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 September 30, 2014March 31, 2015, or

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

For the transition period from             to              

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

(717) 291-2411
(Registrant’s telephone number, including area code)
 
Indicate by check markcheckmark 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 markcheckmark 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 markcheckmark 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 markcheckmark 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 –185,265,000–176,691,000 shares outstanding as of October 31, 2014.April 30, 2015.

1


FULTON FINANCIAL CORPORATION
FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014MARCH 31, 2015
INDEX
 
DescriptionPage
   
PART I. FINANCIAL INFORMATION 
   
Item 1. Financial Statements (Unaudited):
 
   
(a)Consolidated Balance Sheets - September 30, 2014March 31, 2015 and December 31, 20132014
3
   
(b)
Consolidated Statements of Income - Three and nine months ended September 30,March 31, 2015 and 2014 and 2013
4
   
(c)
Consolidated Statements of Comprehensive Income - Three and nine months ended September 30,March 31, 2015 and 2014 and 2013
5
   
(d)
Consolidated Statements of Shareholders’ Equity - NineThree months ended September 30,March 31, 2015 and 2014 and 2013
6
   
(e)
Consolidated Statements of Cash Flows - NineThree months ended September 30,March 31, 2015 and 2014 and 2013
7
   
(f)
Notes to Consolidated Financial Statements
8
   
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
3936
   
Item 3. Quantitative and Qualitative Disclosures about Market Risk
6657
   
Item 4. Controls and Procedures
7061
   
PART II. OTHER INFORMATION
 
   
Item 1. Legal Proceedings
7162
   
Item 1A. Risk Factors
7162
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
7262
   
Item 3. Defaults Upon Senior Securities
7262
   
Item 4. Mine Safety Disclosures
7262
   
Item 5. Other Information
7263
   
Item 6. Exhibits
7263
   
Signatures
7364
   
Exhibit Index
7465
   

2




Item 1. Financial Statements
 

CONSOLIDATED BALANCE SHEETS 
 
(in thousands, except per-share data)
September 30,
2014		 December 31,
2013		March 31,
2015		 December 31,
2014
(unaudited) (unaudited) 
ASSETS      
Cash and due from banks$220,946
 $218,540
$91,870
 $105,702
Interest-bearing deposits with other banks291,523
 163,988
637,973
 358,130
Federal Reserve Bank and Federal Home Loan Bank stock86,056
 84,173
65,694
 64,953
Loans held for sale25,212
 21,351
34,124
 17,522
Available for sale investment securities2,470,609
 2,568,434
2,259,802
 2,323,371
Loans, net of unearned income13,030,405
 12,782,220
13,115,505
 13,111,716
Less: Allowance for loan losses(189,477) (202,780)(177,701) (184,144)
Net Loans12,840,928
 12,579,440
12,937,804
 12,927,572
Premises and equipment224,441
 226,021
226,241
 226,027
Accrued interest receivable43,544
 44,037
42,216
 41,818
Goodwill and intangible assets532,117
 533,076
531,672
 531,803
Other assets502,798
 495,574
535,945
 527,869
Total Assets$17,238,174
 $16,934,634
$17,363,341
 $17,124,767
LIABILITIES      
Deposits:      
Noninterest-bearing$3,556,810
 $3,283,172
$3,765,677
 $3,640,623
Interest-bearing9,776,817
 9,208,014
9,748,820
 9,726,883
Total Deposits13,333,627
 12,491,186
13,514,497
 13,367,506
Short-term borrowings:      
Federal funds purchased6,606
 582,436
43
 6,219
Other short-term borrowings558,346
 676,193
410,062
 323,500
Total Short-Term Borrowings564,952
 1,258,629
410,105
 329,719
Accrued interest payable17,425
 15,218
18,357
 18,045
Other liabilities225,875
 222,830
294,352
 273,419
Federal Home Loan Bank advances and long-term debt1,018,289
 883,584
1,094,517
 1,139,413
Total Liabilities15,160,168
 14,871,447
15,331,828
 15,128,102
SHAREHOLDERS’ EQUITY      
Common stock, $2.50 par value, 600 million shares authorized, 218.1 million shares issued in 2014 and 217.8 million shares issued in 2013545,207
 544,568
Common stock, $2.50 par value, 600 million shares authorized, 218.3 million shares issued in 2015 and 218.2 million shares issued in 2014545,734
 545,555
Additional paid-in capital1,438,343
 1,432,974
1,422,012
 1,420,523
Retained earnings538,749
 463,843
582,724
 558,810
Accumulated other comprehensive loss(11,948) (37,341)(9,800) (17,722)
Treasury stock, at cost, 32.9 million shares in 2014 and 25.2 million shares in 2013(432,345) (340,857)
Treasury stock, at cost, 39.2 million shares in 2015 and 39.3 million shares in 2014(509,157) (510,501)
Total Shareholders’ Equity2,078,006
 2,063,187
2,031,513
 1,996,665
Total Liabilities and Shareholders’ Equity$17,238,174
 $16,934,634
$17,363,341
 $17,124,767
      
See Notes to Consolidated Financial Statements      
 

3



CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
 
(in thousands, except per-share data)Three months ended September 30 Nine months ended September 30Three months ended March 31
2014 2013 2014 20132015 2014
INTEREST INCOME          
Loans, including fees$133,741
 $136,150
 $397,011
 $405,312
$129,777
 $131,830
Investment securities:          
Taxable12,278
 12,977
 37,962
 40,890
11,282
 13,266
Tax-exempt2,219
 2,327
 6,865
 7,151
2,087
 2,348
Dividends339
 337
 996
 1,091
348
 332
Loans held for sale237
 382
 585
 1,261
173
 134
Other interest income976
 659
 3,065
 1,527
2,105
 882
Total Interest Income149,790
 152,832
 446,484
 457,232
145,772
 148,792
INTEREST EXPENSE          
Deposits8,998
 8,743
 25,579
 28,642
9,823
 7,896
Short-term borrowings297
 691
 1,470
 1,900
77
 633
Long-term debt11,129
 10,865
 32,606
 32,448
12,291
 10,698
Total Interest Expense20,424
 20,299
 59,655
 62,990
22,191
 19,227
Net Interest Income129,366
 132,533
 386,829
 394,242
123,581
 129,565
Provision for credit losses3,500
 9,500
 9,500
 38,000
(3,700) 2,500
Net Interest Income After Provision for Credit Losses125,866
 123,033
 377,329
 356,242
127,281
 127,065
NON-INTEREST INCOME          
Service charges on deposit accounts12,801
 13,938
 37,064
 42,700
11,569
 11,711
Investment management and trust services11,120
 10,420
 33,417
 31,117
10,889
 10,958
Other service charges and fees9,954
 9,518
 29,407
 27,536
9,363
 8,927
Mortgage banking income4,038
 7,123
 13,384
 26,293
4,688
 3,605
Net gains on sales of investment securities4,145
 —
Other3,906
 3,725
 10,813
 11,315
4,083
 3,305
Investment securities gains, net:       
Other-than-temporary impairment losses(84) (125) (122) (146)
Less: Portion of gain recognized in other comprehensive income (loss) (before taxes)66
 28
 92
 22
Net other-than-temporary impairment losses(18) (97) (30) (124)
Net gains on sales of investment securities99
 2,730
 1,223
 8,095
Investment securities gains, net81
 2,633
 1,193
 7,971
Total Non-Interest Income41,900
 47,357
 125,278
 146,932
44,737
 38,506
NON-INTEREST EXPENSE          
Salaries and employee benefits62,434
 63,344
 185,623
 188,046
64,990
 59,566
Net occupancy expense11,582
 11,519
 36,649
 34,810
13,692
 13,603
Other outside services8,632
 5,048
 19,684
 13,223
5,750
 3,812
Data processing4,689
 4,757
 12,816
 13,169
4,768
 3,796
Equipment expense3,958
 3,602
Software3,353
 3,268
 9,487
 9,110
3,318
 2,925
Equipment expense3,307
 3,646
 10,269
 11,447
Professional fees3,252
 3,329
 9,715
 9,771
2,871
 2,904
FDIC insurance expense2,882
 2,918
 8,186
 8,766
2,822
 2,689
Supplies and postage2,369
 2,326
Telecommunications1,716
 1,819
Other real estate owned and repossession expense1,362
 983
Marketing1,798
 2,251
 5,719
 6,045
1,233
 1,584
Other real estate owned and repossession expense1,303
 1,453
 3,034
 6,248
Operating risk loss1,242
 3,297
 3,786
 6,923
827
 1,828
Intangible amortization314
 534
 944
 1,603
130
 315
Other11,010
 11,241
 35,614
 35,510
8,672
 7,802
Total Non-Interest Expense115,798
 116,605
 341,526
 344,671
118,478
 109,554
Income Before Income Taxes51,968
 53,785
 161,081
 158,503
53,540
 56,017
Income taxes13,402
 13,837
 41,136
 38,746
13,504
 14,234
Net Income$38,566
 $39,948
 $119,945
 $119,757
$40,036
 $41,783
          
PER SHARE:          
Net Income (Basic)$0.21
 $0.21
 $0.64
 $0.62
$0.22
 $0.22
Net Income (Diluted)0.21
 0.21
 0.64
 0.61
0.22
 0.22
Cash Dividends0.08
 0.08
 0.24
 0.24
0.09
 0.08
See Notes to Consolidated Financial Statements          

4



CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
 
(in thousands)
Three months ended September 30 Nine months ended September 30,Three months ended March 31,
2014 2013 2014 20132015 2014
  
Net Income$38,566
 $39,948
 $119,945
 $119,757
$40,036
 $41,783
Other Comprehensive Income (Loss), net of tax:       
Unrealized gain (loss) on securities(3,011) (6,951) 23,912
 (43,784)
Other Comprehensive Income, net of tax:   
Unrealized gain on securities9,992
 13,933
Reclassification adjustment for postretirement amendment gains included in net income—
 —
 (944) —
—
 (944)
Reclassification adjustment for securities gains included in net income(52) (1,711) (775) (5,181)(2,695) —
Non-credit related unrealized gain on other-than-temporarily impaired debt securities138
 (106) 650
 1,332
125
 189
Unrealized gain on derivative financial instruments34
 34
 102
 102
34
 34
Unrecognized pension and postretirement income—
 —
 2,144
 —
Unrecognized postretirement income arising due to plan amendment—
 2,144
Amortization of net unrecognized pension and postretirement items104
 329
 304
 985
466
 96
Other Comprehensive Income (Loss)(2,787) (8,405) 25,393
 (46,546)
Other Comprehensive Income7,922
 15,452
Total Comprehensive Income$35,779
 $31,543
 $145,338
 $73,211
$47,958
 $57,235
          
See Notes to Consolidated Financial Statements          


5



CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)
NINETHREE MONTHS ENDED SEPTEMBER 30, 2014MARCH 31, 2015 AND 20132014
 
(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, 2014178,924
 $545,555
 $1,420,523
 $558,810
 $(17,722) $(510,501) $1,996,665
Net income
 
 
 40,036
 
 
 40,036
Other comprehensive income
 
 
 
 7,922
 
 7,922
Stock issued, including related tax benefits174
 179
 418
 
 
 1,344
 1,941
Stock-based compensation awards
 
 1,071
 
 
 
 1,071
Common stock cash dividends - $0.09 per share
 
 
 (16,122) 
 
 (16,122)
Balance at March 31, 2015179,098
 $545,734
 $1,422,012
 $582,724
 $(9,800) $(509,157) $2,031,513
             
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
 
 
 119,945
 
 
 119,945

 
 
 41,783
 
 
 41,783
Other comprehensive income (loss)
 
 
 
 25,393
 
 25,393
Other comprehensive income
 
 
 
 15,452
 
 15,452
Stock issued, including related tax benefits506
 639
 1,059
 
 
 3,767
 5,465
198
 253
 539
 
 
 1,385
 2,177
Stock-based compensation awards
 
 4,310
 
 
 
 4,310

 
 1,033
 
 
 
 1,033
Acquisition of treasury stock(8,000)         (95,255) (95,255)(4,000)         (49,804) (49,804)
Common stock cash dividends - $0.24 per share
 
 
 (45,039) 
 
 (45,039)
Balance at September 30, 2014185,158
 $545,207
 $1,438,343
 $538,749
 $(11,948) $(432,345) $2,078,006
             
Balance at December 31, 2012199,225
 $542,093
 $1,426,267
 $363,937
 $5,675
 $(256,316) $2,081,656
Net income
 
 
 119,757
 
 
 119,757
Other comprehensive income (loss)
 
 
 
 (46,546) 
 (46,546)
Stock issued, including related tax benefits1,107
 1,959
 562
 
 
 4,838
 7,359
Stock-based compensation awards
 
 4,186
 
 
 
 4,186
Acquisition of treasury stock(8,000)         (90,927) (90,927)
Common stock cash dividends - $0.24 per share
 
 
 (46,521) 
 
 (46,521)
Balance at September 30, 2013192,332
 $544,052
 $1,431,015
 $437,173
 $(40,871) $(342,405) $2,028,964
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
                          
See Notes to Consolidated Financial Statements                          
 

6



CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
(in thousands)
Nine months ended September 30Three months ended March 31
2014 20132015 2014
CASH FLOWS FROM OPERATING ACTIVITIES:      
Net Income$119,945
 $119,757
$40,036
 $41,783
Adjustments to reconcile net income to net cash provided by operating activities:
 
   
Provision for credit losses9,500
 38,000
(3,700) 2,500
Depreciation and amortization of premises and equipment18,412
 19,165
7,361
 6,629
Net amortization of investment securities premiums4,399
 8,749
1,431
 1,435
Investment securities gains, net(1,193) (7,971)
Net (increase) decrease in loans held for sale(3,861) 28,626
Net gains on sales of investment securities(4,145) —
Net increase in loans held for sale(16,602) (3,066)
Amortization of intangible assets944
 1,603
130
 315
Stock-based compensation4,310
 4,186
1,071
 1,033
Excess tax benefits from stock-based compensation(54) (237)(15) (25)
Decrease in accrued interest receivable493
 1,071
(Increase) decrease in accrued interest receivable(398) 661
(Increase) decrease in other assets(1,909) 37,129
(5,525) 7,271
Increase (decrease) in accrued interest payable2,207
 (2,673)
Decrease in other liabilities(5,315) (24,207)
Increase in accrued interest payable312
 1,754
Increase in other liabilities10,553
 182
Total adjustments27,933
 103,441
(9,527) 18,689
Net cash provided by operating activities147,878
 223,198
30,509
 60,472
CASH FLOWS FROM INVESTING ACTIVITIES:      
Proceeds from sales of securities available for sale15,219
 268,259
11,567
 12,548
Proceeds from maturities of securities held to maturity—
 86
Proceeds from maturities of securities available for sale273,688
 526,393
105,647
 79,045
Purchase of securities available for sale(164,676) (691,362)(37,142) (11,700)
Increase in short-term investments(129,418) (63,965)(280,584) (58,901)
Net increase in loans(271,494) (684,529)
Net (increase) decrease in loans(6,362) 40,017
Net purchases of premises and equipment(16,832) (18,741)(7,575) (6,255)
Net cash used in investing activities(293,513) (663,859)
Net cash (used in) provided by investing activities(214,449) 54,754
CASH FLOWS FROM FINANCING ACTIVITIES:      
Net increase in demand and savings deposits768,979
 595,722
171,022
 94,093
Net increase (decrease) in time deposits73,462
 (358,764)
(Decrease) increase in short-term borrowings(693,677) 330,178
Additions to long-term debt140,000
 —
Net (decrease) increase in time deposits(24,031) 84,638
Increase (decrease) in short-term borrowings80,386
 (188,945)
Repayments of long-term debt(5,295) (5,131)(44,896) (123)
Net proceeds from issuance of common stock5,411
 7,122
1,926
 2,152
Excess tax benefits from stock-based compensation54
 237
15
 25
Dividends paid(45,638) (31,138)(14,314) (15,413)
Acquisition of treasury stock(95,255) (90,927)—
 (49,804)
Net cash provided by financing activities148,041
 447,299
Net Increase in Cash and Due From Banks2,406
 6,638
Net cash provided by (used in) financing activities170,108
 (73,377)
Net (Decrease) Increase in Cash and Due From Banks(13,832) 41,849
Cash and Due From Banks at Beginning of Period218,540
 256,300
105,702
 218,540
Cash and Due From Banks at End of Period$220,946
 $262,938
$91,870
 $260,389
Supplemental Disclosures of Cash Flow Information:      
Cash paid during the period for:      
Interest$57,448
 $65,663
$21,879
 $17,473
Income taxes16,632
 29,964
146
 631
See Notes to Consolidated Financial Statements      
 
7


FULTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
NOTE A1 – Basis of Presentation

The accompanying unaudited consolidated financial statements of Fulton Financial Corporation (the Corporation)"Corporation") have been prepared in conformity with U.S. generally accepted accounting principles (U.S. GAAP)("U.S. GAAP") for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the amounts of assets and liabilities as of the date of the financial statements as well as revenues and expenses during the period. Actual results could differ from those estimates. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2014. Operating results for the three and nine months ended September 30, 2014March 31, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 20142015. The Corporation evaluates subsequent events through the date of filing date of this Form 10-Q with the Securities and Exchange Commission (SEC)("SEC").

Recent Accounting Standards
In April 2014,
Effective January 1, 2015, the Corporation adopted the Financial Accounting Standards Board (FASB) issuedBoard's ("FASB") Accounting Standards Codification (ASC)("ASC") Update 2014-08, "Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.2014-01, "Accounting for Investments in Qualified Affordable Housing Projects." ASC Update 2014-08 changes2014-01 provides guidance on accounting for investments made by a reporting entity in flow-through limited liability entities that manage or invest in affordable housing projects that qualify for the criterialow income housing tax credit. The Corporation has made certain investments in partnerships that generate tax credits under various federal programs which promote investment in low and moderate income housing and local economic development. The net income tax benefit associated with these investments, which consists of the amortization of the investments net of tax benefits, and the income tax credits earned on the investments recorded in income taxes on the consolidated income statements was $2.5 million 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 itsthree months ended March 31, 2015 quarterly reportand 2014. As of March 31, 2015 and December 31, 2014, the Corporation’s tax credit investments, included in other assets on Form 10-Q.the consolidated balance sheets, totaled $164.9 million and $155.6 million, respectively. The adoption of this ASC Update 2014-08 isupdate did not expected to have a material impact on the Corporation's consolidated financial statements.statements for the three months ended March 31, 2015 or 2014.

In May 2014,February 2015, 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 revenue2015-02, "Consolidation: Amendments 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.Consolidation Analysis." ASC Update 2014-092015-02 changes the way reporting enterprises evaluate whether: (a) they should consolidate limited partnerships and similar entities, (b) fees paid to a decision maker or service provider are variable interests in a variable interest entity ("VIE"), and (c) variable interests in a VIE held by related parties of the reporting enterprise require the reporting enterprise to consolidate the VIE.ASC Update 2015-02 is effective for interimpublic business entities' annual and annualinterim reporting periods beginning after December 15, 2016. Early application is not2015, with earlier adoption permitted. For theThe Corporation intends to adopt this standards update is effective with its March 31, 20172016 quarterly report on Form 10-Q. The Corporation is currently evaluating the impact of10-Q, and does not expect the adoption of ASC Update 2014-092015-02 to have a material impact on its consolidated financial statements.

In June 2014,April 2015, the FASB issued ASC Update 2014-11, "Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures.2015-03, "Interest - Imputation of Interest." In addition to new disclosure requirements, ASC Update 2014-11 requires that all repurchase-to-maturity transactions2015-03 simplifies the presentation of debt issuances costs. Debt issuance costs related to a recognized debt liability will be accounted forpresented on the balance sheet as secured borrowings rather thana direct deduction from the debt liability, similar to the presentation of debt discounts. Under current U.S. GAAP, debt issuance costs are reported on the balance sheet as sales of financial assets. Also, all transfers of financial assets executed contemporaneously with a repurchase agreement withThe costs will continue to be amortized to interest expense using the same counterparty must be accounted for separately, the result of which would be the treatment of such transactions as secured borrowings.effective interest method. ASC Update 2014-112015-03 is effective for public business entities’entities' annual and interim and annual reporting periods beginning after December 15, 2014. For the2015, with earlier adoption permitted.The Corporation intends to adopt this standards update is effective with its March 31, 20152016 quarterly report on Form 10-Q. The10-Q and does not expect the adoption of ASC Update 2014-11 is not expected2015-03 to have a material impact on the Corporation’sits consolidated financial statements.

In June 2014,April 2015, the FASB issued ASC Update 2014-12, "Accounting2015-05, "Customer's Accounting for Share-Based Payments When the Terms of an Award Provide ThatFees Paid in a Performance Target Could Be Achieved after the Requisite Service Period.Cloud Computing Arrangement." ASC Update 2014-12 clarifies2015-05 provides explicit guidance related to accountingdetermine when a customer's fees paid in a cloud computing arrangement is for share-based payment awards with terms that allow an employee to vest in the award regardlessacquisition of whether the employee is rendering service on the date a performance target is achieved.software licenses, services, or both. 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 2014-122015-05 is effective for public business entities’entities' annual and interim and annual reporting periods beginning after December 15, 2014,2015, with earlier adoption permitted. For theThe Corporation intends to adopt this standards update is effective with its March 31, 20152016 quarterly report on Form 10-Q. The10-Q and does not expect the adoption of ASC Update 2014-12 is not expected2015-05 to have a material impact on the Corporation’sits consolidated financial statements.

In August 2014, the FASB issued ASC Update 2014-14, "Receivables - Troubled Debt Restructuring by Creditors." ASC Update 2014-14 clarifies troubled debt restructuring guidance related to the classification and measurement of certain government-sponsored loan guarantee programs upon foreclosure. ASC Update 2014-14 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

8


update is effective with its March 31, 2015 quarterly report on Form 10-Q. The adoption of ASC Update 2014-14 is not expected to have a material impact on the Corporation’s consolidated financial statements.

In August 2014, the FASB issued ASC Update 2014-15, "Presentation of Financial Statements - Going Concern." ASC Update 2014-15 provides guidance regarding management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related disclosures. The standards update describes how an entity's management should assess whether there are conditions and events, considered in the aggregate, that raise substantial doubt about an entity's ability to continue as a going concern within one year after the date that the financial statements are issued. ASC Update 2014-15 is effective for public business entities’ annual reporting periods ending after December 15, 2016, with earlier adoption permitted. For the Corporation, this standards update is effective with its December 31, 2016 annual report on Form 10-K. The adoption of ASC Update 2014-15 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.

NOTE B2 – 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)("RSUs") and performance-basedperformance based restricted stock units (PSUs)("PSUs"). PSUs are required to be included in weighted average shares outstanding if performance measures, as defined in each PSU award agreement, are met as of the end of the period.
A reconciliation of weighted average shares outstanding used to calculate basic net income per share and diluted net income per share follows:
Three months ended September 30 Nine months ended September 30Three months ended March 31
2014 2013 2014 20132015 2014
(in thousands)(in thousands)
Weighted average shares outstanding (basic)186,109
 192,251
 187,893
 193,926
178,471
 189,467
Impact of common stock equivalents846
 1,008
 970
 1,000
986
 1,022
Weighted average shares outstanding (diluted)186,955
 193,259
 188,863
 194,926
179,457
 190,489
For the three and nine months ended September 30, March 31, 2015 and 2014, 2.52.1 million and 2.93.1 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 nine months ended September 30, 2013, 3.2 million and 3.7 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.


9


NOTE C3 – Accumulated Other Comprehensive Income (Loss)
The following table presents changes in other comprehensive income (loss):income: 
 Before-Tax Amount Tax Effect Net of Tax Amount
 (in thousands)
Three months ended September 30, 2014     
Unrealized gain (loss) on securities$(4,629) $1,618
 $(3,011)
Reclassification adjustment for securities gains included in net income (1)(81) 29
 (52)
Non-credit related unrealized gains (losses) on other-than-temporarily impaired debt securities212
 (74) 138
Unrealized gain on derivative financial instruments52
 (18) 34
Amortization of net unrecognized pension and postretirement items (2)160
 (56) 104
Total Other Comprehensive Income (Loss)$(4,286) $1,499
 $(2,787)
Three months ended September 30, 2013     
Unrealized gain (loss) on securities$(10,691) $3,740
 $(6,951)
Reclassification adjustment for securities gains included in net income (1)(2,633) 922
 (1,711)
Non-credit related unrealized gains (losses) on other-than-temporarily impaired debt securities(163) 57
 (106)
Unrealized gain on derivative financial instruments52
 (18) 34
Amortization of net unrecognized pension and postretirement items (2)505
 (176) 329
Total Other Comprehensive Income (Loss)$(12,930) $4,525
 $(8,405)
      
Nine months ended September 30, 2014     
Unrealized gain (loss) on securities$36,790
 $(12,878) $23,912
Reclassification adjustment for postretirement gains included in net income (2)(1,452) 508
 (944)
Reclassification adjustment for securities gains included in net income (1)(1,193) 418
 (775)
Non-credit related unrealized gains (losses) on other-than-temporarily impaired debt securities1,000
 (350) 650
Unrealized gain on derivative financial instruments157
 (55) 102
Unrecognized pension and postretirement income3,291
 (1,147) 2,144
Amortization of net unrecognized pension and postretirement items (2)469
 (165) 304
Total Other Comprehensive Income (Loss)$39,062
 $(13,669) $25,393
Nine months ended September 30, 2013     
Unrealized gain (loss) on securities$(67,357) $23,573
 $(43,784)
Reclassification adjustment for securities gains included in net income (1)(7,971) 2,790
 (5,181)
Non-credit related unrealized gains (losses) on other-than-temporarily impaired debt securities2,049
 (717) 1,332
Unrealized gain on derivative financial instruments157
 (55) 102
Amortization of net unrecognized pension and postretirement items (2)1,515
 (530) 985
Total Other Comprehensive Income (Loss)$(71,607) $25,061
 $(46,546)
 Before-Tax Amount Tax Effect Net of Tax Amount
 (in thousands)
Three months ended March 31, 2015     
Unrealized gain on securities$15,371
 $(5,379) $9,992
Reclassification adjustment for securities gains included in net income (1)(4,145) 1,450
 (2,695)
Non-credit related unrealized gains on other-than-temporarily impaired debt securities192
 (67) 125
Unrealized gain on derivative financial instruments52
 (18) 34
Amortization of net unrecognized pension and postretirement items (2)717
 (251) 466
Total Other Comprehensive Income$12,187
 $(4,265) $7,922
Three months ended March 31, 2014     
Unrealized gain on securities$21,435
 $(7,502) $13,933
Reclassification adjustment for postretirement gains included in net income (2)(1,452) 508
 (944)
Non-credit related unrealized gains on other-than-temporarily impaired debt securities291
 (102) 189
Unrealized gain on derivative financial instruments52
 (18) 34
Unrecognized pension and postretirement income3,291
 (1,147) 2,144
Amortization of net unrecognized pension and postretirement items (2)149
 (53) 96
Total Other Comprehensive Income$23,766
 $(8,314) $15,452

(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,4, "Investment Securities," for additional details.
(2)Amounts reclassified out of accumulated other comprehensive income. Before-tax amounts included within "Salaries and employee benefits" on the consolidated statements of income. See Note H,8, "Employee Benefit Plans," for additional details.



109


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) Total
 (in thousands)
Three months ended September 30, 2014         
Balance at June 30, 2014$(580) $1,434
 $(2,614) $(7,401) $(9,161)
Other comprehensive income (loss) before reclassifications(3,011) 138
 —
 —
 (2,873)
Amounts reclassified from accumulated other comprehensive income (loss)(63) 11
 34
 104
 86
Balance at September 30, 2014$(3,654) $1,583
 $(2,580) $(7,297) $(11,948)
Three months ended September 30, 2013
 
   
 
Balance at June 30, 2013$(12,941) $1,050
 $(2,750) $(17,825) $(32,466)
Other comprehensive income (loss) before reclassifications(6,951)
(106) —
 —
 (7,057)
Amounts reclassified from accumulated other comprehensive income (loss)(1,774) 63
 34
 329
 (1,348)
Balance at September 30, 2013$(21,666) $1,007
 $(2,716) $(17,496) $(40,871)
          
Nine months ended September 30, 2014         
Balance at December 31, 2013$(27,510) $1,652
 $(2,682) $(8,801) $(37,341)
Other comprehensive income (loss) before reclassifications23,912
 650
 —
 2,144
 26,706
Amounts reclassified from accumulated other comprehensive income (loss)(56) (719) 102
 (640) (1,313)
Balance at September 30, 2014$(3,654) $1,583
 $(2,580) $(7,297) $(11,948)
Nine months ended September 30, 2013         
Balance at December 31, 2012$26,361
 $613
 $(2,818) $(18,481) $5,675
Other comprehensive income (loss) before reclassifications(43,784) 1,332
 —
 —
 (42,452)
Amounts reclassified from accumulated other comprehensive income (loss)(4,243) (938) 102
 985
 (4,094)
Balance at September 30, 2013$(21,666) $1,007
 $(2,716) $(17,496) $(40,871)
 Unrealized Gains (Losses) on Investment Securities Not Other-Than-Temporarily Impaired Unrealized Non-Credit Gains (Losses) on Other-Than-Temporarily Impaired Debt Securities Unrealized Effective Portions of Losses on Forward-Starting Interest Rate Swaps Unrecognized Pension and Postretirement Plan Income (Costs) Total
 (in thousands)
Three months ended March 31, 2015         
Balance at December 31, 2014$5,980
 $1,349
 $(2,546) $(22,505) $(17,722)
Other comprehensive income before reclassifications9,992
 125
 —
 —
 10,117
Amounts reclassified from accumulated other comprehensive income (loss)(1,661) (1,034) 34
 466
 (2,195)
Balance at March 31, 2015$14,311
 $440
 $(2,512) $(22,039) $(9,800)
Three months ended March 31, 2014
 
   
 
Balance at December 31, 2013$(27,510) $1,652
 $(2,682) $(8,801) $(37,341)
Other comprehensive income before reclassifications13,933

189
 —
 2,144
 16,266
Amounts reclassified from accumulated other comprehensive income (loss)—
 —
 34
 (848) (814)
Balance at March 31, 2014$(13,577) $1,841
 $(2,648) $(7,505) $(21,889)


1110


NOTE D4 – 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)
September 30, 2014       
March 31, 2015       
Equity securities$34,380
 $10,927
 $(29) $45,278
$29,224
 $11,397
 $(13) $40,608
U.S. Government securities200
 —
 —
 200
U.S. Government sponsored agency securities235
 5
 —
 240
198
 5
 —
 203
State and municipal securities250,195
 7,917
 (496) 257,616
216,877
 7,496
 (31) 224,342
Corporate debt securities99,670
 5,777
 (4,020) 101,427
99,120
 3,929
 (5,367) 97,682
Collateralized mortgage obligations975,971
 6,700
 (27,631) 955,040
874,853
 5,924
 (12,901) 867,876
Mortgage-backed securities954,412
 14,201
 (6,278) 962,335
910,418
 20,859
 (1,118) 930,159
Auction rate securities158,725
 1
 (10,253) 148,473
106,410
 —
 (7,478) 98,932
$2,473,788
 $45,528
 $(48,707) $2,470,609
$2,237,100
 $49,610
 $(26,908) $2,259,802
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)
December 31, 2013       
December 31, 2014       
Equity securities$33,922
 $12,355
 $(76) $46,201
$33,469
 $14,167
 $(13) $47,623
U.S. Government securities525
 —
 —
 525
200
 —
 —
 200
U.S. Government sponsored agency securities720
 7
 (1) 726
209
 5
 —
 214
State and municipal securities281,810
 6,483
 (3,444) 284,849
238,250
 7,231
 (266) 245,215
Corporate debt securities100,468
 5,685
 (7,404) 98,749
99,016
 5,126
 (6,108) 98,034
Collateralized mortgage obligations1,069,138
 8,036
 (44,776) 1,032,398
917,395
 5,705
 (20,787) 902,313
Mortgage-backed securities949,328
 13,881
 (17,497) 945,712
914,797
 16,978
 (2,944) 928,831
Auction rate securities172,299
 234
 (13,259) 159,274
108,751
 —
 (7,810) 100,941
$2,608,210
 $46,681
 $(86,457) $2,568,434
$2,312,087
 $49,212
 $(37,928) $2,323,371
Securities carried at $1.8$1.6 billion as of September 30, 2014March 31, 2015 and $1.7$1.7 billion as of December 31, 20132014 were pledged as collateral to secure public and trust deposits and customer repurchase agreements.
Equity securities include common stocks of financial institutions (estimated fair value of $39.3$34.7 million at September 30, 2014March 31, 2015 and $40.6$41.8 million at December 31, 2013)2014) and other equity investments (estimated fair value of $6.0$5.9 million at September 30, 2014March 31, 2015 and $5.6$5.8 million at December 31, 2013)2014).
As of September 30, 2014,March 31, 2015, the financial institutions stock portfolio had a cost basis of $28.6$23.4 million and an estimated fair value of $39.3$34.7 million,, including an investment in a single financial institution with a cost basis of $20.0$15.7 million and an estimated fair value of $27.5 million.$23.2 million. The estimated fair value of this investment accounted for 70.0%66.7% of the estimated fair value of the Corporation's investments in the common stocks of publicly traded financial institutions. No other investment within the financial institutions stock portfolio exceeded 5% of the portfolio's estimated fair value.

1211


The amortized cost and estimated fair values of debt securities as of September 30, 2014,March 31, 2015, by contractual maturity, are shown in the following table. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
 Amortized
Cost		 Estimated
Fair Value		 Amortized
Cost		 Estimated
Fair Value
(in thousands)(in thousands)
Due in one year or less $13,218
 $13,284
 $29,323
 $30,124
Due from one year to five years 75,307
 78,967
 74,801
 78,246
Due from five years to ten years 187,966
 193,537
 140,219
 144,978
Due after ten years 232,534
 222,168
 178,262
 167,811
 509,025
 507,956
 422,605
 421,159
Collateralized mortgage obligations 975,971
 955,040
 874,853
 867,876
Mortgage-backed securities 954,412
 962,335
 910,418
 930,159
 $2,439,408
 $2,425,331
 $2,207,876
 $2,219,194
The following table presents information related to the gross realized gains and losses on the sales of equity and debt securities:
Gross
Realized
Gains		 Gross
Realized
Losses		 Other-than-
temporary
Impairment
Losses		 Net Gains (Losses)Gross
Realized
Gains		 Gross
Realized
Losses		 Net Gains (Losses)
Three months ended September 30, 2014(in thousands)
Three months ended March 31, 2015(in thousands)
Equity securities$99
 $—
 $—
 $99
$1,970
 $—
 $1,970
Debt securities—
 —
 (18) (18)2,175
 —
 2,175
Total$99
 $—
 $(18) $81
$4,145
 $—
 $4,145
Three months ended September 30, 2013       
Three months ended March 31, 2014     
Equity securities$2,135
 $—
 $—
 $2,135
$1
 $—
 $1
Debt securities617
 (22) (97) 498
322
 (323) (1)
Total$2,752
 $(22) $(97) $2,633
$323
 $(323) $—
       
Nine months ended September 30, 2014       
Equity securities$100
 $—
 $(12) $88
Debt securities1,446
 (323) (18) 1,105
Total$1,546
 $(323) $(30) $1,193
Nine months ended September 30, 2013       
Equity securities$4,357
 $(28) $(27) $4,302
Debt securities3,788
 (22) (97) 3,669
Total$8,145
 $(50) $(124) $7,971

The other-than-temporary impairment charges for equity securities during the three and nine months ended September 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.

The credit related other-than-temporary impairment charges for debt securities during the three and nine months ended September 30, 2014 and 2013 were for investments in pooled trust preferred securities issued by financial institutions. The credit related other-than-temporary impairment charges for the pooled trust preferred securities were determined based on an expected cash flows model.



13


The following table presents a summary of the cumulative credit related other-than-temporary impairment charges, recognized as components of earnings, for debt securities held by the Corporation at September 30, 2014March 31, 2015 and 2013:2014:
Three months ended September 30 Nine months ended September 30Three months ended March 31
2014 2013 2014 20132015 2014
(in thousands)(in thousands)
Balance of cumulative credit losses on debt securities, beginning of period$(17,214) $(20,607) $(20,691) $(23,079)$(16,242) $(20,691)
Additions for credit losses recorded which were not previously recognized as components of earnings(18) (97) (18) (97)
Reductions for securities sold during the period—
 —
 3,472
 2,468
3,938
 —
Reductions for increases in cash flows expected to be collected that are recognized over the remaining life of the security—
 —
 5
 4
2
 4
Balance of cumulative credit losses on debt securities, end of period$(17,232) $(20,704) $(17,232) $(20,704)$(12,302) $(20,687)






12

The following table presents the gross unrealized losses and estimated fair values of investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2014:March 31, 2015:
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)
State and municipal securities$7,996
 $(37) $26,484
 $(459) $34,480
 $(496)$5,953
 $(31) $—
 $—
 $5,953
 $(31)
Corporate debt securities—
 —
 38,900
 (4,020) 38,900
 (4,020)4,970
 (4) 34,600
 (5,363) 39,570
 (5,367)
Collateralized mortgage obligations53,189
 (248) 652,396
 (27,383) 705,585
 (27,631)34,287
 (132) 547,418
 (12,769) 581,705
 (12,901)
Mortgage-backed securities241,707
 (527) 291,712
 (5,751) 533,419
 (6,278)116,136
 (327) 72,224
 (791) 188,360
 (1,118)
Auction rate securities—
 —
 148,380
 (10,253) 148,380
 (10,253)—
 —
 98,932
 (7,478) 98,932
 (7,478)
Total debt securities302,892
 (812) 1,157,872
 (47,866) 1,460,764
 (48,678)161,346
 (494) 753,174
 (26,401) 914,520
 (26,895)
Equity securities269
 (17) 77
 (12) 346
 (29)—
 —
 77
 (13) 77
 (13)
$303,161
 $(829) $1,157,949
 $(47,878) $1,461,110
 $(48,707)$161,346
 $(494) $753,251
 $(26,414) $914,597
 $(26,908)
The Corporation’s collateralized mortgage obligations and mortgage-backed securities have contractual terms that generally do not permit the issuer to settle the securities at a price less than the amortized cost of the investment. Because the decline in market value of these securities is attributable to changes in interest rates and not credit quality, and because the Corporation does not have the intent to sell and does not believe it will more likely than not be required to sell any of these securities prior to a recovery of their fair value to amortized cost, the Corporation does not consider these investments to be other-than-temporarily impaired as of September 30, 2014.March 31, 2015.
The unrealized holding losses on auction rate securities or auction(auction rate certificates, (ARCs)or "ARCs"), are attributable to liquidity issues resulting from the failure of periodic auctions. The Corporation had previously purchased ARCs for investment management and trust customers as short-term investments with fair values that could be derived based on periodic auctions under normal market conditions. During 2008 and 2009, the Corporation purchased ARCs from these customers due to the failure of these periodic auctions, which made these previously short-term investments illiquid.
As of September 30, 2014, approximately $144 million, or 97%,March 31, 2015, all of the ARCs were rated above investment grade, with approximately $6 million, or 4%5%, AAA"AAA" rated and $104$93 million, or 72%95%, AA"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 millionAll of the student loans underlying thesethe ARCs have principal payments which are guaranteed by the federal government. In total, approximately $147 million, or 99%, of the student loans underlying the ARCs have principal payments that are guaranteed by the federal government.
During the nine months ended September 30, 2014, the Corporation sold ARCs with a total book value of $11.9 million, with no gain or loss upon sale. As of September 30, 2014,March 31, 2015, all ARCs were current and making scheduled interest payments. Based on management’s evaluations, ARCs with aan estimated fair value of $148.5$98.9 million were not subject to any other-than-temporary impairment charges as of September 30, 2014.March 31, 2015. The Corporation does not have the intent to sell and does not believe it will more likely than not be required to sell any of these securities prior to a recovery of their fair value to amortized cost, which may be at maturity.

14


For its investments in equity securities, particularly its investments in stocks of financial institutions, management evaluates the near-term prospects of the issuers in relation to the severity and duration of the impairment. Based on that evaluation and the Corporation’s ability and intent to hold those investments for a reasonable period of time sufficient for a recovery of fair value, the Corporation does not consider those investments with unrealized holding losses as of September 30, 2014March 31, 2015 to be other-than-temporarily impaired.
The majority of the Corporation's available for sale corporate debt securities are issued by financial institutions. The following table presents the amortized cost and estimated fair value of corporate debt securities:
September 30, 2014 December 31, 2013March 31, 2015 December 31, 2014
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$47,546
 $44,075
 $47,481
 $40,531
$47,590
 $42,863
 $47,569
 $42,016
Subordinated debt47,498
 50,289
 47,405
 50,327
47,563
 50,173
 47,530
 50,023
Pooled trust preferred securities2,050
 4,487
 2,997
 5,306
405
 1,084
 2,010
 4,088
Corporate debt securities issued by financial institutions97,094
 98,851
 97,883
 96,164
95,558
 94,120
 97,109
 96,127
Other corporate debt securities2,576
 2,576
 2,585
 2,585
3,562
 3,562
 1,907
 1,907
Available for sale corporate debt securities$99,670
 $101,427
 $100,468
 $98,749
$99,120
 $97,682
 $99,016
 $98,034


13

The Corporation’s investments in single-issuer trust preferred securities had an unrealized loss of $3.5$4.7 million at September 30, 2014.March 31, 2015. The Corporation did not record any other-than-temporary impairment charges for single-issuer trust preferred securities during the three or nine months ended September 30, 2014March 31, 2015 or 2013.Six2014. Seven of the Corporation's 20 single-issuer trust preferred securities were rated below investment grade by at least one ratings agency, with an amortized cost of $13.5$14.5 million and an estimated fair value of $12.3$12.8 million at September 30, 2014.March 31, 2015. All of the single-issuer trust preferred securities rated below investment grade were rated BB"BB" or Ba."Ba". Three single-issuer trust preferred securities with an amortized cost of $4.7 million and an estimated fair value of $3.9$3.8 million at September 30, 2014March 31, 2015 were not rated by any ratings agency.
During the ninethree months ended September 30, 2014,March 31, 2015, the Corporation sold two pooled trust preferred securities with a total amortized cost of $728,000,$1.5 million, for a gain of $1.1$2.2 million. As of September 30, 2014,March 31, 2015, all sixthree of the Corporation's pooled trust preferred securities, with an amortized cost of $2.1 million$405,000 and an estimated fair value of $4.5$1.1 million, were rated below investment grade by at least one ratings agency, with ratings ranging from C"C" to Ca."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 $101.4$97.7 million were not subject to any additional other-than-temporary impairment charges as of September 30, 2014.March 31, 2015. The Corporation does not have the intent to sell and does not believe it will more likely than not be required to sell any of these securities prior to a recovery of their fair value to amortized cost, which may be at maturity.
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. The Corporation does not engage in proprietary trading or in any other activities prohibited by the Final Rules. Based on the Corporation's evaluation of its investments, none fall within the definition of a "covered fund" and would need to be disposed

15


of by July 21, 2015. Therefore, it does not currently expect that the Final Rules will have a material effect on its business, financial condition or results of operations.

NOTE E5 – Loans and Allowance for Credit Losses

Loans, Net of Unearned Income
Loans, net of unearned income are summarized as follows:
September 30,
2014		 December 31, 2013March 31,
2015		 December 31, 2014
(in thousands)(in thousands)
Real-estate - commercial mortgage$5,156,979
 $5,101,922
$5,227,101
 $5,197,155
Commercial - industrial, financial and agricultural3,691,262
 3,628,420
3,762,631
 3,725,567
Real-estate - home equity1,733,036
 1,764,197
1,701,623
 1,736,688
Real-estate - residential mortgage1,372,033
 1,337,380
1,364,788
 1,377,068
Real-estate - construction687,728
 573,672
677,806
 690,601
Consumer278,219
 283,124
257,301
 265,431
Leasing and other120,144
 99,256
135,552
 127,562
Overdrafts2,646
 4,045
1,721
 4,021
Loans, gross of unearned income13,042,047
 12,792,016
13,128,523
 13,124,093
Unearned income(11,642) (9,796)(13,018) (12,377)
Loans, net of unearned income$13,030,405
 $12,782,220
$13,115,505
 $13,111,716

Allowance for Credit Losses
The allowance for credit losses consists of the allowance for loan losses and the reserve for unfunded lending commitments. The allowance for loan losses represents management’s estimate of incurred losses in the loan portfolio as of the balance sheet date and is recorded as a reduction to loans. The reserve for unfunded lending commitments represents management’s estimate of incurred losses in its unfunded loan commitments and is recorded in other liabilities on the consolidated balance sheet. The allowance for credit losses is increased by charges to expense, through the provision for credit losses, and decreased by charge-offs, net of recoveries.

The Corporation’s allowance for credit losses includes: (1) specific allowances allocated to loans evaluated for impairment under the FASB's ASC Section 310-10-35; and (2) allowances calculated for pools of loans measured for impairment under FASB ASC Subtopic 450-20.

14


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 commercialCommercial 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:
September 30,
2014		 December 31,
2013		March 31,
2015		 December 31,
2014
(in thousands)(in thousands)
Allowance for loan losses$189,477
 $202,780
$177,701
 $184,144
Reserve for unfunded lending commitments1,631
 2,137
1,957
 1,787
Allowance for credit losses$191,108
 $204,917
$179,658
 $185,931

16


The following table presents the activity in the allowance for credit losses:
Three months ended September 30 Nine months ended September 30Three months ended March 31
2014 2013 2014 20132015 2014
(in thousands)(in thousands)
Balance at beginning of period$193,442
 $217,626
 $204,917
 $225,439
$185,931
 $204,917
Loans charged off(9,604) (18,108) (31,348) (61,597)(5,764) (10,268)
Recoveries of loans previously charged off3,770
 3,820
 8,039
 10,996
3,191
 1,857
Net loans charged off(5,834) (14,288) (23,309) (50,601)(2,573) (8,411)
Provision for credit losses3,500
 9,500
 9,500
 38,000
(3,700) 2,500
Balance at end of period$191,108
 $212,838
 $191,108
 $212,838
$179,658
 $199,006

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 September 30, 2014                 
Balance at June 30, 2014$49,842
 $49,084
 $32,041
 $32,744
 $11,331
 $3,306
 $1,851
 $11,486
 $191,685
Three months ended March 31, 2015                 
Balance at December 31, 2014$53,493
 $51,378
 $28,271
 $29,072
 $9,756
 $3,015
 $1,799
 $7,360
 $184,144
Loans charged off(1,557) (5,167) (1,492) (231) (313) (538) (306) —
 (9,604)(709) (1,863) (768) (1,281) —
 (780) (363) —
 (5,764)
Recoveries of loans previously charged off1,167
 1,013
 336
 95
 470
 448
 241
 —
 3,770
436
 786
 251
 159
 1,147
 241
 171
 —
 3,191
Net loans charged off(390) (4,154) (1,156) (136) 157
 (90) (65) —
 (5,834)(273) (1,077) (517) (1,122) 1,147
 (539) (192) —
 (2,573)
Provision for loan losses (1)(278) 6,110
 406
 397
 (312) 244
 180
 (3,121) 3,626
(360) 6,849
 (4,273) (4,715) (2,416) 51
 46
 948
 (3,870)
Balance at September 30, 2014$49,174
 $51,040
 $31,291
 $33,005
 $11,176
 $3,460
 $1,966
 $8,365
 $189,477
Three months ended September 30, 2013                 
Balance at June 30, 2013$58,696
 $57,557
 $25,736
 $32,684
 $14,471
 $2,497
 $2,925
 $21,865
 $216,431
Loans charged off(3,724) (9,394) (2,365) (767) (598) (473) (787) —
 (18,108)
Recoveries of loans previously charged off185
 2,295
 198
 245
 379
 294
 224
 —
 3,820
Net loans charged off(3,539) (7,099) (2,167) (522) (219) (179) (563) —
 (14,288)
Provision for loan losses (1)3,470
 1,437
 4,451
 1,595
 (1,221) 610
 620
 (2,619) 8,343
Balance at September 30, 2013$58,627
 $51,895
 $28,020
 $33,757
 $13,031
 $2,928
 $2,982
 $19,246
 $210,486
Nine months ended September 30, 2014                 
Balance at March 31, 2015$52,860
 $57,150
 $23,481
 $23,235
 $8,487
 $2,527
 $1,653
 $8,308
 $177,701
Three months ended March 31, 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(5,084) (15,804) (4,377) (2,166) (745) (1,738) (1,434) —
 (31,348)(1,386) (5,125) (1,651) (846) (214) (751) (295) —
 (10,268)
Recoveries of loans previously charged off1,641
 2,532
 869
 319
 852
 1,059
 767
 —
 8,039
44
 744
 356
 116
 224
 209
 164
 —
 1,857
Net loans charged off(3,443) (13,272) (3,508) (1,847) 107
 (679) (667) —
 (23,309)(1,342) (4,381) (1,295) (730) 10
 (542) (131) —
 (8,411)
Provision for loan losses (1)(3,042) 13,982
 6,577
 1,770
 (1,580) 879
 (737) (7,843) 10,006
(560) 4,614
 5,533
 977
 (2,817) 606
 (1,228) (4,405) 2,720
Balance at September 30, 2014$49,174
 $51,040
 $31,291
 $33,005
 $11,176
 $3,460
 $1,966
 $8,365
 $189,477
Nine months ended September 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
Loans charged off(13,050) (24,856) (6,735) (8,282) (5,181) (1,456) (2,037) —
 (61,597)
Recoveries of loans previously charged off2,754
 3,430
 721
 442
 1,794
 1,206
 649
 —
 10,996
Net loans charged off(10,296) (21,426) (6,014) (7,840) (3,387) (250) (1,388) —
 (50,601)
Provision for loan losses (1)5,995
 13,116
 11,258
 7,061
 (869) 811
 1,618
 (1,806) 37,184
Balance at September 30, 2013$58,627
 $51,895
 $28,020
 $33,757
 $13,031
 $2,928
 $2,982
 $19,246
 $210,486
Balance at March 31, 2014$53,757
 $50,563
 $32,460
 $33,329
 $9,842
 $3,324
 $2,011
 $11,803
 $197,089

(1)The provision for loan losses excluded a $126,000$170,000 increase and $506,000$220,000 decrease respectively, in the reserve for unfunded lending commitments for the three and nine months ended September 30,March 31, 2015 and March 31, 2014, and excluded a $1.2 million and $816,000 increase, respectively, in the reserve for unfunded lending commitments for the three and nine months ended September 30, 2013.respectively. The total provision for credit losses, comprised of allocations for both funded and unfunded loans, was $3.5a negative $3.7 million and $9.5 million, respectively, for the three and nine months ended September 30, 2014March 31, 2015 and $9.5was $2.5 million and $38.0 million, respectively, for the three and nine months ended September 30, 2013.March 31, 2014.

1715


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 September 30, 2014:              
Allowance for loan losses at March 31, 2015:Allowance for loan losses at March 31, 2015:              
Measured for impairment under FASB ASC Subtopic 450-20$32,951
 $39,098
 $21,666
 $11,503
 $6,009
 $3,439
 $1,966
 $8,365
 $124,997
$38,916
 $40,027
 $16,937
 $9,162
 $6,037
 $2,504
 $1,653
 $8,308
 $123,544
Evaluated for impairment under FASB ASC Section 310-10-3516,223
 11,942
 9,625
 21,502
 5,167
 21
 —
 N/A
 64,480
13,944
 17,123
 6,544
 14,073
 2,450
 23
 —
 N/A
 54,157
$49,174
 $51,040
 $31,291
 $33,005
 $11,176
 $3,460
 $1,966
 $8,365
 $189,477
$52,860
 $57,150
 $23,481
 $23,235
 $8,487
 $2,527
 $1,653
 $8,308
 $177,701
                                  
Loans, net of unearned income at September 30, 2014:              
Loans, net of unearned income at March 31, 2015:Loans, net of unearned income at March 31, 2015:              
Measured for impairment under FASB ASC Subtopic 450-20$5,095,263
 $3,655,162
 $1,719,049
 $1,319,333
 $658,822
 $278,196
 $111,148
 N/A
 $12,836,973
$5,157,342
 $3,716,037
 $1,688,869
 $1,312,861
 $656,021
 $257,265
 $124,255
 N/A
 $12,912,650
Evaluated for impairment under FASB ASC Section 310-10-3561,716
 36,100
 13,987
 52,700
 28,906
 23
 —
 N/A
 193,432
69,759
 46,594
 12,754
 51,927
 21,785
 36
 —
 N/A
 202,855
$5,156,979
 $3,691,262
��$1,733,036
 $1,372,033
 $687,728
 $278,219
 $111,148
 N/A
 $13,030,405
$5,227,101
 $3,762,631
 $1,701,623
 $1,364,788
 $677,806
 $257,301
 $124,255
 N/A
 $13,115,505
                                  
Allowance for loan losses at September 30, 2013:              
Allowance for loan losses at March 31, 2014:Allowance for loan losses at March 31, 2014:              
Measured for impairment under FASB ASC Subtopic 450-20$43,262
 $38,025
 $18,482
 $11,494
 $8,648
 $2,911
 $2,982
 $19,246
 $145,050
$37,363
 $36,859
 $22,969
 $11,618
 $7,256
 $3,309
 $2,011
 $11,803
 $133,188
Evaluated for impairment under FASB ASC Section 310-10-3515,365
 13,870
 9,538
 22,263
 4,383
 17
 —
 N/A
 65,436
16,394
 13,704
 9,491
 21,711
 2,586
 15
 —
 N/A
 63,901
$58,627
 $51,895
 $28,020
 $33,757
 $13,031
 $2,928
 $2,982
 $19,246
 $210,486
$53,757
 $50,563
 $32,460
 $33,329
 $9,842
 $3,324
 $2,011
 $11,803
 $197,089
                                  
Loans, net of unearned income at September 30, 2013:              
Loans, net of unearned income at March 31, 2014:Loans, net of unearned income at March 31, 2014:              
Measured for impairment under FASB ASC Subtopic 450-20$5,001,851
 $3,593,038
 $1,758,492
 $1,277,200
 $543,268
 $296,122
 $97,749
 N/A
 $12,567,720
$5,075,556
 $3,528,857
 $1,726,342
 $1,279,783
 $555,852
 $270,004
 $96,009
 N/A
 $12,532,403
Evaluated for impairment under FASB ASC Section 310-10-3561,522
 52,232
 15,062
 50,269
 34,074
 20
 —
 N/A
 213,179
61,898
 45,273
 14,154
 51,682
 28,365
 17
 —
 N/A
 201,389
$5,063,373
 $3,645,270
 $1,773,554
 $1,327,469
 $577,342
 $296,142
 $97,749
 N/A
 $12,780,899
$5,137,454
 $3,574,130
 $1,740,496
 $1,331,465
 $584,217
 $270,021
 $96,009
 N/A
 $12,733,792
 
(1)The unallocated allowance, which was approximately 4%5% and 9%6% of the total allowance for credit losses as of September 30,March 31, 2015 and March 31, 2014, and September 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.

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)("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.

Based on an evaluation of all relevant credit quality factors, the Corporation recorded a $3.7 million negative provision for credit losses during the three months ended March 31, 2015, compared to a $2.5 million provision for credit losses for the same period in 2014. The $6.2 million improvement in the provision for credit losses was driven by an improvement in net charge-off levels, particularly a decrease in net charge-offs on pooled impaired loans across all loan portfolio segments. During the three months ended March 31, 2015, net charge-offs were $2.6 million, compared to $8.4 million for the three months ended March 31, 2014, and the allowance for loan loss allocations on impaired loans decreased $9.7 million, or 15.2%, compared to the three months ended March 31, 2014.
All loans individually evaluated for impairment under FASB ASC Section 310-10-35 are measured for losses on a quarterly basis.
As of September 30, 2014March 31, 2015 and December 31, 2013,2014, 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 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 September 30,March 31, 2015 and 2014, approximately 78% and 2013, approximately 77% and 89%79%, 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.


16

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:
September 30, 2014 December 31, 2013March 31, 2015 December 31, 2014
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$26,102
 $23,280
 $—
 $28,892
 $24,494
 $—
$35,586
 $30,462
 $—
 $25,802
 $23,236
 $—
Commercial - secured19,100
 15,283
 —
 23,890
 21,383
 —
17,832
 14,769
 —
 17,599
 14,582
 —
Real estate - home equity—
 —
 —
 399
 300
 —
Real estate - residential mortgage1,075
 1,075
 —
 —
 —
 —
4,858
 4,858
 —
 4,873
 4,873
 —
Construction - commercial residential20,725
 14,761
 —
 18,943
 13,740
 —
16,448
 13,643
 —
 18,041
 14,801
 —
Construction - commercial1,361
 1,245
 —
 2,996
 1,976
 —
829
 694
 —
 1,707
 1,581
 —
68,363
 55,644
 
 75,120
 61,893
 
75,553
 64,426
 
 68,022
 59,073
 
With a related allowance recorded:With a related allowance recorded:   
 
 
 
With a related allowance recorded:          
Real estate - commercial mortgage47,938
 38,436
 16,223
 43,282
 35,830
 14,444
48,636
 39,297
 13,944
 49,619
 40,023
 16,715
Commercial - secured29,939
 19,990
 11,336
 34,267
 22,324
 13,315
35,825
 30,565
 16,315
 24,824
 19,335
 12,165
Commercial - unsecured974
 827
 606
 1,113
 1,048
 752
1,417
 1,260
 808
 1,241
 1,089
 865
Real estate - home equity19,810
 13,987
 9,625
 20,383
 14,337
 9,059
18,035
 12,754
 6,544
 19,392
 13,458
 9,224
Real estate - residential mortgage62,182
 51,625
 21,502
 63,682
 51,097
 21,745
56,684
 47,069
 14,073
 56,607
 46,478
 18,592
Construction - commercial residential18,046
 11,990
 4,769
 25,769
 14,579
 3,493
13,267
 6,590
 2,169
 14,007
 7,903
 2,675
Construction - commercial1,834
 629
 260
 485
 195
 77
867
 577
 178
 1,501
 1,023
 459
Construction - other452
 281
 138
 719
 548
 301
452
 281
 103
 452
 281
 137
Consumer - direct18
 18
 16
 11
 11
 10
17
 17
 11
 19
 19
 17
Consumer - indirect5
 5
 5
 2
 2
 2
41
 19
 12
 20
 19
 18
181,198
 137,788
 64,480
 189,713
 139,971
 63,198
175,241
 138,429
 54,157
 167,682
 129,628
 60,867
Total$249,561
 $193,432
 $64,480
 $264,833
 $201,864
 $63,198
$250,794
 $202,855
 $54,157
 $235,704
 $188,701
 $60,867
As of September 30, 2014March 31, 2015 and December 31, 2013,2014, there were $55.6$64.4 million and $61.9$59.1 million, respectively, of impaired loans that did not have a related allowance for loan loss. The estimated fair values of the collateral forsecuring 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.

1917


The following table presents average impaired loans by class segment:
Three months ended September 30 Nine months ended September 30Three months ended March 31
2014 2013 2014 20132015 2014
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$23,056
 $78
 $27,120
 $113
 $23,524
 $244
 $29,630
 394
$26,849
 $91
 $23,993
 $86
Commercial - secured18,903
 29
 33,644
 49
 20,014
 98
 32,528
 131
14,676
 21
 21,125
 35
Commercial - unsecured—
 —
 —
 —
 —
 —
 33
 —
Real estate - home equity150
 —
 300
 —
 225
 1
 253
 1
—
 —
 300
 —
Real estate - residential mortgage1,236
 7
 747
 4
 697
 13
 869
 25
4,866
 28
 159
 1
Construction - commercial residential14,881
 51
 20,809
 66
 16,052
 173
 21,730
 200
14,222
 55
 17,223
 60
Construction - commercial1,060
 —
 2,021
 —
 1,514
 —
 3,500
 2
1,138
 —
 1,969
 —
59,286
 165
 84,641
 232
 62,026
 529
 88,543
 753
61,751
 195
 64,769
 182
With a related allowance recorded:                      
Real estate - commercial mortgage38,469
 130
 37,962
 158
 37,794
 394
 46,213
 563
39,660
 133
 37,119
 132
Commercial - secured19,764
 30
 22,771
 34
 21,404
 101
 29,317
 115
24,950
 36
 23,045
 38
Commercial - unsecured850
 1
 1,260
 1
 847
 3
 1,502
 4
1,175
 1
 845
 1
Real estate - home equity14,116
 30
 14,761
 17
 14,106
 78
 14,031
 49
13,106
 31
 14,096
 20
Real estate - residential mortgage51,283
 298
 51,365
 290
 51,257
 894
 52,581
 924
46,774
 273
 51,231
 294
Construction - commercial residential11,189
 38
 12,053
 39
 10,480
 100
 11,774
 121
7,247
 28
 9,771
 35
Construction - commercial942
 —
 525
 —
 567
 —
 1,641
 3
800
 —
 193
 —
Construction - other281
 —
 501
 —
 414
 —
 517
 1
281
 —
 546
 —
Consumer - direct18
 —
 18
 —
 15
 —
 21
 —
18
 —
 13
 —
Consumer - indirect6
 —
 3
 —
 4
 —
 1
 —
19
 —
 2
 —
Leasing and other and overdrafts—
 —
 —
 —
 —
 —
 14
 —
136,918
 527
 141,219
 539
 136,888
 1,570
 157,612
 1,780
134,030
 502
 136,861
 520
Total$196,204
 $692
 $225,860
 $771
 $198,914
 $2,099
 $246,155
 2,533
$195,781
 $697
 $201,630
 $702
                      
(1)All impaired loans, excluding accruing TDRs, were non-accrual loans. Interest income recognized for the three and nine months ended September 30,March 31, 2015 and 2014 and 2013 represents amounts earned on accruing TDRs.



2018


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, construction - commercial residential loans and construction - commercial loans:
Pass Special Mention Substandard or Lower TotalPass Special Mention Substandard or Lower Total
September 30, 2014 December 31, 2013 September 30, 2014 December 31, 2013 September 30, 2014 December 31, 2013 September 30, 2014 December 31, 2013March 31, 2015 December 31, 2014 March 31, 2015 December 31, 2014 March 31, 2015 December 31, 2014 March 31, 2015 December 31, 2014
(dollars in thousands)(dollars in thousands)
Real estate - commercial mortgage$4,877,904
 $4,763,987
 $113,650
 $141,013
 $165,425
 $196,922
 $5,156,979
 $5,101,922
$4,919,760
 $4,899,016
 $123,644
 $127,302
 $183,697
 $170,837
 $5,227,101
 $5,197,155
Commercial - secured3,243,731
 3,167,168
 138,136
 111,613
 129,273
 125,382
 3,511,140
 3,404,163
3,344,506
 3,333,486
 151,724
 120,584
 112,156
 110,544
 3,608,386
 3,564,614
Commercial - unsecured162,620
 209,836
 12,246
 11,666
 5,256
 2,755
 180,122
 224,257
142,536
 146,680
 3,331
 7,463
 8,378
 6,810
 154,245
 160,953
Total commercial - industrial, financial and agricultural3,406,351
 3,377,004
 150,382
 123,279
 134,529
 128,137
 3,691,262
 3,628,420
3,487,042
 3,480,166
 155,055
 128,047
 120,534
 117,354
 3,762,631
 3,725,567
Construction - commercial residential170,027
 146,041
 28,517
 31,522
 42,875
 57,806
 241,419
 235,369
173,833
 136,109
 20,662
 27,495
 37,038
 40,066
 231,533
 203,670
Construction - commercial370,187
 258,441
 1,469
 2,932
 5,550
 8,124
 377,206
 269,497
378,131
 409,631
 11,802
 12,202
 3,475
 5,586
 393,408
 427,419
Total construction (excluding Construction - other)540,214
 404,482
 29,986
 34,454
 48,425
 65,930
 618,625
 504,866
551,964
 545,740
 32,464
 39,697
 40,513
 45,652
 624,941
 631,089
$8,824,469
 $8,545,473
 $294,018
 $298,746
 $348,379
 $390,989
 $9,466,866
 $9,235,208
$8,958,766
 $8,924,922
 $311,163
 $295,046
 $344,744
 $333,843
 $9,614,673
 $9,553,811
% of Total93.2% 92.6% 3.1% 3.2% 3.7% 4.2% 100.0% 100.0%93.2% 93.4% 3.2% 3.1% 3.6% 3.5% 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 risk rating process allows management to identify riskier credits in a timely manner and to allocate resources to managing troubled accounts.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 otherlease receivables 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 for those loans, which bases the probability of default on this migration.

2119


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
September 30, 2014 December 31, 2013 September 30, 2014 December 31, 2013 September 30, 2014 December 31, 2013 September 30, 2014 December 31, 2013March 31, 2015 December 31, 2014 March 31, 2015 December 31, 2014 March 31, 2015 December 31, 2014 March 31, 2015 December 31, 2014
(dollars in thousands)(dollars in thousands)
Real estate - home equity$1,707,659
 $1,731,185
 $10,306
 $16,029
 $15,071
 $16,983
 $1,733,036
 $1,764,197
$1,674,544
 $1,711,017
 $12,624
 $10,931
 $14,455
 $14,740
 $1,701,623
 $1,736,688
Real estate - residential mortgage1,319,002
 1,282,754
 24,896
 23,279
 28,135
 31,347
 1,372,033
 1,337,380
1,312,299
 1,321,139
 23,894
 26,934
 28,595
 28,995
 1,364,788
 1,377,068
Construction - other68,822
 68,258
 —
 —
 281
 548
 69,103
 68,806
52,119
 59,180
 417
 —
 329
 332
 52,865
 59,512
Consumer - direct115,449
 126,666
 3,025
 3,586
 2,359
 2,391
 120,833
 132,643
97,959
 104,018
 2,919
 2,891
 2,390
 2,414
 103,268
 109,323
Consumer - indirect155,027
 147,017
 2,203
 3,312
 156
 152
 157,386
 150,481
152,286
 153,358
 1,653
 2,574
 94
 176
 154,033
 156,108
Total consumer270,476
 273,683
 5,228
 6,898
 2,515
 2,543
 278,219
 283,124
250,245
 257,376
 4,572
 5,465
 2,484
 2,590
 257,301
 265,431
Leasing and other and overdrafts110,491
 92,876
 269
 581
 388
 48
 111,148
 93,505
122,255
 118,550
 1,976
 523
 24
 133
 124,255
 119,206
$3,476,450
 $3,448,756
 $40,699
 $46,787
 $46,390
 $51,469
 $3,563,539
 $3,547,012
$3,411,462
 $3,467,262
 $43,483
 $43,853
 $45,887
 $46,790
 $3,500,832
 $3,557,905
% of Total97.6%
97.2%
1.2%
1.3%
1.3%
1.5%
100.0%
100.0%97.5% 97.5% 1.2% 1.2% 1.3% 1.3% 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:
September 30,
2014		 December 31,
2013		March 31,
2015		 December 31,
2014
(in thousands)(in thousands)
Non-accrual loans$126,420
 $133,753
$129,929
 $121,080
Accruing loans greater than 90 days past due17,428
 20,524
19,365
 17,402
Total non-performing loans143,848
 154,277
149,294
 138,482
Other real estate owned (OREO)13,489
 15,052
14,251
 12,022
Total non-performing assets$157,337
 $169,329
$163,545
 $150,504
The following table presents TDRs, by class segment:
September 30,
2014		 December 31,
2013		March 31,
2015		 December 31,
2014
(in thousands)(in thousands)
Real-estate - residential mortgage$30,850
 $28,815
$31,574
 $31,308
Real-estate - commercial mortgage18,869
 19,758
23,468
 18,822
Construction - commercial residential9,251
 10,117
7,791
 9,241
Commercial - secured5,042
 7,933
6,786
 5,170
Real estate - home equity2,904
 1,365
3,084
 2,975
Commercial - unsecured73
 112
189
 67
Consumer - indirect17
 19
Consumer - direct18
 11
17
 19
Consumer - indirect5
 —
Total accruing TDRs67,012
 68,111
72,926
 67,621
Non-accrual TDRs (1)27,724
 30,209
29,392
 24,616
Total TDRs$94,736
 $98,320
$102,318
 $92,237
 
(1)Included within non-accrual loans in the preceding table detailing non-performing assets.

As of September 30, 2014March 31, 2015 and December 31, 2013,2014, there were $4.6$7.1 million and $9.6$3.9 million, respectively, of commitments to lend additional funds to borrowers whose loans were modified under TDRs.


2220


The following table presents TDRs, by class segment as of September 30,March 31, 2015 and 2014 and 2013 that were modified during the three and nine months ended September 30, 2014March 31, 2015 and 2013:2014:
Three months ended September 30 Nine months ended September 302015 2014
2014 2013 2014 2013Number of Loans Recorded Investment Number of Loans Recorded Investment
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)
Commercial - secured8 $6,776
 — $—
Real estate - commercial mortgage1 $391
 4 $3,774
 10 $10,195
 13 $8,428
3 2,495
 7 7,470
Construction - commercial residential— —
 2 4,427
 2 1,914
 5 9,542
1 889
 1 548
Real estate - residential mortgage3 256
 5 836
 18 2,092
 44 6,861
4 610
 6 706
Real estate - home equity6 764
 14 1,071
 26 1,627
 42 2,928
10 492
 10 529
Commercial - secured3 1,214
 — —
 4 1,357
 8 592
Commercial - unsecured1 42
 — —
Consumer - indirect— —
 — —
 4 7
 — —
1 13
 3 1
Consumer - direct— —
 — —
 6 8
 9 2
— —
 4 4
Commercial - unsecured— —
 — —
 — —
 1 15
Total13 $2,625
 25 $10,108
 70 $17,200
 122 $28,368
28 $11,317
 31 $9,258

The following table presents TDRs, by class segment as of September 30,March 31, 2015 and 2014 and 2013 that were modified within the previous 12 months and had a post-modification payment default during the ninethree months ended September 30, 2014March 31, 2015 and 2013.2014. The Corporation defines a payment default as a single missed payment.
2014 20132015 2014
Number of Loans Recorded Investment Number of Loans Recorded InvestmentNumber of Loans Recorded Investment Number of Loans Recorded Investment
(dollars in thousands)(dollars in thousands)
Commercial - secured7 $7,888
 1 $11
Real estate - commercial mortgage2 1,659
 3 126
Construction - commercial residential1 1,366
 1 619
Real estate - home equity7 816
 14 1,432
Real estate - residential mortgage8 $1,147
 20 $3,460
8 748
 12 2,522
Real estate - home equity5 724
 18 1,419
Construction - commercial residential3 2,509
 1 608
Real estate - commercial mortgage1 35
 5 2,062
Commercial - secured3 415
 1 100
Consumer - direct— —
 3 1
Total20 $4,830
 48 $7,650
25 $12,477
 31 $4,710

2321


The following table presents past due status and non-accrual loans by portfolio segment and class segment:
September 30, 2014March 31, 2015
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$19,506
 $5,074
 $1,755
 $42,847
 $44,602
 $69,182
 $5,087,797
 $5,156,979
$20,528
 $5,620
 $40
 $46,291
 $46,331
 $72,479
 $5,154,622
 $5,227,101
Commercial - secured7,530
 1,215
 2,292
 30,231
 32,523
 41,268
 3,469,872
 3,511,140
8,056
 1,002
 3,646
 38,548
 42,194
 51,252
 3,557,134
 3,608,386
Commercial - unsecured1,528
 209
 —
 754
 754
 2,491
 177,631
 180,122
832
 58
 —
��1,071
 1,071
 1,961
 152,284
 154,245
Total commercial - industrial, financial and agricultural9,058
 1,424
 2,292
 30,985
 33,277
 43,759
 3,647,503
 3,691,262
8,888
 1,060
 3,646
 39,619
 43,265
 53,213
 3,709,418
 3,762,631
Real estate - home equity8,094
 2,212
 3,988
 11,083
 15,071
 25,377
 1,707,659
 1,733,036
10,347
 2,277
 4,785
 9,670
 14,455
 27,079
 1,674,544
 1,701,623
Real estate - residential mortgage17,102
 7,794
 6,285
 21,850
 28,135
 53,031
 1,319,002
 1,372,033
16,375
 7,519
 8,242
 20,353
 28,595
 52,489
 1,312,299
 1,364,788
Construction - commercial residential215
 —
 205
 17,500
 17,705
 17,920
 223,499
 241,419
1,559
 151
 98
 12,442
 12,540
 14,250
 217,283
 231,533
Construction - commercial—
 —
 —
 1,874
 1,874
 1,874
 375,332
 377,206
—
 —
 —
 1,271
 1,271
 1,271
 392,137
 393,408
Construction - other—
 —
 —
 281
 281
 281
 68,822
 69,103
417
 —
 48
 281
 329
 746
 52,119
 52,865
Total real estate - construction215
 —
 205
 19,655
 19,860
 20,075
 667,653
 687,728
1,976
 151
 146
 13,994
 14,140
 16,267
 661,539
 677,806
Consumer - direct2,032
 993
 2,359
 —
 2,359
 5,384
 115,449
 120,833
1,978
 941
 2,390
 —
 2,390
 5,309
 97,959
 103,268
Consumer - indirect1,815
 388
 156
 —
 156
 2,359
 155,027
 157,386
1,422
 231
 92
 2
 94
 1,747
 152,286
 154,033
Total consumer3,847
 1,381
 2,515
 —
 2,515
 7,743
 270,476
 278,219
3,400
 1,172
 2,482
 2
 2,484
 7,056
 250,245
 257,301
Leasing and other and overdrafts185
 84
 388
 —
 388
 657
 110,491
 111,148
1,666
 310
 24
 —
 24
 2,000
 122,255
 124,255
Total$58,007
 $17,969
 $17,428
 $126,420
 $143,848
 $219,824
 $12,810,581
 $13,030,405
$63,180
 $18,109
 $19,365
 $129,929
 $149,294
 $230,583
 $12,884,922
 $13,115,505
December 31, 2013December 31, 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$15,474
 $4,009
 $3,502
 $40,566
 $44,068
 $63,551
 $5,038,371
 $5,101,922
$14,399
 $3,677
 $800
 $44,437
 $45,237
 $63,313
 $5,133,842
 $5,197,155
Commercial - secured8,916
 1,365
 1,311
 35,774
 37,085
 47,366
 3,356,797
 3,404,163
4,839
 958
 610
 28,747
 29,357
 35,154
 3,529,460
 3,564,614
Commercial - unsecured332
 125
 —
 936
 936
 1,393
 222,864
 224,257
395
 65
 9
 1,022
 1,031
 1,491
 159,462
 160,953
Total commercial - industrial, financial and agricultural9,248
 1,490
 1,311
 36,710
 38,021
 48,759
 3,579,661
 3,628,420
5,234
 1,023
 619
 29,769
 30,388
 36,645
 3,688,922
 3,725,567
Real estate - home equity13,555
 2,474
 3,711
 13,272
 16,983
 33,012
 1,731,185
 1,764,197
8,048
 2,883
 4,257
 10,483
 14,740
 25,671
 1,711,017
 1,736,688
Real estate - residential mortgage16,969
 6,310
 9,065
 22,282
 31,347
 54,626
 1,282,754
 1,337,380
18,789
 8,145
 8,952
 20,043
 28,995
 55,929
 1,321,139
 1,377,068
Construction - commercial residential—
 645
 346
 18,202
 18,548
 19,193
 216,176
 235,369
160
 —
 —
 13,463
 13,463
 13,623
 190,047
 203,670
Construction - commercial14
 —
 —
 2,171
 2,171
 2,185
 267,312
 269,497
—
 —
 —
 2,604
 2,604
 2,604
 424,815
 427,419
Construction - other—
 —
 —
 548
 548
 548
 68,258
 68,806
—
 —
 51
 281
 332
 332
 59,180
 59,512
Total real estate - construction14
 645
 346
 20,921
 21,267
 21,926
 551,746
 573,672
160
 —
 51
 16,348
 16,399
 16,559
 674,042
 690,601
Consumer - direct2,091
 1,495
 2,391
 —
 2,391
 5,977
 126,666
 132,643
2,034
 857
 2,414
 —
 2,414
 5,305
 104,018
 109,323
Consumer - indirect2,864
 448
 150
 2
 152
 3,464
 147,017
 150,481
2,156
 418
 176
 —
 176
 2,750
 153,358
 156,108
Total consumer4,955
 1,943
 2,541
 2
 2,543
 9,441
 273,683
 283,124
4,190
 1,275
 2,590
 —
 2,590
 8,055
 257,376
 265,431
Leasing and other and overdrafts559
 22
 48
 —
 48
 629
 92,876
 93,505
357
 166
 133
 —
 133
 656
 118,550
 119,206
Total$60,774
 $16,893
 $20,524
 $133,753
 $154,277
 $231,944
 $12,550,276
 $12,782,220
$51,177
 $17,169
 $17,402
 $121,080
 $138,482
 $206,828
 $12,904,888
 $13,111,716


2422


NOTE F6 – Mortgage Servicing Rights
The following table summarizes the changes in mortgage servicing rights (MSRs)("MSRs"), which are included in other assets on the consolidated balance sheets:
Three months ended September 30 Nine months ended September 30Three months ended March 31
2014 2013 2014 20132015 2014
(in thousands)(in thousands)
Amortized cost:          
Balance at beginning of period$42,586
 $41,750
 $42,452
 $39,737
$42,148
 $42,452
Originations of mortgage servicing rights1,456
 2,909
 3,807
 10,371
1,557
 1,115
Amortization(1,664) (2,031) (3,881) (7,480)(1,902) (1,899)
Balance at end of period$42,378
 $42,628
 $42,378
 $42,628
$41,803
 $41,668
       
Valuation allowance:       
Balance at beginning of period$—
 $(1,690) $—
 $(3,680)
Reversals—
 1,690
 —
 3,680
Balance at end of period$—
 $—
 $—
 $—
       
Net MSRs at end of period$42,378
 $42,628
 $42,378
 $42,628
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 nine months ended September 30,as of March 31, 2015 or 2014. A decrease to the valuation allowance of $1.7 million and $3.7 million was recorded for the three and nine months ended September 30, 2013.
The Corporation accounts for MSRs at the lower of amortized cost or fair value. As of September 30, 2014,March 31, 2015, the estimated fair value of MSRs was $47.9$43.6 million,, which exceeded their book value. Therefore, no increase to the valuation allowance was necessary during the three or nine months ended September 30, 2014.

NOTE G7 – Stock-Based Compensation
The Corporation grants equity awards to employees, consisting of stock options, restricted stock, RSUs and PSUs under its Amended and Restated Equity and Cash Incentive Compensation Plan ("Employee Equity Plan"). In addition, employees may purchase stock under the Corporation’s Employee Stock Purchase Plan. 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 equityCompensation expense for PSUs is also recognized over the period during which employees are required to provide service in exchange for such awards, however, compensation expense may vary based on the expectations for actual performance relative to employees, consisting of stock options, 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.defined performance measures.

The Corporation also grants stock equity awards to non-employee members of theits board of directors under itsthe 2011 Directors’ Equity Participation Plan (Directors’ 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 OptionEquity Plan are generally granted annually and become fully vested over or after a three year-year vesting period. The vesting period for non-performance based awards represents the period during which employees are required to provide service in exchange for such awards. Equity awards under the Directors' Plan generally vest immediately upon grant. Certain events, as defined in the Employee OptionEquity 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 September 30 Nine months ended September 30Three months ended March 31
2014 2013 2014 20132015 2014
(in thousands)(in thousands)
Stock-based compensation expense$1,288
 $979
 $4,310
 $4,186
$1,071
 $1,033
Tax benefit(358) (272) (1,067) (1,183)(292) (263)
Stock-based compensation expense, net of tax$930
 $707
 $3,243
 $3,003
$779
 $770

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 ofFair values for 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.

During the three and nine months ended September 30, 2014, the Corporation granted approximately 389,000 PSUs, 289,000 stock options and 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'sCorporation’s stock on the date of grant.grant and earn dividends during the vesting period, which are forfeitable if the awards

23

do not vest. 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 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 September 30, 2014March 31, 2015, the Employee OptionEquity Plan had 11.211.5 million shares reserved for future grants through 2023. During the nine months ended September 30, 2014, the Corporation granted approximately 13,000 shares of stock under its Directors' Plan. As of September 30, 2014, and the Directors’ Plan had approximately 424,000410,000 shares reserved for future grants through 2021. On April 1, 2015, the Corporation granted approximately 403,000 PSUs and 139,500 RSUs under its Employee Equity Plan.

NOTE H8 – Employee Benefit Plans
The Corporation maintains a defined benefit pension plan (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 a third-party actuary, consisted of the following components:
Three months ended September 30 Nine months ended September 30Three months ended March 31
2014 2013 2014 20132015 2014
(in thousands)(in thousands)
Service cost (1)$92
 $51
 $276
 $153
$145
 $92
Interest cost853
 772
 2,559
 2,316
851
 853
Expected return on plan assets(811) (800) (2,432) (2,400)(752) (811)
Net amortization and deferral244
 596
 732
 1,788
782
 244
Net periodic benefit cost$378
 $619
 $1,135
 $1,857
$1,026
 $378
 
(1)
The Pension Plan service cost recorded for the three and nine months ended September 30, 2014March 31, 2015 and 20132014, 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)("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 induring the three months ended March 31, 2014, as determined by a third-party actuary and included as a component ofreduction to salaries and employee benefits on the consolidated statements of income. The gain resulted from the recognition of the remaining prior service cost prior to the amendment date as of December 31, 2013. In addition, this amendment resulted in a $3.3$3.4 million decrease in the accumulated postretirement benefit obligation and a corresponding increase in unrecognized prior service cost credits.

26


The net periodic benefit (income) cost (benefit) of the Corporation’s Postretirement Plan as determined by consulting actuaries, consisted of the following components, excluding the impact of the $1.5 million plan amendment gain:gain in 2014:
Three months ended September 30 Nine months ended September 30Three months ended March 31
2014 2013 2014 20132015 2014
(in thousands)(in thousands)
Service cost (1)$—
 $57
 $15
 $171
$—
 $15
Interest cost48
 81
 157
 243
52
 61
Net accretion and deferral(84) (91) (263) (273)(65) (95)
Net periodic benefit (income) cost$(36) $47
 $(91) $141
Net periodic benefit$(13) $(19)

(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.


24

NOTE I9 – 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 counterparty credit risk through its credit approval processes, monitoring procedures and obtaining adequate collateral, when the Corporation determines it is appropriate to do so.so and in accordance with counterparty contracts.
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 valuesvalue within other assets and other 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.

2725


The following table presents a summary of the notional amounts and fair values of derivative financial instruments:
September 30, 2014 December 31, 2013March 31, 2015 December 31, 2014
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$92,136
 $1,324
 $75,217
 $867
$151,389
 $2,509
 $89,655
 $1,391
Negative fair values937
 (16) 11,393
 (59)187
 (2) 301
 (6)
Net interest rate locks with customers
 1,308
 
 808

 2,507
 
 1,385
Forward Commitments              
Positive fair values6,165
 23
 87,904
 1,263
Negative fair values98,323
 (392) 2,373
 (5)144,370
 (610) 93,802
 (1,164)
Net forward commitments  (369)   1,258
Interest Rate Swaps with Customers              
Positive fair values360,442
 10,027
 111,899
 2,105
535,786
 29,035
 468,080
 19,716
Negative fair values54,308
 (615) 105,673
 (2,993)8,000
 (113) 25,418
 (198)
Net interest rate swaps with customers  9,412
   (888)  28,922
   19,518
Interest Rate Swaps with Dealer Counterparties              
Positive fair values54,308
 615
 105,673
 2,993
8,000
 113
 25,418
 198
Negative fair values360,442
 (10,027) 111,899
 (2,105)535,786
 (29,035) 468,080
 (19,716)
Net interest rate swaps with dealer counterparties  (9,412)   888
  (28,922)   (19,518)
Foreign Exchange Contracts with Customers              
Positive fair values17,434
 959
 2,150
 24
12,642
 1,411
 11,616
 810
Negative fair values6,273
 (424) 12,775
 (343)7,033
 (475) 5,250
 (441)
Net foreign exchange contracts with customers  535
   (319)  936
   369
Foreign Exchange Contracts with Correspondent Banks              
Positive fair values6,554
 428
 17,348
 498
8,053
 952
 5,287
 446
Negative fair values16,988
 (871) 5,872
 (48)14,825
 (1,706) 13,572
 (876)
Net foreign exchange contracts with correspondent banks  (443)   450
  (754)   (430)
Net derivative fair value asset  $1,031
   $2,197
  $2,079
   $160

The following table presents a summary of the fair value gains and losses on derivative financial instruments:
Three months ended September 30 Nine months ended September 30Three months ended March 31
2014 2013 2014 20132015 2014
(in thousands)(in thousands)
Interest rate locks with customers$(1,092) $4,717
 $500
 $(3,707)$1,122
 $389
Forward commitments1,374
 (12,244) (1,627) (1,969)554
 (1,498)
Interest rate swaps with customers(40) 1,009
 10,300
 (5,270)9,404
 4,205
Interest rate swaps with dealer counterparties40
 (1,009) (10,300) 5,270
(9,404) (4,205)
Foreign exchange contracts with customers557
 (344) 854
 (175)567
 192
Foreign exchange contracts with correspondent banks(527) (50) (893) 910
(324) (268)
Net fair value gains (losses) on derivative financial instruments$312
 $(7,921) $(1,166) $(4,941)$1,919
 $(1,185)


2826


NOTE J10 – 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,9, "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 recordedclassified within interest income on the consolidated statements of income.
The following table presents a summary of the Corporation’s mortgage loans held for sale:
September 30,
2014		 December 31,
2013		March 31,
2015		 December 31,
2014
(in thousands)(in thousands)
Cost$24,690
 $21,172
$33,421
 $17,080
Fair value25,212
 21,351
34,124
 17,522
During the three months ended September 30,March 31, 2015 and 2014, losses related to changes in fair values of mortgage loans held for sale were $472,000, compared to $343,000 of gains for the nine months ended September 30, 2014. During the three months ended September 30, 2013,Corporation recorded gains related to changes in fair values of mortgage loans held for sale were $2.6 million, compared to losses of $784,000 for the nine months ended September 30, 2013.$261,000 and $297,000, respectively.

NOTE K11 – 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,9, "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, theThe 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 agreementsforeign currency exchange contracts in the event of default. For additional details, see Note I,9, "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.













2927


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)
September 30, 2014       
March 31, 2015       
Interest rate swap derivative assets$10,642
 $(636) $—
 $10,006
$29,148
 $(113) $—
 $29,035
Foreign exchange derivative assets with correspondent banks428
 (428) —
 —
952
 (952) —
 —
Total$11,070
 $(1,064) $—
 $10,006
$30,100
 $(1,065) $—
 $29,035
              
Interest rate swap derivative liabilities$10,642
 $(636) $(9,480) $526
$29,148
 $(113) $(28,070) $965
Foreign exchange derivative liabilities with correspondent banks871
 (428) (310) 133
1,706
 (952) (940) (186)
Total$11,513
 $(1,064) $(9,790) $659
$30,854
 $(1,065) $(29,010) $779
              
December 31, 2013       
December 31, 2014       
Interest rate swap derivative assets$5,098
 $(2,104) $—
 $2,994
$19,914
 $(206) $—
 $19,708
Foreign exchange derivative assets with correspondent banks446
 (446) —
 —
Total$20,360
 $(652) $—
 $19,708
              
Interest rate swap derivative liabilities$5,098
 $(2,104) $(730) $2,264
$19,914
 $(206) $(19,210) $498
Foreign exchange derivative liabilities with correspondent banks876
 (446) (310) 120
Total$20,790
 $(652) $(19,520) $618

(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 L12 – 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.
The outstanding amounts of commitments to extend credit and letters of credit were as follows:
September 30,
2014		 December 31, 2013March 31,
2015		 December 31, 2014
(in thousands)(in thousands)
Commitments to extend credit$4,437,607
 $4,379,578
$4,575,869
 $4,389,064
Standby letters of credit382,526
 391,445
379,947
 382,465
Commercial letters of credit30,067
 36,344
36,049
 32,304
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,5, "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)("Fannie Mae") and the Federal Home Loan Mortgage Corporation (Freddie Mac)("Freddie Mac"). The Corporation also sells a portion of prime loans to non-government sponsored agency investors.

28


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 reimburse the investor for a credit loss incurred on a loan, if it is determined that the representations and warranties have not been

30


met. Such repurchases or reimbursements generally result from an underwriting or documentation deficiency. As of September 30, 2014March 31, 2015 and December 31, 2013,2014, total outstanding repurchase requests totaled $543,000$803,000 and $8.8 million,$917,000, respectively. During the first quarter of 2014, the Corporation entered into a settlement agreement with a secondary market investor. Under this agreement, the Corporation agreed

From 2000 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 to operating risk loss on the consolidated statements of income during the nine months ended September 30, 2014.
From 2000 to 2011,, the Corporation sold loans to the Federal Home Loan Bank of Pittsburgh under its Mortgage Partnership Finance Program (MPF Program)("MPF Program"). No loans were sold under this program during the ninethree months ended September 30, 2014March 31, 2015 or during 2013 or 2012.2014. 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)Account," or "FLA" balance, up to specified amounts. The FLA is funded by the Federal Home Loan Bank of Pittsburgh based on a percentage of the outstanding principal balance of loans sold. As of September 30, 2014,March 31, 2015, the unpaid principal balance of loans sold under the MPF Program was approximately $158 million.$148 million. As of September 30, 2014March 31, 2015 and December 31, 2013,2014, the reserve for estimated credit losses related to loans sold under the MPF Program was $2.4$2.2 million and $2.5$2.3 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.methodology for residential mortgage loans.

As of September 30, 2014March 31, 2015 and December 31, 2013,2014, the total reserve for losses on residential mortgage loans sold was $3.3$3.0 million and $8.6$3.2 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 September 30, 2014March 31, 2015 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, established through charges to earnings, in the future.
Regulatory Matters
In July
As disclosed by the Corporation in Part II, Item 9B of its Annual Report on Form 10-K for the year ended December 31, 2014 threefiled with the SEC on February 25, 2015, in February 2015, Fulton Bank of New Jersey ("FBNJ"), a wholly owned banking subsidiariessubsidiary 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 OfficeFDIC consenting to the issuance by the FDIC of a Consent Order (the "FDIC Consent Order"). In addition, in February 2015, FBNJ entered into a Consent Order with the ComptrollerCommissioner of Banking and Insurance for the Currency, relatingState of New Jersey (the "New Jersey Consent Order") and, together with the FDIC Consent Order, the "Consent Orders"). The Consent Orders impose substantially identical requirements and relate to identified deficiencies in a centralized Bank Secrecy Act and anti-money laundering compliance program (the "BSA/AML 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. The Consent Orders generally require, among other things, that FBNJ review, assess and take actions to strengthen and enhance the BSA/AML Compliance Program, including increasing oversight of the BSA/AML Compliance Program by the Board of Directors of FBNJ; designating a qualified Bank Secrecy Act officer that is acceptable to the FDIC and the Commissioner of Banking and Insurance for the State of New Jersey, that reports monthly to the Board of Directors of FBNJ and is provided with sufficient authority and resources to implement and enforce the BSA/AML Compliance Program; enhancing the periodic risk assessment process relating to the BSA/AML Requirements; revising internal controls designed to ensure compliance with the BSA/AML Requirements, including enhancing customer due diligence procedures and establishing enhanced due diligence procedures for higher-risk customers; and reviewing and enhancing procedures for monitoring for, identifying, investigating and reporting suspicious activity, or known or suspected violations of law in accordance with the BSA/AML Requirements.

The Corporation and each of its other banking subsidiaries are subject to similar regulatory enforcement orders issued during 2014 by their respective bank regulatory agencies relating to identified deficiencies in the BSA/AML Compliance Program. Information relating to the regulatory enforcement orders issued during 2014 was disclosed by the Corporation in a Current ReportReports on Form 8-K filed with the SEC on July 18, 2014.  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 September 2014, the Corporation and its wholly owned banking subsidiary, Lafayette Ambassador Bank (Lafayette), entered 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 (Reserve Board), as disclosed by the Corporation in a Current Report on Form 8-K filed with the SEC on September 9, 2014. The Cease and Desist Order requires, among other things, that the Corporation and Lafayette strengthen the BSA/AML Compliance Program and imposes requirements similar to those set forth in the Consent Orders. In addition, the Cease and Desist Order requires the Corporation to engage an independent third-party firm to conduct a comprehensive assessment of the BSA/AML Compliance Program, and that Lafayette engage an independent third-party firm to conduct a retrospective review of account and transaction activity from January 1, 2014 to June 30, 2014 associated with high-risk customers to determine whether suspicious activity was properly identified and reported in accordance with the BSA/AML requirements. Based on the results of this review the Reserve Board may require a review of transactions for additional time periods. Further, because the Consent Orders and the Cease and Desist Order relate to the BSA/AML Compliance Program, which is operated jointly for all of the Corporation’s subsidiary banks, management anticipates that one or both of the Corporation's other subsidiary banks will also become subject to an enforcement action related to the BSA/AML Requirements, and the provisions of any such enforcement action may differ from those of the Consent Orders and Cease and Desist Order.December 29, 2014.

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.

3129



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 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.

NOTE M13 – 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:
September 30, 2014March 31, 2015
Level 1 Level 2 Level 3 TotalLevel 1 Level 2 Level 3 Total
(in thousands)(in thousands)
Mortgage loans held for sale$—
 $25,212
 $—
 $25,212
$—
 $34,124
 $—
 $34,124
Available for sale investment securities:              
Equity securities45,278
 —
 —
 45,278
40,608
 —
 —
 40,608
U.S. Government securities—
 200
 —
 200
U.S. Government sponsored agency securities—
 240
 —
 240
—
 203
 —
 203
State and municipal securities—
 257,616
 —
 257,616
—
 224,342
 —
 224,342
Corporate debt securities—
 93,071
 8,356
 101,427
—
 92,778
 4,904
 97,682
Collateralized mortgage obligations—
 955,040
 —
 955,040
—
 867,876
 —
 867,876
Mortgage-backed securities—
 962,335
 —
 962,335
—
 930,159
 —
 930,159
Auction rate securities—
 —
 148,473
 148,473
—
 —
 98,932
 98,932
Total available for sale investments45,278
 2,268,502
 156,829
 2,470,609
40,608
 2,115,358
 103,836
 2,259,802
Other assets17,475
 11,988
 —
 29,463
19,198
 31,657
 —
 50,855
Total assets$62,753
 $2,305,702
 $156,829
 $2,525,284
$59,806
 $2,181,139
 $103,836
 $2,344,781
Other liabilities$17,376
 $11,050
 $—
 $28,426
$19,009
 $29,760
 $—
 $48,769

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December 31, 2013December 31, 2014
Level 1 Level 2 Level 3 TotalLevel 1 Level 2 Level 3 Total
(in thousands)(in thousands)
Mortgage loans held for sale$—
 $21,351
 $—
 $21,351
$—
 $17,522
 $—
 $17,522
Available for sale investment securities:              
Equity securities46,201
 —
 —
 46,201
47,623
 —
 —
 47,623
U.S. Government securities—
 525
 —
 525
—
 200
 —
 200
U.S. Government sponsored agency securities—
 726
 —
 726
—
 214
 —
 214
State and municipal securities—
 284,849
 —
 284,849
—
 245,215
 —
 245,215
Corporate debt securities—
 89,662
 9,087
 98,749
—
 90,126
 7,908
 98,034
Collateralized mortgage obligations—
 1,032,398
 —
 1,032,398
—
 902,313
 —
 902,313
Mortgage-backed securities—
 945,712
 —
 945,712
—
 928,831
 —
 928,831
Auction rate securities—
 —
 159,274
 159,274
—
 —
 100,941
 100,941
Total available for sale investments46,201
 2,353,872
 168,361
 2,568,434
47,623
 2,166,899
 108,849
 2,323,371
Other assets15,779
 7,227
 —
 23,006
17,682
 21,305
 —
 38,987
Total assets$61,980
 $2,382,450
 $168,361
 $2,612,791
$65,305
 $2,205,726
 $108,849
 $2,379,880
Other liabilities$15,648
 $5,161
 $—
 $20,809
$17,737
 $21,084
 $—
 $38,821
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 September 30, 2014March 31, 2015 and December 31, 20132014 were measured based on the price that secondary market investors were offering for loans with similar characteristics. See Note 10, "Fair Value Option" for details related to the Corporation’s election to measure assets and liabilities at fair value.
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%80% 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 ($39.334.7 million at September 30, 2014March 31, 2015 and $40.6$41.8 million at December 31, 2013)2014) and other equity investments ($6.05.9 million at September 30, 2014March 31, 2015 and $5.6$5.8 million at December 31, 2013)2014). 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 ($50.350.2 million at September 30, 2014March 31, 2015 and $50.0 million at December 31, 2013)2014), single-issuer trust preferred securities issued by financial institutions ($44.142.9 million at September 30, 2014March 31, 2015 and $40.5$42.0 million at December 31, 2013)2014), pooled trust preferred securities issued by financial institutions ($4.51.1 million at September 30, 2014March 31, 2015 and $5.3$4.1 million at December 31, 2013)2014) and other corporate debt issued by non-financial institutions ($2.63.6 million at September 30, 2014March 31, 2015 and $1.9 million at December 31, 2013)2014).
Level 2 investments include the Corporation’s holdings of subordinated debt, other corporate debt issued by non-financial institutions and $40.2$39.0 million and $36.7$38.2 million of single-issuer trust preferred securities held at

3331


September 30, 2014March 31, 2015 and December 31, 2013,2014, 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 ($3.93.8 million at September 30, 2014March 31, 2015 and $3.8 million at December 31, 2013)2014). 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.
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 ($16.116.8 million at September 30, 2014March 31, 2015 and $15.3$16.4 million at December 31, 2013)2014) and the fair value of foreign currency exchange contracts ($1.42.4 million at September 30, 2014March 31, 2015 and $522,000$1.3 million at December 31, 2013)2014). 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 ($1.32.5 million at September 30, 2014March 31, 2015 and $2.1$1.4 million at December 31, 2013)2014) and the fair value of interest rate swaps ($10.629.1 million at September 30, 2014March 31, 2015 and $5.1$19.9 million at December 31, 2013)2014). 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,9, "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 ($16.116.8 million at September 30, 2014March 31, 2015 and $15.3$16.4 million at December 31, 2013)2014) and the fair value of foreign currency exchange contracts ($1.32.2 million at September 30, 2014March 31, 2015 and $391,000$1.3 million at December 31, 2013)2014). 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 ($408,000612,000 at September 30, 2014March 31, 2015 and $64,000$1.2 million at December 31, 2013)2014) and the fair value of interest rate swaps ($10.629.1 million at September 30, 2014March 31, 2015 and $5.1$19.9 million at December 31, 2013)2014). The fair values of these liabilities are determined in the same manner as the related assets, as described under the heading "Other assets" above.






3432


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 September 30, 2014
 Pooled Trust
Preferred
Securities		 Single-issuer
Trust Preferred
Securities		 ARCs
 (in thousands)
Balance at June 30, 2014$4,275
 $3,820
 $146,931
Realized adjustment to fair value (1)(18) —
 —
Unrealized adjustment to fair value (2)230
 47
 1,280
Discount accretion (3)—
 2
 262
Balance at September 30, 2014$4,487
 $3,869
 $148,473
      
 Three months ended September 30, 2013
Balance at June 30, 2013$5,391
 $3,670
 $152,592
Sales—
 —
 (25)
Realized adjustment to fair value (1)(97) —
 —
Unrealized adjustment to fair value (2)(103) 108
 1,983
Settlements - calls—
 —
 (317)
Discount accretion (3)—
 2
 277
Balance at September 30, 2013$5,191
 $3,780
 $154,510
      
 Nine months ended September 30, 2014
 Pooled Trust
Preferred
Securities		 Single-issuer
Trust Preferred
Securities		 ARCs
 (in thousands)
Balance at December 31, 2013$5,306
 $3,781
 $159,274
Sales(1,394) —
 (11,912)
Realized adjustment to fair value (1)(18) —
 —
Unrealized adjustment to fair value (2)789
 83
 1,528
Settlements - calls(200) —
 (1,081)
Discount accretion (3)4
 5
 664
Balance at September 30, 2014$4,487
 $3,869
 $148,473
      
 Nine months ended September 30, 2013
Balance at December 31, 2012$6,927
 $3,360
 $149,339
Sales(4,987) —
 (25)
Realized adjustment to fair value (1)1,604
 —
 —
Unrealized adjustment to fair value (2)1,771
 412
 7,171
Settlements - calls(124) —
 (2,725)
Discount accretion (3)—
 8
 750
Balance at September 30, 2013$5,191
 $3,780
 $154,510
      
 Three months ended March 31, 2015
 Pooled Trust
Preferred
Securities		 Single-issuer
Trust Preferred
Securities		 ARCs
 (in thousands)
Balance at December 31, 2014$4,088
 $3,820
 $100,941
Sales(3,079) —
 —
Unrealized adjustment to fair value (1)190
 (2) 332
Settlements - calls(117) —
 (2,446)
Discount accretion (2)2
 2
 105
Balance at March 31, 2015$1,084
 $3,820
 $98,932
      
 Three months ended March 31, 2014
Balance at December 31, 2013$5,306
 $3,781
 $159,274
Sales—
 —
 (11,912)
Unrealized adjustment to fair value (1)521
 38
 124
Settlements - calls(172) —
 —
Discount accretion (2)4
 1
 227
Balance at March 31, 2014$5,659
 $3,820
 $147,713

(1)Realized adjustments to fair value represent credit related other-than-temporary impairment charges and gains on sales of investment securities, both included
as components of investment securities gains on the consolidated statements of income.
(2)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.
(3)(2)Included as a component of net interest income on the consolidated statements of income.

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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:
September 30, 2014March 31, 2015
Level 1 Level 2 Level 3 TotalLevel 1 Level 2 Level 3 Total
(in thousands)(in thousands)
Net loans$—
 $—
 $128,952
 $128,952
$—
 $—
 $148,698
 $148,698
Other financial assets—
 —
 55,867
 55,867
—
 —
 56,054
 56,054
Total assets$—
 $—
 $184,819
 $184,819
$—
 $—
 $204,752
 $204,752
December 31, 2013December 31, 2014
Level 1 Level 2 Level 3 TotalLevel 1 Level 2 Level 3 Total
(in thousands)(in thousands)
Net loans$—
 $—
 $138,666
 $138,666
$—
 $—
 $127,834
 $127,834
Other financial assets—
 —
 57,504
 57,504
—
 —
 54,170
 54,170
Total assets$—
 $—
 $196,170
 $196,170
$—
 $—
 $182,004
 $182,004
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,5, "Loans and Allowance for Credit Losses," for additional details.
Other financial assets – This category includes OREO ($13.514.3 million at September 30, 2014March 31, 2015 and $15.1$12.0 million at December 31, 2013)2014) and MSRs ($42.441.8 million at September 30, 2014March 31, 2015 and $42.5$42.1 million at December 31, 2013)2014), both classified as Level 3 assets.

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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 September 30, 2014March 31, 2015 valuation were 12.0%12.6% and 9.1%9.6%, respectively. Management tests the reasonableness of the significant inputs to the third-party valuation in comparison to market data.










36


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 September 30, 2014March 31, 2015 and December 31, 2013.2014. In addition, a general description of the methods and assumptions used to estimate such fair values is also provided.
September 30, 2014 December 31, 2013March 31, 2015 December 31, 2014
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$220,946
 $220,946
 $218,540
 $218,540
$91,870
 $91,870
 $105,702
 $105,702
Interest-bearing deposits with other banks291,523
 291,523
 163,988
 163,988
637,973
 637,973
 358,130
 358,130
Federal Reserve Bank and Federal Home Loan Bank stock86,056
 86,056
 84,173
 84,173
65,694
 65,694
 64,953
 64,953
Loans held for sale (1)25,212
 25,212
 21,351
 21,351
34,124
 34,124
 17,522
 17,522
Available for sale investment securities (1)2,470,609
 2,470,609
 2,568,434
 2,568,434
2,259,802
 2,259,802
 2,323,371
 2,323,371
Loans, net of unearned income (1)13,030,405
 12,909,164
 12,782,220
 12,688,774
13,115,505
 13,078,115
 13,111,716
 13,030,543
Accrued interest receivable43,544
 43,544
 44,037
 44,037
42,216
 42,216
 41,818
 41,818
Other financial assets (1)157,664
 157,664
 146,933
 146,933
178,496
 178,496
 169,764
 169,764
FINANCIAL LIABILITIES              
Demand and savings deposits$10,342,243
 $10,342,243
 $9,573,264
 $9,573,264
$10,467,077
 $10,467,077
 $10,296,055
 $10,296,055
Time deposits2,991,384
 2,986,545
 2,917,922
 2,927,374
3,047,420
 3,058,030
 3,071,451
 3,069,883
Short-term borrowings564,952
 564,952
 1,258,629
 1,258,629
410,105
 410,105
 329,719
 329,719
Accrued interest payable17,425
 17,425
 15,218
 15,218
18,357
 18,357
 18,045
 18,045
Other financial liabilities (1)147,121
 147,121
 124,440
 124,440
193,924
 193,924
 172,786
 172,786
Federal Home Loan Bank advances and long-term debt1,018,289
 1,012,741
 883,584
 875,984
1,094,517
 1,104,738
 1,139,413
 1,142,980
 
(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.
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.
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


34

Federal Reserve Bank and Federal 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.

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NOTE N14 – Common Stock Repurchase PlansSubsequent Events

On April 1, 2015, $100.0 million of the Corporation's outstanding subordinated debt originally issued in March of 2005 with an effective interest rate of 5.49%, matured and was fully repaid with available liquidity.

In October 2013,November 2014, the Corporation entered into an accelerated share repurchase agreement ("ASR") with a third party to repurchase $100.0 million of shares of its common stock. Under the terms of the ASR, the Corporation paid $100.0 million to the third party in November 2014 and received an initial delivery of 6.5 million shares, representing 80% of the shares expected to be delivered under the ASR, based on the closing price for the Corporation’s shares on November 13, 2014. In April 2015, the third party delivered an additional 1.8 million shares of common stock pursuant to the terms of the ASR, thereby completing the $100.0 million ASR. The Corporation repurchased a total of 8.3 million shares of common stock under the ASR at an average price of $12.05 per share.

In April 2015, the Corporation announced that its board of directors had approved a share repurchase program pursuant to which the Corporation wasis authorized to repurchase up to 4.0$50.0 million shares, or approximately 2.1% of its outstanding shares through March 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,common stock, or approximately 2.1%2.3% of its outstanding shares, through December 31, 2014. During the third quarter of 2014, the Corporation repurchased 4.0 million2015. Repurchased shares under thismay be added to treasury stock, at cost, and will be used for general corporate purposes. As permitted by securities laws and other legal requirements and subject to market conditions and other factors, purchases may be made from time to time in open market or privately negotiated transactions, including without limitation, through accelerated share repurchase plan at an average cost of $11.36 pertransactions. The share completing this repurchase program on August 25, 2014.

NOTE O - Subsequent Event

Dividend Declaration

On November 5, 2014, the Corporation announced that its Board of Directors declared a special cash dividend of $0.02 per share on its common stock, which willmay be paid on December 15, 2014 to shareholders of record as of December 1, 2014.discontinued at any time.

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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)("Management’s Discussion") relates to Fulton Financial Corporation (the Corporation)"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.  Statements relating to the "outlook" or "outlook for 2015" contained herein are 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 effects of market interest rates, and the relative balances of rate-sensitive assets to rate-sensitive liabilities, on net interest margin and net interest income;
the effects of changes in interest rates on demand for the Corporation’s products and services;
the effects of changes in interest rates or disruptions in liquidity markets on the Corporation’s sources of funding;
the Corporation’s ability to manage liquidity, both at the holding company level and at its subsidiary banks;
the impact of increased regulatory scrutiny of the banking industry;
the effects of the increasing amounts of time and expense associated with regulatory compliance and risk management;
the potential for negative consequences from regulatory violations, including potential supervisory actions and the assessment of fines and penalties;
the additional time, expense and investment required to comply with, and the restrictions on potential growth and investment activities resulting from, the existing enforcement orders applicable to the Corporation by federal and state bank regulatory agencies requiring improvement in compliance functions and other remedial actions, or any future enforcement orders;
the Corporation’s ability to manage the uncertainty associated with the delay in implementing many of the regulations mandated by the Dodd-Frank Act;
the effects of negative publicity on the Corporation’s reputation;
the Corporation’s ability to successfully transform its business model;
the Corporation’s ability to achieve its growth plans;
the effects of competition on deposit rates and growth, loan rates and growth and net interest margin;
the Corporation’s ability to manage the level of non-interest expenses, including salaries and employee benefits expenses, operating risk losses and goodwill impairment;
the impact of adverse changesconditions in the economy and real estatecapital markets including protracted periodson the performance of low-growththe Corporation’s loan portfolio and sluggish loan demand;demand for the Corporation’s products and services;
increases in non-performing assets, which may require the Corporation to increase the allowance for credit losses, charge-offcharge off loans and incur elevated collection and carrying costs related to such non-performing assets;
the effects 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 Corporation’s ability to comply with applicable capital and liquidity requirements (including the finalized Basel III 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,operational risks, 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, compliancecomputer and legaltelecommunications systems failures, faulty or incomplete data and an inadequate risk and external events;management framework;
the impact of failures of third parties upon which the Corporation relies to perform in accordance with contractual arrangements;
the failure or circumvention of the Corporation’s system of internal controls;
the loss of, or failure to safeguard, confidential or proprietary information;
the Corporation’s abilityfailure to manage the level of non-interest expenses, including salariesidentify and employee benefits expenses, operating risk losses, amortization of intangible assets and goodwill impairment;to address cyber-security risks;
the Corporation’s ability to keep pace with technological changeschanges;
the Corporation’s ability to attract and retain talented personnel;

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capital and liquidity strategies, including the Corporation’s ability to identifycomply with applicable capital and liquidity requirements, and the Corporation’s ability to address cyber-security risks;generate capital internally or raise capital on favorable terms;
the Corporation’s reliance on its subsidiaries for substantially all of its revenues and its ability to pay dividends or other distributions; and
the effects of competition on rates of deposit, loan growth and net interest margin; and
any damage todowngrade in the Corporation’s reputation resulting from developments relatedcredit ratings on its borrowing costs or access to any of the items identified above.capital markets.

RESULTS OF OPERATIONS

Overview and Summary Financial ResultsOutlook
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)

39


"FTE") as a percentage of average interest-earning assets. The Corporation also generates revenue through fees earned on the various 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.
The following table presents a summary of the Corporation’s earnings and selected performance ratios:
As of or for the
Three months ended
September 30		 As of or for the
Nine months ended
September 30		As of or for the
Three months ended
March 31
2014 2013 2014 20132015 2014
Income before income taxes (in thousands)$51,968
 $53,785
 $161,081
 $158,503
$53,540
 $56,017
Net income (in thousands)$38,566
 $39,948
 $119,945
 $119,757
$40,036
 $41,783
Diluted net income per share$0.21
 $0.21
 $0.64
 $0.61
$0.22
 $0.22
Return on average assets0.90% 0.93% 0.95% 0.95%0.95% 1.01%
Return on average equity7.32% 7.81% 7.72% 7.79%8.05% 8.21%
Net interest margin (1)3.39% 3.45% 3.42% 3.51%3.27% 3.47%
Non-performing assets to total assets0.91% 1.09% 0.91% 1.09%0.94% 1.01%
Annualized net charge-offs to average loans0.18% 0.45% 0.24% 0.54%0.08% 0.26%
 
(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 thirdfirst quarter of 20142015 decreased $1.8$2.5 million, or 3.4%4.4%, compared to the thirdfirst quarter of 2013. For the first nine months of 2014, income before taxes increased $2.6 million, or 1.6%, compared to the same period in 2013.2014. The Corporation's results for the three and nine months ended September 30, 2014March 31, 2015 in comparison to the same periodsperiod in 20132014 were most significantly impacted by decreases in the provision for credit losses, as a result of improved asset quality, a decline in net interest income and loweran increase in non-interest income,expense, partially offset by decreasesa decrease in the provision for credit losses and higher non-interest expense.income.
Following is a summary of financial highlights for the three and nine months ended September 30, 2014:
Asset Quality - For the three and nine months ended September 30, 2014, the Corporation's provision for credit losses decreased $6.0 million, or 63.2%, and $28.5 million, or 75.0%, respectively, in comparison to the same periods in 2013. These decreases were due to an overall improvement in asset quality.
Non-performing loans decreased $24.4 million, or 14.5%, since September 30, 2013. The total delinquency rate was 1.69% as of September 30, 2014, compared to 1.97% as of September 30, 2013. Annualized net charge-offs to average loans outstanding were 0.18% for the third quarter of 2014, compared to 0.45% for the third quarter of 2013.March 31, 2015:
Net Interest Income and Net Interest Margin - For the three and nine months ended September 30, 2014,March 31, 2015, net interest income decreased $3.2 million, or 2.4%, and $7.4$6.0 million, or 1.9%, respectively, in comparison to the same periods in 2013. Net interest income for the three and nine months ended September 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 in comparison to the same periods in 2013. The net interest margin for the third quarter of 2014 decreased 6 basis points, or 1.7%, in comparison to the third quarter of 2013. For the nine months ended September 30, 2014, net interest margin decreased 9 basis points, or 2.6%4.6%, in comparison to the same period in 2014. The decrease in net interest income resulted from a 20 basis point decrease in the net interest margin, as yields on interest-earning assets declined 14 basis points while the cost of 2013.interest-bearing liabilities increased 11 basis points in comparison to the same period in 2014.
Average interest-earning assets decreased $56.5increased $247.8 million,, or 0.4%1.6%, in the thirdfirst quarter of 20142015 in comparison to the same period of 2013,2014, mainly due to a $295.6 million, or 10.7%, decrease in average investment securities partially offset by a $194.7 million, or 1.5%, increase in average loans. Average interest-earning assets for the first nine months of 2014 increased $110.0 million, or 0.7%, compared to the same period in 2013, primarily as a result of a $321.2$333.2 million, or 2.6%, increase in average loans and a $215.2 million, or 83.2%, increase in other earnings assets, partially offset by a $233.1$304.1 million, or 8.5%11.8%, decrease in average investment securities.securities.
Average interest-bearing liabilities decreased $174.2 million, or 1.5%, in the first quarter of 2015 in comparison to the first quarter of 2014 primarily due to a $659.2 million, or 31.5%, decrease in borrowings, offset by a $485.0 million, or 5.3%, increase in interest-bearing deposits.
Asset Quality - The Corporation recorded a $3.7 million negative provision for credit losses during the three months ended March 31, 2015, compared to a $2.5 million provision for credit losses for the same period in 2014. The $6.2 million improvement in the

37

provision for credit losses was driven by an improvement in net charge-off levels, particularly a decrease in net charge-offs on pooled impaired loans across all loan portfolio segments. During the first quarter of 2015, net charge-offs were $2.6 million, compared to $8.4 million for the same period in 2014, while the allowance for loan loss allocations on impaired loans decreased $9.7 million, or 15.2%.
Annualized net charge-offs to average loans outstanding were 0.08% for the first quarter of 2015, compared to 0.26% for the first quarter of 2014. Non-performing loans decreased $5.6 million, or 3.6%, since March 31, 2014. The total delinquency rate was 1.76% as of March 31, 2015, compared to 1.78% as of March 31, 2014.
Non-interest Income - For the three and nine months ended September 30, 2014,March 31, 2015, non-interest income, excluding investment securities gains, decreased $2.9increased $2.1 million,, or 6.5%5.4%, and $14.9 million, 10.7%, respectively, in comparison to the same periodsperiod in 2013. The decreases in non-interest income were primarily2014, due to decreasesincreases across a number of fee categories, including a $1.1 million, or 30.0%, increase in mortgage banking income, with declines in service chargesincome.
Gains on deposits, particularly overdraft fee income, also contributingsales of investment securities for the first quarter of 2015 were $4.1 million due to the decreases.gains on sales of debt and equity securities of $2.1 million and $2.0 million, respectively.

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Non-interest Expense - For the three and nine months ended September 30, 2014,March 31, 2015, non-interest expense decreased $807,000, or 0.7%, and $3.1increased $8.9 million, or 0.9%8.1%, respectively, in comparison to the same periodsperiod in 2013. These decreases were primarily driven by decreases in other real estate owned (OREO) and repossession expense, due to improved asset quality, and decreases in operating risk losses, partially offset by increases in other outside 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 $7 million in 2014 and approximately $8 million on an annualized basis. These initiatives included the consolidation of 13 branches, streamlining 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.2014. During the first quarter of 2014, $2.1certain expense categories, most notably incentive compensation, employee benefits and outside services expense, were significantly lower than quarterly expense levels experienced during the preceding two years. Total non-interest expenses for the first quarter of 2015 of $118.5 million were more consistent with those incurred during the first quarters of expenses, consisting mainly2013 and 2012.
In the first quarters of lease termination costs2015 and 2014, the Corporation implemented cost savings initiatives to mitigate the impact of elevated expense levels related to the continued build out of its risk, compliance and information technology infrastructures. In both periods, these initiatives included branch consolidations, changes in benefits and reductions in staffing.
In 2015, these initiatives included the consolidation of nine branches, modifications to retirement benefits and the write-offelimination of leasehold improvements, were incurred. Totalcertain positions. The Corporation also plans to consolidate an additional two branches in the third quarter of 2015. These actions resulted in implementation expenses of $1.5 million in the first quarter of 2015, with an additional $700,000 of such expenses expected in the second quarter of 2015. The annualized expense reductions from these initiatives, when completed, are approximately $6.5 million, with $5.3 million expected to be realized in 2015.
In 2014, as a result of the branch consolidations are approximately $2.4 million, including $800,000 and $1.6 million, respectively, during the three and nine months ended September 30, 2014.
The streamlining of subsidiary bank management structurescost savings initiatives resulted in the eliminationimplementation expenses, net of five subsidiary bank divisional executive positions, while other employee compensation and benefit reductions were realized from changes to certain employee benefits plans, most notably an amendment to the postretirement benefits plan (Postretirement Plan). Duringassociated gains, of $980,000 during the first quarter and cost savings of approximately $7 million, or an annualized rate or $7.9 million.
The following table presents a summary of the 2015 and 2014 $1.1 million of net implementation gains were recognized from these actions. Total expense reductions to be realized in 2014 as a result of these actions are approximately $4.6 million, including $1.2 million and $3.4 million, respectively, during the three and nine months ended September 30, 2014.cost savings initiatives:
 Three months ended March 31, 2015    
 Implementation Expenses Expense Reductions Estimated Expense Reductions for the Year Ending December 31, 2015 Annualized Cost Savings
 (in thousands)
Branch consolidations$1,050
 $—
 $(2,350) $(3,050)
Modification of retirement benefits and staffing reductions450
 (710) (2,950) (3,470)
2015 cost savings initiatives$1,500
 $(710) $(5,300) $(6,520)
        
 Three months ended March 31, 2014    
 Implementation Expenses (Gains) Expense Reductions Actual Expense Reductions for the Year Ending December 31, 2014 Annualized Cost Savings
 (in thousands)
Branch consolidations$2,080
 $—
 $(2,400) $(3,200)
Subsidiary bank management reductions and other employee benefit reductions(1,100) (1,020) (4,550) (4,700)
2014 cost savings initiatives$980
 $(1,020) $(6,950) $(7,900)

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Regulatory ComplianceEnforcement Orders -During 2014 and Risk Management Matters - Virtually every aspect2015, the Corporation and each of the Corporation’s operations isits banking subsidiaries became subject to extensive regulation, and in recent years, a combination of financial reform legislation and heightened scrutinyregulatory enforcement orders (the "Regulatory Orders") issued by banking regulators has significantly increased expectations regarding what constitutes an effective riskregulatory agencies relating to identified deficiencies in a centralized Bank Secrecy Act and anti-money laundering compliance management infrastructure. Bank regulators are scrutinizing banks through longer and more extensive bank examinations in both the safety and soundness and compliance areas.

To keep pace with these heightened expectations in the compliance area, in 2012 the Corporation began devoting substantial resources to improving its risk management framework and regulatory compliance programs, including thoseprogram (the "BSA/AML 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, BSA/the "BSA/AML Requirements)Requirements"). The Corporation has made substantial progressRegulatory Orders are described in strengthening its risk management and regulatory compliance programs, includingmore detail in Part II. Other Information, Item 1. Legal Proceedings under 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 BSA/AML Requirements have been identified at the Corporation’s banking subsidiaries, and at the Corporation.heading “Regulatory Matters.”

In July 2014, three of the Corporation’s banking subsidiaries, 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 compliance program (BSA/AML Compliance Program) designed to comply with 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. The ConsentRegulatory Orders require, among other things, that the Corporation and its banking subsidiaries in question review, assess and take actions to strengthen and enhance the BSA/AML Compliance Program.
In September 2014, the CorporationProgram, and, its wholly owned banking subsidiary, Lafayette Ambassador Bank (Lafayette), entered into a consent ceasein some cases, conduct retrospective reviews of past account activity and desist order (Cease and Desist Order) with their primary Federal bank regulatory agency, the Board of Governors of the Federal Reserve System (Reserve Board),transactions, as disclosed by the Corporationwell as certain reports filed in a Current Report on Form 8-K filedaccordance with the SEC on September 9, 2014. The Cease and Desist Order requires, among other things, that the Corporation and Lafayette strengthen the BSA/AML Compliance Program and imposes requirements similar to those set forth in the Consent Orders. In addition, the Cease and Desist Order requires the Corporation to engage an independent third-party firm to conduct a comprehensive assessment of the BSA/AML Compliance Program, and that Lafayette engage an independent third-party firm to conduct a retrospective review of account and transaction activity from January 1, 2014 to June 30, 2014 associated with high-risk customersRequirements, to determine whether suspicious activity wasand certain transactions in currency were properly identified and reported in accordance with the BSA/AML requirements. Based on the results of this review the Reserve Board may require a review of transactions for additional time periods. Further, because the Consent Orders and the Cease and Desist Order relate to the BSA/AML Compliance Program, which is operated

41


jointly for all of the Corporation’s subsidiary banks, management anticipates that one or both of the Corporation's other subsidiary banks will also become subject to an enforcement action related to the BSA/AML Requirements, and the provisions of any such enforcement action may differ from those of the Consent Orders and Cease and Desist Order.Requirements.

In addition to requiring strengthening and enhancement of the BSA/AML Compliance Program, while the ConsentRegulatory Orders andremain in effect, the Cease and Desist Order imposeCorporation is subject to 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 actionsthe Regulatory Orders 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 subsidiary banks, or the assessment of fines or penalties.
During the three and nine months ended September 30, 2014 the Corporation incurred approximately $3 million and $6 million, respectively, of outside services expense related to strengthening and enhancing the BSA/AML Compliance Program.
Additional expenses and investments may be requiredhave been incurred as the Corporation further expandsexpanded its hiring of personnel and use of outside professionals, such as consulting and legal services, and possibly for capital investments in operating systems to strengthen and support the BSA/AML Compliance Program, as well as the Corporation’s broader compliance and risk management infrastructures. The expense and capital investment associated with all of these efforts, including in connection with the ConsentRegulatory Orders, andhave had an adverse effect on the the CeaseCorporation’s results of operations in recent periods and Desist Order could have a material adverse effect on the Corporation’s results of operations in future periods.

2015 Outlook

The Corporation's outlook for 2015 includes the following:

Anticipated annual average loan and deposit growth rates of 3% to 7%;
net interest margin compression at a rate of 0 to 4 basis points per quarter, on average, based on the current interest rate environment;
continued modest provision for credit losses, although provisions could be impacted by the performance of individual credits;
annual mid- to high single digit annual growth rate in non-interest income, excluding the impact of securities gains; and
annual non-interest expense growth in the low-single digit rate.


4239


Quarter Ended September 30, 2014March 31, 2015 compared to the Quarter Ended September 30, 2013March 31, 2014
Net Interest Income
Fully-taxable equivalent (FTE) net interest income decreased $3.2$5.8 million, to $133.7$128.1 million, in the thirdfirst quarter of 2014,2015, from $136.9$133.8 million in the thirdfirst quarter of 2013.2014. This decrease was primarily due to a 620 basis point, or 1.7%5.8%, decrease in the net interest margin, to 3.39%3.27% for the thirdfirst quarter of 20142015 from 3.45%3.47% for the thirdfirst quarter of 2013.2014. The following table provides a comparative average balance sheet and net interest income analysis for the thirdfirst quarter of 20142015 as compared to the same period in 2013.2014. 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 September 30Three months ended March 31
2014 20132015 2014
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)$12,922,821
 $136,773
 4.20% $12,728,162
 $139,141
 4.34%$13,095,528
 $133,055
 4.11% $12,762,357
 $134,749
 4.28%
Taxable investment securities (3)2,181,099
 12,278
 2.25
 2,446,583
 12,977
 2.12
2,005,542
 11,282
 2.25
 2,257,773
 13,266
 2.35
Tax-exempt investment securities (3)256,303
 3,414
 5.33
 284,372
 3,581
 5.04
229,082
 3,212
 5.61
 279,278
 3,613
 5.17
Equity securities (3)34,002
 438
 5.12
 35,999
 435
 4.82
32,210
 450
 5.66
 33,922
 429
 5.11
Total investment securities2,471,404
 16,130
 2.61
 2,766,954
 16,993
 2.46
2,266,834
 14,944
 2.64
 2,570,973
 17,308
 2.70
Loans held for sale23,699
 237
 4.01
 36,450
 382
 4.19
17,002
 173
 4.07
 13,426
 134
 4.00
Other interest-earning assets293,286
 976
 1.33
 236,185
 659
 1.12
474,033
 2,105
 1.78
 258,803
 882
 1.36
Total interest-earning assets15,711,210
 154,116
 3.90% 15,767,751
 157,175
 3.96%15,853,397
 150,277
 3.83% 15,605,559
 153,073
 3.97%
Noninterest-earning assets:
 
 
 
 
 
           
Cash and due from banks203,134
 
 
 210,525
 
 
105,271
     199,641
    
Premises and equipment224,241
 
 
 224,837
 
 
226,391
     226,295
    
Other assets1,055,521
 
 
 1,009,162
 
 
1,114,078
     1,032,071
    
Less: Allowance for loan losses(192,163) 
 
 (220,342) 
 
(183,927)     (203,201)    
Total Assets$17,001,943
 
 
 $16,991,933
 
 
$17,115,210
     $16,860,365
    
LIABILITIES AND EQUITY                      
Interest-bearing liabilities:
 
 
 
 
 
           
Demand deposits$3,047,191
 $953
 0.12% $2,895,156
 $938
 0.13%$3,135,927
 $983
 0.13% $2,945,211
 $909
 0.13%
Savings deposits3,468,958
 1,061
 0.12
 3,359,795
 1,015
 0.12
3,517,057
 1,119
 0.13
 3,351,871
 1,035
 0.13
Time deposits3,009,225
 6,984
 0.92
 3,065,210
 6,790
 0.88
3,061,593
 7,721
 1.02
 2,932,456
 5,952
 0.82
Total interest-bearing deposits9,525,374
 8,998
 0.37
 9,320,161
 8,743
 0.37
9,714,577
 9,823
 0.41
 9,229,538
 7,896
 0.35
Short-term borrowings667,397
 297
 0.18
 1,337,742
 691
 0.20
309,215
 77
 0.10
 1,208,953
 633
 0.21
Federal Home Loan Bank advances and long-term debt995,486
 11,129
 4.45
 889,141
 10,865
 4.87
1,124,074
 12,291
 4.40
 883,532
 10,698
 4.88
Total interest-bearing liabilities11,188,257
 20,424
 0.73% 11,547,044
 20,299
 0.70%11,147,866
 22,191
 0.80% 11,322,023
 19,227
 0.69%
Noninterest-bearing liabilities:
 
 
 
 
 

          
Demand deposits3,514,033
 
 
 3,221,648
 
 
3,662,040
     3,243,424
    
Other210,194
 
 
 194,163
 
 
289,341
     232,004
    
Total Liabilities14,912,484
 
 
 14,962,855
 
  15,099,247
     14,797,451
    
Shareholders’ equity2,089,459
 
 
 2,029,078
 
 
2,015,963
     2,062,914
    
Total Liabilities and Shareholders’ Equity$17,001,943
 
 
 $16,991,933
 
 
$17,115,210
     $16,860,365
    
Net interest income/net interest margin (FTE)  133,692
 3.39%   136,876
 3.45%  128,086
 3.27%   133,846
 3.47%
Tax equivalent adjustment  (4,326)     (4,343)    (4,505)     (4,281)  
Net interest income  $129,366
     $132,533
    $123,581
     $129,565
  
(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.

4340


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 September 30:March 31:
2014 vs. 2013
Increase (Decrease) due
to change in
2015 vs. 2014
Increase (Decrease) due
to change in
Volume Rate NetVolume Rate Net
(in thousands)(in thousands)
Interest income on:          
Loans, net of unearned income$2,127
 $(4,495) $(2,368)$3,572
 $(5,266) $(1,694)
Taxable investment securities(1,471) 772
 (699)(1,264) (720) (1,984)
Tax-exempt investment securities(368) 201
 (167)(1,292) 891
 (401)
Equity securities(24) 27
 3
(23) 44
 21
Loans held for sale(129) (16) (145)40
 (1) 39
Other interest-earning assets178
 139
 317
916
 307
 1,223
Total interest income$313
 $(3,372) $(3,059)$1,949
 $(4,745) $(2,796)
Interest expense on:          
Demand deposits$65
 $(50) $15
$74
 $—
 $74
Savings deposits46
 —
 46
87
 (3) 84
Time deposits(121) 315
 194
270
 1,499
 1,769
Short-term borrowings(329) (65) (394)(326) (230) (556)
Federal Home Loan Bank advances and long-term debt1,245
 (981) 264
2,707
 (1,114) 1,593
Total interest expense$906
 $(781) $125
$2,812
 $152
 $2,964
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 614 basis point, or 1.5%3.5%, decrease in yields on average interest-earnings assets resulted in a $3.4$4.7 million decrease in FTE interest income, partially offset by a $313,000$1.9 million increase in FTE interest income as a result of an increase in average loans, partially offset by a shiftdecrease in the mix of average interest-earning assets.investment securities.
Average investments decreased $295.6$304.1 million, or 10.7%11.8%, as portfolio cash flows were not fully reinvested. The yield on average investments increased 15decreased 6 basis points, or 6.1%2.2%, to 2.61%2.64% in the thirdfirst quarter of 20142015 from 2.46%2.70% in the thirdfirst quarter of 2013. A $1.2 million, or 41.5%, decrease in net premium amortization on mortgage-backed securities and collateralized mortgage obligations had a 14 basis point positive impact on the overall change in portfolio yield.
Average loans and average FTE yields, by type, are summarized in the following table:
 Three months ended September 30 Increase (Decrease) in
 2014 2013 Balance
 Balance Yield Balance Yield $ %
 (dollars in thousands)
Real estate – commercial mortgage$5,114,221
 4.35% $4,961,871
 4.57% $152,350
 3.1%
Commercial – industrial, financial and agricultural3,657,047
 3.97
 3,706,113
 4.04
 (49,066) (1.3)
Real estate – home equity1,727,253
 4.18
 1,767,095
 4.19
 (39,842) (2.3)
Real estate – residential mortgage1,369,087
 3.93
 1,323,972
 4.15
 45,115
 3.4
Real estate – construction663,922
 3.98
 576,222
 4.10
 87,700
 15.2
Consumer284,630
 5.39
 299,057
 4.76
 (14,427) (4.8)
Leasing and other106,661
 7.16
 93,832
 9.42
 12,829
 13.7
Total$12,922,821
 4.20% $12,728,162
 4.34% $194,659
 1.5%
Average loans increased $194.7 million, or 1.5%, compared to the third quarter of 2013, mainly in commercial mortgages, real estate - construction and residential 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 14 basis points, or 3.2%, to 4.20% in 2014 from 4.34% in 2013.2014. The decrease in average yields on loansinvestments was primarilypartially offset by a $215.2 million, or 83.2%, increase in commercial mortgages and was

44


attributable to repayments of higher-yielding loans and new loan production at lower rates and elimination of interest rate floors on certain loans.
Average other interest-earning assets. During the fourth quarter of 2014, the Corporation changed providers for check clearing services to the Federal Reserve Bank of Philadelphia, resulting in the transfer of clearing account balances from non-interest earning assets increased $57.1 million, or 24.2%, primarily due to an increase in averagelow-yielding interest-bearing deposits with other banks. Federal Reserve Bank accounts.
The average yield on other interest-earning assets increased 2142 basis points, or 18.8%30.9%, due to increasesan increase in dividends on Federal Home Loan Bank stock.stock, as a special dividend of $1.2 million was paid during the first quarter of 2015. 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"). As of September 30, 2014,March 31, 2015, the Corporation held $66.8$46.4 million of FHLB stock.

41


Average loans and average FTE yields, by type, are summarized in the following table:
 Three months ended March 31 Increase (Decrease) in
 2015 2014 Balance
 Balance Yield Balance Yield $ %
 (dollars in thousands)
Real estate – commercial mortgage$5,163,845
 4.22% $5,085,128
 4.44% $78,717
 1.5%
Commercial – industrial, financial and agricultural3,770,187
 3.87
 3,637,075
 4.03
 133,112
 3.7
Real estate – home equity1,721,300
 4.14
 1,755,346
 4.18
 (34,046) (1.9)
Real estate – residential mortgage1,370,376
 3.84
 1,336,323
 3.99
 34,053
 2.5
Real estate – construction688,690
 3.93
 576,346
 4.08
 112,344
 19.5
Consumer259,138
 5.26
 274,910
 4.82
 (15,772) (5.7)
Leasing and other121,992
 8.41
 97,229
 10.26
 24,763
 25.5
Total$13,095,528
 4.11% $12,762,357
 4.28% $333,171
 2.6%
Average loans increased $333.2 million, or 2.6%, compared to the first quarter of 2014, mainly in commercial loans, commercial mortgages, construction and residential mortgages. The growth in commercial loans and commercial mortgages was driven by a combination of loans to new customers and increased borrowings from existing customers, while the growth in construction loans was primarily due to an increase in loans secured by commercial properties. The average yield on loans decreased 17 basis points, or 4.0%, to 4.11% in 2015 from 4.28% in 2014. The decrease in average yields on loans was attributable to repayments of higher-yielding loans, continued refinancing activity at lower rates, and new loan production at rates lower than the overall portfolio yield.
Interest expense increased $125,000,$3.0 million, or 0.6%15.4%, to $20.4$22.2 million in the thirdfirst quarter of 20142015 from $20.3$19.2 million in the thirdfirst quarter of 2013.2014. Although average interest-bearing liabilities decreased $358.8$174.2 million, or 3.1%1.5%, compared to the thirdfirst quarter of 2013,2014, a change in funding mix from lower cost short-term federalFederal funds purchased and short-term FHLB advances to higher rate interest bearing non-maturitycost time deposits and higher-cost long-term FHLB advances and subordinated debt resulted in a $906,000$2.8 million increase in interest expense.
Average deposits and average interest rates, by type, are summarized in the following table:
Three months ended September 30 Increase (Decrease) inThree months ended March 31 Increase (Decrease) in
2014 2013 Balance2015 2014 Balance
Balance Rate Balance Rate $ %Balance Rate Balance Rate $ %
(dollars in thousands)(dollars in thousands)
Noninterest-bearing demand$3,514,033
 —% $3,221,648
 —% $292,385
 9.1%$3,662,040
 —% $3,243,424
 —% $418,616
 12.9%
Interest-bearing demand3,047,191
 0.12
 2,895,156
 0.13
 152,035
 5.3
3,135,927
 0.13
 2,945,211
 0.13
 190,716
 6.5
Savings3,468,958
 0.12
 3,359,795
 0.12
 109,163
 3.2
3,517,057
 0.13
 3,351,871
 0.13
 165,186
 4.9
Total demand and savings10,030,182
 0.08
 9,476,599
 0.08
 553,583
 5.8
10,315,024
 0.08
 9,540,506
 0.08
 774,518
 8.1
Time deposits3,009,225
 0.92
 3,065,210
 0.88
 (55,985) (1.8)3,061,593
 1.02
 2,932,456
 0.82
 129,137
 4.4
Total deposits$13,039,407
 0.27% $12,541,809
 0.28% $497,598
 4.0%$13,376,617
 0.30% $12,472,962
 0.26% $903,655
 7.2%
The $553.6$774.5 million, or 5.8%8.1%, increase in total demand and savings accounts was primarily due to a $251.5$422.1 million, or 7.6%13.1%, increase in business account balances, a $190.1$198.2 million, or 4.3%, increase in personal account balances and a $129.4$156.2 million, or 7.8%9.3%, increase in municipal account balances. The average cost of total deposits decreased oneincreased four basis pointpoints largely due to a higher concentration in demand and savings accounts, partially offset by an increase in rates on average time deposits.






42

Average borrowings and interest rates, by type, are summarized in the following table:
Three months ended September 30 Increase (Decrease) inThree months ended March 31 Increase (Decrease) in
2014 2013 Balance2015 2014 Balance
Balance Rate Balance Rate $ %Balance Rate Balance Rate $ %
(dollars in thousands)(dollars in thousands)
Short-term borrowings:                      
Customer repurchase agreements$202,809
 0.11% $196,503
 0.11% $6,306
 3.2 %$173,625
 0.10% $187,362
 0.11% $(13,737) (7.3)%
Customer short-term promissory notes83,734
 0.05
 91,573
 0.06
 (7,839) (8.6)86,258
 0.03
 102,000
 0.06
 (15,742) (15.4)
Total short-term customer funding286,543
 0.09
 288,076
 0.09
 (1,533) (0.5)259,883
 0.08
 289,362
 0.09
 (29,479) (10.2)
Federal funds purchased224,930
 0.19
 559,992
 0.23
 (335,062) (59.8)25,054
 0.15
 416,230
 0.21
 (391,176) (94.0)
Short-term FHLB advances (1)155,924
 0.32
 489,674
 0.23
 (333,750) (68.2)24,278
 0.28
 503,361
 0.28
 (479,083) (95.2)
Total short-term borrowings667,397
 0.18
 1,337,742
 0.20
 (670,345) (50.1)309,215
 0.10
 1,208,953
 0.21
 (899,738) (74.4)
Long-term debt:
   
   
 

   
   
 
FHLB advances625,712
 3.60
 519,520
 4.14
 106,192
 20.4
657,697
 3.49
 513,790
 4.14
 143,907
 28.0
Other long-term debt369,774
 5.89
 369,621
 5.89
 153
 —
466,377
 5.69
 369,742
 5.90
 96,635
 26.1
Total long-term debt995,486
 4.45
 889,141
 4.87
 106,345
 12.0
1,124,074
 4.40
 883,532
 4.88
 240,542
 27.2
Total borrowings$1,662,883
 2.74% $2,226,883
 2.07% $(564,000) (25.3)%$1,433,289
 3.47% $2,092,485
 2.20% $(659,196) (31.5)%
                      
(1) Represents FHLB advances with an original maturity term of less than one year.
Total short-term borrowings decreased $670.3$899.7 million, or 50.1%74.4%, primarily in federalFederal funds purchased and short-term FHLB advances. The decrease was driven by lower wholesale funding needs resulting from the decrease in average investment securities and an increase in average deposits exceeding the growth in average loans.

45The $143.9 million increase in FHLB advances was a result of the Corporation’s efforts to lengthen maturities and lock in longer-term rates, while the $96.6 million increase in other long-term debt was a result of the issuance of $100.0 million of subordinated debt in November 2014.


The average cost of total borrowings increased 67127 basis points, or 32.4%57.7%, to 2.74%3.47% in 20142015 from 2.07%2.20% in 2013,2014, primarily due to the weighted average cost impact of a decrease in lower-cost, short-term borrowings, which were 40.1%21.6% of total borrowings in 2014 and 60.1%the first quarter of 2015, compared to 57.8% for the same period in 2013. This reflects the Corporation's continuing efforts to lengthen maturities and lock in longer term rates.2014.

Provision for Credit Losses
The provision for credit losses was $3.5a negative $3.7 million for the thirdfirst quarter of 2014,2015, a decrease of $6.0$6.2 million or 63.2%, from the thirdfirst quarter of 2013 due to improvements2014. This resulted from an improvement in asset quality, as shown by reductions in non-performing loans and overall delinquency rates.net charge-off levels, particularly on pooled impaired loans.
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.


43

Non-Interest Income
The following table presents the components of non-interest income:
Three months ended September 30 Increase (Decrease)Three months ended March 31 Increase (Decrease)
2014 2013 $ %2015 2014 $ %
(dollars in thousands)(dollars in thousands)
Service charges on deposit accounts:              
Overdraft fees$5,806
 $7,191
 $(1,385) (19.3)%$4,801
 $5,297
 $(496) (9.4)%
Cash management fees3,191
 3,001
 190
 6.3
3,217
 3,105
 112
 3.6
Other3,804
 3,746
 58
 1.5
3,551
 3,309
 242
 7.3
Total service charges on deposit accounts12,801
 13,938
 (1,137) (8.2)11,569
 11,711
 (142) (1.2)
Investment management and trust services11,120
 10,420
 700
 6.7
10,889
 10,958
 (69) (0.6)
Other service charges and fees:              
Merchant fees3,774
 3,396
 378
 11.1
3,177
 2,723
 454
 16.7
Debit card income2,407
 2,394
 13
 0.5
2,389
 2,210
 179
 8.1
Letter of credit fees1,163
 1,255
 (92) (7.3)1,157
 1,101
 56
 5.1
Commercial swap fees537
 447
 90
 20.1
811
 1,013
 (202) (19.9)
Other2,073
 2,026
 47
 2.3
1,829
 1,880
 (51) (2.7)
Total other service charges and fees9,954
 9,518
 436
 4.6
9,363
 8,927
 436
 4.9
Mortgage banking income:              
Gain on sales of mortgage loans2,613
 4,457
 (1,844) (41.4)3,533
 2,422
 1,111
 45.9
Mortgage servicing income1,425
 2,666
 (1,241) (46.5)1,155
 1,183
 (28) (2.4)
Total mortgage banking income4,038
 7,123
 (3,085) (43.3)4,688
 3,605
 1,083
 30.0
Credit card income2,331
 2,229
 102
 4.6
2,235
 2,171
 64
 2.9
Other income1,575
 1,496
 79
 5.3
1,848
 1,134
 714
 63.0
Total, excluding investment securities gains41,819
 44,724
 (2,905) (6.5)
Investment securities gains81
 2,633
 (2,552) (96.9)
Total, excluding gains on sales of investment securities40,592
 38,506
 2,086
 5.4
Net gains on sales of investment securities4,145
 —
 4,145
 N/M
Total$41,900
 $47,357
 $(5,457) (11.5)%$44,737
 $38,506
 $6,231
 16.2 %

N/M - Not meaningful
The $1.4 million,$496,000, or 19.3%9.4%, decrease in overdraft fee income consisted of a $974,000$251,000 decrease in fees assessed on personalcommercial accounts and a $411,000$245,000 decrease in fees assessed on commercialpersonal accounts. The overall decline in these fees resulted from a reduction in the number of overdrafts, partially driven by changes in customer behavior andbehavior. Partially offsetting the decrease in overdraft fee income was a reduction in the maximum number of overdraft fees that may be assessed each day.
The $700,000,$242,000, or 6.7%7.3%, increase in investment managementother service charges on deposits.
The $454,000, or 16.7%, increase in merchant fee income and trust servicesthe $179,000, or 8.1%, increase in debit card income are due to an increase in the volumes of transactions, while $202,000, or 19.9%, decrease in commercial swap fees was due to a $350,000, or 7.7%, increasedecrease in brokerage revenue and a $350,000, or 6.0%, increasethe number of new swap transactions in trust commissions. These increases resulted from new trust business

46


sales, improved market conditions that increasedcomparison to the valuesfirst quarter of existing assets under management and additional recurring revenue generated through the brokerage business due to growth in new accounts.2014.
Gains on sales of mortgage loans decreased $1.8increased $1.1 million, or 41.4%45.9%, due to a $94.4$128.1 million, or 32.4%66.8%, decreaseincrease in new loan commitments, andpartially offset by a 13.3%12.6% decrease in pricing spreads compared to the thirdfirst quarter of 2013.2014. The declineincrease in new loan commitments was mainly in refinancing volumes, which totaled approximately $56.4$209.2 million, or 28.6%65.4%, of new loan commitments, in the thirdfirst quarter of 20142015 compared to $93.6$63.5 million, or 32.1%33.1%, during the thirdfirst quarter of 2013. Mortgage servicing2014.
The $714,000, or 63.0%, increase in other income decreased $1.2 million, or 46.5%,was due to increases in values of bank owned life insurance policies and gains on the absencesale of a $1.7 million reversal of the mortgage servicing rights valuation allowance, which occurred in the third quarter of 2013.two branch properties.
Merchant fees increased $377,000, or 11.1%, due to an increase in volumes. Investment securities gains for the thirdfirst quarter of 20142015 were a result of net realized gains onfrom the sales of financial institution stocks partially offset by $18,000 of other-than-temporary impairment charges onand pooled trust preferred securities. InvestmentThere were no securities gains of $2.6 million forin the thirdfirst quarter of 2013 included $2.1 million of realized gains on financial institution stocks and $595,000 of net realized gains on the sales of debt securities, partially offset by $97,000 of other-than temporary impairment charges on pooled trust preferred debt securities.2014. See Note D,4, "Investment Securities," in the Notes to Consolidated Financial Statements for additional details.



44

Non-Interest Expense
The following table presents the components of non-interest expense:
Three months ended September 30 Increase (Decrease)Three months ended March 31 Increase (Decrease)
2014 2013 $ %2015 2014 $ %
(dollars in thousands)(dollars in thousands)
Salaries and employee benefits$62,434
 $63,344
 $(910) (1.4)%$64,990
 $59,566
 $5,424
 9.1%
Net occupancy expense11,582
 11,519
 63
 0.5
13,692
 13,603
 89
 0.7
Other outside services8,632
 5,048
 3,584
 71.0
5,750
 3,812
 1,938
 50.8
Data processing4,689
 4,757
 (68) (1.4)4,768
 3,796
 972
 25.6
Equipment expense3,958
 3,602
 356
 9.9
Software3,353
 3,268
 85
 2.6
3,318
 2,925
 393
 13.4
Equipment expense3,307
 3,646
 (339) (9.3)
Professional fees3,252
 3,329
 (77) (2.3)2,871
 2,904
 (33) (1.1)
FDIC insurance expense2,882
 2,918
 (36) (1.2)2,822
 2,689
 133
 4.9
Supplies and postage2,369
 2,326
 43
 1.8
Telecommunications1,716
 1,819
 (103) (5.7)
Other real estate owned and repossession expense1,362
 983
 379
 38.6
Marketing1,798
 2,251
 (453) (20.1)1,233
 1,584
 (351) (22.2)
Telecommunications1,587
 2,046
 (459) (22.4)
Postage1,415
 1,163
 252
 21.7
Other real estate owned and repossession expense1,303
 1,453
 (150) (10.3)
Operating risk loss1,242
 3,297
 (2,055) (62.3)827
 1,828
 (1,001) (54.8)
Supplies1,145
 1,504
 (359) (23.9)
Intangible amortization314
 534
 (220) (41.2)130
 315
 (185) (58.7)
Other6,863
 6,528
 335
 5.1
8,672
 7,802
 870
 11.2
Total$115,798
 $116,605
 $(807) (0.7)%$118,478
 $109,554
 $8,924
 8.1%

In comparison to the first quarter of 2014, non-interest expenses increased $8.9 million, or 8.1%, largely reflecting certain expenses in 2014 that were significantly lower than quarterly expense levels experienced during the preceding two years. The increase in 2015 largely reflects a return to levels more consistent with those in the prior two years. Contributing factors in the first quarter of 2014 included lower incentive compensation and benefits costs, and lower outside services expenses.
Salaries and employee benefits decreased $910,000,The $5.4 million, or 1.4%, as a result of a $601,000, or 1.2%9.1%, increase in salaries offset byand employee benefits resulted from a $1.5$2.4 million, or 13.9%4.8%, decreaseincrease in salaries and a $3.0 million, or 34.8%, increase in employee benefits. The increase in salaries was mostlyprimarily due to normal merit increases,higher average salaries per full-time equivalent employee and an increase in incentive compensation, partially offset by lower salaries expense resultinga decrease in the number of full-time equivalent employees to 3,480 as of March 31, 2015 from the 2014 cost savings initiatives.3,540 as of March 31, 2014. The decreaseincrease in employee benefits was primarily a result of 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 Plan. For additional information related to the amendment to the Postretirement Plan, see Note H, "Employee Benefit Plans" in the Notes to Consolidated Financial Statements.
Other outside services increased $3.6 million, or 71.0%, due to an increase in consultingemployee healthcare costs, defined benefit plan expense and a $1.5 million gain realized on the post retirement plan amendment in 2014.
The $1.9 million, or 50.8%, increase in other outside services resulted from the timing of engagements related to the acceleration of risk management and compliance efforts, including those in connection with the enhancement of the Corporation’s program for compliance with the BSA/AML Requirements.
The $2.1$1.4 million, or 62.3%20.3%, increase in data processing and software resulted from increased expenses related to the core processing system and amortization of software. The $870,000, or 11.1%, increases in other expenses resulted from an increase in appraisal fees as a result of increased loan volumes in the first quarter of 2015 compared to the same period in 2014.
These increases were partially offset by a $1.0 million, or 54.8%, decrease in operating risk loss was due to a $2.0$1.5 million, or 85.1%, decrease in losses associatedrelated to check fraud, partially offset by the impact of $600,000 of gains recorded in the first quarter of 2014 related to the settlement with a third-party investor of outstanding repurchase requests related to certain previously sold residential mortgages.


4745


Income Taxes
Income tax expense for the thirdfirst quarter of 20142015 was $13.4$13.5 million, a $435,000,$730,000, or 3.1%5.1%, decrease from $13.8$14.2 million for the thirdfirst quarter of 2013.2014.
The Corporation’s effective tax rate was 25.8%25.2% in the thirdfirst quarter of 2014,2015, as compared to 25.7%25.4% in the thirdfirst quarter of 2013.2014. 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.
Nine Months Ended September 30, 2014 compared to the Nine Months Ended September 30, 2013
Net Interest Income
FTE net interest income decreased $7.5 million, or 1.8%, to $399.7 million in the first nine months of 2014 from $407.2 million in the same period of 2013.
Net interest margin decreased 9 basis points, or 2.6%, to 3.42% for the first nine months of 2014 from 3.51% for the first nine months of 2013. The decrease in net interest margin was the result of a 12 basis point, or 3.0%, decrease in yields on interest-earning assets, partially offset by a 3 basis point, or 4.1%, decrease in funding costs.




















48



The following table provides a comparative average balance sheet and net interest income analysis for the first nine months 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.
 Nine months ended September 30
 2014 2013
ASSETSAverage
Balance		 Interest  (1) Yield/
Rate		 Average
Balance		 Interest  (1) Yield/
Rate
Interest-earning assets:           
Loans, net of unearned income (2)$12,827,563
 $405,904
 4.23% $12,506,393
 $414,091
 4.43%
Taxable investment securities (3)2,216,344
 37,962
 2.28
 2,426,015
 40,890
 2.25
Tax-exempt investment securities (3)268,604
 10,561
 5.24
 285,638
 11,003
 5.14
Equity securities (3)33,949
 1,286
 5.06
 40,352
 1,416
 4.69
Total investment securities2,518,897
 49,809
 2.64
 2,752,005
 53,309
 2.58
Loans held for sale18,259
 585
 4.27
 42,122
 1,261
 3.99
Other interest-earning assets263,797
 3,065
 1.55
 217,975
 1,527
 0.93
Total interest-earning assets15,628,516
 459,363
 3.93% 15,518,495
 470,188
 4.05%
Noninterest-earning assets:           
Cash and due from banks200,368
     206,403
    
Premises and equipment225,033
     225,733
    
Other assets1,041,834
     1,047,122
    
Less: Allowance for loan losses(197,235)     (223,220)    
Total Assets$16,898,516
     $16,774,533
    
LIABILITIES AND EQUITY           
Interest-bearing liabilities:           
Demand deposits$2,969,470
 $2,766
 0.12% $2,773,917
 $2,687
 0.13%
Savings deposits3,392,681
 3,127
 0.12
 3,348,413
 3,054
 0.12
Time deposits2,984,861
 19,686
 0.88
 3,184,281
 22,901
 0.96
Total interest-bearing deposits9,347,012
 25,579
 0.37
 9,306,611
 28,642
 0.41
Short-term borrowings972,694
 1,470
 0.20
 1,228,882
 1,900
 0.20
FHLB advances and long-term debt924,920
 32,606
 4.71
 889,826
 32,448
 4.87
Total interest-bearing liabilities11,244,626
 59,655
 0.71% 11,425,319
 62,990
 0.74%
Noninterest-bearing liabilities:           
Demand deposits3,360,876
     3,103,381
    
Other214,826
     190,976
    
Total Liabilities14,820,328
     14,719,676
    
Shareholders’ equity2,078,188
     2,054,857
    
Total Liabilities and Shareholders’ Equity$16,898,516
     $16,774,533
    
Net interest income/net interest margin (FTE)  399,708
 3.42%   407,198
 3.51%
Tax equivalent adjustment  (12,879)     (12,956)  
Net interest income  $386,829
     $394,242
  
(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.










49




The following table summarizes the changes in FTE interest income and expense for the first nine 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$10,461
 $(18,648) $(8,187)
Taxable investment securities(3,425) 497
 (2,928)
Tax-exempt investment securities(650) 208
 (442)
Equity securities(237) 107
 (130)
Loans held for sale(759) 83
 (676)
Other interest-earning assets365
 1,173
 1,538
Total interest income$5,755
 $(16,580) $(10,825)
Interest expense on:     
Demand deposits$184
 $(105) $79
Savings deposits41
 32
 73
Time deposits(1,383) (1,832) (3,215)
Short-term borrowings(467) 37
 (430)
FHLB advances and long-term debt1,218
 (1,060) 158
Total interest expense$(407) $(2,928) $(3,335)
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.

A 12 basis point, or 3.0%, decrease in yields on average interest-earning assets resulted in a $16.6 million decrease in FTE interest income, which was partially offset by a $5.8 million increase in FTE interest income resulting from a $110.0 million, or 0.7%, increase in average interest-earning assets. Average investments decreased $233.1 million, or 8.5%, as portfolio cash flows were not fully reinvested.

The yield on average investments increased 6 basis points, or 2.3%, to 2.64% in 2014 from 2.58% in 2013.A $5.4 million, or 52.1%, decrease in net premium amortization on mortgage-backed securities and collateralized mortgage obligations had a 13 basis point positive impact on the overall change in portfolio yield. This positive impact was partially offset by the impact of purchases of mortgage-backed securities and collateralized mortgage obligations at yields that were lower than the overall portfolio yield.
Average loans, by type, are summarized in the following table:
 Nine months ended September 30 Increase (Decrease) in
 2014 2013 Balance
 Balance Yield Balance Yield $ %
 (dollars in thousands)
Real estate – commercial mortgage$5,112,735
 4.38% $4,796,557
 4.71% $316,178
 6.6%
Commercial – industrial, financial and agricultural3,637,440
 3.98
 3,694,612
 4.14
 (57,172) (1.5)
Real estate – home equity1,739,352
 4.18
 1,721,041
 4.24
 18,311
 1.1
Real estate – residential mortgage1,348,269
 3.96
 1,305,434
 4.17
 42,835
 3.3
Real estate – construction609,803
 4.08
 594,991
 4.10
 14,812
 2.5
Consumer278,697
 4.93
 303,127
 4.88
 (24,430) (8.1)
Leasing and other101,267
 8.54
 90,631
 8.99
 10,636
 11.7
Total$12,827,563
 4.23% $12,506,393
 4.43% $321,170
 2.6%


50


The $316.2 million, or 6.6%, increase in commercial mortgages was from both new and existing customers. The average yield on loans decreased 20 basis points, or 4.5%, to 4.23% in 2014 from 4.43% in 2013. The decrease in average yields on loans was attributable to repayments of higher-yielding loans and new loan production at lower rates and elimination of interest rate floors on certain loans.
Interest expense decreased $3.3 million, or 5.3%, to $59.7 million in the first nine months of 2014 from $63.0 million in the first nine months of 2013. Interest expense decreased $2.9 million as a result of a 3 basis point, or 4.1%, decrease in the average cost of interest-bearing liabilities, primarily a result of a decrease in average costs of time deposits. A $180.7 million, or 1.6%, decrease in average interest-bearing liabilities resulted in an additional $407,000 decrease in interest expense.
Average deposits, by type, are summarized in the following table:
 Nine months ended September 30 Increase (Decrease) in
 2014 2013 Balance
 Balance Rate Balance Rate $ %
 (dollars in thousands)
Noninterest-bearing demand$3,360,876
 —% $3,103,381
 —% $257,495
 8.3%
Interest-bearing demand2,969,470
 0.12
 2,773,917
 0.13
 195,553
 7.0
Savings3,392,681
 0.12
 3,348,413
 0.12
 44,268
 1.3
Total demand and savings9,723,027
 0.08
 9,225,711
 0.08
 497,316
 5.4
Time deposits2,984,861
 0.88
 3,184,281
 0.96
 (199,420) (6.3)
Total deposits$12,707,888
 0.27% $12,409,992
 0.31% $297,896
 2.4%
The $497.3 million, or 5.4%, increase in total demand and savings account balances was primarily due to a $233.4 million, or 7.5%, increase in business account balances, a $207.0 million, or 4.7%, increase in personal account balances and a $74.3 million, or 4.5%, increase in municipal account balances. The $199.4 million, or 6.3%, decrease in average time deposits was in accounts with balances less than $100,000 with original maturity terms of less than three years, partially offset by increases in accounts with balances of $100,000 or more and accounts with original maturity terms longer than 3 years.
The average cost of deposits decreased 4 basis points, or 12.9%, to 0.27% in 2014 from 0.31% in 2013, primarilydue to a decrease in higher-cost time deposits and an increase in non-interest bearing deposits and lower-cost interest-bearing savings and demand balances.
The following table summarizes changes in average short-term borrowings and long-term debt, by type:
 Nine months ended September 30 Increase (Decrease) in
 2014 2013 Balance
 Balance Rate Balance Rate $ %
 (dollars in thousands)
Short-term borrowings:           
Customer repurchase agreements$202,184
 0.11% $183,432
 0.11% $18,752
 10.2 %
Customer short-term promissory notes89,119
 0.05
 100,532
 0.05
 (11,413) (11.4)
Total short-term customer funding291,303
 0.09
 283,964
 0.09
 7,339
 2.6
Federal funds purchased361,162
 0.21
 681,576
 0.24
 (320,414) (47.0)
Short-term FHLB advances (1)320,229
 0.29
 263,342
 0.23
 56,887
 21.6
Total short-term borrowings972,694
 0.20
 1,228,882
 0.20
 (256,188) (20.8)
Long-term debt:           
FHLB advances555,172
 3.92
 520,278
 4.14
 34,894
 6.7
Other long-term debt369,748
 5.90
 369,548
 5.90
 200
 0.1
Total long-term debt924,920
 4.71
 889,826
 4.87
 35,094
 3.9
Total$1,897,614
 2.40% $2,118,708
 2.16% $(221,094) (10.4)%
(1) Represents FHLB advances with an original maturity term of less than one year.
Total short-term borrowings decreased $256.2 million, or 20.8%, primarily in federal funds purchased, partially offset by an increase in short-term FHLB advances. Total borrowings decreased $221.1 million, or 10.4%. The cost of borrowings increased

51


24 basis points, or 11.1%, as a result of lower-cost, short-term borrowings comprising a smaller percentage of total borrowings in an effort to extend maturities and lock in longer term rates.

Provision for Credit Losses
The provision for credit losses was $9.5 million for the first nine months of 2014, a decrease of $28.5 million, or 75.0%, in comparison to the first nine months 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."

Non-Interest Income
The following table presents the components of non-interest income:
 Nine months ended September 30 Increase (Decrease)
 2014 2013 $ %
 (dollars in thousands)
Service charges on deposit accounts:       
Overdraft fees$16,645
 $22,276
 $(5,631) (25.3)%
Cash management fees9,589
 8,803
 786
 8.9
Other10,830
 11,621
 (791) (6.8)
         Total service charges on deposit accounts37,064
 42,700
 (5,636) (13.2)
Investment management and trust services33,417
 31,117
 2,300
 7.4
Other service charges and fees:       
Merchant fees10,340
 10,070
 270
 2.7
Debit card income7,052
 6,852
 200
 2.9
Letter of credit fees3,448
 3,721
 (273) (7.3)
Commercial swap fees2,544
 986
 1,558
 158.0
Other6,023
 5,907
 116
 2.0
        Total other service charges and fees29,407
 27,536
 1,871
 6.8
Mortgage banking income:       
Gain on sales of mortgage loans8,009
 21,472
 (13,463) (62.7)
Mortgage servicing income5,375
 4,821
 554
 11.5
        Total mortgage banking income13,384
 26,293
 (12,909) (49.1)
Credit card income6,855
 6,535
 320
 4.9
Other income3,958
 4,780
 (822) (17.2)
        Total, excluding investment securities gains124,085
 138,961
 (14,876) (10.7)
Investment securities gains1,193
 7,971
 (6,778) (85.0)
              Total$125,278
 $146,932
 $(21,654) (14.7)%

The $5.6 million, or 25.3%, decrease in overdraft fee income consisted of a $3.6 million decrease in fees assessed on personal accounts and a $2.0 million decrease in fees assessed on commercial accounts. The overall decline in these fees resulted from a reduction in the number of overdrafts.
The $2.3 million, or 7.4%, increase in investment management and trust services income was primarily due to a $1.6 million, or 11.7%, increase in brokerage revenue and a $731,000, or 4.1%, 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 $1.6 million, or 158.0%, due to the favorable interest rate environment for this product and the Corporation's introduction of this product by all of the Corporation's banking subsidiaries. For additional details see Note I, "Derivative Financial Instruments" in the Notes to Consolidated Financial Statements.

52


Gains on sales of mortgage loans decreased $13.5 million, or 62.7%, due to a $648.0 million, or 50.0%, decrease in new loan commitments and a 25.4% decrease in pricing spreads compared to the prior year. Both decreases resulted primarily 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 $186.5 million, or 28.8%, of new loan commitments in 2014 compared to $652.2 million, or 50.3%, during 2013.
Investment securities gains of $1.2 million for the first nine months of 2014 were a result of $1.1 million of net realized gains on the sales of debt securities and $100,000 of net realized gains on the sales of financial institution stocks.The $8.0 million of investment securities gains for first nine months of 2013 included $4.3 million of net realized gains on financial institution stocks and $3.8 million of realized gains on the sales of debt securities, partially offset by $124,000 of other-than-temporary impairment charges for certain financial institution stocks and pooled trust preferred debt securities.
Non-Interest Expense
The following table presents the components of non-interest expense:
 Nine months ended September 30 Increase (Decrease)
 2014 2013 $ %
 (dollars in thousands)
Salaries and employee benefits$185,623
 $188,046
 $(2,423) (1.3)%
Net occupancy expense36,649
 34,810
 1,839
 5.3
Other outside services19,684
 13,223
 6,461
 48.9
Data processing12,816
 13,169
 (353) (2.7)
Equipment expense10,269
 11,447
 (1,178) (10.3)
Professional fees9,715
 9,771
 (56) (0.6)
Software9,487
 9,110
 377
 4.1
FDIC insurance expense8,186
 8,766
 (580) (6.6)
Marketing5,719
 6,045
 (326) (5.4)
Telecommunications5,193
 5,586
 (393) (7.0)
Postage4,014
 3,633
 381
 10.5
Operating risk loss3,786
 6,923
 (3,137) (45.3)
Supplies3,323
 4,096
 (773) (18.9)
Other real estate owned and repossession expense3,034
 6,248
 (3,214) (51.4)
Intangible amortization944
 1,603
 (659) (41.1)
Other23,084
 22,195
 889
 4.0
Total$341,526
 $344,671
 $(3,145) (0.9)%

Salaries and employee benefits decreased $2.4 million, or 1.3%, with salaries increasing $953,000, or 0.6%, and employee benefits decreasing $3.4 million, or 10.5%. 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 and severance.
The $1.8 million, or 5.3%, increase in net occupancy expense was primarily due to an increase in snow removal costs in 2014, partially offset by savings from the branch consolidations. Other outside services increased $6.5 million, or 48.9%, due to an increase in consulting services related to the Corporation’s acceleration of risk management and compliance efforts, including those in connection with the enhancement of the Corporation's program for compliance with the BSA/AML requirements. The $1.2 million, or 10.3%, decrease in equipment expense was primarily due to a decrease in depreciation expense as certain assets became fully depreciated.
The $3.1 million, or 45.3%, decrease in operating risk loss was due to a $3.7 million decrease in losses associated with previously sold residential mortgages, partially offset by a net decrease in debit card and check 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.

53


OREO and repossession expense decreased $3.2 million, or 51.4%, 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 $659,000, or 41.1%, decrease in intangible amortization was primarily due to core deposit intangible assets, which are amortized on an accelerated basis.
Income Taxes
Income tax expense for the first nine months of 2014 was $41.1 million, a $2.4 million, or 6.2%, increase from $38.7 million in 2013.
The Corporation’s effective tax rate was 25.5% in 2014, as compared to 24.4% in 2013. The effective rate is generally lower than the Federal statutory rate of 35% due to investments in tax-free municipal securities, tax credits earned from investments in partnerships that generate such credits under various federal programs and the effect of state income taxes. The increase in the effective tax rate in comparison to the first nine months of 2013 was due primarily to a $2.1 million ($1.4 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.






5446


FINANCIAL CONDITION
The table below presents condensed consolidated ending balance sheets for the Corporation.
  Increase (Decrease)  Increase (Decrease)
September 30, 2014 December 31, 2013 $ %March 31, 2015 December 31, 2014 $ %
(dollars in thousands)(dollars in thousands)
Assets              
Cash and due from banks$220,946
 $218,540
 $2,406
 1.1 %$91,870
 $105,702
 $(13,832) (13.1)%
Other interest-earning assets377,579
 248,161
 129,418
 52.2
703,667
 423,083
 280,584
 66.3
Loans held for sale25,212
 21,351
 3,861
 18.1
34,124
 17,522
 16,602
 94.7
Investment securities2,470,609
 2,568,434
 (97,825) (3.8)2,259,802
 2,323,371
 (63,569) (2.7)
Loans, net of allowance12,840,928
 12,579,440
 261,488
 2.1
12,937,804
 12,927,572
 10,232
 0.1
Premises and equipment224,441
 226,021
 (1,580) (0.7)226,241
 226,027
 214
 0.1
Goodwill and intangible assets532,117
 533,076
 (959) (0.2)531,672
 531,803
 (131) —
Other assets546,342
 539,611
 6,731
 1.2
578,161
 569,687
 8,474
 1.5
Total Assets$17,238,174
 $16,934,634
 $303,540
 1.8 %$17,363,341
 $17,124,767
 $238,574
 1.4 %
Liabilities and Shareholders’ Equity              
Deposits$13,333,627
 $12,491,186
 $842,441
 6.7 %$13,514,497
 $13,367,506
 $146,991
 1.1 %
Short-term borrowings564,952
 1,258,629
 (693,677) (55.1)410,105
 329,719
 80,386
 24.4
Long-term debt1,018,289
 883,584
 134,705
 15.2
1,094,517
 1,139,413
 (44,896) (3.9)
Other liabilities243,300
 238,048
 5,252
 2.2
312,709
 291,464
 21,245
 7.3
Total Liabilities15,160,168
 14,871,447
 288,721
 1.9
15,331,828
 15,128,102
 203,726
 1.3
Total Shareholders’ Equity2,078,006
 2,063,187
 14,819
 0.7
2,031,513
 1,996,665
 34,848
 1.7
Total Liabilities and Shareholders’ Equity$17,238,174
 $16,934,634
 $303,540
 1.8 %$17,363,341
 $17,124,767
 $238,574
 1.4 %
Other interest-earning assets
The $129.4$280.6 million, or 52.2%66.3%, increase in other interest-earning assets was due to an increase in interest-bearing deposits with other banks.
Investment Securities
The following table presents the carrying amount of investment securities:
  Increase (Decrease)  Increase (Decrease)
September 30, 2014 December 31, 2013 $ %March 31, 2015 December 31, 2014 $ %
(dollars in thousands)(dollars in thousands)
U.S. Government securities$200
 $525
 $(325) (61.9)%$—
 $200
 $(200) (100.0)%
U.S. Government sponsored agency securities240
 726
 (486) (66.9)203
 214
 (11) (5.1)
State and municipal securities257,616
 284,849
 (27,233) (9.6)224,342
 245,215
 (20,873) (8.5)
Corporate debt securities101,427
 98,749
 2,678
 2.7
97,682
 98,034
 (352) (0.4)
Collateralized mortgage obligations955,040
 1,032,398
 (77,358) (7.5)867,876
 902,313
 (34,437) (3.8)
Mortgage-backed securities962,335
 945,712
 16,623
 1.8
930,159
 928,831
 1,328
 0.1
Auction rate securities148,473
 159,274
 (10,801) (6.8)98,932
 100,941
 (2,009) (2.0)
Total debt securities2,425,331
 2,522,233
 (96,902) (3.8)2,219,194
 2,275,748
 (56,554) (2.5)
Equity securities45,278
 46,201
 (923) (2.0)40,608
 47,623
 (7,015) (14.7)
Total$2,470,609
 $2,568,434
 $(97,825) (3.8)%$2,259,802
 $2,323,371
 $(63,569) (2.7)%
Total investment securities decreased $97.8$63.6 million, or 3.8%2.7%, in comparison to December 31, 2013,2014, mainly in collateralized mortgage obligations and state and municipal securities, as portfolio cash flows were not fully reinvested due to relatively low yields available on current investment options. Cash flows that were reinvested during the first nine months of 2014 were used to purchase 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

5547


were not fully reinvested. The decrease in ARCs was primarily due to the sales of securities with a total book value of $11.9 million, resulting in no gain or loss.
The net pre-tax unrealized lossgain on available for sale investment securities was $3.2$22.7 million as of September 30, 2014,March 31, 2015, compared to a $39.8$11.3 million pre-tax unrealized lossgain as of December 31, 2013. 2014.The $36.6$11.4 million decreaseincrease in the net pre-tax unrealized lossgain 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 3, "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)
September 30, 2014 December 31, 2013 $ %March 31, 2015 December 31, 2014 $ %
(in thousands)  (in thousands)  
Real-estate – commercial mortgage$5,156,979
 $5,101,922
 $55,057
 1.1 %$5,227,101
 $5,197,155
 $29,946
 0.6 %
Commercial – industrial, financial and agricultural3,691,262
 3,628,420
 62,842
 1.7
3,762,631
 3,725,567
 37,064
 1.0
Real-estate – home equity1,733,036
 1,764,197
 (31,161) (1.8)1,701,623
 1,736,688
 (35,065) (2.0)
Real-estate – residential mortgage1,372,033
 1,337,380
 34,653
 2.6
1,364,788
 1,377,068
 (12,280) (0.9)
Real-estate – construction687,728
 573,672
 114,056
 19.9
677,806
 690,601
 (12,795) (1.9)
Consumer278,219
 283,124
 (4,905) (1.7)257,301
 265,431
 (8,130) (3.1)
Leasing and other111,148
 93,505
 17,643
 18.9
124,255
 119,206
 5,049
 4.2
Loans, net of unearned income$13,030,405
 $12,782,220
 $248,185
 1.9 %$13,115,505
 $13,111,716
 $3,789
 — %
The Corporation does not have a significant concentration of credit risk with any single borrower, industry or geographical location. AsApproximately $5.9 billion, or 45.0%, of September 30, 2014, the loan portfolio was in commercial mortgage and construction loans as of March 31, 2015. The Corporation's maximum total lending commitment to an individual borrower was $50.0 million.million as of March 31, 2015. In addition to limiting the maximum total lending commitment to any individual borrower to $50.0 million, the Corporation has established lower total lending limits for certain types of lending commitments, and lower total lending limits based on the Corporation's internal risk rating of an individual borrower at the time the lending commitment is approved. As of September 30, 2014,March 31, 2015, the Corporation had 6673 relationships with total borrowing commitments between $20.0 million and $50.0 million.
Approximately $5.8 billion, or 44.9%, of the loan portfolio was in commercial mortgage and construction loans as of September 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 $33.0 million to any one borrower, based on the Corporation's internal risk rating at the time the lending commitment is approved, and limits its exposure to any one development project to $15.0 million.
Construction loans include loans to commercial borrowers secured by commercial real estate, loans to commercial borrowers secured by residential 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:
September 30, 2014 December 31, 2013March 31, 2015 December 31, 2014
Balance Delinquency Rate (1) % of Total Balance Delinquency Rate (1) % of TotalBalance Delinquency Rate (1) % of Total Balance Delinquency Rate (1) % of Total
(dollars in thousands)(dollars in thousands)
Commercial$377,206
 0.5% 54.9% $269,497
 0.8% 47.0%$393,408
 0.3% 58.0% $427,419
 0.6% 61.9%
Commercial - residential241,419
 7.4
 35.1
 235,369
 8.2
 41.0
231,533
 6.2
 34.2
 203,670
 6.6
 29.5
Other69,103
 0.4
 10.0
 68,806
 0.8
 12.0
52,865
 1.4
 7.8
 59,512
 0.6
 8.6
Total Real estate - construction$687,728
 2.9% 100.0% $573,672
 3.8% 100.0%$677,806
 2.4% 100.0% $690,601
 2.4% 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 $114.1decreased $12.8 million, or 19.9%1.9%, in comparison to December 31, 20132014 and comprised 5.3%5.2% of the total loan portfolio at September 30, 2014March 31, 2015 as compared to 4.5%5.3% at December 31, 2013. Over the past five years, the Corporation reduced its exposure2014. The decrease in its construction portfolio, which accounted 8.2% of its total loan portfolio as of December 31, 2009. The growth during the first nine months of 2014loans was primarily in loans secured by commercial construction, which increased $107.7 million, or 40.0%.

56


real estate, partially offset by an increase in loans to commercial borrowers secured by residential real estate. Geographically, the increasedecrease in real estate construction loans was primarily in the PennsylvaniaMaryland ($58.140.3 million, or 20.1%46.7%), Maryland market, partially offset by an increase in the Pennsylvania ($25.525.8 million, or 41.8%7.1%) and New Jersey ($20.6, or 22.7%) markets.market.
The $62.8$37.1 million, or 1.7%1.0%, increase in commercial loans was primarily in the Pennsylvania and Virginia markets offset by decreases in the Delaware and New Jersey market.markets. Commercial mortgage loans increased $55.1$29.9 million, or 0.6%, in comparison to December 31, 2013.2014. Geographically, the increase in was in the New JerseyMaryland ($74.238.1 million, or 5.8%6.7%), MarylandDelaware ($35.012.8 million, or 6.5%)5.7 %) and DelawareVirginia ($22.13.7 million, or 11.3%0.9%) markets, partially offset by a decreasedecreases in the Pennsylvania ($76.013.9 million, or 2.9%0.5%) market.and New Jersey ($10.7 million, or 0.8%) markets.

48


The following table summarizes the percentage of commercial loans, by industry:
September 30,
2014		 December 31, 2013March 31,
2015		 December 31, 2014
Services18.7% 19.2%18.8% 19.2%
Manufacturing14.0
 13.5
13.1
 13.1
Construction (1)11.5
 10.0
10.7
 11.0
Retail10.0
 11.0
9.4
 9.6
Wholesale9.4
 9.7
9.1
 8.7
Health care8.9
 9.0
Real estate (2)7.9
 7.0
7.3
 7.6
Health care7.6
 8.1
Agriculture4.7
 5.8
5.0
 5.5
Arts and entertainment3.5
 2.7
3.1
 3.4
Transportation2.4
 2.5
2.5
 2.4
Financial services1.9
 1.6
1.9
 1.9
Other8.4
 8.9
10.2
 8.6
100.0% 100.0%100.0% 100.0%
(1)Includes commercial loans to borrowers engaged in the construction industry.
(2)Includes commercial loans to 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:
September 30, 2014 December 31, 2013March 31, 2015 December 31, 2014
(dollars in thousands)(dollars in thousands)
Commercial - industrial, financial and agricultural$141,100
 $129,840
$123,647
 $116,705
Real estate - commercial mortgage137,501
 87,868
136,511
 137,952
$278,601
 $217,708
$260,158
 $254,657
Total shared national credits increased $60.9$5.5 million, or 28.0%2.2%, in comparison to December 31, 2013.2014. The Corporation's shared national credits are to borrowers located in its geographical markets, and the increase was due to normal lending activities consistent with the Corporation's underwriting policies. As of September 30, 2014 and DecemberMarch 31, 2013, none2015, two of the shared national credits, or 2.6% of the total balance, were past due. There were no shared national credits past due at December 31, 2014.
The $34.7Home equity loans decreased $35.1 million, or 2.6%2.0%, which was due, in part, to an increase in residential mortgages was due to the retention of certain 15-year fixed rate mortgages in the portfolio instead of selling those mortgages to third-party investors.refinance activity as customers rolled outstanding home equity loans into residential mortgages.










5749


Provision for Credit Losses and Allowance for Credit Losses
The following table presents the activity in the allowance for credit losses:
Three months ended September 30 Nine months ended September 30Three months ended March 31
2014 2013 2014 20132015 2014
(dollars in thousands)(dollars in thousands)
Average balance of loans, net of unearned income$12,922,821
 $12,728,162
 $12,827,563
 $12,506,393
$13,095,528
 $12,762,357
          
Balance of allowance for credit losses at beginning of period$193,442
 $217,626
 $204,917
 $225,439
$185,931
 $204,917
Loans charged off:
 
    
 
Commercial – industrial, financial and agricultural5,167
 9,394
 15,804
 24,856
1,863
 5,125
Real estate – commercial mortgage1,557
 3,724
 5,084
 13,050
Real estate – home equity1,492
 2,365
 4,377
 6,735
Real estate – residential mortgage231
 767
 2,166
 8,282
1,281
 846
Consumer538
 473
 1,738
 1,456
780
 751
Real estate – home equity768
 1,651
Real estate – commercial mortgage709
 1,386
Real estate – construction313
 598
 745
 5,181
—
 214
Leasing and other306
 787
 1,434
 2,037
363
 295
Total loans charged off9,604
 18,108
 31,348
 61,597
5,764
 10,268
Recoveries of loans previously charged off:          
Commercial – industrial, financial and agricultural1,013
 2,295
 2,532
 3,430
786
 744
Real estate – commercial mortgage1,167
 185
 1,641
 2,754
Real estate – home equity336
 198
 869
 721
Real estate – residential mortgage95
 245
 319
 442
159
 116
Consumer448
 294
 1,059
 1,206
241
 209
Real estate – home equity251
 356
Real estate – commercial mortgage436
 44
Real estate – construction470
 379
 852
 1,794
1,147
 224
Leasing and other241
 224
 767
 649
171
 164
Total recoveries3,770
 3,820
 8,039
 10,996
3,191
 1,857
Net loans charged off5,834
 14,288
 23,309
 50,601
2,573
 8,411
Provision for credit losses3,500
 9,500
 9,500
 38,000
(3,700) 2,500
Balance of allowance for credit losses at end of period$191,108
 $212,838
 $191,108
 $212,838
$179,658
 $199,006
          
Net charge-offs to average loans (annualized)0.18% 0.45% 0.24% 0.54%0.08% 0.26%
The following table presents the components of the allowance for credit losses:
September 30,
2014		 December 31,
2013		March 31,
2015		 December 31,
2014
(dollars in thousands)(dollars in thousands)
Allowance for loan losses$189,477
 $202,780
$177,701
 $184,144
Reserve for unfunded lending commitments1,631
 2,137
1,957
 1,787
Allowance for credit losses$191,108
 $204,917
$179,658
 $185,931
      
Allowance for credit losses to loans outstanding1.47% 1.60%1.37% 1.42%
For the three and nine months ended September 30, 2014, the Corporation'sThe provision for credit losses decreased $6.0for the three months ended March 31, 2015 was a negative $3.7 million, or 63.2%, and $28.5a decrease of $6.2 million or 75.0%, respectively, in comparison to the same periodsperiod in 2013.2014.Based on an evaluation of all relevant credit quality factors, the Corporation recorded a $3.7 million negative provision for credit losses during the three months ended March 31, 2015, compared to a $2.5 million provision for credit losses for the same period in 2014. The decreases$6.2 million improvement in the provision for credit losses were due to improvementswas driven by an improvement in credit quality, as shown bynet charge-off levels, particularly a reductiondecrease in non-performingnet charge-offs on pooled impaired loans and overall delinquency.across all loan portfolio segments.
Net charge-offs decreased $8.5$5.8 million, or 59.2%69.4%, to $5.8$2.6 million for the thirdfirst quarter of 2014,2015, compared to $14.3$8.4 million for the thirdfirst quarter of 2013. 2014.The decrease in net charge-offs was primarily due to a $3.1$3.3 million, or 89.0%75.4%, decrease in commercial loan

50

net charge-offs, a $1.1 million decrease in construction loan net charge-offs and a $1.1 million, or 79.7%, decrease in commercial mortgage net charge-offs and a $2.9 million, or 41.5%, decrease in commercial loan net charge-offs. Of the $5.8$2.6 million of net charge-offs recorded in the thirdfirst quarter of 2014, 40.8% were for loans originated in Maryland, 32.6% were for loans originated in New Jersey and 26.5% were for loans originated in Pennsylvania.

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During2015, the first nine months of 2014, net charge-offs decreased $27.3 million, or 53.9%, to $23.3 million, compared to $50.6 million for the same period of 2013. The decrease in net charge-offs was primarily due to an $8.2 million, or 38.1%, decrease in commercial loan net charge-offs, a $6.9 million, or 66.6%, decrease in commercial mortgage net charge-offs and a $6.0 million, or 76.4%, decrease in residential mortgage net charge-offs. Of the $23.3 million of net charge-offs recorded during the first nine months of 2014, 58.6%, 26.3% and 16.8%majority were for loans originated in Pennsylvania and New Jersey, and Maryland, respectively. Netpartially offset by net recoveries were recorded during the first nine months of 2014 for loans originated in Delaware and Virginia.Maryland.

The following table summarizes non-performing assets as of the indicated dates:
September 30, 2014 September 30, 2013 December 31, 2013March 31, 2015 March 31, 2014 December 31, 2014
(dollars in thousands)(dollars in thousands)
Non-accrual loans$126,420
 $143,012
 $133,753
$129,929
 $133,705
 $121,080
Loans 90 days past due and accruing17,428
 25,271
 20,524
19,365
 21,225
 17,402
Total non-performing loans143,848
 168,283
 154,277
149,294
 154,930
 138,482
Other real estate owned (OREO)13,489
 18,173
 15,052
14,251
 15,300
 12,022
Total non-performing assets$157,337
 $186,456
 $169,329
$163,545
 $170,230
 $150,504
Non-accrual loans to total loans0.97% 1.12% 1.05%0.99% 1.05% 0.92%
Non-performing assets to total assets0.91% 1.09% 1.00%0.94% 1.01% 0.88%
Allowance for credit losses to non-performing loans132.85% 126.48% 132.82%120.34% 128.45% 134.26%

The following table presents accruing loans whose terms have been modified under troubled debt restructurings (TDRs)("TDRs"), by type, as of the indicated dates:
September 30, 2014 September 30, 2013 December 31, 2013March 31, 2015 March 31, 2014 December 31, 2014
(in thousands)(in thousands)
Real estate – residential mortgage$30,850
 $27,820
 $28,815
$31,574
 $30,363
 $31,308
Real estate – commercial mortgage18,869
 22,644
 19,758
23,468
 19,514
 18,822
Real estate – construction9,251
 9,841
 10,117
7,791
 8,430
 9,241
Commercial – industrial, financial and agricultural5,115
 8,184
 8,045
6,975
 6,755
 5,237
Real estate – home equity2,904
 1,667
 1,365
3,084
 2,606
 2,975
Consumer23
 11
 11
34
 16
 38
Total accruing TDRs67,012
 70,167
 68,111
72,926
 67,684
 67,621
Non-accrual TDRs (1)27,724
 30,501
 30,209
29,392
 27,487
 24,616
Total TDRs$94,736
 $100,668
 $98,320
$102,318
 $95,171
 $92,237
(1) Included with non-accrual loans in the preceding table.

TDRs modified during the first ninethree months of 20142015 and still outstanding as of September 30, 2014March 31, 2015 totaled $17.2$11.3 million. During the first ninethree months of 2014, $4.82015, $12.5 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.

59


The following table presents the changes in non-accrual loans for the three and nine months ended September 30, 2014:March 31, 2015:
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 September 30, 2014              
Balance of non-accrual loans at June 30, 2014$35,980
 $41,936
 $19,236
 $21,053
 $11,729
 $—
 $—
 $129,934
Balance of non-accrual loans at December 31, 2014$29,769
 $44,437
 $16,348
 $20,043
 $10,483
 $—
 $—
 $121,080
Additions6,885
 8,766
 2,813
 1,796
 2,846
 538
 —
 23,644
16,586
 6,934
 698
 3,609
 1,532
 782
 132
 30,273
Payments(4,400) (5,353) (1,850) (178) (1,132) —
 —
 (12,913)(4,181) (4,123) (3,052) (933) (420) —
 —
 (12,709)
Charge-offs(5,167) (1,557) (313) (231) (1,492) (533) —
 (9,293)(1,863) (709) —
 (1,281) (768) (780) (132) (5,533)
Transfers to accrual status(2,302) —
 —
 (30) (160) (5) —
 (2,497)—
 (44) —
 (304) (213) —
 —
 (561)
Transfers to OREO status(11) (945) (231) (560) (708) —
 —
 (2,455)(692) (204) —
 (781) (944) —
 —
 (2,621)
Balance of non-accrual loans as of September 30, 2014$30,985
 $42,847
 $19,655
 $21,850
 $11,083
 $—
 $—
 $126,420
               
Nine months ended September 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
Additions27,054
 23,190
 3,964
 8,601
 8,397
 1,742
 407
 73,355
Payments(13,910) (13,965) (4,185) (1,624) (2,512) (6) —
 (36,202)
Charge-offs(15,804) (5,084) (745) (2,166) (4,377) (1,733) (407) (30,316)
Transfers to accrual status(2,302) (54) —
 (2,358) (1,718) (5) —
 (6,437)
Transfers to OREO status(763) (1,806) (300) (2,885) (1,979) —
 —
 (7,733)
Balance of non-accrual loans as of September 30, 2014$30,985
 $42,847
 $19,655
 $21,850
 $11,083
 $—
 $—
 $126,420
Balance of non-accrual loans at March 31, 2015$39,619
 $46,291
 $13,994
 $20,353
 $9,670
 $2
 $—
 $129,929


51

Non-accrual loans decreased $16.6$3.8 million, or 11.6%2.8%, in comparison to September 30, 2013March 31, 2014 and $7.3increased $8.8 million, or 7.3% in comparison to December 31, 2013. Total2014. The increase in non-accrual additions forloans during the three and nine months ended September 30, 2014 were $23.6 million and $73.4 million, respectively, comparedfirst quarter of 2015 was primarily attributable to additions for the three and nine months ended September 30, 2013addition of $22.1 million and $105.7 million, respectively.two specific credits totaling approximately $15 million.

The following table summarizes non-performing loans, by type, as of the indicated dates:
September 30, 2014 September 30, 2013 December 31, 2013March 31, 2015 March 31, 2014 December 31, 2014
(in thousands)(in thousands)
Real estate – commercial mortgage$44,602
 $42,623
 $44,068
$46,331
 $45,876
 $45,237
Commercial – industrial, financial and agricultural33,277
 45,184
 38,021
43,265
 38,830
 30,388
Real estate – residential mortgage28,135
 34,309
 31,347
28,595
 29,305
 28,995
Real estate – home equity14,455
 17,088
 14,740
Real estate – construction19,860
 24,396
 21,267
14,140
 20,758
 16,399
Real estate – home equity15,071
 18,691
 16,983
Consumer2,484
 2,999
 2,590
Leasing388
 67
 48
24
 74
 133
Consumer2,515
 3,013
 2,543
Total non-performing loans$143,848
 $168,283
 $154,277
$149,294
 $154,930
 $138,482

Non-performing commercialconstruction loans decreased $11.9$6.6 million, or 26.4%31.9%, in comparison to September 30, 2013,March 31, 2014 across all markets except Delaware, which showed a slight increase. Non-performing home equity loans decreased $2.6 million, or 15.4%, in comparison to March 31, 2014, primarily in the Pennsylvania, market. Non-performing residential mortgages decreased $6.2New Jersey and Maryland markets. Partially offsetting these decreases was an increase of $4.4 million, or 18.0%11.4%, in non-performing commercial loans, in comparison to September 30, 2013. Geographically, the decrease was primarily in theMarch 31, 2014, across all markets except for New Jersey ($4.2 million, or 39.9%) market. Non-performing construction loans decreased $4.5 million, or 18.6%, in comparison to September 30, 2013.Geographically, the decrease occurred primarily in the Pennsylvania ($2.4 million, or 18.3%) and Maryland ($1.9 million, or 32.0%) markets.Jersey.


60


The following table summarizes the Corporation’s OREO, by property type, as of the indicated dates:
September 30, 2014 September 30, 2013 December 31, 2013March 31, 2015 March 31, 2014 December 31, 2014
(in thousands)(in thousands)
Residential properties$8,121
 $5,836
 $7,052
$8,055
 $8,026
 $6,656
Commercial properties3,758
 9,514
 5,586
3,254
 5,412
 3,453
Undeveloped land1,610
 2,823
 2,414
2,942
 1,862
 1,913
Total OREO$13,489
 $18,173
 $15,052
$14,251
 $15,300
 $12,022

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 payment history, through the monitoring of delinquency levels and trends. For a description of the Corporation's risk ratings, see Note 5, "Loans and Allowance for Credit Losses," in the Notes to Consolidated Financial Statements.
















52

Total internally risk rated loans were $9.5$9.6 billion as of September 30, 2014March 31, 2015 and $9.2 billion as of December 31, 2013.2014. 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
September 30, 2014 December 31, 2013 $ % September 30, 2014 December 31, 2013 $ % September 30, 2014 December 31, 2013March 31, 2015 December 31, 2014 $ % March 31, 2015 December 31, 2014 $ % March 31, 2015 December 31, 2014
(dollars in thousands)(dollars in thousands)
Real estate - commercial mortgage$113,650
 $141,013
 $(27,363) (19.4)% $165,425
 $196,922
 $(31,497) (16.0)% $279,075
 $337,935
$123,644
 $127,302
 $(3,658) (2.9)% $183,697
 $170,837
 $12,860
 7.5 % $307,341
 $298,139
Commercial - secured138,136
 111,613
 26,523
 23.8
 129,273
 125,382
 3,891
 3.1
 267,409
 236,995
151,724
 120,584
 31,140
 25.8
 112,156
 110,544
 1,612
 1.5
 263,880
 231,128
Commercial -unsecured12,246
 11,666
 580
 5.0
 5,256
 2,755
 2,501
 90.8
 17,502
 14,421
3,331
 7,463
 (4,132) (55.4) 8,378
 6,810
 1,568
 23.0
 11,709
 14,273
Total Commercial - industrial, financial and agricultural150,382
 123,279
 27,103
 22.0
 134,529
 128,137
 6,392
 5.0
 284,911
 251,416
155,055
 128,047
 27,008
 21.1
 120,534
 117,354
 3,180
 2.7
 275,589
 245,401
Construction - commercial residential28,517
 31,522
 (3,005) (9.5) 42,875
 57,806
 (14,931) (25.8) 71,392
 89,328
20,662
 27,495
 (6,833) (24.9) 37,038
 40,066
 (3,028) (7.6) 57,700
 67,561
Construction - commercial1,469
 2,932
 (1,463) (49.9) 5,550
 8,124
 (2,574) (31.7) 7,019
 11,056
11,802
 12,202
 (400) (3.3) 3,475
 5,586
 (2,111) (37.8) 15,277
 17,788
Total real estate - construction (excluding construction - other)29,986
 34,454
 (4,468) (13.0) 48,425
 65,930
 (17,505) (26.6) 78,411
 100,384
32,464
 39,697
 (7,233) (18.2) 40,513
 45,652
 (5,139) (11.3) 72,977
 85,349
Total$294,018
 $298,746
 $(4,728) (1.6)% $348,379
 $390,989
 $(42,610) (10.9)% $642,397
 $689,735
$311,163
 $295,046
 $16,117
 5.5 % $344,744
 $333,843
 $10,901
 3.3 % $655,907
 $628,889
                                      
% of total risk rated loans3.1% 3.2%     3.7% 4.2%     6.8% 7.4%3.2% 3.1%     3.6% 3.5%     6.8% 6.6%

As of September 30, 2014,March 31, 2015, total loans with risk ratings of Substandard or lower decreased $42.6increased $10.9 million, or 10.9%3.3%, in comparison to December 31, 2013,2014, primarily due to decreasesan increase in substandard commercial mortgages and construction loans to commercial borrowers.mortgages. Special mention loans decreased $4.7increased $16.1 million, or 1.6%5.5%, in comparison to December 31, 20132014 due to a decrease in special mention commercial mortgages and residential construction loans to commercial borrowers, partially offset by an increase in special mention commercial loans.loans, partially offset by decreases in special mention construction loans to commercial borrowers and commercial mortgages.






61


The following table summarizes loan delinquency rates, by type, as of the dates indicated:
September 30, 2014 September 30, 2013 December 31, 2013March 31, 2015 March 31, 2014 December 31, 2014
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 mortgage0.48% 0.86% 1.34% 0.40% 0.84% 1.24% 0.38% 0.87% 1.25%0.50% 0.89% 1.39% 0.35% 0.89% 1.24% 0.35% 0.87% 1.22%
Commercial – industrial, financial and agricultural0.28% 0.91% 1.19% 0.32% 1.24% 1.56% 0.30% 1.04% 1.34%0.26% 1.15% 1.41% 0.33% 1.09% 1.42% 0.17% 0.81% 0.98%
Real estate – construction0.03% 2.89% 2.92% 0.40% 4.22% 4.62% 0.11% 3.71% 3.82%0.31% 2.09% 2.40% 0.43% 3.55% 3.98% 0.02% 2.38% 2.40%
Real estate – residential mortgage1.81% 2.06% 3.87% 1.82% 2.58% 4.40% 1.74% 2.34% 4.08%1.75% 2.10% 3.85% 1.53% 2.20% 3.73% 1.96% 2.10% 4.06%
Real estate – home equity0.59% 0.87% 1.46% 1.03% 1.05% 2.08% 0.91% 0.96% 1.87%0.74% 0.85% 1.59% 0.69% 0.98% 1.67% 0.63% 0.85% 1.48%
Consumer, leasing and other1.41% 0.75% 2.16% 1.91% 0.79% 2.70% 1.99% 0.68% 2.67%1.72% 0.65% 2.37% 1.87% 0.84% 2.71% 1.56% 0.70% 2.26%
Total0.58% 1.11% 1.69% 0.66% 1.31% 1.97% 0.61% 1.20% 1.81%0.62% 1.14% 1.76% 0.56% 1.22% 1.78% 0.52% 1.06% 1.58%
Total dollars (in thousands)$75,976
 $143,848
 $219,824
 $83,941
 $168,283
 $252,224
 $77,667
 $154,277
 $231,944
$81,289
 $149,294
 $230,583
 $71,410
 $154,930
 $226,340
 $68,346
 $138,482
 $206,828
 
(1)Includes non-accrual loans.
The CorporationManagement believes that the allowance for credit losses of $191.1$179.7 million as of September 30, 2014March 31, 2015 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.




53

Deposits and Borrowings
The following table presents ending deposits, by type:
    Increase    Increase (Decrease)
September 30, 2014 December 31, 2013 $ %March 31, 2015 December 31, 2014 $ %
(dollars in thousands)(dollars in thousands)
Noninterest-bearing demand$3,556,810
 $3,283,172
 $273,638
 8.3%$3,765,677
 $3,640,623
 $125,054
 3.4 %
Interest-bearing demand3,164,514
 2,945,210
 219,304
 7.4
3,133,748
 3,150,612
 (16,864) (0.5)
Savings3,620,919
 3,344,882
 276,037
 8.3
3,567,652
 3,504,820
 62,832
 1.8
Total demand and savings10,342,243
 9,573,264
 768,979
 8.0
10,467,077
 10,296,055
 171,022
 1.7
Time deposits2,991,384
 2,917,922
 73,462
 2.5
3,047,420
 3,071,451
 (24,031) (0.8)
Total deposits$13,333,627
 $12,491,186
 $842,441
 6.7%$13,514,497
 $13,367,506
 $146,991
 1.1 %

Non-interest bearing demand deposits increased $273.6$125.1 million, or 8.3%3.4%, due primarily toas a $258.1 million, or 10.6%, increaseresult of increases in business account balances and a $13.7of $77.0 million, or 13.2%2.8%, increase inpersonal account balances of $33.9 million, or 4.6%, and municipal account balances.balances of $10.2 million, or 10.2%.

Interest-bearing demand accounts increased $219.3decreased $16.9 million, or 7.4%0.5%, primarily due to a $228.0$47.3 million, or 21.0%3.9%, seasonal increasedecrease in municipal account balances and a $31.0 million, or 28.4%, increase in business account balances, partially offset by $39.6 million, or 2.3%, decrease in personal account balances. The $276.0 million, or 8.3%, increase in savings account balances was due to a $240.7 million, or 50.4%, seasonal increase in municipal account balances and a $34.8$29.6 million, or 1.6%, increase in personal account balances. The $73.5$62.8 million, or 2.5%1.8%, increase in savings account balances was primarily due to a $119.4 million, or 5.5%, increase in personal account balances and a $4.5 million, or 0.6%, increase in business account balances, partially offset by a seasonal decrease of $61.0 million, or 10.6%, in municipal account balances. The $24.0 million, or 0.8%, decrease in time deposits was primarily due to an increasea decrease in time deposits with original maturities of 4 to 5 years due to promotional efforts intended to lock in longer-term rates.less than two years.








62


The following table summarizes the changes in ending borrowings, by type:
  Increase (Decrease)  Increase (Decrease)
September 30, 2014 December 31, 2013 $ %March 31, 2015 December 31, 2014 $ %
(dollars in thousands)(dollars in thousands)
Short-term borrowings:              
Customer repurchase agreements$195,121
 $175,621
 $19,500
 11.1 %$161,886
 $158,394
 $3,492
 2.2%
Customer short-term promissory notes78,225
 100,572
 (22,347) (22.2)93,176
 95,106
 (1,930) (2.0)
Total short-term customer funding273,346
 276,193
 (2,847) (1.0)255,062
 253,500
 1,562
 0.6
Federal funds purchased6,606
 582,436
 (575,830) (98.9)43
 6,219
 (6,176) (99.3)
Short-term FHLB advances (1)285,000
 400,000
 (115,000) (28.8)155,000
 70,000
 85,000
 121.4
Total short-term borrowings564,952
 1,258,629
 (693,677) (55.1)410,105
 329,719
 80,386
 24.4
Long-term debt:              
FHLB advances648,477
 513,854
 134,623
 26.2
628,070
 673,107
 (45,037) (6.7)
Other long-term debt369,812
 369,730
 82
 —
466,447
 466,306
 141
 —
Total long-term debt1,018,289
 883,584
 134,705
 15.2
1,094,517
 1,139,413
 (44,896) (3.9)
Total borrowings$1,583,241
 $2,142,213
 (558,972) (26.1)%$1,504,622
 $1,469,132
 $35,490
 2.4%
              
(1) Represents FHLB advances with an original maturity term of less than one year.
The $693.7$80.4 million reductionincrease in total short-term borrowings reflects the use of a portion of the $842.4was largely due to an $85.0 million, or 121.4%, increase in depositsshort-term FHLB advances. The $44.9 million decrease in long-term debt was due to repay short-term borrowings, as wella $45.0 million decrease in FHLB advances as a change in funding mix fromresult of maturities that were replaced with short-term federal funds purchased and short-term FHLB advances to long-term FHLB advances.






54

Shareholders' Equity
Total shareholders’ equity increased $14.8$34.8 million, or 0.7%1.7%, during the first ninethree months of 2014.2015. The increase was due primarily to $119.9$40.0 million of net income and a $23.8$7.4 million increase in after-tax unrealized holding gains on available for sale investment securities, partially offset by $95.3 million of stock repurchases and $45.0$16.1 million of common stock cash dividends.
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 4.0 million shares, or approximately 2.1% of its outstanding shares, through March 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.
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. During the third quarter of 2014, 4.0 million shares were repurchased by the Corporation at an average cost of $11.36 per share, completing this repurchase program on August 25, 2014.
The Corporation and its subsidiary banks are subject to regulatory 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 Corporation’s financial statements. The regulations require that banks maintain minimum amounts 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 September 30, 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:
 September 30, 2014 December 31, 2013 Regulatory
Minimum
for Capital
Adequacy
Total Capital (to Risk-Weighted Assets)14.5% 15.0% 8.0%
Tier I Capital (to Risk-Weighted Assets)13.0% 13.1% 4.0%
Tier I Capital (to Average Assets)10.6% 10.6% 4.0%

63


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.

The new minimum regulatory capital requirements established by the U.S. Basel III Capital Rules arebecame effective for the Corporation beginning on January 1, 2015, and becomewill be fully phased in on January 1, 2019.
When fully phased in, the
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
Comply with a revised definition of capital to improve the ability of regulatory capital instruments to absorb losses. Certain non-qualifying capital instruments, including cumulative preferred stock and trust preferred securities, will be excludedare being phased out as a component of Tier 1 capital for institutions of the Corporation's size.
When fully phased in on January 1, 2019, the Corporation and its bank subsidiaries will also be required to 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.

The U.S. Basel III Capital Rules use a standardized approach for risk weightings that expands the risk-weightings for assets and off balance sheet exposures from the currentprevious 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 off-balance sheet exposures and resulting in higher risk weights for a variety of asset categories.

As of September 30, 2014,March 31, 2015, the Corporation believesand each of its currentbank subsidiaries met the minimum requirements of the U.S. Basel III Capital Rules, and each of the Corporation’s bank subsidiaries’ capital ratios exceeded the amounts required to be considered "well capitalized" as defined in the regulations. As of March 31, 2015, the Corporation's capital levels would meetalso met the fully-phased in minimum capital requirements, including the capital conservation buffers, as prescribed in the U.S. Basel III Capital Rules.

The following table summarizes the Corporation’s capital ratios in comparison to regulatory requirements:
 March 31, 2015 December 31, 2014 Regulatory
Minimum
for Capital
Adequacy
Common Equity Tier I (to Risk-Weighted Assets)11.2% N/A
 4.5%
Total Capital (to Risk-Weighted Assets)14.6% 14.7% 8.0%
Tier I Capital (to Risk-Weighted Assets)11.4% 12.3% 6.0%
Tier I Capital (to Average Assets)9.4% 10.0% 4.0%

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.

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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 experience a proportionate 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 September 30, 2014,March 31, 2015, the Corporation had $933.5$783.1 million of short and long-term advances outstanding from the FHLB with an additional borrowing capacity of approximately $2.1$2.6 billion under these facilities. Advances from the FHLB are secured by qualifying commercial real estate and residential mortgage loans, investments and other assets.

As of September 30, 2014,March 31, 2015, the Corporation had aggregate availability under Federal funds lines of $1.3$1.4 billion, with $6.6 million$43,000 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 September 30, 2014,March 31, 2015, the Corporation had $1.1$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.

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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.Discussion and Analysis. The consolidated statements of cash flows provide additional information. The Corporation’s operating activities during the first ninethree months of 20142015 generated $147.9$30.5 million of cash, mainly due to net income, as adjusted forpartially offset by the impact of non-cash expenses, most notably depreciation and amortization of premises and equipment and the provision for credit losses, partially offset by a net decreaseincrease in other liabilities and loans held for sale. Cash used in investing activities was $293.5$214.4 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 in excess of purchases. Net cash provided by financing activities was $148.0$170.1 million due to increases in deposits and additions to long-term debt,short-term borrowings, partially offset by a net decrease in short-term borrowings, acquisitionsrepayments of treasurylong-term debt and common stock and dividends paid on common shares.cash dividends.


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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 price 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 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 September 30, 2014,March 31, 2015, equity investments consisted of $39.3$34.7 million of common stocks of publicly traded financial institutions, and $6.0$5.9 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 $28.6$23.4 million and a fair value of $39.3$34.7 million at September 30, 2014,March 31, 2015, including an investment in a single financial institution with a cost basis of $20.0$15.7 million and a fair value of $27.5 million.$23.2 million. The fair value of this investment accounted for 70.0%66.7% 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 $10.7$11.3 million and gross unrealized losses of $21,000$4,000 as of September 30, 2014.March 31, 2015.
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. equitysecurities 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 September 30, 2014,March 31, 2015, the Corporation had $257.6 million ofowned municipal securities issued by various municipalities.municipalities with a total fair value of $224.3 million. 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 September 30, 2014,March 31, 2015, approximately 95% of municipal securities were supported by the general obligation of corresponding municipalities. Approximately 87%88% of these securities were school district issuances, which are also supported by the states of the issuing municipalities.

Auction Rate Certificates
As of September 30, 2014,March 31, 2015, the Corporation’s investments in student loan auction rate certificates (ARCs), had a cost basis of $158.7$106.4 million and a fair value of $148.5 million.$98.9 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. Therefore, as of September 30, 2014,March 31, 2015, the fair values of the ARCs currently in the portfolio were derived using

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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 current market. The expected cash flows

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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 September 30, 2014, approximately $144 million, or 97%,March 31, 2015, all of the ARCs were rated above investment grade, with approximately $6$6 million, or 5%, or 4%, AAA"AAA" rated and $104$93 million, or 95%, or 72%, AA"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 millionAll of the student loans underlying these ARCs have principal payments which are guaranteed by the federal government. In total, approximately $147 million, or 99%, of the student loans underlying the ARCs have principal payments whichthat are guaranteed by the federal government. As of September 30, 2014,March 31, 2015, 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 as of September 30, 2014:March 31, 2015:
Amortized
cost
 
Estimated
fair value
Amortized
cost
 
Estimated
fair value
(in thousands)(in thousands)
Single-issuer trust preferred securities$47,546
 $44,075
$47,590
 $42,863
Subordinated debt47,498
 50,289
47,563
 50,173
Pooled trust preferred securities2,050
 4,487
405
 1,084
Corporate debt securities issued by financial institutions$97,094
 $98,851
$95,558
 $94,120

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 $3.5$4.7 million at September 30, 2014.March 31, 2015. The Corporation did not record any other-than-temporary impairment charges for single-issuer trust preferred securities during the ninethree months ended September 30, 2014March 31, 2015 or 2013. Six2014. Seven of the Corporation's 20 single-issuer trust preferred securities were rated below investment grade by at least one ratings agency, with an amortized cost of $13.5$14.5 million and an estimated fair value of $12.3$12.8 million as of September 30, 2014.March 31, 2015. All of the single-issuer trust preferred securities rated below investment grade were rated BB"BB" or Ba."Ba". Single-issuer trust preferred securities with an amortized cost of $4.7$4.7 million and an estimated fair value of $3.9$3.8 million at September 30, 2014March 31, 2015 were not rated by any ratings agency.
As of September 30, 2014,March 31, 2015, all sixthree of the Corporation's pooled trust preferred securities with an amortized cost of $2.1 million$405,000 and an estimated fair value of $4.5$1.1 million,, were rated below investment grade by at least one ratings agency, with ratings ranging from C"C" to Ca."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 pools.pool.
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.
During the nine months ended September 30, 2014, the Corporation recorded $18,000 of other than temporary impairment charges for pooled trust preferred securities. Additional impairment charges for corporate debt securities issued by financial institutions may be necessary in the future depending upon the performance of the individual investments.
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 M,10, "Fair Value Measurements," in the Notes to Consolidated Financial Statements for further discussion related to the fair values of debt securities.






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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)("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.

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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.

The following table provides information about the Corporation’s interest rate sensitive financial instruments as of September 30, 2014.March 31, 2015. 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)$979,605
 $477,082
 $360,627
 $360,794
 $208,873
 $654,018
 $3,040,999
 $3,025,002
$944,463
 $491,060
 $354,616
 $384,681
 $191,213
 $637,266
 $3,003,299
 $3,004,169
Average rate3.87% 4.47% 4.37% 4.65% 4.57% 3.90% 4.17% 
3.91% 4.35% 4.26% 4.51% 4.49% 3.82% 4.12% 
                              
Floating rate loans (1) (2)2,384,919
 1,467,374
 1,196,069
 1,028,622
 1,369,511
 2,540,265
 9,986,760
 9,881,516
2,309,708
 1,520,146
 1,232,654
 1,056,653
 1,353,835
 2,637,489
 10,110,485
 10,072,225
Average rate3.81% 3.96% 3.98% 3.97% 3.83% 3.97% 3.91% 
3.73% 3.88% 3.90% 3.90% 3.80% 3.86% 3.83% 
                              
Fixed rate investments (3)384,258
 334,001
 270,899
 222,095
 196,268
 822,832
 2,230,353
 2,229,442
334,511
 294,958
 251,396
 204,945
 182,151
 783,344
 2,051,305
 2,074,789
Average rate2.77% 2.79% 2.80% 2.62% 2.59% 2.70% 2.72% 
2.92% 2.89% 2.76% 2.65% 2.52% 2.60% 2.71% 
                              
Floating rate investments (3)15
 4,963
 163,680
 41
 38
 40,690
 209,427
 196,261
—
 4,974
 111,401
 33
 —
 40,509
 156,917
 144,751
Average rate1.00% 0.94% 1.99% 1.62% 2.09% 1.44% 1.86% 
—% 0.97% 1.55% 1.87% —% 1.46% 1.51% 
                              
Other interest-earning assets316,735
 —
 —
 —
 —
 86,056
 402,791
 402,791
672,097
 —
 —
 —
 —
 65,694
 737,791
 737,791
Average rate0.37% —% —% —% —% 4.42% 0.37% 
0.41% —% —% —% —% 4.45% 0.77% 
                              
Total$4,065,532
 $2,283,420
 $1,991,275
 $1,611,552
 $1,774,690
 $4,143,861
 $15,870,330
 $15,735,012
$4,260,779
 $2,311,138
 $1,950,067
 $1,646,312
 $1,727,199
 $4,164,302
 $16,059,797
 $16,033,725
Average rate3.46% 3.89% 3.73% 3.94% 3.78% 3.69% 3.70% 
3.18% 3.85% 3.68% 3.89% 3.74% 3.60% 3.58% 
                              
Fixed rate deposits (4)$1,410,310
 $465,112
 $313,816
 $98,102
 $314,450
 $22,882
 $2,624,672
 $2,640,788
$1,318,918
 $466,560
 $332,354
 $263,137
 $306,143
 $20,934
 $2,708,046
 $2,726,933
Average rate0.70% 1.02% 1.29% 1.50% 2.08% 1.84% 1.03% 
0.71% 1.05% 1.34% 1.99% 2.09% 1.93% 1.14% 
                              
Floating rate deposits (5)4,947,476
 831,604
 458,962
 398,349
 341,540
 174,214
 7,152,145
 7,131,190
4,921,235
 823,303
 466,474
 388,074
 322,837
 118,851
 7,040,774
 7,032,497
Average rate0.15% 0.11% 0.09% 0.08% 0.08% 0.10% 0.13% 
0.15% 0.11% 0.09% 0.08% 0.09% 0.15% 0.13% 
                              
Fixed rate borrowings (6)187,323
 729
 551,539
 565
 100,452
 161,185
 1,001,793
 1,007,287
141,389
 451,709
 100,596
 774
 125,046
 258,506
 1,078,020
 1,098,095
Average rate3.66% 4.47% 4.49% 4.67% 1.87% 6.17% 4.34% 
3.90% 4.21% 5.74% 4.64% 1.84% 5.59% 4.37% 
                              
Floating rate borrowings (7)564,952
 —
 —
 —
 —
 16,496
 581,448
 570,406
410,106
 —
 —
 —
 —
 16,496
 426,602
 416,748
Average rate0.18% —% —% —% —% 2.37% 0.25% 
0.19% —% —% —% —% 2.40% 0.28% 
                              
Total$7,110,061
 $1,297,445
 $1,324,317
 $497,016
 $756,442
 $374,777
 $11,360,058
 $11,349,671
$6,791,648
 $1,741,572
 $899,424
 $651,985
 $754,026
 $414,787
 $11,253,442
 $11,274,273
Average rate0.35% 0.43% 2.21% 0.37% 1.15% 2.92% 0.72% 
0.34% 1.42% 1.19% 0.86% 1.19% 3.72% 0.79% 
 
(1)Amounts are based on contractual payments and maturities, adjusted for expected prepayments. Excludes $2.6$1.7 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)Amounts are based on contractual maturities of time deposits.
(5)Estimated based on history of deposit flows.
(6)Amounts are based on contractual maturities of debt instruments, adjusted for possible calls. Amounts also include junior subordinated deferrable interest debentures.
(7)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.

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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 income 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 $10.0$10.1 billion of floating rate loans above are $3.6$3.4 billion of loans, or 35.8%34.3% of the total, that float with the prime interest rate, $2.0$2.1 billion, or 19.7%20.5%, of loans that float with other interest rates, primarily the London Interbank Offered Rate (LIBOR)("LIBOR"), and $4.4$4.6 billion, or 44.5%45.2%, of adjustable rate loans. The $4.4$4.6 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 September 30, 2014,March 31, 2015, stratified by the period until their next repricing:
 Percent of Total
Adjustable Rate
Loans
One year29.8%30.9%
Two years17.618.1
Three years15.917.1
Four years16.214.3
Five years11.010.6
Greater than five years9.59.0
The Corporation uses two complementary methods to measure and manage interest rate risk. They are 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.
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 abrupt interest rate shockschanges 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 + $ 61.083.7 million    +12.1%+17.2%
+200 bp + $ 38.254.2 million +7.611.1
+100 bp + $ 15.823.8 million +3.14.9
–100 bp – $ 18.919.5 million –3.84.0
 
(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. UpwardAbrupt changes or "shocks" in interest rates, both 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 September 30, 2014,March 31, 2015, 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 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 JulyAs disclosed by the Corporation in Part II, Item 9B of its Annual Report on Form 10-K for the year ended December 31, 2014 threefiled with the SEC on February 25, 2015, in February 2015, Fulton Bank of New Jersey ("FBNJ"), a wholly owned banking subsidiariessubsidiary 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 OfficeFDIC consenting to the issuance by the FDIC of a Consent Order (the "FDIC Consent Order"). In addition, in February 2015, FBNJ entered into a Consent Order with the ComptrollerCommissioner of Banking and Insurance for the Currency relatingState of New Jersey (the "New Jersey Consent Order") and, together with the FDIC Consent Order, the "Consent Orders"). The Consent Orders impose substantially identical requirements and relate to identified deficiencies in a centralized Bank Secrecy Act and anti-money laundering compliance program (the "BSA/AML 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. The Consent Orders generally require, among other things, that FBNJ review, assess and take actions to strengthen and enhance the BSA/AML Compliance Program, including increasing oversight of the BSA/AML Compliance Program by the Board of Directors of FBNJ; designating a qualified Bank Secrecy Act officer that is acceptable to the FDIC and the Commissioner of Banking and Insurance for the State of New Jersey, that reports monthly to the Board of Directors of FBNJ and is provided with sufficient authority and resources to implement and enforce the BSA/AML Compliance Program; enhancing the periodic risk assessment process relating to the BSA/AML Requirements; revising internal controls designed to ensure compliance with the BSA/AML Requirements, including enhancing customer due diligence procedures and establishing enhanced due diligence procedures for higher-risk customers; and reviewing and enhancing procedures for monitoring for, identifying, investigating and reporting suspicious activity, or known or suspected violations of law in accordance with the BSA/AML Requirements.

The Corporation and each of its other banking subsidiaries are subject to similar regulatory enforcement orders issued during 2014 by their respective bank regulatory agencies relating to identified deficiencies in the BSA/AML Compliance Program. Information relating to the regulatory enforcement orders issued during 2014 was disclosed by the Corporation in a Current ReportReports on Form 8-K filed with the SEC on July 18, 2014. 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 September 2014, the Corporation and its wholly owned banking subsidiary, Lafayette Ambassador Bank (Lafayette), entered 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 (Reserve Board), as disclosed by the Corporation in a Current Report on Form 8-K filed with the SEC on September 9, 2014. The Cease and Desist Order requires, among other things, that the Corporation and Lafayette strengthen the BSA/AML Compliance Program and imposes requirements similar to those set forth in the Consent Orders. In addition, the Cease and Desist Order requires the Corporation to engage an independent third-party firm to conduct a comprehensive assessment of the BSA/AML Compliance Program, and that Lafayette engage an independent third-party firm to conduct a retrospective review of account and transaction activity from January 1, 2014 to June 30, 2014 associated with high-risk customers to determine whether suspicious activity was properly identified and reported in accordance with the BSA/AML requirements. Based on the results of this review the Reserve Board may require a review of transactions for additional time periods. Further, because the Consent Orders and the Cease and Desist Order relate to the BSA/AML Compliance Program, which is operated jointly for all of the Corporation’s subsidiary banks, management anticipates that one or both of the Corporation's other subsidiary banks will also become subject to an enforcement action related to the BSA/AML Requirements, and the provisions of any such enforcement action may differ from those of the Consent Orders and Cease and Desist Order.December 29, 2014.

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, 20132014.

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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 third quarter of 2014:Not Applicable.
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
July 1, 2014 to July 31, 2014 1,316,158
 $11.46 1,316,158
 2,683,842
August 1, 2014 to August 31, 2014 2,683,842
 $11.32 2,683,842
 —
September 1, 2014 to September 30, 2014 —
 — —
 —
On May 28,2014, 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. As of September 30, 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.

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: November 5, 2014May 11, 2015 /s/ E. Philip Wenger
    E. Philip Wenger
    Chairman, Chief Executive Officer and President
     
Date: November 5, 2014May 11, 2015 /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 an Amended Form 8-K dated September 23, 2014.
  �� 
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.
    
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Financial statements from the Quarterly Report on Form 10-Q of Fulton Financial Corporation for the quarterperiod ended September 30, 2014,March 31, 2015, filed on November 5, 2014,May 11, 2015, 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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