)(1,186) (912) (2,098)
Tax-exempt investment securities(166) (35) (201)(130) 56
 (74)
Equity securities(129) 48
 (81)(83) 31
 (52)
Loans held for sale(344) (17) (361)(272) 102
 (170)
Other interest-earning assets185
 268
 453
24
 744
 768
Total interest income$4,161
 $(6,681) $(2,520)$1,245
 $(6,486) $(5,241)
Interest expense on:          
Demand deposits$75
 $(43) $32
$62
 $(30) $32
Savings deposits5
 7
 12
2
 13
 15
Time deposits(920) (1,629) (2,549)(367) (493) (860)
Short-term borrowings91
 33
 124
(138) (22) (160)
FHLB advances and long-term debt(93) 23
 (70)
Federal Home Loan Bank advances and long-term debt55
 (91) (36)
Total interest expense$(842) $(1,609) $(2,451)$(386) $(623) $(1,009)
Note: Changes which are partially attributable to both volume and rate are allocated to the volume and rate components presented above based on the percentage of direct changes that are attributable to each component.
As summarized above, a 1615 basis point, or 3.9%3.7%, decrease in yields on average interest-earnings assets resulted in a $6.7$6.5 million decrease in FTE interest income, partially offset by a $4.2$1.2 million increase in FTE interest income as a result of an $352.2a $38.9 million, or 2.3%0.3%, increase in average interest-earning assets.
Average investments decreased $186.7$215.9 million, or 6.8%7.9%, as portfolio cash flows were not fully reinvested. The average yield on investments increased 13decreased 12 basis points, or 5.1%4.4%, to 2.70%2.60% in the firstsecond quarter of 2014 from 2.57%2.72% in the firstsecond quarter of 2013. A $2.5$1.7 million, or 60.5%51.1%, decrease in net premium amortization on mortgage-backed securities and collateralized mortgage obligations had a 1517 basis point positive impact on the overall change in portfolio yield. TheThis positive impact of the net decrease in premium amortization was partiallymore than offset by the reinvestmentimpact of cash flows and purchases of mortgage-backed securities and collateralized mortgage obligations at yields that were lower than the overall portfolio yield.
Average loans and average FTE yields, by type, are summarized in the following table:
Three months ended June 30 Increase (Decrease) in
March 31, 2014 March 31, 2013 Increase (Decrease) in Balance2014 2013 Balance
Balance Yield Balance Yield $ %Balance Yield Balance Yield $ %
(dollars in thousands)(dollars in thousands)
Real estate – commercial mortgage$5,085,128
 4.44% $4,666,494
 4.84% $418,634
 9.0%$5,138,537
 4.36% $4,758,060
 4.72% $380,477
 8.0%
Commercial – industrial, financial and agricultural3,637,075
 4.03
 3,662,566
 4.24
 (25,491) (0.7)3,617,977
 3.95
 3,714,683
 4.13
 (96,706) (2.6)
Real estate – home equity1,755,346
 4.18
 1,662,173
 4.30
 93,173
 5.6
1,735,767
 4.18
 1,732,704
 4.24
 3,063
 0.2
Real estate – residential mortgage1,336,323
 3.99
 1,283,168
 4.25
 53,155
 4.1
1,339,034
 3.97
 1,308,713
 4.09
 30,321
 2.3
Real estate – construction576,346
 4.08
 591,338
 4.11
 (14,992) (2.5)588,176
 4.17
 617,577
 4.09
 (29,401) (4.8)
Consumer274,910
 4.82
 305,480
 5.00
 (30,570) (10.0)276,444
 4.56
 304,918
 4.87
 (28,474) (9.3)
Leasing and other97,229
 9.79
 86,061
 8.59
 11,168
 13.0
99,812
 8.83
 91,907
 8.92
 7,905
 8.6
Total$12,762,357
 4.28% $12,257,280
 4.53% $505,077
 4.1%$12,795,747
 4.21% $12,528,562
 4.42% $267,185
 2.1%


4044


Average loans increased $505.1$267.2 million, or 4.1%2.1%, compared to the firstsecond quarter of 2013.2013, mainly in commercial mortgages. The growth in commercial mortgages was driven by a combination of loans to new customers and increased borrowings from existing customers. The average yield on loans decreased 2521 basis points, or 5.5%4.8%, to 4.28%4.21% in 2014 from 4.53%4.42% in 2013. The decrease in average yields on loans was attributable to repayments of higher-yielding loans continued refinancing activity, the renegotiation of certain existing loans to commercial borrowers to eliminate interest rate floors and new loan production at lower rates.
Average other interest-earning assets increased $68.2$12.3 million, or 35.8%5.4%, primarily due to an increase in average interest-bearing deposits with other banks. The average yield on other interest-earning assets increased 46125 basis points, or 51.1%162.3%, due to increases in dividends from Federal Home Loan Bank (FHLB) stock. AsEach of March 31,the Corporation’s subsidiary banks is a member of the Federal Home Loan Bank for the region encompassing the headquarters of the subsidiary bank.  Memberships are maintained with the Atlanta, New York and Pittsburgh regional Federal Home Loan Banks (collectively referred to as the "FHLB").As of June 30, 2014, the Corporation held $55.3$63.4 million of FHLB stock.
Interest expense decreased $2.5$1.0 million, or 11.3%4.8%, to $19.2$20.0 million in the firstsecond quarter of 2014 from $21.7$21.0 million in the firstsecond quarter of 2013. Interest expense decreased $1.6 million$623,000 due to a 93 basis point, or 11.5%4.1%, decrease in the average cost of total interest-bearing liabilities. While totalTotal interest-bearing liabilities increased $37.3decreased $216.2 million, or 0.3%1.9%, the change in the overall funding mixwhich resulted in an additional $842,000$386,000 decrease in interest expense. A decrease in higher cost time deposits was more than offset by increases in interest-bearing demand deposits and short-term borrowings. However, the cost of these funding sources is significantly lower, resulting in the interest expense decrease.
Average deposits and average interest rates, by type, are summarized in the following table:
Three months ended June 30 Increase (Decrease) in
March 31, 2014 March 31, 2013 Increase (Decrease) in Balance2014 2013 Balance
Balance Rate Balance Rate $ %Balance Rate Balance Rate $ %
(dollars in thousands)(dollars in thousands)
Noninterest-bearing demand$3,243,424
 % $2,968,777
 % $274,647
 9.3%$3,322,195
 % $3,116,940
 % $205,255
 6.6%
Interest-bearing demand2,945,211
 0.13
 2,705,835
 0.13
 239,376
 8.8
2,914,887
 0.12
 2,718,679
 0.13
 196,208
 7.2
Savings3,351,871
 0.13
 3,334,305
 0.12
 17,566
 0.5
3,355,929
 0.12
 3,350,856
 0.12
 5,073
 0.2
Total demand and savings9,540,506
 0.08
 9,008,917
 0.09
 531,589
 5.9
9,593,011
 0.08
 9,186,475
 0.08
 406,536
 4.4
Time deposits2,932,456
 0.82
 3,321,309
 1.04
 (388,853) (11.7)3,012,061
 0.90
 3,169,141
 0.96
 (157,080) (5.0)
Total deposits$12,472,962
 0.26% $12,330,226
 0.34% $142,736
 1.2%$12,605,072
 0.28% $12,355,616
 0.30% $249,456
 2.0%
The $531.6$406.5 million, or 5.9%4.4%, increase in total demand and savings accounts was primarily due to a $238.4$193.1 million, or 5.5%4.3%, increase in personal account balances and a $260.5$187.9 million, or 8.8%6.1%, increase in business account balances. The $388.9$157.1 million, or 11.7%5.0%, decrease in average time deposits was primarily due to a decrease in time deposits occurring in accounts with balances less than $100,000.$100,000 and with original maturity terms of less than three years.
The average cost of interest-bearing deposits decreased 103 basis points, or 22.2%7.3%, to 0.35%0.38% in 2014 from 0.45%0.41% in 2013, primarily due to a decrease in higher cost time deposits and an increase in lower cost interest-bearing savings and demand balances as a percentage of total interest-bearing deposits, to 68.2% in the first quarter of 2014 from 64.5% in 2013. During the first quarter of 2014, excluding early redemptions, $537.1 million of time deposits matured at a weighted average rate of 0.50%, while approximately $709.5 million of time deposits were issued at a weighted average rate of 0.83%.balances.

41


Average borrowings and interest rates, by type, are summarized in the following table:

 March 31, 2014 March 31, 2013 Increase (Decrease) in Balance
 Balance Rate Balance Rate $ %
 (dollars in thousands)
Short-term borrowings:           
Customer repurchase agreements$187,362
 0.11% $165,109
 0.11% $22,253
 13.5 %
Customer short-term promissory notes102,000
 0.06
 112,041
 0.04
 (10,041) (9.0)
Total short-term customer funding289,362
 0.09
 277,150
 0.08
 12,212
 4.4
Federal funds purchased416,230
 0.21
 709,779
 0.24
 (293,549) (41.4)
Short-term FHLB advances (1)503,361
 0.28
 45,193
 0.27
 458,168
 N/M
Total short-term borrowings1,208,953
 0.21
 1,032,122
 0.20
 176,831
 17.1
Long-term debt:
   
   
 
FHLB advances513,790
 4.14
 521,699
 4.13
 (7,909) (1.5)
Other long-term debt369,742
 5.90
 369,474
 5.90
 268
 0.1
Total long-term debt883,532
 4.88
 891,173
 4.87
 (7,641) (0.9)
Total borrowings$2,092,485
 2.20% $1,923,295
 2.38% $169,190
 8.8 %
            
45


 Three months ended June 30 Increase (Decrease) in
 2014 2013 Balance
 Balance Rate Balance Rate $ %
 (dollars in thousands)
Short-term borrowings:           
Customer repurchase agreements$216,212
 0.11% $188,339
 0.11% $27,873
 14.8 %
Customer short-term promissory notes81,823
 0.05
 98,207
 0.06
 (16,384) (16.7)
Total short-term customer funding298,035
 0.09
 286,546
 0.09
 11,489
 4.0
Federal funds purchased444,429
 0.22
 776,603
 0.25
 (332,174) (42.8)
Short-term FHLB advances (1)305,220
 0.30
 250,275
 0.23
 54,945
 22.0
Total short-term borrowings1,047,684
 0.21
 1,313,424
 0.21
 (265,740) (20.2)
Long-term debt:
   
   
 
FHLB advances524,782
 4.07
 519,638
 4.14
 5,144
 1.0
Other long-term debt369,729
 5.90
 369,548
 5.90
 181
 
Total long-term debt894,511
 4.83
 889,186
 4.87
 5,325
 0.6
Total borrowings$1,942,195
 2.33% $2,202,610
 2.09% $(260,415) (11.8)%
            
(1) Represents FHLB advances with an original maturity term of less than one year.
N/M - Not meaningful.
Total short-term borrowings increased $176.8decreased $265.7 million, or 17.1%20.2%, primarily due to increasesdecreases in Federal funds purchased, partially offset by an increase in short-term FHLB advances, partially offset by a reduction in Federal funds purchased.advances. The increasedecrease in short-term borrowings was driven by the growthdecrease in average loans exceedinginvestment securities as the increase in average deposits. The $7.6 million decreasedeposits kept pace with the growth in long-term debt was due to the repayment of FHLB advances, which were not replaced with new long-term borrowings.average loans.
The average cost of total borrowings decreased 18increased 24 basis points, or 7.6%11.5%, to 2.20%2.33% in 2014 from 2.38%2.09% in 2013, primarily due to the weighted average cost impact of an increasea decrease in lower cost short-term borrowings, which were 57.8%53.9% of total borrowings in 2014 and 53.6%59.6% in 2013.

Provision for Credit Losses
The provision for credit losses was $2.5$3.5 million for the firstsecond quarter of 2014, a decrease of $12.5$10.0 million, or 83.3%74.1%, from the firstsecond quarter of 2013 due to improvements in asset quality, as shown by a reduction in non-performing loans and overall delinquency rates.
The provision for credit losses is recognized as an expense in the consolidated statements of income and is the amount necessary to adjust the allowance for credit losses to its appropriate balance, as determined through the Corporation's allowance methodology. The Corporation determines the appropriate level of the allowance for credit losses based on many quantitative and qualitative factors, including, but not limited to: the size and composition of the loan portfolio, changes in risk ratings, changes in collateral values, delinquency levels, historical losses and economic conditions. See the "Financial Condition" section of Management's Discussion under the heading "Provision for Credit Losses and Allowance for Credit Losses" for details related to the Corporation's allowance and provision for credit losses.


42


Non-Interest Income
The following table presents the components of non-interest income:

46


Three months ended March 31 Increase (decrease)Three months ended June 30 Increase (Decrease)
2014 2013 $ %2014 2013 $ %
(dollars in thousands)(dollars in thousands)
Service Charges on deposit accounts:       
Service charges on deposit accounts:       
Overdraft fees$5,297
 $7,461
 $(2,164) (29.0)%$5,542
 $7,624
 $(2,082) (27.3)%
Cash management fees3,105
 2,832
 273
 9.6
3,293
 2,970
 323
 10.9
Other3,309
 3,818
 (509) (13.3)3,717
 4,057
 (340) (8.4)
Total service charges on deposit accounts11,711
 14,111
 (2,400) (17.0)12,552
 14,651
 (2,099) (14.3)
Investment management and trust services10,958
 10,096
 862
 8.5
11,339
 10,601
 738
 7.0
Other service charges and fees:              
Merchant fees2,723
 3,074
 (351) (11.4)3,843
 3,600
 243
 6.8
Debit card income2,210
 2,084
 126
 6.0
2,435
 2,374
 61
 2.6
Letter of credit fees1,101
 1,234
 (133) (10.8)1,184
 1,232
 (48) (3.9)
Commercial swap fees1,013
 287
 726
 253.0
994
 252
 742
 294.4
Other1,880
 1,831
 49
 2.7
2,070
 2,050
 20
 1.0
Total other service charges and fees8,927
 8,510
 417
 4.9
10,526
 9,508
 1,018
 10.7
Mortgage banking income:              
Gain on sales of mortgage loans2,422
 8,338
 (5,916) (71.0)2,974
 8,677
 (5,703) (65.7)
Mortgage servicing income1,183
 (165) 1,348
      N/M2,767
 2,320
 447
 (19.3)
Total mortgage banking income3,605
 8,173
 (4,568) (55.9)5,741
 10,997
 (5,256) (47.8)
Credit card income2,171
 2,171
 
 
2,353
 2,134
 219
 10.3
Other income1,134
 1,725
 (591) (34.3)1,249
 1,560
 (311) (19.9)
Total, excluding investment securities gains38,506
 44,786
 (6,280) (14.0)43,760
 49,451
 (5,691) (11.5)
Investment securities gains
 2,473
 (2,473) 1,112
 2,865
 (1,753) (61.2)
Total$38,506
 $47,259
 $(8,753) (18.5)%$44,872
 $52,316
 $(7,444) (14.2)%

N/M - Not meaningful.
The $2.2$2.1 million, or 29.0%27.3%, decrease in overdraft fee income included a $1.4 million decrease in fees assessed on personal accounts and a $764,000$735,000 decrease in fees assessed on commercial accounts. The overall decline in these fees resulted from a reduction in the number of overdraft items paid.fees assessed, partially driven by changes in customer behavior and a reduction in the maximum number of overdraft fees that may be assessed each day.
The $862,000,$738,000, or 8.5%7.0%, increase in investment management and trust services income was due to a $713,000,$507,000, or 16.8%10.8%, increase in brokerage revenue and a $149,000,$231,000, or 2.6%3.9%, increase in trust commissions. These increases resulted from new trust business sales, improved market conditions that increased the values of existing assets under management and additional recurring revenue generated through the brokerage business due to growth in new accounts.
Commercial swap fees increased $726,000,$742,000, or 253.0%294.4%, due to the current interest rate environment and the Corporation's continued roll outroll-out of the product. For additional details see Note I, "Derivative Financial Instruments" in the notes to consolidated financial statements.
Gains on sales of mortgage loans decreased $5.9$5.7 million, or 71.0%65.7%, due to a $322.1$231.6 million, or 62.7%47.1%, decrease in new loan commitments and an 22.1%a 35.2% decrease in pricing spreads compared to the firstsecond quarter of 2013.2013. Both decreases resulted from an increase in mortgage interest rates in the second half of 2013. The decline in new loan commitments was mainly in refinancing volumes, which representedtotaled approximately 33%$66.6 million, or 25.7%, of new loan commitments, in the second quarter of 2014 compared to 63%$234.9 million, or 47.8%, during 2013.the second quarter of 2013.
Mortgage servicing income, which includes fees earnedInvestment securities gains for servicing sold residential mortgage loansthe second quarter of 2014 were a result of net realized gains on sales of debt securities. The $2.9 million of investment securities gains for the amortization of MSRs, increased $1.3 million in comparison to the firstsecond quarter of 2013 primarily due to aincluded $1.1 million decreaseof net realized gains on financial institution stocks and $1.8 million of realized gains on sales of debt securities. See Note D, "Investment Securities," in MSR amortization as prepayments slowed duethe Notes to increases in mortgage rates.Consolidated Financial Statements for additional details.

43


Non-Interest Expense
The following table presents the components of non-interest expense:

47


Three months ended March 31 Increase (decrease)Three months ended June 30 Increase (Decrease)
2014 2013 $ %2014 2013 $ %
(dollars in thousands)(dollars in thousands)
Salaries and employee benefits$59,566
 $61,212
 $(1,646) (2.7)%$63,623
 $63,490
 $133
 0.2 %
Net occupancy expense13,603
 11,844
 1,759
 14.9
11,464
 11,447
 17
 0.1
Other outside services3,812
 2,860
 952
 33.3
7,240
 5,315
 1,925
 36.2
Data processing3,796
 3,903
 (107) (2.7)4,331
 4,509
 (178) (3.9)
Professional fees3,559
 3,395
 164
 4.8
Equipment expense3,602
 3,908
 (306) (7.8)3,360
 3,893
 (533) (13.7)
Software2,925
 2,748
 177
 6.4
3,209
 3,094
 115
 3.7
Professional fees2,904
 3,047
 (143) (4.7)
FDIC insurance expense2,689
 2,847
 (158) (5.5)2,615
 3,001
 (386) (12.9)
Operating risk loss1,828
 1,766
 62
 3.5
Marketing2,337
 1,922
 415
 21.6
Telecommunications1,819
 1,804
 15
 0.8
1,787
 1,736
 51
 2.9
Marketing1,584
 1,872
 (288) (15.4)
Postage1,260
 1,264
 (4) (0.3)1,339
 1,206
 133
 11.0
Supplies1,065
 1,196
 (131) (11.0)1,112
 1,396
 (284) (20.3)
Other real estate owned (OREO) and repossession expense983
 2,854
 (1,871) (65.6)
Other real estate owned and repossession expense748
 1,941
 (1,193) (61.5)
Operating risk loss716
 1,860
 (1,144) (61.5)
Intangible amortization315
 534
 (219) (41.0)315
 535
 (220) (41.1)
Other7,803
 7,277
 526
 7.2
8,419
 8,390
 29
 0.3
Total$109,554
 $110,936
 $(1,382) (1.2)%$116,174
 $117,130
 $(956) (0.8)%

Salaries and employee benefits decreased $1.6 million,increased $133,000, or 2.7%0.2%, due to a $205,000,$146,000, or 0.4%0.3%, increase in salaries and a $1.9 million,$13,000, or 17.7%0.11%, decrease in employee benefits. The increase in salaries was caused byresulted from normal merit increases. These increases and an increase in average full-time equivalent employees,were partially offset by a $2.5 million decrease in incentive compensation. Average full-time equivalent employees were 3,590 forcompensation, a $371,000 decrease in stock-based compensation expense and lower salaries expense as a result of the three months ended March 31, 2014 as compared to 3,570 forcost savings initiatives executed in the same period in 2013.first quarter of 2014. The decrease in employee benefits was primarily due to the Corporation's cost savings initiatives, which included the elimination and reduction of certain employee benefit plans, most notably a decrease in profit sharing contributions and an amendment to the Postretirement Benefits Plan.Plan, offset by an increase in healthcare expenses. For additional information related to the amendment to the postretirement plan,Postretirement Plan, see Note H, "Employee Benefit Plans" in the notesNotes to consolidated financial statements.Consolidated Financial Statements.
Net occupancy expense increased $1.8 million, or 14.9%, primarily due to snow removal costs in 2014. Other outside services increased $952,000,$1.9 million, or 33.3%36.2%, due to increasesan increase in consulting services related to IT initiatives and consulting expense, incurred primarily forthe acceleration of risk management and regulatory compliance initiatives.efforts, including those in connection with the enhancement of the Corporation’s program for compliance with the BSA/AML Requirements.
Equipment expense decreased $533,000, or 13.7%, due to a decrease in depreciation expense on office equipment, as assets related to significant information technology initiatives in prior years became fully depreciated.
OREO and repossession expense decreased $1.9$1.2 million, or 65.6%61.5%, primarily due to an increase in net gains on sales of properties and a decrease in valuation provisions, which reflect the continued improvement in overall asset quality.provisions.
The $526,000,$1.1 million, or 7.2%61.5%, increasedecrease in other expense included $1.5 million of lease termination costsoperating risk loss was due to a $679,000 decrease in charges related to debit card fraud losses and a $574,000 decrease in losses associated with the Corporation's consolidation of 13 branches in the first quarter of 2014, partially offset by a decrease in lending related expenses. For a summary of the impact of cost savings initiatives implemented during the first quarter of 2014, see the "Overview and Summary Financial Results" section of Management's Discussion.previously sold residential mortgages.
Income Taxes
Income tax expense for the firstsecond quarter of 2014 was $14.2$13.5 million, a $2.5 million,$331,000, or 21.2%2.5%, increase from $11.7$13.2 million for the firstsecond quarter of 2013.2013.
The Corporation’s effective tax rate was 25.4% in the second quarter of 2014, as compared to 23.0%24.5% in 2013.the second quarter of 2013. The effective rate is generally lower than the Federal statutory rate of 35% due to investments in tax-free municipal securities and credits earned from investments in partnerships that generate tax credits under various federal programs. The increase in the effective tax rate in comparison to the firstsecond quarter of 2013 was primarily due to a $982,000 ($638,000,$488,000, net of federal tax)tax, reduction in the valuation allowance for certain state deferred tax assets recognized through a credit to income tax expense recognizedin the second quarter of 2013.
Six Months Ended June 30, 2014 compared to the Six Months Ended June 30, 2013

48


Net Interest Income
FTE net interest income decreased $4.3 million, or 1.6%, to $266.0 million in the first half of 2014 from $270.3 million in the first half of 2013.
Net interest margin decreased 10 basis points, or 2.8%, to 3.44% for the first half of 2014 from 3.54% for the first half of 2013. The decrease in net interest margin was the result of a 15 basis point, or 3.7%, decrease in yields on interest-earning assets, partially offset by a 6 basis point, or 7.9%, decrease in funding costs.

49


The following table provides a comparative average balance sheet and net interest income analysis for the first half of 2014 as compared to the same period in 2013. Interest income and yields are presented on an FTE basis, using a 35% Federal tax rate and statutory interest expense disallowances. The discussion following this table is based on these FTE amounts. All dollar amounts are in thousands.
 Six months ended June 30
 2014 2013
ASSETSAverage
Balance
 Interest  (1) Yield/
Rate
 Average
Balance
 Interest  (1) Yield/
Rate
Interest-earning assets:           
Loans, net of unearned income (2)$12,779,145
 $269,131
 4.24% $12,393,670
 $274,950
 4.47%
Taxable investment securities (3)2,234,259
 25,684
 2.30
 2,415,562
 27,913
 2.31
Tax-exempt investment securities (3)274,856
 7,147
 5.20
 286,281
 7,422
 5.19
Equity securities (3)33,922
 848
 5.03
 42,565
 981
 4.64
Total investment securities2,543,037
 33,679
 2.65
 2,744,408
 36,316
 2.65
Loans held for sale15,494
 348
 4.49
 45,005
 879
 3.91
Other interest-earning assets248,807
 2,089
 1.68
 208,718
 868
 0.83
Total interest-earning assets15,586,483
 305,247
 3.95% 15,391,801
 313,013
 4.10%
Noninterest-earning assets:           
Cash and due from banks198,962
     204,308
    
Premises and equipment225,436
     226,189
    
Other assets1,034,877
     1,066,416
    
Less: Allowance for loan losses(199,813)     (224,682)    
Total Assets$16,845,945
     $16,664,032
    
LIABILITIES AND EQUITY           
Interest-bearing liabilities:           
Demand deposits$2,929,965
 $1,813
 0.12% $2,712,292
 $1,749
 0.13%
Savings deposits3,353,910
 2,066
 0.12
 3,342,626
 2,039
 0.12
Time deposits2,972,480
 12,702
 0.86
 3,244,805
 16,111
 1.00
Total interest-bearing deposits9,256,355
 16,581
 0.36
 9,299,723
 19,899
 0.43
Short-term borrowings1,127,872
 1,173
 0.21
 1,173,550
 1,209
 0.21
FHLB advances and long-term debt889,051
 21,477
 4.85
 890,174
 21,583
 4.87
Total interest-bearing liabilities11,273,278
 39,231
 0.70% 11,363,447
 42,691
 0.76%
Noninterest-bearing liabilities:           
Demand deposits3,283,027
     3,043,268
    
Other217,181
     189,357
    
Total Liabilities14,773,486
     14,596,072
    
Shareholders’ equity2,072,459
     2,067,960
    
Total Liabilities and Shareholders’ Equity$16,845,945
     $16,664,032
    
Net interest income/net interest margin (FTE)  266,016
 3.44%   270,322
 3.54%
Tax equivalent adjustment  (8,553)     (8,613)  
Net interest income  $257,463
     $261,709
  
(1)Includes dividends earned on equity securities.
(2)Includes non-performing loans.
(3)Balances include amortized historical cost for available for sale securities. The related unrealized holding gains (losses) are included in other assets.

50



The following table summarizes the changes in FTE interest income and expense for the first six months of 2014 as compared to the same period in 2013 due to changes in average balances (volume) and changes in rates:
 2014 vs. 2013
Increase (Decrease) due
to change in
 Volume Rate Net
 (in thousands)
Interest income on:     
Loans, net of unearned income$8,387
 $(14,206) $(5,819)
Taxable investment securities(2,084) (145) (2,229)
Tax-exempt investment securities(297) 22
 (275)
Equity securities(210) 77
 (133)
Loans held for sale(645) 114
 (531)
Other interest-earning assets192
 1,029
 1,221
Total interest income$5,343
 $(13,109) $(7,766)
Interest expense on:     
Demand deposits$137
 $(73) $64
Savings deposits7
 20
 27
Time deposits(1,281) (2,128) (3,409)
Short-term borrowings(48) 12
 (36)
FHLB advances and long-term debt(27) (79) (106)
Total interest expense$(1,212) $(2,248) $(3,460)

A 15 basis point, or 3.7%, decrease in average yields on interest-earning assets resulted in a $13.1 million decrease in FTE interest income, which was partially offset by a $5.3 million increase in FTE interest income resulting from a $194.7 million, or 1.3%, increase in average interest-earning assets. Average investments decreased $201.4 million, or 7.3%, as portfolio cash flows were not fully reinvested.
Average loans, by type, are summarized in the following table:
 Six months ended June 30 Increase (Decrease) in
 2014 2013 Balance
 Balance Yield Balance Yield $ %
 (dollars in thousands)
Real estate – commercial mortgage$5,111,979
 4.40% $4,712,530
 4.78% $399,449
 8.5%
Commercial – industrial, financial and agricultural3,627,471
 3.99
 3,688,767
 4.19
 (61,296) (1.7)
Real estate – home equity1,745,503
 4.18
 1,697,634
 4.27
 47,869
 2.8
Real estate – residential mortgage1,337,686
 3.98
 1,296,012
 4.17
 41,674
 3.2
Real estate – construction582,294
 4.13
 604,531
 4.10
 (22,237) (3.7)
Consumer275,682
 4.69
 305,199
 4.94
 (29,517) (9.7)
Leasing and other98,530
 9.30
 88,997
 8.76
 9,533
 10.7
Total$12,779,145
 4.24% $12,393,670
 4.47% $385,475
 3.1%

The $399.4 million, or 8.5%, increase in commercial mortgages was from both new and existing customers. The average yield on loans decreased 23 basis points, or 5.1%, to 4.24% in 2014 from 4.47% in 2013. The decrease in average yields on loans was attributable to repayments of higher-yielding loans and new loan production at lower rates.
Interest expense decreased $3.5 million, or 8.1%, to $39.2 million in the first half of 2014 from $42.7 million in the first half of 2013. Interest expense decreased $2.2 million as a result of a six basis point, or 7.9%, decrease in the average cost of interest-bearing liabilities, primarily a result of a decrease in average costs of time deposits. A $90.2 million, or 0.8%, decrease in interest-bearing liabilities resulted in an additional $1.2 million decrease in interest expense.


51


Average deposits, by type, are summarized in the following table:
 Six months ended June 30 Increase (Decrease) in
 2014 2013 Balance
 Balance Rate Balance Rate $ %
 (dollars in thousands)
Noninterest-bearing demand$3,283,027
 % $3,043,268
 % $239,759
 7.9%
Interest-bearing demand2,929,965
 0.12% 2,712,292
 0.13% 217,673
 8.0
Savings3,353,910
 0.12% 3,342,626
 0.12% 11,284
 0.3
Total demand and savings9,566,902
 0.08% 9,098,186
 0.08% 468,716
 5.2
Time deposits2,972,480
 0.86% 3,244,805
 1.00% (272,325) (8.4)
Total deposits$12,539,382
 0.27% $12,342,991
 0.33% $196,391
 1.6%

The $468.7 million, or 5.2%, increase in total demand and savings account balances was primarily due to a $215.6 million, or 4.9%, increase in personal account balances, a $224.0 million, or 7.4%, increase in business account balances and a $46.5 million, or 2.9%, increase in municipal account balances. The $272.3 million, or 8.4%, decrease in average time deposits was primarily in accounts with balances less than $100,000 and with original maturity terms of less than three years.
The average cost of interest-bearing deposits decreased seven basis points, or 16.3%, to 0.36% in 2014 from 0.43% in 2013, primarilydue to a decrease in higher cost time deposits and an increase in lower cost interest-bearing savings and demand balances.
The following table summarizes changes in average short-term borrowings and long-term debt, by type:
 Six months ended June 30 Increase (Decrease) in
 2014 2013 Balance
 Balance Rate Balance Rate $ %
 (dollars in thousands)
Short-term borrowings:           
Customer repurchase agreements$201,866
 0.11% $176,788
 0.11% $25,078
 14.2 %
Customer short-term promissory notes91,856
 0.06% 105,086
 0.05% (13,230) (12.6)
Total short-term customer funding293,722
 0.09% 281,874
 0.09% 11,848
 4.2
Federal funds purchased430,407
 0.21% 743,376
 0.24% (312,969) (42.1)
Short-term FHLB advances (1)403,743
 0.29% 148,300
 0.24% 255,443
 172.2
Total short-term borrowings1,127,872
 0.21% 1,173,550
 0.21% (45,678) (3.9)
Long-term debt:           
FHLB advances519,316
 4.11% 520,663
 4.14% (1,347) (0.3)
Other long-term debt369,735
 5.90% 369,511
 5.90% 224
 0.1
Total long-term debt889,051
 4.85% 890,174
 4.87% (1,123) (0.1)
Total$2,016,923
 2.26% $2,063,724
 2.22% $(46,801) (2.3)%
(1) Represents FHLB advances with an original maturity term of less than one year.
Total short-term borrowings decreased $45.7 million, or 3.9%, primarily due to a decrease in Federal funds purchased, partially offset by an increase in short-term FHLB advances.

Provision for Credit Losses
The provision for credit losses was $6.0 million for the first half of 2014, a decrease of $22.5 million, or 78.9%, in comparison to the first half of 2013, reflecting improvements in asset quality. For details related to the Corporation's allowance and provision for credit losses, see the "Financial Condition" section of Management's Discussion under the heading "Provision for Credit Losses and Allowance for Credit Losses."






52


Non-Interest Income
The following table presents the components of non-interest income:
 Six months ended June 30 Increase (Decrease)
 2014 2013 $ %
 (dollars in thousands)
Service charges on deposit accounts:       
Overdraft fees$10,839
 $15,085
 $(4,246) (28.1)%
Cash management fees6,398
 5,802
 596
 10.3
Other7,026
 7,875
 (849) (10.8)
         Total service charges on deposit accounts24,263
 28,762
 (4,499) (15.6)
Investment management and trust services22,297
 20,697
 1,600
 7.7
Other service charges and fees:       
Merchant fees6,566
 6,674
 (108) (1.6)
Debit card income4,645
 4,458
 187
 4.2
Letter of credit fees2,285
 2,466
 (181) (7.3)
Commercial swap fees2,007
 539
 1,468
 272.4
Foreign currency processing income618
 676
 (58) (8.6)
Other3,332
 3,205
 127
 4.0
        Total other service charges and fees19,453
 18,018
 1,435
 8.0
Mortgage banking income:       
Gain on sales of mortgage loans5,396
 17,015
 (11,619) (68.3)
Mortgage servicing income3,950
 2,155
 1,795
 (83.3)
        Total mortgage banking income9,346
 19,170
 (9,824) (51.2)
Credit card income4,524
 4,306
 218
 5.1
Other income2,383
 3,284
 (901) (27.4)
        Total, excluding investment securities gains82,266
 94,237
 (11,971) (12.7)
Investment securities gains1,112
 5,338
 (4,226) (79.2)
              Total$83,378
 $99,575
 $(16,197) (16.3)%

The $4.2 million, or 28.1%, decrease in overdraft fee income included a $2.8 million decrease in fees assessed on personal accounts and a $1.4 million decrease in fees assessed on commercial accounts. The overall decline in these fees resulted from a reduction in the number of overdraft items paid.
The $1.6 million, or 7.7%, increase in investment management and trust services income was primarily due to a $1.2 million, or 13.7%, increase in brokerage revenue and a $381,000, or 3.2%, increase in trust commissions. These increases resulted from new trust business sales, improved market conditions that increased the values of existing assets under management, and additional recurring revenue generated through the brokerage business due to growth in new accounts. The $1.5 million increase in commercial loan swap fees was due to the current interest rate environment and the Corporation's continued roll-out of the product.
Gains on sales of mortgage loans decreased $11.6 million, or 68.3%, due to a $553.6 million, or 55.1%, decrease in new loan commitments and a 29.4% decrease in pricing spreads compared to the prior year. Both decreases resulted from an increase in mortgage interest rates in the second half of 2013. The decline in new loan commitments was mainly in refinancing volumes, which were $130.1 million, or 28.8%, of new loan commitments in 2014 compared to $558.6 million, or 55.6%, during 2013.
Mortgage servicing income increased $1.8 million in comparison to 2013, primarily due to a $3.2 million decrease in amortization of mortgage servicing rights (MSRs) as prepayments slowed as mortgage rates increased, partially offset by the absence of a $2.0 million reversal of the valuation allowance for MSRs recorded in the second quarter of 2013.
Investment securities gains of $1.1 million was a result of net realized gains on the sales of debt securities. The $5.4 million of investment securities gains for first half 2013 included $2.2 million of net realized gains on financial institution stocks and $3.2 million of realized gains on the sales of debt securities.

53


Non-Interest Expense
The following table presents the components of non-interest expense:
 Six months ended June 30 Increase (Decrease)
 2014 2013 $ %
 (dollars in thousands)
Salaries and employee benefits$123,189
 $124,702
 $(1,513) (1.2)%
Net occupancy expense25,067
 23,291
 1,776
 7.6
Other outside services11,052
 8,175
 2,877
 35.2
Data processing8,127
 8,412
 (285) (3.4)
Equipment expense6,962
 7,801
 (839) (10.8)
Professional fees6,463
 6,442
 21
 0.3
Software6,134
 5,842
 292
 5.0
FDIC insurance expense5,304
 5,848
 (544) (9.3)
Marketing3,921
 3,794
 127
 3.3
Telecommunications3,606
 3,540
 66
 1.9
Postage2,599
 2,470
 129
 5.2
Operating risk loss2,544
 3,626
 (1,082) (29.8)
Supplies2,178
 2,592
 (414) (16.0)
Other real estate owned and repossession expense1,731
 4,795
 (3,064) (63.9)
Intangible amortization630
 1,069
 (439) (41.1)
Other16,221
 15,667
 554
 3.5
Total$225,728
 $228,066
 $(2,338) (1.0)%

Salaries and employee benefits decreased $1.5 million, or 1.2%, with salaries increasing $352,000, or 0.3%, and employee benefits decreasing $1.9 million, or 8.8%. The increase in salaries was primarily due to normal merit increases, partially offset by decreases in overtime and temporary employee expense related to lower residential mortgage volumes and the core processing system conversion in 2013, a decrease in incentive compensation and lower salaries expense as a result of the completion of the cost savings initiatives executed in the first quarter of 2013, along2014. The decrease in employee benefits was primarily due to the cost savings initiatives, which included the elimination and reduction of certain employee benefit plans, most notably a decrease in profit sharing contributions and an amendment to the Postretirement Plan, partially offset by an increase in healthcare expenses.
The $1.8 million, or 7.6%, increase in net occupancy expense was primarily due to an increase in snow removal costs in 2014, partially offset by savings from the Corporation's 2014 branch consolidations.
Other outside services increased $2.9 million, or 35.2%, due to an increase in consulting services related to the Corporation’s acceleration of risk management and compliance efforts.
The $839,000, or 10.8%, decrease in equipment expense was primarily due to a decrease in depreciation expense as certain assets became fully depreciated. FDIC insurance expense decreased $544,000, or 9.3%, due to a decrease in assessment rates based on improvements in subsidiary bank impaired asset levels.
The $1.1 million, or 29.8%, decrease in operating risk loss was due to a decrease in for losses associated with previously sold residential mortgages, primarily due to the Corporation entering into a settlement agreement with a higher levelsecondary market investor during the first half of pre-tax income2014 and a decrease in charges related to debit card fraud losses. See Note L "Commitments and Contingencies," in the notes to consolidated financial statements for additional details related to repurchases of previously sold residential mortgages.
Stationary and supplies decreased $414,000, or 16.0% due to one-time cost associated with the core systems conversion in 2013.
OREO and repossession expense decreased $3.1 million, or 63.9%, primarily due to an increase in net gains on sales of properties and a decrease in valuation provisions, which reflect the continued improvement in overall asset quality. The $439,000, or 41.1%, decrease in intangible amortization was primarily due to core deposit intangible assets, which are amortized on an accelerated basis.

54


Income Taxes
Income tax expense for the first quartersix months of 2014.2014 was $27.7 million, a $2.8 million, or 11.3%, increase from $24.9 million in 2013.
The Corporation’s effective tax rate was 25.4% in 2014, as compared to 23.8% in 2013. The effective rate is generally lower than the Federal statutory rate of 35% due to investments in tax-free municipal securities and tax credits earned from investments in partnerships that generate such credits under various federal programs.The increase in the effective tax rate in comparison to the first six months of 2013 was due primarily to a $1.7 million ($1.1 million, net of federal tax) decrease in the valuation allowance for certain state deferred tax assets that was recorded as a credit to income tax expense in 2013.






4455


FINANCIAL CONDITION
The table below presents condensed consolidated ending balance sheets for the Corporation.
  Increase (decrease)  Increase (Decrease)
March 31, 2014 December 31, 2013 $ %June 30, 2014 December 31, 2013 $ %
(dollars in thousands)(dollars in thousands)
Assets              
Cash and due from banks$260,389
 $218,540
 $41,849
 19.1 %$258,837
 $218,540
 $40,297
 18.4 %
Other interest-earning assets307,062
 248,161
 58,901
 23.7
305,518
 248,161
 57,357
 23.1
Loans held for sale24,417
 21,351
 3,066
 14.4
36,079
 21,351
 14,728
 69.0
Investment securities2,501,198
 2,568,434
 (67,236) (2.6)2,497,776
 2,568,434
 (70,658) (2.8)
Loans, net of allowance12,536,703
 12,579,440
 (42,737) (0.3)12,647,826
 12,579,440
 68,386
 0.5
Premises and equipment225,647
 226,021
 (374) (0.2)225,168
 226,021
 (853) (0.4)
Goodwill and intangible assets532,747
 533,076
 (329) (0.1)532,432
 533,076
 (644) (0.1)
Other assets523,726
 539,611
 (15,885) (2.9)530,003
 539,611
 (9,608) (1.8)
Total Assets$16,911,889
 $16,934,634
 $(22,745) (0.1)%$17,033,639
 $16,934,634
 $99,005
 0.6 %
Liabilities and Shareholders’ Equity              
Deposits$12,669,917
 $12,491,186
 $178,731
 1.4 %$12,693,659
 $12,491,186
 $202,473
 1.6 %
Short-term borrowings1,069,684
 1,258,629
 (188,945) (15.0)1,008,307
 1,258,629
 (250,322) (19.9)
Long-term debt883,461
 883,584
 (123) 
968,395
 883,584
 84,811
 9.6
Other liabilities230,108
 238,048
 (7,940) (3.3)263,478
 238,048
 25,430
 10.7
Total Liabilities14,853,170
 14,871,447
 (18,277) (0.1)14,933,839
 14,871,447
 62,392
 0.4
Total Shareholders’ Equity2,058,719
 2,063,187
 (4,468) (0.2)2,099,800
 2,063,187
 36,613
 1.8
Total Liabilities and Shareholders’ Equity$16,911,889
 $16,934,634
 $(22,745) (0.1)%$17,033,639
 $16,934,634
 $99,005
 0.6 %
Cash and due from banks
Cash and due from banks increased $40.3 million, or 18.4%. Because of daily fluctuations that result in the normal course of business, cash is more appropriately analyzed in terms of average balances. On an average balance basis, cash and due from banks decreased $16.2 million, or 7.4%, from $219.2 million for the month of December, 2013 to $203.0 million for the month of June 2014.
Other interest-earning assets
The $58.9$57.4 million, or 23.7%23.1%, increase in other interest-earning assets was due to an increase in interest-bearing deposits with other banks.











56


Investment Securities
The following table presents the carrying amount of investment securities:
  Increase (decrease)  Increase (Decrease)
March 31, 2014 December 31, 2013 $ %June 30, 2014 December 31, 2013 $ %
(dollars in thousands)(dollars in thousands)
U.S. Government securities$526
 $525
 1
 0.2 %$525
 $525
 
  %
U.S. Government sponsored agency securities280
 726
 (446) (61.4)%260
 726
 (466) (64.2)
State and municipal securities283,453
 284,849
 (1,396) (0.5)%269,823
 284,849
 (15,026) (5.3)
Corporate debt securities100,552
 98,749
 1,803
 1.8 %100,653
 98,749
 1,904
 1.9
Collateralized mortgage obligations1,006,737
 1,032,398
 (25,661) (2.5)%1,002,731
 1,032,398
 (29,667) (2.9)
Mortgage-backed securities916,203
 945,712
 (29,509) (3.1)%930,605
 945,712
 (15,107) (1.6)
Auction rate securities147,713
 159,274
 (11,561) (7.3)%146,931
 159,274
 (12,343) (7.7)
Total debt securities2,455,464
 2,522,233
 (66,769) (2.6)%2,451,528
 2,522,233
 (70,705) (2.8)
Equity securities45,734
 46,201
 (467) (1.0)%46,248
 46,201
 47
 0.1
Total$2,501,198
 $2,568,434
 $(67,236) (2.6)%$2,497,776
 $2,568,434
 $(70,658) (2.8)%
Total investment securities decreased $67.2$70.7 million, or 2.6%2.8%, in comparison to December 31, 2013, due primarily to a decreasemainly in mortgage-backed securities, collateralized mortgage obligations and auction rate securities (ARCs). The decreases in mortgage-backed securities, and collateralized mortgage obligationsas portfolio cash flows were primarilynot fully reinvested due to the Corporation not fully reinvesting portfolio cash flows. As in the prior year, portfolio cashrelatively low yields on current investment options. Cash flows that were reinvested during the first three monthshalf of 2014 were used to

45


purchase collateralized mortgage obligations and mortgage-backed securities with average lives of approximately five years to provide for more structured cash flows, thereby limiting price and extension risk in a rising interest rate environment. State and municipal securities decreased primarily due to maturities that were not fully reinvested. The decrease in ARCs was primarily due to the salesales of ARCs during the first quarter of 2014securities with a total book value of $11.9 million, withresulting in no gain or loss upon sale.loss.
The net pre-tax unrealized lossgain on available for sale investment securities was $18.1$1.3 million as of March 31,June 30, 2014, compared to a $39.8 million pre-tax unrealized loss as of December 31, 2013. The $21.7$41.1 million increase in the unrealized lossinvestment portfolio value was due to a decrease in market interest rates, which caused the fair values of collateralized mortgage obligations and mortgage-backed securities to increase. See additional details regarding investment security price risk within Item 7A, "Quantitative and Qualitative Disclosures About Market Risk."
Loans, net of unearned income
The following table presents ending balances of loans outstanding, net of unearned income:
    Increase (decrease)    Increase (Decrease)
March 31,
2014
 December 31,
2013
 $ %June 30, 2014 December 31, 2013 $ %
(in thousands)  (in thousands)  
Real-estate – commercial mortgage$5,137,454
 $5,101,922
 $35,532
 0.7 %$5,128,734
 $5,101,922
 $26,812
 0.5 %
Commercial – industrial, financial and agricultural3,574,130
 3,628,420
 (54,290) (1.5)3,601,721
 3,628,420
 (26,699) (0.7)
Real-estate – home equity1,740,496
 1,764,197
 (23,701) (1.3)1,730,497
 1,764,197
 (33,700) (1.9)
Real-estate – residential mortgage1,331,465
 1,337,380
 (5,915) (0.4)1,361,976
 1,337,380
 24,596
 1.8
Real-estate – construction584,217
 573,672
 10,545
 1.8
634,018
 573,672
 60,346
 10.5
Consumer270,021
 283,124
 (13,103) (4.6)280,557
 283,124
 (2,567) (0.9)
Leasing and other96,009
 93,505
 2,504
 2.7
102,008
 93,505
 8,503
 9.1
Loans, net of unearned income$12,733,792
 $12,782,220
 $(48,428) (0.4)%$12,839,511
 $12,782,220
 $57,291
 0.4 %
The Corporation does not have a concentration of credit risk with any single borrower, industry or geographical location within its footprint.location. The maximum total lending commitment to an individual borrower was $39.0 million as of March 31,June 30, 2014, which is below the Corporation's maximum lending limit. As of March 31,June 30, 2014, the Corporation had 60 relationships with total borrowing commitments between $20.0 million and $39.0 million.

Approximately $5.7$5.8 billion, or 44.9%, of the loan portfolio was in commercial mortgage and construction loans as of March 31,June 30, 2014. The performance of these loans can be adversely impacted by fluctuations in real estate values. The Corporation limits its maximum non-owner occupied commercial real estate exposure to $28.0 million to any one borrower, and limits its exposure to any one development project to $15.0 million.

57


Construction loans include loans to commercial borrowers secured by residential real estate, loans to commercial borrowers secured by commercial real estate and other construction loans, which represent loans to individuals secured by residential real estate. The following table presents outstanding construction loans and their delinquency rates by these class segments:
March 31, 2014 December 31, 2013June 30, 2014 December 31, 2013
$ Delinquency Rate (1) % of Total $ Delinquency Rate (1) % of TotalBalance Delinquency Rate (1) % of Total Balance Delinquency Rate (1) % of Total
(dollars in thousands)(dollars in thousands)
Commercial$283,096
 0.8% 48.4% $269,497
 0.8% 47.0%$335,195
 0.6% 52.9% $269,497
 0.8% 47.0%
Commercial - residential229,541
 8.5
 39.3
 235,369
 8.2
 41.0
229,809
 8.0
 36.2
 235,369
 8.2
 41.0
Other71,580
 2.1
 12.3
 68,806
 0.8
 12.0
69,014
 0.6
 10.9
 68,806
 0.8
 12.0
Total Real estate - construction$584,217
 4.0% 100.0% $573,672
 3.8% 100.0%$634,018
 3.3% 100.0% $573,672
 3.8% 100.0%

(1)Represents all accruing loans 31 days or more past due and non-accrual loans as a percentage of total loans within each class segment.

Construction loans increased $10.5$60.3 million, or 1.8%10.5%, in comparison to December 31, 2013. Geographically, the increase in construction loans was in the DelawarePennsylvania ($7.430.6 million, or 19.2%10.6%) and VirginiaMaryland ($3.024.6 million or 3.2%40.2%) markets.
The $54.3$26.7 million, or 1.5%0.7%, decrease in commercial loans was due to a decrease in the Pennsylvania ($61.862.4 million, or 2.3%2.4%) market, partially offset by an increaseincreases in the New Jersey ($10.131.4 million, or 2.0%6.3%) market.and Virginia ($12.2 million, or 8.5%) markets.

46



The following table summarizes the percentage of commercial loans, by industry, of the Corporation's commercial loan portfolio:industry:
March 31,
2014
 December 31, 2013June 30,
2014
 December 31, 2013
Services19.1% 19.2%18.6% 19.2%
Manufacturing12.8
 13.5
13.7
 13.5
Construction11.0
 10.0
Retail11.1
 11.0
10.4
 11.0
Construction10.1
 10.0
Wholesale9.9
 9.7
9.4
 9.7
Real estate (1)7.9
 7.0
Health care7.9
 8.1
7.7
 8.1
Real estate (1)7.4
 7.0
Agriculture5.0
 5.8
4.9
 5.8
Arts and entertainment3.2
 2.7
3.2
 2.7
Transportation2.3
 2.5
2.2
 2.5
Financial services1.7
 1.6
1.8
 1.6
Other9.5
 8.9
9.2
 8.9
100.0% 100.0%100.0% 100.0%
(1)Includes borrowers engaged in the business of: renting, leasing or managing real estate for others; selling and/or buying real estate for others; and appraising real estate.
Commercial loans and commercial mortgage loans also include shared national credits, which are participations in loans or loan commitments of at least $20 million that are shared by three or more banks. Below is a summary of the Corporation's outstanding purchased shared national credits:
March 31, 2014 December 31, 2013June 30, 2014 December 31, 2013
(dollars in thousands)(dollars in thousands)
Commercial - industrial, financial and agricultural$117,481
 $129,840
$136,200
 $129,840
Real estate - commercial mortgage135,199
 87,868
137,740
 87,868
$252,680
 $217,708
$273,940
 $217,708
Total shared national credits increased $35.0$56.2 million, or 16.1%25.8%, in comparison to December 31, 2013. The Corporation's shared national credits are to borrowers located in its geographical markets and the increase was due to normal lending activities consistent

58


with the Corporation's underwriting policies. As of March 31,June 30, 2014 and December 31, 2013, none of the shared national credits were past due.
Home equity loans decreased $23.7The $24.6 million, or 1.3%,1.8% increase in residential mortgages was due to decreases in new originations as a resultthe retention of certain home equity promotions that occurred through 2013. Geographically, the decrease was primarily15-year fixed rate mortgages in the Pennsylvania ($20.1 million, or 1.9%) market.
Consumer loans decreased $13.1 million, or 4.6%, dueportfolio instead of selling those mortgages to decreases in both direct consumer loans ($9.4 million, or 0.7%) and indirect automobile loans ($3.7 million, or 2.5%).third-party investors.

47


Provision for Credit Losses and Allowance for Credit Losses
The following table presents the activity in the allowance for credit losses:
Three months ended
March 31
Three months ended June 30 Six months ended June 30
2014 20132014 2013 2014 2013
(dollars in thousands)(dollars in thousands)
Average balance of loans, net of unearned income$12,762,357
 $12,257,280
$12,795,747
 $12,528,562
 $12,779,145
 $12,393,670
          
Balance of allowance for credit losses at beginning of period$204,917
 $225,439
$199,006
 $221,527
 $204,917
 $225,439
Loans charged off:
 

 
    
Commercial – industrial, financial and agricultural5,125
 9,502
5,512
 5,960
 10,637
 15,462
Real estate – commercial mortgage2,141
 5,193
 3,527
 9,326
Real estate – home equity1,651
 2,404
1,234
 1,966
 2,885
 4,370
Real estate – commercial mortgage1,386
 4,133
Real estate – residential mortgage846
 3,050
1,089
 4,465
 1,935
 7,515
Consumer751
 550
449
 433
 1,200
 983
Real estate – construction214
 1,986
218
 2,597
 432
 4,583
Leasing and other295
 481
833
 769
 1,128
 1,250
Total loans charged off10,268
 22,106
11,476
 21,383
 21,744
 43,489
Recoveries of loans previously charged off:          
Commercial – industrial, financial and agricultural744
 379
775
 756
 1,519
 1,135
Real estate – commercial mortgage430
 1,505
 474
 2,569
Real estate – home equity356
 331
177
 192
 533
 523
Real estate – commercial mortgage44
 1,064
Real estate – residential mortgage116
 81
108
 116
 224
 197
Consumer209
 506
402
 406
 611
 912
Real estate – construction224
 671
158
 744
 382
 1,415
Leasing and other164
 162
362
 263
 526
 425
Total recoveries1,857
 3,194
2,412
 3,982
 4,269
 7,176
Net loans charged off8,411
 18,912
9,064
 17,401
 17,475
 36,313
Provision for credit losses2,500
 15,000
3,500
 13,500
 6,000
 28,500
Balance of allowance for credit losses at end of period$199,006
 $221,527
$193,442
 $217,626
 $193,442
 $217,626
          
Net charge-offs to average loans (annualized)0.26% 0.62%0.28% 0.56% 0.27% 0.59%
The following table presents the components of the allowance for credit losses:
March 31,
2014
 December 31,
2013
June 30,
2014
 December 31,
2013
(dollars in thousands)(dollars in thousands)
Allowance for loan losses$197,089
 $202,780
$191,685
 $202,780
Reserve for unfunded lending commitments1,917
 2,137
1,757
 2,137
Allowance for credit losses$199,006
 $204,917
$193,442
 $204,917
      
Allowance for credit losses to loans outstanding1.56% 1.60%1.51% 1.60%
For the three and six months ended March 31,June 30, 2014, the Corporation's provision for credit losses decreased $12.5$10.0 million, or 83.3%74.1%, and $22.5 million, or 78.9%, respectively, in comparison to the same periodperiods in 2013. The decreasedecreases in the provision for credit losses waswere due to improvements in credit quality, as shown by a reduction in non-performing loans and overall delinquency.

59


Net charge-offs decreased $10.58.3 million, or 55.5%47.9%, to $8.4$9.1 million for the firstsecond quarter of 2014, compared to $18.9$17.4 million for the firstsecond quarter of 2013. The decrease in net charge-offs was primarily due to a $4.7$3.4 million, or 52.0%77.4%, decrease in residential mortgage net charge-offs, a $2.0 million, or 53.6%, decrease in commercial mortgage net charge-offs and a $1.8 million, or 96.8%, decrease in real estate - construction net charge-offs. Of the $9.1 million of net charge-offs recorded in the second quarter of 2014, 65.8% were for loans originated in Pennsylvania and 24.6% were for loans originated in New Jersey.
During the first half 2014, net charge-offs decreased $18.8 million, or 51.9%, to $17.5 million for the first half of 2014 compared to $36.3 million for the same period of 2013. The decrease in net charge-offs was primarily due to a $5.6 million, or 76.6%, decrease in residential mortgage net charge-offs, a $5.2 million, or 36.4%, decrease in commercial loan net charge-offs and a $2.2$3.7 million or 75.4%, decrease in residential mortgage net charge-offs and a $1.7 million, or 56.3%54.8%, decrease in commercial mortgage net charge-offs. Of the $8.4$17.5 million of net charge-offs recorded induring the first quartersix months of 2014, 73.1%69.3% and 24.1% were for loans originated in Pennsylvania and 23.7% were for loans originated in New Jersey.Jersey, respectively.

48


The following table summarizes non-performing assets as of the indicated dates:
March 31, 2014 March 31, 2013 
December 31,
2013
June 30, 2014 June 30, 2013 December 31, 2013
(dollars in thousands)(dollars in thousands)
Non-accrual loans$133,705
 $179,334
 $133,753
$129,934
 $164,039
 $133,753
Loans 90 days past due and accruing21,225
 29,325
 20,524
19,378
 25,159
 20,524
Total non-performing loans154,930
 208,659
 154,277
149,312
 189,198
 154,277
Other real estate owned (OREO)15,300
 23,820
 15,052
13,482
 20,984
 15,052
Total non-performing assets$170,230
 $232,479
 $169,329
$162,794
 $210,182
 $169,329
Non-accrual loans to total loans1.05% 1.45% 1.05%1.01% 1.30% 1.05%
Non-performing assets to total assets1.01% 1.39% 1.00%0.96% 1.23% 1.00%
Allowance for credit losses to non-performing loans128.45% 106.17% 132.82%129.56% 115.03% 132.82%

The following table presents accruing loans whose terms have been modified under troubled debt restructurings (TDRs), by type, as of the indicated dates:
March 31, 2014 March 31, 2013 December 31, 2013June 30, 2014 June 30, 2013 December 31, 2013
(in thousands)(in thousands)
Real estate – residential mortgage$30,363
 $33,095
 $28,815
$31,184
 $28,948
 $28,815
Real estate – commercial mortgage19,514
 28,421
 19,758
19,398
 24,828
 19,758
Real estate – construction8,430
 11,125
 10,117
8,561
 10,599
 10,117
Commercial – industrial, financial and agricultural6,755
 9,031
 8,045
6,953
 8,394
 8,045
Real estate - home equity2,606
 1,537
 1,365
Real estate – home equity2,815
 1,549
 1,365
Consumer16
 12
 11
23
 13
 11
Total accruing TDRs67,684
 83,221
 68,111
68,934
 74,331
 68,111
Non-accrual TDRs (1)27,487
 33,215
 30,209
25,526
 30,377
 30,209
Total TDRs$95,171
 $116,436
 $98,320
$94,460
 $104,708
 $98,320
(1) Included with non-accrual loans in the preceding table.

TDRs modified during the first three monthshalf of 2014 and still outstanding as of March 31,June 30, 2014 totaled $9.3$14.6 million. During the first three monthshalf of 2014, $4.7$2.6 million of TDRs that were modified within the previous 12 months had a payment default, which the Corporation defines as a single missed scheduled payment, subsequent to modification.

60


The following table presents the changes in non-accrual loans for the three and six months ended March 31,June 30, 2014:
Commercial -
Industrial,
Financial and
Agricultural
 Real Estate -
Commercial
Mortgage
 Real Estate -
Construction
 Real Estate -
Residential
Mortgage
 Real Estate -
Home
Equity
 Consumer Leasing TotalCommercial -
Industrial,
Financial and
Agricultural
 Real Estate -
Commercial
Mortgage
 Real Estate -
Construction
 Real Estate -
Residential
Mortgage
 Real Estate -
Home
Equity
 Consumer Leasing Total
(in thousands)(in thousands)
Three months ended June 30, 2014Three months ended June 30, 2014              
Balance of non-accrual loans at March 31, 2014$38,518
 $42,384
 $19,935
 $21,319
 $11,548
 $1
 $
 $133,705
Additions9,662
 6,841
 668
 3,218
 3,181
 449
 407
 24,426
Payments(6,596) (4,331) (1,080) (1,119) (849) (1) 
 (13,976)
Charge-offs(5,512) (2,141) (218) (1,089) (1,234) (449) (407) (11,050)
Transfers to accrual status
 
 
 (489) (155) 
 
 (644)
Transfers to OREO status(92) (817) (69) (787) (762) 
 
 (2,527)
Balance of non-accrual loans as of June 30, 2014$35,980
 $41,936
 $19,236
 $21,053
 $11,729
 $
 $
 $129,934
               
Six months ended June 30, 2014Six months ended June 30, 2014              
Balance of non-accrual loans as of December 31, 2013$36,710
 $40,566
 $20,921
 $22,282
 $13,272
 $2
 $
 $133,753
$36,710
 $40,566
 $20,921
 $22,282
 $13,272
 $2
 $
 $133,753
Additions10,507
 7,583
 483
 3,587
 2,370
 755
 
 25,285
20,169
 14,424
 1,151
 6,805
 5,551
 1,204
 407
 49,711
Payments(2,914) (4,281) (1,255) (327) (531) (5) 
 (9,313)(9,510) (8,612) (2,335) (1,446) (1,380) (6) 
 (23,289)
Charge-offs(5,125) (1,386) (214) (846) (1,651) (751) 
 (9,973)(10,637) (3,527) (432) (1,935) (2,885) (1,200) (407) (21,023)
Transfers to accrual status
 (54) 
 (1,839) (1,403) 
 
 (3,296)
 (54) 
 (2,328) (1,558) 
 
 (3,940)
Transfers to OREO(660) (44) 
 (1,538) (509) 
 
 (2,751)
Balance of non-accrual loans as of March 31, 2014$38,518
 $42,384
 $19,935
 $21,319
 $11,548
 $1
 $
 $133,705
Transfers to OREO status(752) (861) (69) (2,325) (1,271) 
 
 (5,278)
Balance of non-accrual loans as of June 30, 2014$35,980
 $41,936
 $19,236
 $21,053
 $11,729
 $
 $
 $129,934

Non-accrual loans decreased $45.6$34.1 million, or 25.4%20.8%, in comparison to March 31,June 30, 2013 and $48,000$3.8 million in comparison to December 31, 2013. Total non-accrual additions for the three and six months ended March 31,June 30, 2014 were $25.324.4 million, and $49.7 million, respectively, compared to additions for the three and six months ended March 31,June 30, 2013 of $45.3 million.$38.3 million and $83.6 million, respectively.

49


The following table summarizes non-performing loans, by type, as of the indicated dates:
March 31, 2014 March 31, 2013 December 31,
2013
June 30, 2014 June 30, 2013 December 31, 2013
(in thousands)(in thousands)
Real estate – commercial mortgage$44,015
 $49,429
 $44,068
Commercial – industrial, financial and agricultural$38,830
 $61,113
 $38,021
38,163
 57,219
 38,021
Real estate – commercial mortgage45,876
 58,805
 44,068
Real estate – residential mortgage29,305
 36,361
 31,347
27,887
 30,660
 31,347
Real estate – construction20,758
 31,919
 21,267
20,268
 29,964
 21,267
Real estate – home equity17,088
 17,468
 16,983
16,094
 19,046
 16,983
Leasing60
 100
 48
Consumer2,999
 2,782
 2,543
2,825
 2,780
 2,543
Leasing74
 211
 48
Total non-performing loans$154,930
 $208,659
 $154,277
$149,312
 $189,198
 $154,277

Non-performing commercial loans decreased $22.3 million, or 36.5%, in comparison to March 31, 2013. Geographically, the decrease occurred primarily in the Pennsylvania ($16.4 million, or 38.0%) and Maryland ($2.2 million, or 57.2%) markets.
Non-performing commercial mortgages decreased $12.9$5.4 million, or 22.0%11.0%, in comparison to March 31,June 30, 2013. Geographically, the decrease was primarily in the Virginia ($10.85.2 million, or 85.5%76.9%) and Delaware ($2.9 million, or 78.0%) markets.
Non-performing commercial loans decreased $19.1 million, or 33.3%, in comparison to June 30, 2013. Geographically, the decrease was primarily in the Pennsylvania ($16.8 million, or 40.9%) market.
Non-performing construction loans decreased $11.2$9.7 million, or 35.0%32.4%, in comparison to March 31,June 30, 2013. Geographically, the decrease occurred primarily in the New JerseyMaryland ($6.35.7 million, or 57.4%), Virginia ($2.4 million, or 82.2%61.9%) and Maryland ($1.6 million, or 29.5%) markets.
Non-performing residential mortgages decreased $7.1 million, or 19.4%, in comparison to March 31, 2013. Geographically, the decrease was primarily in the VirginiaPennsylvania ($2.7 million, or 27.5%), Pennsylvania ($2.4 million, or 18.5%) and New Jersey ($1.3 million, or 14.6%19.3%) markets.

61


The following table summarizes the Corporation’s OREO, by property type, as of the indicated dates:
March 31, 2014 March 31, 2013 December 31,
2013
June 30, 2014 June 30, 2013 December 31, 2013
(in thousands)(in thousands)
Residential properties$8,026
 $6,286
 $7,052
$8,279
 $10,501
 $7,052
Commercial properties5,412
 14,775
 5,586
3,262
 5,800
 5,586
Undeveloped land1,862
 2,759
 2,414
1,941
 4,683
 2,414
Total OREO$15,300
 $23,820
 $15,052
$13,482
 $20,984
 $15,052
The Corporation's ability to identify potential problem loans in a timely manner is important to maintaining an adequate allowance for credit losses. For commercial loans, commercial mortgages and construction loans to commercial borrowers, an internal risk rating process is used to monitor credit quality. For a description of the Corporation's risk ratings, see Note E, "Loans and Allowance for Credit Losses," in the Notes to Consolidated Financial Statements. The evaluation of credit risk for residential mortgages, home equity loans, construction loans to individuals, consumer loans and lease receivables is based on aggregate payment history, through the monitoring of delinquency levels and trends.

50


Total internally risk rated loans were $9.3 billion as of June 30, 2014 and $9.2 billion as of March 31, 2014 and December 31, 2013. The following table presents internal risk ratings for commercial loans, commercial mortgages and construction loans to commercial borrowers with internal risk ratings of Special Mention (considered criticized loans) or Substandard or lower (considered classified loans), by class segment:
Special Mention Increase (decrease) Substandard or lower Increase (decrease) Total Criticized and Classified LoansSpecial Mention Increase (decrease) Substandard or lower Increase (decrease) Total Criticized and Classified Loans
March 31, 2014 December 31, 2013 $ % March 31, 2014 December 31, 2013 $ % March 31, 2014 December 31, 2013June 30, 2014 December 31, 2013 $ % June 30, 2014 December 31, 2013 $ % June 30, 2014 December 31, 2013
(dollars in thousands)(dollars in thousands)
Real estate - commercial mortgage$122,929
 $141,013
 $(18,084) (12.8)% $180,543
 $196,922
 $(16,379) (8.3)% $303,472
 $337,935
$115,220
 $141,013
 $(25,793) (18.3)% $163,287
 $196,922
 $(33,635) (17.1)% $278,507
 $337,935
Commercial - secured137,176
 111,613
 25,563
 22.9
 128,326
 125,382
 2,944
 2.3
 265,502
 236,995
128,824
 111,613
 17,211
 15.4
 126,790
 125,382
 1,408
 1.1
 255,614
 236,995
Commercial -unsecured10,369
 11,666
 (1,297) (11.1) 4,986
 2,755
 2,231
 81.0
 15,355
 14,421
23,681
 11,666
 12,015
 103.0
 5,272
 2,755
 2,517
 91.4
 28,953
 14,421
Total Commercial - industrial, financial and agricultural147,545
 123,279
 24,266
 19.7
 133,312
 128,137
 5,175
 4.0
 280,857
 251,416
152,505
 123,279
 29,226
 23.7
 132,062
 128,137
 3,925
 3.1
 284,567
 251,416
Construction - commercial residential29,556
 31,522
 (1,966) (6.2) 46,490
 57,806
 (11,316) (19.6) 76,046
 89,328
28,412
 31,522
 (3,110) (9.9) 47,031
 57,806
 (10,775) (18.6) 75,443
 89,328
Construction - commercial2,915
 2,932
 (17) (0.6) 6,144
 8,124
 (1,980) (24.4) 9,059
 11,056
1,470
 2,932
 (1,462) (49.9) 6,415
 8,124
 (1,709) (21.0) 7,885
 11,056
Total real estate - construction (excluding construction - other)32,471
 34,454
 (1,983) (5.8) 52,634
 65,930
 (13,296) (20.2) 85,105
 100,384
29,882
 34,454
 (4,572) (13.3) 53,446
 65,930
 (12,484) (18.9) 83,328
 100,384
Total$302,945
 $298,746
 $4,199
 1.4 % $366,489
 $390,989
 $(24,500) (6.3)% $669,434
 $689,735
$297,607
 $298,746
 $(1,139) (0.4)% $348,795
 $390,989
 $(42,194) (10.8)% $646,402
 $689,735
                                      
% of total loans3.3% 3.2%     4.0% 4.2%     7.3% 7.4%
% of total risk rated loans3.2% 3.2%     3.8% 4.2%     7.0% 7.4%
As of March 31,June 30, 2014, total loans with risk ratings of Substandard or lower decreased $24.5$42.2 million, or 6.3%10.8%, in comparison to December 31, 2013 and $138.9$120.9 million, or 27.5%25.7%, in comparison to March 31,June 30, 2013. Special Mention loans increased $4.2decreased $1.1 million, or 1.4%0.4%, in comparison to December 31, 2013 and decreased $51.0$23.5 million, or 14.4%7.3%, in comparison to March 31,June 30, 2013.







62


The following table summarizes loan delinquency rates, by type, as of the dates indicated:
March 31, 2014
March 31, 2013 December 31, 2013June 30, 2014
June 30, 2013 December 31, 2013
31-89
Days
 ≥ 90 Days (1) Total 31-89
Days
 ≥ 90 Days (1) Total 31-89
Days
 ≥ 90 Days (1) Total31-89
Days
 ≥ 90 Days (1) Total 31-89
Days
 ≥ 90 Days (1) Total 31-89
Days
 ≥ 90 Days (1) Total
Real estate – commercial mortgage0.35% 0.89% 1.24% 0.39% 1.25% 1.64% 0.38% 0.87% 1.25%0.30% 0.86% 1.16% 0.47% 1.01% 1.48% 0.38% 0.87% 1.25%
Commercial – industrial, financial and agricultural0.33% 1.09% 1.42% 0.35% 1.67% 2.02% 0.30% 1.04% 1.34%0.47% 1.05% 1.52% 0.41% 1.54% 1.95% 0.30% 1.04% 1.34%
Real estate – construction0.43% 3.55% 3.98% 0.17% 5.34% 5.51% 0.11% 3.71% 3.82%0.10% 3.20% 3.30% 0.42% 4.91% 5.33% 0.11% 3.71% 3.82%
Real estate – residential mortgage1.53% 2.20% 3.73% 2.07% 2.79% 4.86% 1.74% 2.34% 4.08%1.78% 2.05% 3.83% 2.12% 2.33% 4.45% 1.74% 2.34% 4.08%
Real estate – home equity0.69% 0.98% 1.67% 0.69% 1.03% 1.72% 0.91% 0.96% 1.87%0.68% 0.93% 1.61% 0.68% 1.08% 1.76% 0.91% 0.96% 1.87%
Consumer, leasing and other1.87% 0.84% 2.71% 1.38% 0.75% 2.13% 1.99% 0.68% 2.67%1.55% 0.76% 2.31% 1.47% 0.74% 2.21% 1.99% 0.68% 2.67%
Total0.56% 1.22% 1.78% 0.62% 1.68% 2.30% 0.61% 1.20% 1.81%0.58% 1.17% 1.75% 0.68% 1.50% 2.18% 0.61% 1.20% 1.81%
Total dollars (in thousands)$71,410
 $154,930
 $226,340
 $76,373
 $208,659
 $285,032
 $77,667
 $154,277
 $231,944
$74,955
 $149,312
 $224,267
 $85,869
 $189,198
 $275,067
 $77,667
 $154,277
 $231,944
 
(1)Includes non-accrual loans.
The Corporation believes that the allowance for credit losses of $199.0$193.4 million as of March 31,June 30, 2014 is sufficient to cover incurred losses in both the loan portfolio and the unfunded lending commitments as of that date and is appropriate based on applicable accounting standards.
Other Assets
Other assets decreased $15.9 million, or 2.9%, in comparison to December 31, 2013 due primarily to a decrease in net deferred tax assets that resulted primarily from a decrease in unrealized losses on available for sale investment securities.

51


Deposits and Borrowings
The following table presents ending deposits, by type:
    Increase    Increase(Decrease)
March 31, 2014 December 31, 2013 $ %June 30, 2014 December 31, 2013 $ %
(dollars in thousands)(dollars in thousands)
Noninterest-bearing demand$3,359,900
 $3,283,172
 $76,728
 2.3%$3,484,125
 $3,283,172
 $200,953
 6.1 %
Interest-bearing demand2,960,577
 2,945,210
 15,367
 0.5
2,855,511
 2,945,210
 (89,699) (3.0)
Savings3,346,880
 3,344,882
 1,998
 0.1
3,338,018
 3,344,882
 (6,864) (0.2)
Total demand and savings9,667,357
 9,573,264
 94,093
 1.0
9,677,654
 9,573,264
 104,390
 1.1
Time deposits3,002,560
 2,917,922
 84,638
 2.9
3,016,005
 2,917,922
 98,083
 3.4
Total deposits$12,669,917
 $12,491,186
 $178,731
 1.4%$12,693,659
 $12,491,186
 $202,473
 1.6 %
Non-interest bearing demand deposits increased $76.7$201.0 million, or 2.3%6.1%, due primarily to a $46.0$168.9 million, or 6.5%7.0%, increase in business account balances and a $29.6 million, or 4.2%, increase in personal account balances and a $16.8balances.
Interest-bearing demand accounts decreased $89.7 million, or 0.7%3.0%, primarily due to a $129.9 million, or 12.0%, seasonal decrease in municipal account balances partially offset by a $40.0 million, or 36.7%, increase in business account balances.
Interest-bearing demand accounts increased $15.4 The $6.9 million, or 0.5%, due to an increase in personal account balances. The $2.0 million, or 0.1%, increase0.2% ,decrease in savings account balances was due to a $66.0$53.0 million, or 3.1%7.0%, increasedecrease in personalbusiness account balances, partially offset by a $38.5 million, or 8.1%1.8%, seasonal decreaseincrease in municipalpersonal account balances and a $25.5balances. The $98.1 million, or 3.4%, decrease in business account balances. The $84.6 million, or 2.9%, increase in time deposits was due to an increase in accountstime deposits with balances less than $100,000.original maturities of 4 to 5 years due to promotional efforts intended to lock in longer-term rates.









63


The following table summarizes the changes in ending borrowings, by type:
  Increase (decrease)  Increase (Decrease)
March 31, 2014 December 31, 2013 $ %June 30, 2014 December 31, 2013 $ %
(dollars in thousands)(dollars in thousands)
Short-term borrowings:              
Customer repurchase agreements$220,426
 $175,621
 44,805
 25.5 %$212,930
 $175,621
 $37,309
 21.2 %
Customer short-term promissory notes88,160
 100,572
 (12,412) (12.3)86,366
 100,572
 (14,206) (14.1)
Total short-term customer funding308,586
 276,193
 32,393
 11.7
299,296
 276,193
 23,103
 8.4
Federal funds purchased361,098
 582,436
 (221,338) (38.0)384,011
 582,436
 (198,425) (34.1)
Short-term FHLB advances (1)400,000
 400,000
 
 
325,000
 400,000
 (75,000) (18.8)
Total short-term borrowings1,069,684
 1,258,629
 (188,945) (15.0)1,008,307
 1,258,629
 (250,322) (19.9)
Long-term debt:              
FHLB advances513,732
 513,854
 (122) 
598,661
 513,854
 84,807
 16.5
Other long-term debt369,729
 369,730
 (1) 
369,734
 369,730
 4
 
Total long-term debt883,461
 883,584
 (123) 
968,395
 883,584
 84,811
 9.6
Total borrowings$1,953,145
 $2,142,213
 (189,068) (8.8)%$1,976,702
 $2,142,213
 (165,511) (7.7)%
              
(1) Represents FHLB advances with an original maturity term of less than one year.
The $188.9$250.3 million decrease in total short-term borrowings was primarily the result of a $178.7$202.5 million increase in deposits.
Other liabilities
Other liabilities decreased $7.9increased $25.4 million, or 3.3%10.7%, in comparison to December 31, 2013. As of December 31, 2013, theThe Corporation had $6.2$25.6 million of investment securities purchases executed prior to December 31, 2013, thatJune 30, 2014, which had not settled at the end of the year. The Corporation had noquarter, compared to $6.2 million of such payables outstanding as of MarchDecember 31, 2014.2013. Also contributing to the decrease in other liabilities was a reduction in reserves associated with the potential repurchase of previously sold residential mortgages.

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Shareholders' Equity
Total shareholders’ equity decreased $4.5increased $36.6 million, or 0.2%1.8%, during the first threesix months of 2014. The decreaseincrease was due primarily to $81.4 million of net income and a $26.7 million increase in after-tax unrealized holding gains on available for sale investment securities, partially offset by $49.8 million of stock repurchases and $15.1$30.2 million of dividends on shares outstanding, partially offset by $41.8 million of net income and a $14.1 million decrease in after-tax unrealized holding losses on available for sale investment securities.outstanding.
In October 2013,, the Corporation announced that its board of directors had approved a share repurchase program pursuant to which the Corporation was authorized to repurchase up to four4.0 million shares, or approximately 2.1% of its outstanding shares, through March 2014.2014. During the first quarter of 2014, the Corporation repurchased 4.0 million shares at an average cost of $12.45 per share, completing this repurchase program on February 19, 2014.
Bank holding companiesIn May 2014, the Corporation announced that its board of directors had approved a share repurchase program pursuant to which the Corporation was authorized to repurchase up to 4.0 million shares, or approximately 2.1% of its outstanding shares, through December 31, 2014. No shares were repurchased under this repurchase program during the three and six months ended June 30, 2014, however, the Corporation intends to complete the share repurchase program by the end of the third quarter of 2014, as permitted by securities laws and other legal requirements, and subject to market conditions and other factors.
The Corporation and its subsidiary banks are requiredsubject to comply withregulatory capital requirements administered by various banking regulators. Failure to meet minimum capital requirements could result in certain actions by regulators that could have a material effect on the Federal Reserve Board’s risk-based capital guidelines, whichCorporation’s financial statements. The regulations require athat banks maintain minimum ratioamounts and ratios of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and Tier I capital to average assets (as defined).
As of 8.00%. At least halfJune 30, 2014, the Corporation and each of its bank subsidiaries met the minimum requirements. In addition, each of the totalCorporation’s bank subsidiaries’ capital isratios exceeded the amounts required to be Tier 1 capital. In addition to the risk-based capital guidelines, the Federal Reserve Board has adopted a minimum leverage capital ratio under which a bank holding company must maintain a level of Tier 1 capital to average total consolidated assets of at least 3.00%considered "well capitalized" as defined in the case of a bank holding company which hasregulations.




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The following table summarizes the highest regulatory examination rating and is not contemplating significant growth or expansion. For all other bank holding companies, the minimum ratio of Tier 1 capital to total assets is 4.00%. Depository institutions are required to comply with similar capital guidelines issued by their primary federal regulator. Bank holding companies and depository institutions with supervisory, financial, operational, or managerial weaknesses, as well as those that are anticipating or experiencing significant growth, are expected to maintainCorporation’s capital ratios well above the minimum levels. Moreover, higher capital ratios may be required for any bank holding company and depository institution if warranted by its particular circumstances or risk profile. In all cases, bank holding companies and depository institutions should hold capital commensurate with the level and nature of the risks, including the volume and severity of problem loans,in comparison to which they are exposed.regulatory requirements:
The Basel Committee on Banking Supervision (Basel) is a committee of central banks and bank regulators from major industrialized countries that develops broad policy guidelines for use by each country’s regulators with the purpose of ensuring that financial institutions have adequate capital given the risk levels of assets and off-balance sheet financial instruments. In December 2010, Basel released frameworks for strengthening international capital and liquidity regulations, referred to as Basel III.
 June 30, 2014 December 31, 2013 Regulatory
Minimum
for Capital
Adequacy
Total Capital (to Risk-Weighted Assets)14.8% 15.0% 8.0%
Tier I Capital (to Risk-Weighted Assets)13.2% 13.1% 4.0%
Tier I Capital (to Average Assets)10.8% 10.6% 4.0%
In July 2013, the Federal Reserve Board approved final rules (the "U.S. Basel III Capital Rules") establishing a new comprehensive capital framework for U.S. banking organizations and implementing the Basel Committee on Banking Supervision's December 2010 framework for strengthening international capital standards. The U.S. Basel III Capital Rules substantially revise the risk-based capital requirements applicable to bank holding companies and depository institutions.
As of March 31, 2014, the Corporation and each of its bank subsidiaries met the minimum requirements. In addition, each of the Corporation’s bank subsidiaries’ capital ratios exceeded the amounts required to be considered "well capitalized" as defined in the regulations.
The following table summarizes the Corporation’s capital ratios in comparison to regulatory requirements:
 March 31, 2014 December 31,
2013
 Regulatory
Minimum
for Capital
Adequacy
Total Capital (to Risk-Weighted Assets)15.0% 15.0% 8.0%
Tier I Capital (to Risk-Weighted Assets)13.1% 13.1% 4.0%
Tier I Capital (to Average Assets)10.5% 10.6% 4.0%
The new minimum regulatory capital requirements established by the U.S. Basel III Capital Rules are effective for the Corporation beginning on January 1, 2015, and become fully phased in on January 1, 2019.
When fully phased in, the U.S. Basel III Capital Rules will require the Corporation and its bank subsidiaries to:
Meet a new minimum Common Equity Tier 1 capital ratio of 4.50% of risk-weighted assets and a Tier 1 capital ratio of 6.00% of risk-weighted assets;
Continue to require the current minimum Total capital ratio of 8.00% of risk-weighted assets and the minimum Tier 1 leverage capital ratio of 4.00% of average assets;
Maintain a "capital conservation buffer" of 2.50% above the minimum risk-based capital requirements, which must be maintained to avoid restrictions on capital distributions and certain discretionary bonus payments; and

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Comply with a revised definition of capital to improve the ability of regulatory capital instruments to absorb losses as a result of which certain non-qualifying capital instruments, including cumulative preferred stock and trust preferred securities, will be excluded as a component of Tier 1 capital for institutions of the Corporation's size.
The U.S. Basel III Capital Rules use a standardized approach for risk weightings that expand the risk-weightings for assets and off balance sheet exposures from the current 0%, 20%, 50% and 100% categories to a much larger and more risk-sensitive number of categories, depending on the nature of the assets and resulting in higher risk weights for a variety of asset categories.
As of March 31,June 30, 2014, the Corporation believes its current capital levels would meet the fully-phased in minimum capital requirements, including the capital conservation buffer,buffers, as prescribed in the U.S. Basel III Capital Rules.
Liquidity
The Corporation must maintain a sufficient level of liquid assets to meet the cash needs of its customers who, as depositors, may want to withdraw funds or who, as borrowers, need credit availability. Liquidity is provided on a continuous basis through scheduled and unscheduled principal and interest payments on outstanding loans and investments and through the availability of deposits and borrowings. The Corporation also maintains secondary sources that provide liquidity on a secured and unsecured basis to meet short-term and long-term needs.

The Corporation maintains liquidity sources in the form of demand and savings deposits, time deposits, repurchase agreements and short-term promissory notes. The Corporation can access additional liquidity from these sources, if necessary, by increasing interest rates. The positive impact to liquidity resulting from higher interest rates could have a detrimental impact on the net interest margin and net income if rates on interest-earning assets do not have a corresponding increase.
Borrowing availability with the FHLB and the Federal Reserve Bank, along with Federal funds lines at various correspondent banks, provides the Corporation with additional liquidity.
Each of the Corporation’s subsidiary banks is a member of the FHLB and has access to FHLB overnight and term credit facilities. As of March 31,June 30, 2014, the Corporation had $913.7$923.7 million of short and long-term advances outstanding from the FHLB with an additional borrowing capacity of approximately $1.7 billion under these facilities. Advances from the FHLB are secured by FHLB stock, qualifying commercial real estate and residential mortgages,mortgage loans, investments and other assets.

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As of March 31,June 30, 2014, the Corporation had aggregate availability under Federal funds lines of $1.6 billion, with $361.1$384.0 million of that amount outstanding. A combination of commercial real estate loans, commercial loans and securities are pledged to the Federal Reserve Bank of Philadelphia to provide access to Federal Reserve Bank Discount Window borrowings. As of March 31,June 30, 2014, the Corporation had $2.2$1.2 billion of collateralized borrowing availability at the Discount Window, and no outstanding borrowings.
Liquidity must also be managed at the Fulton Financial Corporation parent company level. For safety and soundness reasons, banking regulations limit the amount of cash that can be transferred from subsidiary banks to the parent company in the form of loans and dividends. Generally, these limitations are based on the subsidiary banks’ regulatory capital levels and their net income. Management continues to monitor the liquidity and capital needs of the parent company and will implement appropriate strategies, as necessary, to remain adequately capitalized and to meet its cash needs.
The Corporation’s sources and uses of funds were discussed in general terms in the net interest income section of Management’s Discussion. The consolidated statements of cash flows provide additional information. The Corporation’s operating activities during the first threesix months of 2014 generated $60.5$94.4 million of cash, mainly due to net income, as adjusted for non-cash expenses, most notably depreciation and amortization of premises and equipment and a net increase in other liabilities, partially offset by net decrease in other assets.loans held for sale. Cash provided byused in investing activities was $54.8$14.8 million, due mainly to an increase in loans and a net increase in short-term investments, partially offset by proceeds from the maturities and sales of investment securities partially offset by an increase in short-term investments and purchasesexcess of investment securities.purchases. Net cash used by financing activities was $73.4$39.3 million due to a net decrease in short-term borrowings, acquisitions of treasury stock and dividends paid on common shares, partially offset by an increaseincreases in deposits.deposits and long-term debt.


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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the exposure to economic loss that arises from changes in the values of certain financial instruments. The types of market risk exposures generally faced by financial institutions include interest rate risk, equity market price risk, debt security market price risk, foreign currency risk and commodity price risk. Due to the nature of its operations, only equity market price risk, debt security market price risk and interest rate risk are materially significant to the Corporation.
Equity Market Price Risk
Equity market price risk is the risk that changes in the values of equity investments could have a material impact on the financial position or results of operations of the Corporation. As of March 31,June 30, 2014, equity investments consisted of $39.8$40.2 million of common stocks of publicly traded financial institutions, and $5.9$6.0 million of other equity investments.
The equity investments most susceptible to equity market price risk are the financial institutions stocks, which had a cost basis of approximately $28.5$28.5 million and a fair value of $39.8$40.2 million at March 31,June 30, 2014, including an investment in a single financial institution with a cost basis of $20.0 million and a fair value of $27.928.2 million. The fair value of this investment accounted for 70.1%70.2% of the fair value of the common stocks of publicly traded financial institutions. No other investment within the financial institutions stock portfolio exceeded 5% of the portfolio's fair value. In total, the financial institutions stock portfolio had gross unrealized gains of $11.3$11.8 million and gross unrealized losses of $14,000$5,000 as of March 31,June 30, 2014.
Management continuously monitors the fair value of its equity investments and evaluates current market conditions and operating results of the issuers. Periodic sale and purchase decisions are made based on this monitoring process. None of the Corporation’s equity securities are classified as trading.
In addition to its equity portfolio, investment management and trust services income may be impacted by fluctuations in the equity markets. A portion of this revenue is based on the value of the underlying investment portfolios, many of which include equity investments. If the values of those investment portfolios decrease, whether due to factors influencing U.S. equity markets in general or otherwise, the Corporation’s revenue would be negatively impacted. In addition, the Corporation’s ability to sell its brokerage services in the future will be dependent, in part, upon consumers’ level of confidence in financial markets.

Debt Security Market Price Risk
Debt security market price risk is the risk that changes in the values of debt securities, unrelated to interest rate changes, could have a material impact on the financial position or results of operations of the Corporation. The Corporation’s debt security investments consist primarily of U.S. government sponsored agency issued mortgage-backed securities and collateralized mortgage obligations, state and municipal securities, U.S. government debt securities, auction rate securities and corporate debt securities. All of the Corporation's investments in mortgage-backed securities and collateralized mortgage obligations have principal payments that are guaranteed by U.S. government sponsored agencies.
Municipal Securities
As of March 31,June 30, 2014, the Corporation had $283.5$269.8 million of securities issued by various municipalities. Ongoing uncertainty with respect to the financial strength of municipal bond insurers places much greater emphasis on the underlying strength of issuers. Continued pressure on local tax revenues of issuers due to adverse economic conditions could have an adverse impact on the underlying credit quality of issuers. The Corporation evaluates existing and potential holdings primarily based on the creditworthiness of the issuing municipality and then, to a lesser extent, on any underlying credit enhancement. Municipal securities can be supported by the general obligation of the issuing municipality, allowing the securities to be repaid by any means available to the issuing municipality. As of March 31,June 30, 2014, approximately 95% of municipal securities were supported by the general obligation of corresponding municipalities. Approximately 84%86% of these securities were school district issuances, which are also supported by the states of the issuing municipalities.

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Auction Rate Certificates
As of March 31,June 30, 2014, the Corporation’s investments in student loan auction rate certificates (ARCs), had a cost basis of $159.4$158.5 million and a fair value of $147.7 million.$146.9 million.
ARCs are long-term securities that were structured to allow their sale in periodic auctions, resulting in both the treatment of ARCs as short-term instruments in normal market conditions and fair values that could be derived based on periodic auction prices. However, beginning in 2008, market auctions for these securities began to fail due to an insufficient number of buyers, resulting in an illiquid market. This illiquidity has resulted in recent market prices that represent forced liquidations or distressed sales and do not provide an accurate basis for fair value. Therefore, as of March 31,June 30, 2014, the fair values of the ARCs were derived using significant unobservable inputs based on an expected cash flows model which produced fair values which were materially different from those that would be expected from settlement of these investments in the illiquid market that presently exists. The expected cash flows model, prepared by a third-party valuation expert, produced fair values which assumed a return to market liquidity sometime within the next five years. The Corporation believes that the trusts underlying the ARCs will self-liquidate as student loans are repaid.
The credit quality of the underlying debt associated with ARCs is also a factor in the determination of their estimated fair value. As of March 31,June 30, 2014, approximately $143 million, or 97%, of the ARCs were rated above investment grade, with approximately $6 million, or 4%, AAA rated and $103102 million, or 70%, AA rated. Approximately $4 million, or 3%, of ARCs were either not rated or rated below investment grade by at least one ratings agency. Of this amount, approximately $3 million, or 59%, of the student loans underlying these ARCs have principal payments which are guaranteed by the federal government. In total, approximately $146145 million, or 99%, of the student loans underlying the ARCs have principal payments which are guaranteed by the federal government. As of March 31,June 30, 2014, all ARCs were current and making scheduled interest payments.

Corporate Debt Securities
The Corporation holds corporate debt securities in the form of pooled trust preferred securities, single-issuer trust preferred securities and subordinated debt issued by financial institutions, as presented in the following table:table as of June 30, 2014:
March 31, 2014
Amortized
cost
 
Estimated
fair value
Amortized
cost
 
Estimated
fair value
(in thousands)(in thousands)
Single-issuer trust preferred securities$47,502
 $41,879
$47,524
 $43,186
Subordinated debt47,436
 50,429
47,467
 50,616
Pooled trust preferred securities2,825
 5,659
2,067
 4,275
Corporate debt securities issued by financial institutions$97,763
 $97,967
$97,058
 $98,077

The fair values for pooled trust preferred securities and certain single-issuer trust preferred securities were based on quotes provided by third-party brokers who determined fair values based predominantly on internal valuation models which were not indicative prices or binding offers.

The Corporation’s investments in single-issuer trust preferred securities had an unrealized loss of $5.64.3 million at March 31,June 30, 2014. The Corporation did not record any other-than-temporary impairment charges for single-issuer trust preferred securities during the threesix months ended March 31,June 30, 2014 or 2013. Six of the Corporation's 2220 single-issuer trust preferred securities were rated below investment grade by at least one ratings agency, with an amortized cost of $13.5 million and an estimated fair value of $11.712.1 million as of March 31,June 30, 2014. All 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 $3.8 million at March 31,June 30, 2014 were not rated by any ratings agency.
As of March 31,June 30, 2014, all eightsix of the Corporation's pooled trust preferred securities with an amortized cost of $2.82.1 million and an estimated fair value of $5.74.3 million, were rated below investment grade by at least one ratings agency, with ratings ranging from C to Ca. The class of securities held by the Corporation was below the most senior tranche, with the Corporation’s interests being subordinate to other investors in the pool.pools.
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 was 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.

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See Note D, "Investment Securities," in the Notes to Consolidated Financial Statements for further discussion related to other-than-temporary impairment evaluations for debt securities and Note L,M, "Fair Value Measurements," in the Notes to Consolidated Financial Statements for further discussion related to the fair values of debt securities.

Interest Rate Risk, Asset/Liability Management and Liquidity
Interest rate risk creates exposure in two primary areas. First, changes in rates have an impact on the Corporation’s liquidity position and could affect its ability to meet obligations and continue to grow. Second, movements in interest rates can create fluctuations in the Corporation’s net interest income and changes in the economic value of its equity.
The Corporation employs various management techniques to minimize its exposure to interest rate risk. An Asset/Liability Management Committee (ALCO), consisting of key financial and senior management personnel, meets on a regular basis. The ALCO is responsible for reviewing the interest rate sensitivity and liquidity positions of the Corporation, approving asset and liability management policies, and overseeing the formulation and implementation of strategies regarding balance sheet positions.
From a liquidity standpoint, the Corporation must maintain a sufficient level of liquid assets to meet the cash needs of its customers, who, as depositors, may want to withdraw funds or who, as borrowers, need credit availability. Liquidity is provided on a continuous basis through scheduled and unscheduled principal and interest payments on outstanding loans and investments and through the availability of deposits and borrowings. The Corporation also maintains secondary sources that provide liquidity on a secured and unsecured basis to meet short-term and long-term needs.




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The following table provides information about the Corporation’s interest rate sensitive financial instruments as of March 31,June 30, 2014. The table presents expected cash flows and weighted average rates for each of the Corporation's significant interest rate sensitive financial instruments, by expected maturity period. None of the Corporation’s financial instruments are classified as trading. All dollar amounts are in thousands.
Expected Maturity Period   EstimatedExpected Maturity Period   Estimated
Year 1 Year 2 Year 3 Year 4 Year 5 Beyond Total Fair ValueYear 1 Year 2 Year 3 Year 4 Year 5 Beyond Total Fair Value
Fixed rate loans (1)$1,038,502
 $481,227
 $358,523
 $347,552
 $223,835
 $688,435
 $3,138,074
 $3,124,133
$992,839
 $473,224
 $361,546
 $350,680
 $219,212
 $659,957
 $3,057,458
 $3,040,703
Average rate3.91% 4.61% 4.53% 4.75% 4.67% 4.07% 4.27% 
3.90% 4.55% 4.42% 4.69% 4.63% 3.98% 4.22% 
                              
Floating rate loans (1) (2)2,225,044
 1,429,523
 1,158,476
 987,825
 1,383,239
 2,408,577
 9,592,684
 9,501,816
2,301,776
 1,441,538
 1,176,358
 1,006,320
 1,381,185
 2,471,625
 9,778,802
 9,700,927
Average rate3.97% 4.04% 4.06% 4.06% 3.88% 4.05% 4.01% 
3.91% 4.00% 4.02% 4.02% 3.86% 4.01% 3.96% 
                              
Fixed rate investments (3)388,713
 311,708
 258,563
 235,944
 188,809
 889,731
 2,273,468
 2,260,056
410,452
 331,291
 272,851
 222,704
 188,435
 827,452
 2,253,185
 2,257,929
Average rate2.52% 2.65% 2.61% 2.73% 2.74% 2.89% 2.73% 
2.55% 2.62% 2.77% 2.65% 2.64% 2.84% 2.71% 
                              
Floating rate investments (3)
 37
 165,171
 4,984
 49
 41,616
 211,857
 195,716
26
 4,958
 163,409
 48
 35
 40,885
 209,361
 193,962
Average rate% 1.31% 2.17% 0.92% 1.95% 1.46% 2.00% 
1.20% 0.93% 1.06% 1.75% 2.18% 2.58% 1.36% 
                              
Other interest-earning assets (4)249,845
 
 
 
 
 81,634
 331,479
 329,892
258,973
 
 
 
 
 82,624
 341,597
 341,597
Average rate0.70% % % % % 3.32% 1.34% 
0.85% % % % % 4.58% 1.74% 
                              
Total$3,902,104
 $2,222,495
 $1,940,733
 $1,576,305
 $1,795,932
 $4,109,993
 $15,547,562
 $15,411,613
$3,964,066
 $2,251,011
 $1,974,164
 $1,579,752
 $1,788,867
 $4,082,543
 $15,640,403
 $15,535,118
Average rate3.60% 3.97% 3.80% 4.01% 3.86% 3.76% 3.79% 
3.57% 3.91% 3.67% 3.98% 3.82% 3.76% 3.75% 
                              
Fixed rate deposits (5)$1,470,035
 $541,514
 $260,248
 $92,264
 $209,043
 $27,072
 $2,600,176
 $2,613,586
$1,389,877
 $554,247
 $277,423
 $100,632
 $287,985
 $24,220
 $2,634,384
 $2,648,494
Average rate0.63% 1.27% 1.23% 1.40% 2.05% 1.81% 0.97% 
0.63% 1.20% 1.27% 1.45% 2.09% 1.83% 1.02% 
                              
Floating rate deposits (6)4,766,812
 714,981
 379,458
 355,369
 334,556
 158,665
 6,709,841
 6,705,569
4,659,017
 698,491
 379,594
 356,878
 336,178
 144,992
 6,575,150
 6,570,715
Average rate0.14% 0.10% 0.09% 0.09% 0.09% 0.12% 0.13% 
0.14% 0.10% 0.09% 0.09% 0.10% 0.15% 0.13% 
                              
Fixed rate borrowings (7)52,418
 100,742
 451,582
 100,516
 668
 161,039
 866,965
 871,586
187,361
 758
 551,564
 539
 50,565
 161,111
 951,898
 959,585
Average rate3.20% 5.34% 4.21% 5.74% 4.65% 6.18% 4.82% 
3.66% 4.41% 4.49% 4.67% 1.87% 6.18% 4.47% 
                              
Floating rate borrowings (8)1,069,684
 
 
 
 
 16,496
 1,086,180
 1,079,295
1,008,308
 
 
 
 
 16,496
 1,024,804
 1,013,519
Average rate0.20% % % % % 2.36% 0.23% 
0.21% % % % % 2.36% 0.24% 
                              
Total$7,358,949
 $1,357,237
 $1,091,288
 $548,149
 $544,267
 $363,272
 $11,263,162
 $11,270,036
$7,244,563
 $1,253,496
 $1,208,581
 $458,049
 $674,728
 $346,819
 $11,186,236
 $11,192,313
Average rate0.27% 0.96% 2.07% 1.34% 0.85% 3.04% 0.70% 
0.34% 0.59% 2.37% 0.40% 1.08% 3.17% 0.72% 
 
(1)Amounts are based on contractual payments and maturities, adjusted for expected prepayments. Excludes $3.0$3.3 million of overdraft deposit balances.
(2)Line of credit amounts are based on historical cash flows, with an average life of approximately 5 years.
(3)Amounts are based on contractual maturities; adjusted for expected prepayments on mortgage-backed securities and collateralized mortgage obligations and expected calls on agency and municipal securities. Excludes equity securities as such investments do not have maturity dates.
(4)Excludes Federal Reserve Bank and FHLB stock as such restricted investments do not have maturity dates.
(5)Amounts are based on contractual maturities of time deposits.
(6)Estimated based on history of deposit flows.
(7)Amounts are based on contractual maturities of debt instruments, adjusted for possible calls. Amounts also include junior subordinated deferrable interest debentures.
(8)Amounts include Federal Funds purchased, short-term promissory notes and securities sold under agreements to repurchase, which mature in less than 90 days, in addition to junior subordinated deferrable interest debentures.
The preceding table and discussion addressed the liquidity implications of interest rate risk and focused on expected cash flows from financial instruments. Expected maturities, however, do not necessarily reflect the net interest impact of interest rate changes. Certain financial instruments, such as adjustable rate loans, have repricing periods that differ from expected cash flows periods.
Included within the $9.6$9.8 billion of floating rate loans above are $3.7$3.6 billion of loans, or 38.4%36.5% of the total, that float with the prime interest rate, $1.7$1.9 billion, or 18.1%19.0%, of loans that float with other interest rates, primarily the London Interbank Offered Rate (LIBOR), and $4.2$4.3 billion, or 43.5%44.5%, of adjustable rate loans. The $4.2$4.3 billion of adjustable rate loans include loans that are fixed rate instruments for a certain period of time, and then convert to floating rates.


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The following table presents the percentage of adjustable rate loans, at March 31,June 30, 2014, stratified by the period until their next repricing:
 Percent of Total
Adjustable Rate
Loans
One year29.4%
Two years17.6
Three years15.315.5
Four years15.316.4
Five years12.811.2
Greater than five years9.69.9
The Corporation uses three complementary methods to measure and manage interest rate risk. They are static gap analysis, simulation of net interest income, and estimates of economic value of equity. Using these measurements in tandem provides a reasonably comprehensive summary of the magnitude of the Corporation's interest rate risk, level of risk as time evolves, and exposure to changes in interest rates.
Static gap provides a measurement of repricing risk in the Corporation’s balance sheet as of a point in time. This measurement is accomplished through stratification of the Corporation’s assets and liabilities into repricing periods. The sum of assets and liabilities in each of these periods are compared for mismatches within that maturity segment. Core deposits having no contractual maturities are placed into repricing periods based upon historical balance performance. Repricing for mortgage loans, mortgage-backed securities and collateralized mortgage obligations is based upon industry projections for prepayment speeds. The Corporation’s policy limits the cumulative six-month ratio of rate sensitive assets to rate sensitive liabilities (RSA/RSL) to a range of 0.85 to 1.15. As of March 31,June 30, 2014, the cumulative six-month ratio of RSA/RSL was 1.10.1.15.
Simulation of net interest income is performed for the next twelve-month period. A variety of interest rate scenarios are used to measure the effects of sudden and gradual movements upward and downward in the yield curve. These results are compared to the results obtained in a flat or unchanged interest rate scenario. Simulation of net interest income is used primarily to measure the Corporation’s short-term earnings exposure to rate movements. The Corporation’s policy limits the potential exposure of net interest income, in a non-parallel instantaneous shock, to 10% of the base case net interest income for a 100 basis point shock in interest rates, 15% for a 200 basis point shock and 20% for a 300 basis point shock. A "shock" is an immediate upward or downward movement of interest rates. The shocks do not take into account changes in customer behavior that could result in changes to mix and/or volumes in the balance sheet, nor do they account for competitive pricing over the forward 12-month period.
The following table summarizes the expected impact of interest rate shocks on net interest income (due to the current level of interest rates, the 200 and 300 basis point downward shock scenarios are not shown):
Rate Shock (1) 
Annual change
in net interest income
 % Change
+300 bp + $ 47.147.8 million    +9.0%+9.4%
+200 bp + $ 27.928.3 million +5.45.6
+100 bp + $ 9.79.5 million +1.9
–100 bp – $ 20.216.8 million 3.93.3
 
(1)These results include the effect of implicit and explicit floors that limit further reduction in interest rates.

Economic value of equity estimates the discounted present value of asset cash flows and liability cash flows. Discount rates are based upon market prices for like assets and liabilities. Upward and downward shocks of interest rates are used to determine the comparative effect of such interest rate movements relative to the unchanged environment. This measurement tool is used primarily to evaluate the longer-term repricing risks and options in the Corporation’s balance sheet. The Corporation's policy limits the economic value of equity that may be at risk, in a non-parallel instantaneous shock, to 10% of the base case economic value of equity for a 100 basis point shock in interest rates, 20% for a 200 basis point shock and 30% for a 300 basis point shock. As of March 31,June 30, 2014, the Corporation was within policy limits for every 100 basis point shock.

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Item 4. Controls and Procedures
The Corporation carried out an evaluation, under the supervision and with the participation of the Corporation’s management, including the Corporation’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures pursuant to Rule 13a-15, promulgated under the Securities Exchange Act of 1934 (the "Exchange Act"). Based upon that evaluation, the Corporation’s Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this quarterly report, the Corporation’s disclosure controls and procedures are effective. Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in Corporation reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.
There have been no changes in the Corporation’s internal control over financial reporting during the fiscal quarter covered by this quarterly report that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.


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PART II – OTHER INFORMATION

Item 1. Legal Proceedings
The Corporation and its subsidiaries are involved in various legal proceedings in the ordinary course of business of the Corporation. The Corporation periodically evaluates the possible impact of pending litigation matters based on, among other factors, the advice of counsel, available insurance coverage and recorded liabilities and reserves for probable legal liabilities and costs. In addition, from time to time, the Corporation is the subject of investigations or other forms of regulatory or governmental inquiry covering a range of possible issues and, in some cases, these may be part of similar reviews of the specified activities of other industry participants. These inquiries could lead to administrative, civil or criminal proceedings, and could possibly result in fines, penalties, restitution or the need to alter the Corporation’s business practices, and cause the Corporation to incur additional costs. The Corporation’s practice is to cooperate fully with regulatory and governmental investigations.
As of the date of this report, the Corporation believes that any liabilities, individually or in the aggregate, which may result from the final outcomes of pending proceedings will not have a material adverse effect on the financial position,condition, the operating results and/or the liquidity of the Corporation. However, legal proceedings are often unpredictable, and the actual results of such proceedings cannot be determined with certainty.
Regulatory Matters

In July 2014, three wholly owned banking subsidiaries of the Corporation, Fulton Bank, N.A., Swineford National Bank and FNB Bank, N.A., each entered into a Stipulation and Consent to the Issuance of a Consent Order (Consent Order) with their primary Federal bank regulatory agency, the Office of the Comptroller of the Currency relating to identified deficiencies in a centralized Bank Secrecy Act and anti-money laundering compliance program, which was designed to comply with the requirements of the Bank Secrecy Act, the USA Patriot Act of 2001 and related anti-money laundering regulations (collectively, the "BSA/AML Requirements") as disclosed by the Corporation in a Current Report on Form 8-K filed with the Securities and Exchange Commission on July 18, 2014 (Form 8-K).   The Consent Orders require, among other things that the banking subsidiaries in question review, assess and take actions to strengthen and enhance their compliance programs related to the BSA/AML Requirements (BSA/AML Compliance Program). In addition, the Form 8-K disclosed that the Corporation and its wholly owned subsidiary, Lafayette Ambassador Bank (Lafayette), anticipate that they will enter into a consent cease and desist order (Cease and Desist Order) with their primary Federal bank regulatory agency, the Board of Governors of the Federal Reserve System, in the near future. It is anticipated that the Cease and Desist Order will require the Corporation and Lafayette to strengthen the BSA/AML Compliance Program and will impose requirements similar to those set forth in the Consent Orders. Further, because the Consent Orders and the anticipated Cease and Desist Order relate to the BSA/AML Compliance Program, which is operated jointly for all of the Corporation’s subsidiary banks, the Corporation anticipates that one or more of the Corporation’s other subsidiary banks may also become the subject or subjects of a regulatory enforcement action related to the BSA/AML Requirements, and the provisions of any such enforcement action may differ from those of the Consent Orders.

Item 1A. Risk Factors

The discussion under the heading “Regulatory Compliance and Risk Management Matters” contained in Part I, Item 2 (Management’s Discussion and Analysis of Financial Condition and Results of Operations) of this Quarterly Report on Form 10-Q, supplements and modifies the discussion of the risk factor “The supervision and regulation to which the Corporation is subject is increasing and can be a competitive disadvantage; the Corporation may incur fines, penalties and other negative consequences from regulatory violations, including inadvertent or unintentional violations” as set forth in Part I, Item 1A of the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2013. There have been no other material changes to the risk factors as previously disclosed in Part I, Item 1A of the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2013.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table presents the Corporation's monthly repurchases of its common stock during the first quarter of 2014:
Period Total Number of Shares Purchased Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
January 1, 2014 to January 31, 2014 684,800
 $12.66 684,800
 3,315,200
February 1, 2014 to February 28, 2014 3,315,200
 $12.41 3,315,200
 
March 1, 2014 to March 31, 2014 
  
 

On October 22, 2013, the Corporation announced that its board of directors had approved a share repurchase program pursuant to which the Corporation was authorized to repurchase up to four million shares, or approximately 2.1% of its outstanding shares, through March 2014. As of March 31, 2014, 4.0 million shares were repurchased, completing this repurchase program. No stock repurchases were made outside the program and all repurchases were made in accordance with the guidelines of Rule 10b-18 and in compliance with Regulation M.Not applicable.

Item 3. Defaults Upon Senior Securities
Not applicable.

Item 4. Mine Safety Disclosures
Not applicable.

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Item 5. Other Information
Not applicable.

Item 6. Exhibits
See Exhibit Index for a list of the exhibits required by Item 601 of Regulation S-K and filed as part of this report.

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FULTON FINANCIAL CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
FULTON FINANCIAL CORPORATION  
     
Date: May 12,August 8, 2014 /s/ E. Philip Wenger
    E. Philip Wenger
    Chairman, Chief Executive Officer and President
     
Date: May 12,August 8, 2014 /s/ Patrick S. Barrett
    Patrick S. Barrett
    Senior Executive Vice President and
    Chief Financial Officer


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EXHIBIT INDEX
Exhibits Required Pursuant
to Item 601 of Regulation S-K
 
    
3.1  Articles of Incorporation, as amended and restated, of Fulton Financial Corporation– Incorporated by reference to Exhibit 3.1 of the Fulton Financial Corporation Current Report on Form 8-K dated June 24, 2011.
    
3.2  Bylaws of Fulton Financial Corporation as amended – Incorporated by reference to Exhibit 3.1 of the Fulton Financial Corporation Current Report on Form 8-K dated September 18, 2008.
    
31.1  Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
    
31.2  Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
    
32.1  Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
    
32.2  Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
    
101 
Financial statements from the Quarterly Report on Form 10-Q of Fulton Financial Corporation for the quarter ended March 31,June 30, 2014, filed on May 12,August 8, 2014, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income (iv) the Consolidated Statements of Shareholders' Equity, (v) the Consolidated Statement of Cash Flows and (vi) the Notes to Consolidated Financial Statements - filed herewith.
    


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