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

FORM 10-Q

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

For the quarterly period ended March 31,June 30, 2015, or

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

For the transition period from             to              

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

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

APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
Common Stock, $2.50 Par Value –176,691,000–174,944,000 shares outstanding as of April 30,July 31, 2015.

1


FULTON FINANCIAL CORPORATION
FORM 10-Q FOR THE THREE AND SIX MONTHS ENDED MARCH 31,JUNE 30, 2015
INDEX
 
DescriptionPage
   
PART I. FINANCIAL INFORMATION 
   
 
   
(a)
   
(b)
   
(c)
   
(d)
   
(e)
   
(f)
   
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
   
   
   
 
   
   
   
   
   
Item 4. Mine Safety Disclosures
   
   
   
   
   

2




Item 1. Financial Statements
 

CONSOLIDATED BALANCE SHEETS 
 
(in thousands, except per-share data)
March 31,
2015
 December 31,
2014
June 30,
2015
 December 31,
2014
(unaudited) (unaudited) 
ASSETS      
Cash and due from banks$91,870
 $105,702
$100,455
 $105,702
Interest-bearing deposits with other banks637,973
 358,130
322,218
 358,130
Federal Reserve Bank and Federal Home Loan Bank stock65,694
 64,953
65,106
 64,953
Loans held for sale34,124
 17,522
33,980
 17,522
Available for sale investment securities2,259,802
 2,323,371
2,440,492
 2,323,371
Loans, net of unearned income13,115,505
 13,111,716
13,244,230
 13,111,716
Less: Allowance for loan losses(177,701) (184,144)(167,485) (184,144)
Net Loans12,937,804
 12,927,572
13,076,745
 12,927,572
Premises and equipment226,241
 226,027
226,794
 226,027
Accrued interest receivable42,216
 41,818
41,193
 41,818
Goodwill and intangible assets531,672
 531,803
531,567
 531,803
Other assets535,945
 527,869
526,923
 527,869
Total Assets$17,363,341
 $17,124,767
$17,365,473
 $17,124,767
LIABILITIES      
Deposits:      
Noninterest-bearing$3,765,677
 $3,640,623
$3,805,165
 $3,640,623
Interest-bearing9,748,820
 9,726,883
9,700,544
 9,726,883
Total Deposits13,514,497
 13,367,506
13,505,709
 13,367,506
Short-term borrowings:      
Federal funds purchased43
 6,219
5,058
 6,219
Other short-term borrowings410,062
 323,500
403,977
 323,500
Total Short-Term Borrowings410,105
 329,719
409,035
 329,719
Accrued interest payable18,357
 18,045
15,172
 18,045
Other liabilities294,352
 273,419
278,099
 273,419
Federal Home Loan Bank advances and long-term debt1,094,517
 1,139,413
1,132,641
 1,139,413
Total Liabilities15,331,828
 15,128,102
15,340,656
 15,128,102
SHAREHOLDERS’ EQUITY      
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
Common stock, $2.50 par value, 600 million shares authorized, 218.5 million shares issued in 2015 and 218.2 million shares issued in 2014546,219
 545,555
Additional paid-in capital1,422,012
 1,420,523
1,445,315
 1,420,523
Retained earnings582,724
 558,810
603,597
 558,810
Accumulated other comprehensive loss(9,800) (17,722)(22,877) (17,722)
Treasury stock, at cost, 39.2 million shares in 2015 and 39.3 million shares in 2014(509,157) (510,501)
Treasury stock, at cost, 42.5 million shares in 2015 and 39.3 million shares in 2014(547,437) (510,501)
Total Shareholders’ Equity2,031,513
 1,996,665
2,024,817
 1,996,665
Total Liabilities and Shareholders’ Equity$17,363,341
 $17,124,767
$17,365,473
 $17,124,767
      
See Notes to Consolidated Financial Statements      
 

3



CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
 
(in thousands, except per-share data)Three months ended March 31Three months ended June 30 Six months ended June 30
2015 20142015 2014 2015 2014
INTEREST INCOME          
Loans, including fees$129,777
 $131,830
$129,910
 $131,440
 $259,687
 $263,270
Investment securities:          
Taxable11,282
 13,266
10,944
 12,418
 22,226
 25,684
Tax-exempt2,087
 2,348
1,881
 2,298
 3,968
 4,646
Dividends348
 332
296
 325
 644
 657
Loans held for sale173
 134
265
 214
 438
 348
Other interest income2,105
 882
933
 1,207
 3,038
 2,089
Total Interest Income145,772
 148,792
144,229
 147,902
 290,001
 296,694
INTEREST EXPENSE          
Deposits9,823
 7,896
10,053
 8,685
 19,876
 16,581
Short-term borrowings77
 633
103
 540
 180
 1,173
Long-term debt12,291
 10,698
11,153
 10,779
 23,444
 21,477
Total Interest Expense22,191
 19,227
21,309
 20,004
 43,500
 39,231
Net Interest Income123,581
 129,565
122,920
 127,898
 246,501
 257,463
Provision for credit losses(3,700) 2,500
2,200
 3,500
 (1,500) 6,000
Net Interest Income After Provision for Credit Losses127,281
 127,065
120,720
 124,398
 248,001
 251,463
NON-INTEREST INCOME          
Service charges on deposit accounts11,569
 11,711
12,637
 12,552
 24,206
 24,263
Investment management and trust services10,889
 10,958
11,011
 11,339
 21,900
 22,297
Other service charges and fees9,363
 8,927
10,988
 10,526
 20,351
 19,453
Mortgage banking income4,688
 3,605
5,339
 5,741
 10,027
 9,346
Investment securities gains, net:       
Net gains on sales of investment securities4,145
 
2,415
 1,124
 6,560
 1,124
Other-than-temporary impairment losses
 (12) 
 (12)
Investment securities gains, net2,415
 1,112
 6,560
 1,112
Other4,083
 3,305
4,099
 3,602
 8,182
 6,907
Total Non-Interest Income44,737
 38,506
46,489
 44,872
 91,226
 83,378
NON-INTEREST EXPENSE          
Salaries and employee benefits64,990
 59,566
65,067
 63,623
 130,057
 123,189
Net occupancy expense13,692
 13,603
11,809
 11,464
 25,501
 25,067
Other outside services5,750
 3,812
8,125
 7,240
 13,875
 11,052
Data processing4,768
 3,796
4,894
 4,331
 9,662
 8,127
Software3,376
 3,209
 6,694
 6,134
Equipment expense3,958
 3,602
3,335
 3,360
 7,293
 6,962
Software3,318
 2,925
FDIC insurance expense2,885
 2,615
 5,707
 5,304
Professional fees2,871
 2,904
2,731
 3,559
 5,602
 6,463
FDIC insurance expense2,822
 2,689
Supplies and postage2,369
 2,326
2,726
 2,451
 5,095
 4,777
Marketing2,235
 2,337
 3,468
 3,921
Telecommunications1,716
 1,819
1,617
 1,787
 3,333
 3,606
Operating risk loss674
 716
 1,501
 2,544
Other real estate owned and repossession expense1,362
 983
129
 748
 1,491
 1,731
Marketing1,233
 1,584
Operating risk loss827
 1,828
Intangible amortization130
 315
106
 315
 236
 630
Other8,672
 7,802
8,645
 8,419
 17,317
 16,221
Total Non-Interest Expense118,478
 109,554
118,354
 116,174
 236,832
 225,728
Income Before Income Taxes53,540
 56,017
48,855
 53,096
 102,395
 109,113
Income taxes13,504
 14,234
12,175
 13,500
 25,679
 27,734
Net Income$40,036
 $41,783
$36,680
 $39,596
 $76,716
 $81,379
          
PER SHARE:          
Net Income (Basic)$0.22
 $0.22
$0.21
 $0.21
 $0.43
 $0.43
Net Income (Diluted)0.22
 0.22
0.21
 0.21
 0.43
 0.43
Cash Dividends0.09
 0.08
0.09
 0.08
 0.18
 0.16
See Notes to Consolidated Financial Statements          

4



CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
 
(in thousands)
Three months ended March 31,Three months ended June 30 Six months ended June 30
2015 20142015 2014 2015 2014
  
Net Income$40,036
 $41,783
$36,680
 $39,596
 $76,716
 $81,379
Other Comprehensive Income, net of tax:   
Unrealized gain on securities9,992
 13,933
Other Comprehensive Income (Loss), net of tax:       
Unrealized gain (loss) on securities(12,008) 12,990
 (2,016) 26,923
Reclassification adjustment for postretirement amendment gains included in net income
 (944)
 
 
 (944)
Reclassification adjustment for securities gains included in net income(2,695) 
(1,569) (723) (4,264) (723)
Non-credit related unrealized gain on other-than-temporarily impaired debt securities125
 189

 323
 125
 512
Unrealized gain on derivative financial instruments34
 34
34
 34
 68
 68
Unrecognized postretirement income arising due to plan amendment
 2,144

 
 
 2,144
Amortization of net unrecognized pension and postretirement items466
 96
466
 104
 932
 200
Other Comprehensive Income7,922
 15,452
Other Comprehensive Income (Loss)(13,077) 12,728
 (5,155) 28,180
Total Comprehensive Income$47,958
 $57,235
$23,603
 $52,324
 $71,561
 $109,559
          
See Notes to Consolidated Financial Statements          


5



CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)
THREESIX MONTHS ENDED MARCH 31,JUNE 30, 2015 AND 2014
 
(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
178,924
 $545,555
 $1,420,523
 $558,810
 $(17,722) $(510,501) $1,996,665
Net income
 
 
 40,036
 
 
 40,036

 
 
 76,716
 
 
 76,716
Other comprehensive income
 
 
 
 7,922
 
 7,922
Other comprehensive loss
 
 
 
 (5,155) 
 (5,155)
Stock issued, including related tax benefits174
 179
 418
 
 
 1,344
 1,941
423
 664
 1,954
 
 
 2,077
 4,695
Stock-based compensation awards
 
 1,071
 
 
 
 1,071

 
 2,838
 
 
 
 2,838
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
Acquisition of treasury stock(1,538)         (19,013) (19,013)
Settlement of accelerated stock repurchase agreement(1,790)   20,000
     (20,000) 
Common stock cash dividends - $0.18 per share
 
 
 (31,929) 
 
 (31,929)
Balance at June 30, 2015176,019
 $546,219
 $1,445,315
 $603,597
 $(22,877) $(547,437) $2,024,817
                          
Balance at December 31, 2013192,652
 $544,568
 $1,432,974
 $463,843
 $(37,341) $(340,857) $2,063,187
192,652
 $544,568
 $1,432,974
 $463,843
 $(37,341) $(340,857) $2,063,187
Net income
 
 
 41,783
 
 
 41,783

 
 
 81,379
 
 
 81,379
Other comprehensive income
 
 
 
 15,452
 
 15,452

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

 
 3,022
 
 
 
 3,022
Acquisition of treasury stock(4,000)         (49,804) (49,804)(4,000)         (49,804) (49,804)
Common stock cash dividends - $0.08 per share
 
 
 (15,109) 
 
 (15,109)
Balance at March 31, 2014188,850
 $544,821
 $1,434,546
 $490,517
 $(21,889) $(389,276) $2,058,719
Common stock cash dividends - $0.16 per share
 
 
 (30,234) 
 
 (30,234)
Balance at June 30, 2014189,033
 $545,066
 $1,436,759
 $514,988
 $(9,161) $(387,852) $2,099,800
                          
See Notes to Consolidated Financial Statements                          
 

6



CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
(in thousands)
Three months ended March 31Six months ended June 30
2015 20142015 2014
CASH FLOWS FROM OPERATING ACTIVITIES:      
Net Income$40,036
 $41,783
$76,716
 $81,379
Adjustments to reconcile net income to net cash provided by operating activities:      
Provision for credit losses(3,700) 2,500
(1,500) 6,000
Depreciation and amortization of premises and equipment7,361
 6,629
13,920
 12,354
Net amortization of investment securities premiums1,431
 1,435
3,288
 2,908
Net gains on sales of investment securities(4,145) 
(6,560) (1,112)
Net increase in loans held for sale(16,602) (3,066)(16,458) (14,728)
Amortization of intangible assets130
 315
236
 630
Stock-based compensation1,071
 1,033
2,838
 3,022
Excess tax benefits from stock-based compensation(15) (25)(63) (52)
(Increase) decrease in accrued interest receivable(398) 661
(Increase) decrease in other assets(5,525) 7,271
Increase in accrued interest payable312
 1,754
Increase in other liabilities10,553
 182
Decrease in accrued interest receivable625
 1,921
Decrease (increase) in other assets9,818
 (3,039)
(Decrease) increase in accrued interest payable(2,873) 1,429
(Decrease) increase in other liabilities(2,959) 3,646
Total adjustments(9,527) 18,689
312
 12,979
Net cash provided by operating activities30,509
 60,472
77,028
 94,358
CASH FLOWS FROM INVESTING ACTIVITIES:      
Proceeds from sales of securities available for sale11,567
 12,548
18,815
 15,189
Proceeds from maturities of securities available for sale105,647
 79,045
205,620
 174,619
Purchase of securities available for sale(37,142) (11,700)(346,322) (60,952)
Increase in short-term investments(280,584) (58,901)
Net (increase) decrease in loans(6,362) 40,017
Decrease (increase) in short-term investments35,759
 (57,357)
Net increase in loans(147,492) (74,766)
Net purchases of premises and equipment(7,575) (6,255)(14,687) (11,501)
Net cash (used in) provided by investing activities(214,449) 54,754
Net cash used in investing activities(248,307) (14,768)
CASH FLOWS FROM FINANCING ACTIVITIES:      
Net increase in demand and savings deposits171,022
 94,093
205,901
 104,390
Net (decrease) increase in time deposits(24,031) 84,638
(67,698) 98,083
Increase (decrease) in short-term borrowings80,386
 (188,945)79,316
 (250,322)
Additions to long-term debt148,099
 90,000
Repayments of long-term debt(44,896) (123)(154,871) (5,189)
Net proceeds from issuance of common stock1,926
 2,152
4,632
 4,018
Excess tax benefits from stock-based compensation15
 25
63
 52
Dividends paid(14,314) (15,413)(30,397) (30,521)
Acquisition of treasury stock
 (49,804)(19,013) (49,804)
Net cash provided by (used in) financing activities170,108
 (73,377)166,032
 (39,293)
Net (Decrease) Increase in Cash and Due From Banks(13,832) 41,849
(5,247) 40,297
Cash and Due From Banks at Beginning of Period105,702
 218,540
105,702
 218,540
Cash and Due From Banks at End of Period$91,870
 $260,389
$100,455
 $258,837
Supplemental Disclosures of Cash Flow Information:      
Cash paid during the period for:      
Interest$21,879
 $17,473
$46,373
 $37,802
Income taxes146
 631
11,051
 16,407
See Notes to Consolidated Financial Statements      
 
7


FULTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
NOTE 1 – Basis of Presentation

The accompanying unaudited consolidated financial statements of Fulton Financial Corporation (the "Corporation") have been prepared in conformity with U.S. generally accepted accounting principles ("U.S. GAAP") for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the amounts of assets and liabilities as of the date of the financial statements as well as revenues and expenses during the period. Actual results could differ from those estimates. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2014. Operating results for the three and six months ended March 31,June 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015.2015. The Corporation evaluates subsequent events through the date of filing of this Form 10-Q with the Securities and Exchange Commission ("SEC").

Recent Accounting Standards

Effective January 1, 2015, the Corporation adopted the Financial Accounting Standards Board's ("FASB") Accounting Standards Codification ("ASC") Update 2014-01, "Accounting for Investments in Qualified Affordable Housing Projects." ASC Update 2014-01 provides guidance on accounting for investments made by a reporting entity in flow-through limited liability entities that manage or invest in affordable housing projects that qualify for the low income housing tax credit. The Corporation has made certain investments in partnerships that generate tax credits under various federal programs which promote investment in low and moderate income housing and local economic development. The net income tax benefit associated with these investments, which consists of the amortization of the investments net of tax benefits, and the income tax credits earned on the investments recorded in income taxes on the consolidated income statements was $2.5$2.4 million and $2.8 million for the three months ended March 31,June 30, 2015 and 2014.2014, respectively and $4.8 million and $5.3 million for the six months ended June 30, 2015 and 2014, respectively. As of March 31,June 30, 2015 and December 31, 2014, the Corporation’s tax credit investments, included in other assets on the consolidated balance sheets, totaled $164.9$156.8 million and $155.6 million, respectively. The adoption of this ASC update did not have a material impact on the Corporation's consolidated financial statements for the three or six months ended March 31,June 30, 2015 or 2014.

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

In April 2015, the FASB issued ASC Update 2015-03, "Interest - Imputation of Interest." ASC Update 2015-03 simplifies the presentation of debt issuances costs. Debt issuance costs related to a recognized debt liability will be presented on the balance sheet as a direct deduction from the debt liability, similar to the presentation of debt discounts. Under current U.S. GAAP, debt issuance costs are reported on the balance sheet as assets. The costs will continue to be amortized to interest expense using the effective interest method. ASC Update 2015-03 is effective for public business entities' annual and interim reporting periods beginning after December 15, 2015, with earlier adoption permitted. The Corporation intends to adopt this standards update effective with its March 31, 2016 quarterly report on Form 10-Q and does not expect the adoption of ASC Update 2015-03 to have a material impact on its consolidated financial statements.

In April 2015, the FASB issued ASC Update 2015-05, "Customer's Accounting for Fees Paid in a Cloud Computing Arrangement." ASC Update 2015-05 provides explicit guidance to determine when a customer's fees paid in a cloud computing arrangement is for the acquisition of software licenses, services, or both. ASC Update 2015-05 is effective for public business entities' annual and interim reporting periods beginning after December 15, 2015, with earlier adoption permitted. The Corporation intends to adopt this standards update effective with its March 31, 2016 quarterly report on Form 10-Q and does not expect the adoption of ASC Update 2015-05 to have a material impact on its consolidated financial statements.


8




NOTE 2 – Net Income Per Share
Basic net income per share is calculated as net income divided by the weighted average number of shares outstanding.
Diluted net income per share is calculated as net income divided by the weighted average number of shares outstanding plus the incremental number of shares added as a result of converting common stock equivalents, calculated using the treasury stock method. The Corporation’s common stock equivalents consist of outstanding stock options, restricted stock, restricted stock units ("RSUs") and performance based restricted stock units ("PSUs"). PSUs are required to be included in weighted average shares outstanding if performance measures, as defined in each PSU award agreement, are met as of the end of the period.
A reconciliation of weighted average shares outstanding used to calculate basic net income per share and diluted net income per share follows:
Three months ended March 31Three months ended June 30 Six months ended June 30
2015 20142015 2014 2015 2014
(in thousands)(in thousands)
Weighted average shares outstanding (basic)178,471
 189,467
176,433
 188,139
 177,446
 188,799
Impact of common stock equivalents986
 1,022
1,098
 1,043
 1,042
 1,033
Weighted average shares outstanding (diluted)179,457
 190,489
177,531
 189,182
 178,488
 189,832
For the three and six months ended March 31,June 30, 2015 and 2014, 2.11.8 million and 2.0 million stock options, respectively, were excluded from the diluted net income per share computation as their effect would have been anti-dilutive. For the three and six months ended June 30, 2014, 3.13.3 million shares issuable underand 3.2 million stock options, respectively, were excluded from the diluted net income per share computation as their effect would have been anti-dilutive.


9


NOTE 3 – Accumulated Other Comprehensive Income
The following table presents changes in other comprehensive income: 
Before-Tax Amount Tax Effect Net of Tax AmountBefore-Tax Amount Tax Effect Net of Tax Amount
(in thousands)(in thousands)
Three months ended March 31, 2015     
Three months ended June 30, 2015     
Unrealized loss on securities$(18,474) $6,466
 $(12,008)
Reclassification adjustment for securities gains included in net income (1)(2,413) 844
 (1,569)
Unrealized gain on derivative financial instruments52
 (18) 34
Amortization of net unrecognized pension and postretirement items (2)717
 (251) 466
Total Other Comprehensive Loss$(20,118) $7,041
 $(13,077)
Three months ended June 30, 2014     
Unrealized gain on securities$15,371
 $(5,379) $9,992
$19,984
 $(6,994) $12,990
Reclassification adjustment for securities gains included in net income (1)(4,145) 1,450
 (2,695)(1,112) 389
 (723)
Non-credit related unrealized gains on other-than-temporarily impaired debt securities192
 (67) 125
497
 (174) 323
Unrealized gain on derivative financial instruments52
 (18) 34
52
 (18) 34
Amortization of net unrecognized pension and postretirement items (2)717
 (251) 466
160
 (56) 104
Total Other Comprehensive Income$12,187
 $(4,265) $7,922
$19,581
 $(6,853) $12,728
Three months ended March 31, 2014     
     
Six months ended June 30, 2015     
Unrealized loss on securities$(3,103) $1,087
 $(2,016)
Reclassification adjustment for securities gains included in net income (1)(6,558) 2,294
 (4,264)
Non-credit related unrealized gains (losses) on other-than-temporarily impaired debt securities192
 (67) 125
Unrealized gain on derivative financial instruments104
 (36) 68
Amortization of net unrecognized pension and postretirement items (2)1,434
 (502) 932
Total Other Comprehensive Loss$(7,931) $2,776
 $(5,155)
Six months ended June 30, 2014     
Unrealized gain on securities$21,435
 $(7,502) $13,933
$41,419
 $(14,496) $26,923
Reclassification adjustment for securities gains included in net income (1)(1,112) 389
 (723)
Reclassification adjustment for postretirement gains included in net income (2)(1,452) 508
 (944)(1,452) 508
 (944)
Non-credit related unrealized gains on other-than-temporarily impaired debt securities291
 (102) 189
Non-credit related unrealized gains (losses) on other-than-temporarily impaired debt securities788
 (276) 512
Unrealized gain on derivative financial instruments52
 (18) 34
105
 (37) 68
Unrecognized pension and postretirement income3,291
 (1,147) 2,144
3,291
 (1,147) 2,144
Amortization of net unrecognized pension and postretirement items (2)149
 (53) 96
309
 (109) 200
Total Other Comprehensive Income$23,766
 $(8,314) $15,452
$43,348
 $(15,168) $28,180

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







910


The following table presents changes in each component of accumulated other comprehensive income, net of tax: 
Unrealized Gains (Losses) on Investment Securities Not Other-Than-Temporarily Impaired Unrealized Non-Credit Gains (Losses) on Other-Than-Temporarily Impaired Debt Securities Unrealized Effective Portions of Losses on Forward-Starting Interest Rate Swaps Unrecognized Pension and Postretirement Plan Income (Costs) TotalUnrealized Gains (Losses) on Investment Securities Not Other-Than-Temporarily Impaired Unrealized Non-Credit Gains (Losses) on Other-Than-Temporarily Impaired Debt Securities Unrealized Effective Portions of Losses on Forward-Starting Interest Rate Swaps Unrecognized Pension and Postretirement Plan Income (Costs) Total
(in thousands)(in thousands)
Three months ended March 31, 2015         
Balance at December 31, 2014$5,980
 $1,349
 $(2,546) $(22,505) $(17,722)
Three months ended June 30, 2015         
Balance at March 31, 2015$14,311
 $440
 $(2,512) $(22,039) $(9,800)
Other comprehensive loss before reclassifications(12,008) 
 
 
 (12,008)
Amounts reclassified from accumulated other comprehensive income (loss)(1,473) (96) 34
 466
 (1,069)
Balance at June 30, 2015$830
 $344
 $(2,478) $(21,573) $(22,877)
Three months ended June 30, 2014
 
   
 
Balance at March 31, 2014$(13,577) $1,841
 $(2,648) $(7,505) $(21,889)
Other comprehensive income before reclassifications9,992
 125
 
 
 10,117
12,990

323
 
 
 13,313
Amounts reclassified from accumulated other comprehensive income (loss)(1,661) (1,034) 34
 466
 (2,195)7
 (730) 34
 104
 (585)
Balance at March 31, 2015$14,311
 $440
 $(2,512) $(22,039) $(9,800)
Three months ended March 31, 2014
 
   
 
Balance at June 30, 2014$(580) $1,434
 $(2,614) $(7,401) $(9,161)
         
Six months ended June 30, 2015         
Balance at December 31, 2014$5,980
 $1,349
 $(2,546) $(22,505) $(17,722)
Other comprehensive income (loss) before reclassifications(2,016) 125
 
 
 (1,891)
Amounts reclassified from accumulated other comprehensive income (loss)(3,134) (1,130) 68
 932
 (3,264)
Balance at June 30, 2015$830
 $344
 $(2,478) $(21,573) $(22,877)
Six months ended June 30, 2014         
Balance at December 31, 2013$(27,510) $1,652
 $(2,682) $(8,801) $(37,341)$(27,510) $1,652
 $(2,682) $(8,801) $(37,341)
Other comprehensive income before reclassifications13,933

189
 
 2,144
 16,266
26,923
 512
 
 2,144
 29,579
Amounts reclassified from accumulated other comprehensive income (loss)
 
 34
 (848) (814)7
 (730) 68
 (744) (1,399)
Balance at March 31, 2014$(13,577) $1,841
 $(2,648) $(7,505) $(21,889)
Balance at June 30, 2014$(580) $1,434
 $(2,614) $(7,401) $(9,161)


1011


NOTE 4 – Investment Securities
The following table presents the amortized cost and estimated fair values of investment securities, which were all classified as available for sale:
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
(in thousands)(in thousands)
March 31, 2015       
June 30, 2015       
Equity securities$29,224
 $11,397
 $(13) $40,608
$23,981
 $9,072
 $(12) $33,041
U.S. Government sponsored agency securities198
 5
 
 203
48,333
 57
 (130) 48,260
State and municipal securities216,877
 7,496
 (31) 224,342
231,592
 5,312
 (387) 236,517
Corporate debt securities99,120
 3,929
 (5,367) 97,682
98,756
 3,183
 (4,767) 97,172
Collateralized mortgage obligations874,853
 5,924
 (12,901) 867,876
931,093
 4,932
 (17,793) 918,232
Mortgage-backed securities910,418
 20,859
 (1,118) 930,159
998,418
 14,112
 (3,866) 1,008,664
Auction rate securities106,410
 
 (7,478) 98,932
106,504
 
 (7,898) 98,606
$2,237,100
 $49,610
 $(26,908) $2,259,802
$2,438,677
 $36,668
 $(34,853) $2,440,492
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
 (in thousands)
December 31, 2014       
Equity securities$33,469
 $14,167
 $(13) $47,623
U.S. Government securities200
 
 
 200
U.S. Government sponsored agency securities209
 5
 
 214
State and municipal securities238,250
 7,231
 (266) 245,215
Corporate debt securities99,016
 5,126
 (6,108) 98,034
Collateralized mortgage obligations917,395
 5,705
 (20,787) 902,313
Mortgage-backed securities914,797
 16,978
 (2,944) 928,831
Auction rate securities108,751
 
 (7,810) 100,941
 $2,312,087
 $49,212
 $(37,928) $2,323,371
Securities carried at $1.6 billion as of March 31,June 30, 2015 and $1.7 billion as of December 31, 2014 were pledged as collateral to secure public and trust deposits and customer repurchase agreements.
Equity securities include common stocks of financial institutions (estimated fair value of $34.7$27.2 million at March 31,June 30, 2015 and $41.8 million at December 31, 2014) and other equity investments (estimated fair value of $5.9$5.8 million at March 31,both June 30, 2015 and $5.8 million at December 31, 2014).
As of March 31,June 30, 2015, the financial institutions stock portfolio had a cost basis of $23.4$18.2 million and an estimated fair value of $34.7$27.2 million, including an investment in a single financial institution with a cost basis of $15.7$10.7 million and an estimated fair value of $23.2$15.7 million. The estimated fair value of this investment accounted for 66.7%57.7% 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.

1112


The amortized cost and estimated fair values of debt securities as of March 31,June 30, 2015, by contractual maturity, are shown in the following table. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
 Amortized
Cost
 Estimated
Fair Value
 Amortized
Cost
 Estimated
Fair Value
(in thousands)(in thousands)
Due in one year or less $29,323
 $30,124
 $57,382
 $58,372
Due from one year to five years 74,801
 78,246
 104,022
 106,663
Due from five years to ten years 140,219
 144,978
 148,682
 151,430
Due after ten years 178,262
 167,811
 175,099
 164,090
 422,605
 421,159
 485,185
 480,555
Collateralized mortgage obligations 874,853
 867,876
 931,093
 918,232
Mortgage-backed securities 910,418
 930,159
 998,418
 1,008,664
 $2,207,876
 $2,219,194
 $2,414,696
 $2,407,451
The following table presents information related to the gross realized gains and losses on the sales of equity and debt securities:
Gross
Realized
Gains
 Gross
Realized
Losses
 Net Gains (Losses)Gross
Realized
Gains
 Gross
Realized
Losses
 Other-than-
temporary
Impairment
Losses
 Net Gains (Losses)
Three months ended March 31, 2015(in thousands)
Three months ended June 30, 2015(in thousands)
Equity securities$1,970
 $
 $1,970
$2,290
 $
 $
 $2,290
Debt securities2,175
 
 2,175
125
 
 
 125
Total$4,145
 $
 $4,145
$2,415
 $
 $
 $2,415
Three months ended March 31, 2014     
Three months ended June 30, 2014       
Equity securities$1
 $
 $1
$
 $
 $(12) $(12)
Debt securities322
 (323) (1)1,124
 
 
 1,124
Total$323
 $(323) $
$1,124
 $
 $(12) $1,112
       
Six months ended June 30, 2015       
Equity securities$4,260
 $
 $
 $4,260
Debt securities2,300
 
 
 2,300
Total$6,560
 $
 $
 $6,560
Six months ended June 30, 2014       
Equity securities$1
 $
 $(12) $(11)
Debt securities1,446
 (323) 
 1,123
Total$1,447
 $(323) $(12) $1,112









13


The following table presents a summary of the cumulative credit related other-than-temporary impairment charges, recognized as components of earnings, for debt securities held by the Corporation at March 31,June 30, 2015 and 2014:
Three months ended March 31Three months ended June 30 Six months ended June 30
2015 20142015 2014 2015 2014
(in thousands)(in thousands)
Balance of cumulative credit losses on debt securities, beginning of period$(16,242) $(20,691)$(12,302) $(19,961) $(16,242) $(20,691)
Reductions for securities sold during the period3,938
 
792
 2,746
 4,730
 3,472
Reductions for increases in cash flows expected to be collected that are recognized over the remaining life of the security2
 4

 1
 2
 5
Balance of cumulative credit losses on debt securities, end of period$(12,302) $(20,687)$(11,510) $(17,214) $(11,510) $(17,214)






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 March 31,June 30, 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)
U.S. Government sponsored agency securities$28,051
 $(130) $
 $
 $28,051
 $(130)
State and municipal securities$5,953
 $(31) $
 $
 $5,953
 $(31)34,107
 (387) 
 
 34,107
 (387)
Corporate debt securities4,970
 (4) 34,600
 (5,363) 39,570
 (5,367)7,965
 (13) 35,229
 (4,754) 43,194
 (4,767)
Collateralized mortgage obligations34,287
 (132) 547,418
 (12,769) 581,705
 (12,901)95,315
 (651) 517,338
 (17,142) 612,653
 (17,793)
Mortgage-backed securities116,136
 (327) 72,224
 (791) 188,360
 (1,118)306,980
 (2,498) 69,029
 (1,368) 376,009
 (3,866)
Auction rate securities
 
 98,932
 (7,478) 98,932
 (7,478)
 
 98,606
 (7,898) 98,606
 (7,898)
Total debt securities161,346
 (494) 753,174
 (26,401) 914,520
 (26,895)472,418
 (3,679) 720,202
 (31,162) 1,192,620
 (34,841)
Equity securities
 
 77
 (13) 77
 (13)
 
 78
 (12) 78
 (12)
$161,346
 $(494) $753,251
 $(26,414) $914,597
 $(26,908)$472,418
 $(3,679) $720,280
 $(31,174) $1,192,698
 $(34,853)
The Corporation’s collateralized mortgage obligations and mortgage-backed securities have contractual terms that generally do not permit the issuer to settle the securities at a price less than the amortized cost of the investment. Because the decline in market value of these securities is attributable to changes in interest rates and not credit quality, and because the Corporation does not have the intent to sell and does not believe it will more likely than not be required to sell any of these securities prior to a recovery of their fair value to amortized cost, the Corporation does not consider these investments to be other-than-temporarily impaired as of March 31,June 30, 2015.
The unrealized holding losses on auction rate securities (auction rate certificates, or "ARCs"), are attributable to liquidity issues resulting from the failure of periodic auctions. The Corporation had previously purchased ARCs for investment management and trust customers as short-term investments with fair values that could be derived based on periodic auctions under normal market conditions. During 2008 and 2009, the Corporation purchased ARCs from these customers due to the failure of these periodic auctions, which made these previously short-term investments illiquid.
As of March 31,June 30, 2015, all of the ARCs were rated above investment grade, with approximately $6 million, or 5%6%, "AAA" rated and $93 million, or 95%94%, "AA" rated. All of the loans underlying the ARCs have principal payments which are guaranteed by the federal government.
As of March 31,June 30, 2015, all ARCs were current and making scheduled interest payments. Based on management’s evaluations, ARCs with an estimated fair value of $98.9$98.6 million were not subject to any other-than-temporary impairment charges as of March 31,June 30, 2015. The Corporation does not have the intent to sell and does not believe it will more likely than not be required to sell any of these securities prior to a recovery of their fair value to amortized cost, which may be at maturity.
For its investments in equity securities, particularly its investments in stocks of financial institutions, management evaluates the near-term prospects of the issuers in relation to the severity and duration of the impairment. Based on that evaluation and the Corporation’s ability and intent to hold those investments for a reasonable period of time sufficient for a recovery of fair value, the Corporation does not consider those investments with unrealized holding losses as of March 31,June 30, 2015 to be other-than-temporarily impaired.

14


The majority of the Corporation's available for sale corporate debt securities are issued by financial institutions. The following table presents the amortized cost and estimated fair value of corporate debt securities:
March 31, 2015 December 31, 2014June 30, 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$47,590
 $42,863
 $47,569
 $42,016
$47,613
 $43,378
 $47,569
 $42,016
Subordinated debt47,563
 50,173
 47,530
 50,023
47,595
 49,716
 47,530
 50,023
Pooled trust preferred securities405
 1,084
 2,010
 4,088

 530
 2,010
 4,088
Corporate debt securities issued by financial institutions95,558
 94,120
 97,109
 96,127
95,208
 93,624
 97,109
 96,127
Other corporate debt securities3,562
 3,562
 1,907
 1,907
3,548
 3,548
 1,907
 1,907
Available for sale corporate debt securities$99,120
 $97,682
 $99,016
 $98,034
$98,756
 $97,172
 $99,016
 $98,034


13


The Corporation’s investments in single-issuer trust preferred securities had an unrealized loss of $4.7$4.2 million at March 31,June 30, 2015.The Corporation did not record any other-than-temporary impairment charges for single-issuer trust preferred securities during the three or six months ended March 31,June 30, 2015 or 2014. Seven of the Corporation's 2019 single-issuer trust preferred securities were rated belowinvestment grade by at least one ratings agency, with an amortized cost of $14.5 million and an estimated fair value of $12.8$13.1 million at March 31,June 30, 2015. All of the single-issuer trust preferred securities rated below investment grade were rated "BB" or "Ba". Three single-issuer trust preferred securities with an amortized cost of $4.7 million and an estimated fair value of $3.8 million at March 31,June 30, 2015 were not rated by any ratings agency.
During the threesix months ended March 31,June 30, 2015, the Corporation sold twothree pooled trust preferred securities with a total amortized cost of $1.5$1.9 million, for a gain of $2.2$2.3 million. As of March 31,June 30, 2015, all threeboth of the Corporation's remaining pooled trust preferred securities, with an amortized cost of $405,000$0 and an estimated fair value of $1.1 million,$530,000, were rated below investment grade by at least one ratings agency, with ratings ranging from "C" to "Ca". The class of securities held by the Corporation was below the most senior tranche, with the Corporation’s interests being subordinate to other investors in the pool. The Corporation determines the fair value of pooled trust preferred securities based on quotes provided by third-party brokers.
The amortized cost of pooled trust preferred securities is the purchase price of the securities, net of cumulative credit related other-than-temporary impairment charges, determined using an expected cash flows model. The most significant input to the expected cash flows model is the expected payment deferral rate for each pooled trust preferred security. The Corporation evaluates the financial metrics, such as capital ratios and non-performing assets ratios, of the individual financial institution issuers that comprise each pooled trust preferred security to estimate its expected deferral rate.
Based on management’s evaluations, corporate debt securities with a fair value of $97.7$97.2 million were not subject to any additional other-than-temporary impairment charges as of March 31,June 30, 2015. The Corporation does not have the intent to sell and does not believe it will more likely than not be required to sell any of these securities prior to a recovery of their fair value to amortized cost, which may be at maturity.


15


NOTE 5 – Loans and Allowance for Credit Losses

Loans, Net of Unearned Income
Loans, net of unearned income are summarized as follows:
March 31,
2015
 December 31, 2014June 30,
2015
 December 31, 2014
(in thousands)(in thousands)
Real-estate - commercial mortgage$5,227,101
 $5,197,155
$5,237,800
 $5,197,155
Commercial - industrial, financial and agricultural3,762,631
 3,725,567
3,806,699
 3,725,567
Real-estate - home equity1,701,623
 1,736,688
1,689,688
 1,736,688
Real-estate - residential mortgage1,364,788
 1,377,068
1,369,103
 1,377,068
Real-estate - construction677,806
 690,601
731,925
 690,601
Consumer257,301
 265,431
272,494
 265,431
Leasing and other135,552
 127,562
147,960
 127,562
Overdrafts1,721
 4,021
2,642
 4,021
Loans, gross of unearned income13,128,523
 13,124,093
13,258,311
 13,124,093
Unearned income(13,018) (12,377)(14,081) (12,377)
Loans, net of unearned income$13,115,505
 $13,111,716
$13,244,230
 $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. Commercial loans include loans secured by collateral and unsecured loans. Construction loan class segments include loans secured by commercial real estate, loans to commercial borrowers secured by residential real estate and loans to individuals secured by residential real estate. Consumer loan class segments include direct consumer installment loans and indirect automobile loans.

The following table presents the components of the allowance for credit losses:
March 31,
2015
 December 31,
2014
June 30,
2015
 December 31,
2014
(in thousands)(in thousands)
Allowance for loan losses$177,701
 $184,144
$167,485
 $184,144
Reserve for unfunded lending commitments1,957
 1,787
1,968
 1,787
Allowance for credit losses$179,658
 $185,931
$169,453
 $185,931






16


The following table presents the activity in the allowance for credit losses:
Three months ended March 31Three months ended June 30 Six months ended June 30
2015 20142015 2014 2015 2014
(in thousands)(in thousands)
Balance at beginning of period$185,931
 $204,917
$179,658
 $199,006
 $185,931
 $204,917
Loans charged off(5,764) (10,268)(15,372) (11,476) (21,136) (21,744)
Recoveries of loans previously charged off3,191
 1,857
2,967
 2,412
 6,158
 4,269
Net loans charged off(2,573) (8,411)(12,405) (9,064) (14,978) (17,475)
Provision for credit losses(3,700) 2,500
2,200
 3,500
 (1,500) 6,000
Balance at end of period$179,658
 $199,006
$169,453
 $193,442
 $169,453
 $193,442

The following table presents the activity in the allowance for loan losses by portfolio segment:
Real Estate -
Commercial
Mortgage
 
Commercial -
Industrial,
Financial and
Agricultural
 
Real Estate -
Home
Equity
 
Real Estate -
Residential
Mortgage
 
Real Estate -
Construction
 Consumer 
Leasing
and other
and
overdrafts
 Unallocated Total
Real Estate -
Commercial
Mortgage
 
Commercial -
Industrial,
Financial and
Agricultural
 
Real Estate -
Home
Equity
 
Real Estate -
Residential
Mortgage
 
Real Estate -
Construction
 Consumer 
Leasing
and other
and
overdrafts
 Unallocated Total
(in thousands)(in thousands)
Three months ended March 31, 2015                 
Three months ended June 30, 2015                 
Balance at March 31, 2015$52,860
 $57,150
 $23,481
 $23,235
 $8,487
 $2,527
 $1,653
 $8,308
 $177,701
Loans charged off(1,642) (11,166) (870) (783) (87) (357) (467) 
 (15,372)
Recoveries of loans previously charged off451
 1,471
 189
 187
 231
 368
 70
 
 2,967
Net loans charged off(1,191) (9,695) (681) (596) 144
 11
 (397) 
 (12,405)
Provision for loan losses (1)(989) 1,715
 (294) 148
 (882) 70
 359
 2,062
 2,189
Balance at June 30, 2015$50,680
 $49,170
 $22,506
 $22,787
 $7,749
 $2,608
 $1,615
 $10,370
 $167,485
Three months ended June 30, 2014                 
Balance at March 31, 2014$53,757
 $50,563
 $32,460
 $33,329
 $9,842
 $3,324
 $2,011
 $11,803
 $197,089
Loans charged off(2,141) (5,512) (1,234) (1,089) (218) (449) (833) 
 (11,476)
Recoveries of loans previously charged off430
 775
 177
 108
 158
 402
 362
 
 2,412
Net loans charged off(1,711) (4,737) (1,057) (981) (60) (47) (471) 
 (9,064)
Provision for loan losses (1)(2,204) 3,258
 638
 396
 1,549
 29
 311
 (317) 3,660
Balance at June 30, 2014$49,842
 $49,084
 $32,041
 $32,744
 $11,331
 $3,306
 $1,851
 $11,486
 $191,685
Six months ended June 30, 2015                 
Balance at December 31, 2014$53,493
 $51,378
 $28,271
 $29,072
 $9,756
 $3,015
 $1,799
 $7,360
 $184,144
$53,493
 $51,378
 $28,271
 $29,072
 $9,756
 $3,015
 $1,799
 $7,360
 $184,144
Loans charged off(709) (1,863) (768) (1,281) 
 (780) (363) 
 (5,764)(2,351) (13,029) (1,638) (2,064) (87) (1,137) (830) 
 (21,136)
Recoveries of loans previously charged off436
 786
 251
 159
 1,147
 241
 171
 
 3,191
887
 2,257
 440
 346
 1,378
 609
 241
 
 6,158
Net loans charged off(273) (1,077) (517) (1,122) 1,147
 (539) (192) 
 (2,573)(1,464) (10,772) (1,198) (1,718) 1,291
 (528) (589) 
 (14,978)
Provision for loan losses (1)(360) 6,849
 (4,273) (4,715) (2,416) 51
 46
 948
 (3,870)(1,349) 8,564
 (4,567) (4,567) (3,298) 121
 405
 3,010
 (1,681)
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 June 30, 2015$50,680
 $49,170
 $22,506
 $22,787
 $7,749
 $2,608
 $1,615
 $10,370
 $167,485
Six months ended June 30, 2014                 
Balance at December 31, 2013$55,659
 $50,330
 $28,222
 $33,082
 $12,649
 $3,260
 $3,370
 $16,208
 $202,780
$55,659
 $50,330
 $28,222
 $33,082
 $12,649
 $3,260
 $3,370
 $16,208
 $202,780
Loans charged off(1,386) (5,125) (1,651) (846) (214) (751) (295) 
 (10,268)(3,527) (10,637) (2,885) (1,935) (432) (1,200) (1,128) 
 (21,744)
Recoveries of loans previously charged off44
 744
 356
 116
 224
 209
 164
 
 1,857
474
 1,519
 533
 224
 382
 611
 526
 
 4,269
Net loans charged off(1,342) (4,381) (1,295) (730) 10
 (542) (131) 
 (8,411)(3,053) (9,118) (2,352) (1,711) (50) (589) (602) 
 (17,475)
Provision for loan losses (1)(560) 4,614
 5,533
 977
 (2,817) 606
 (1,228) (4,405) 2,720
(2,764) 7,872
 6,171
 1,373
 (1,268) 635
 (917) (4,722) 6,380
Balance at March 31, 2014$53,757
 $50,563
 $32,460
 $33,329
 $9,842
 $3,324
 $2,011
 $11,803
 $197,089
Balance at June 30, 2014$49,842
 $49,084
 $32,041
 $32,744
 $11,331
 $3,306
 $1,851
 $11,486
 $191,685

(1)The provision for loan losses excluded a $170,000an $11,000 and $181,000 increase, and $220,000 decreaserespectively, in the reserve for unfunded lending commitments for the three and six months ended March 31,June 30, 2015 and March 31, 2014, respectively.a $160,000 and $380,000 decrease, respectively, in the reserve for unfunded lending commitments for the three and six months ended June 30, 2014. The total provision for credit losses, comprised of allocations for both funded and unfunded loans, was a$2.2 million and negative $3.7$1.5 million, respectively, for the three and six months ended March 31,June 30, 2015 and was $2.5$3.5 million and $6.0 million, respectively, for the three and six months ended March 31,June 30, 2014.

1517


The following table presents loans, net of unearned income and their related allowance for loan losses, by portfolio segment:
Real Estate -
Commercial
Mortgage
 
Commercial -
Industrial,
Financial and
Agricultural
 
Real Estate -
Home
Equity
 
Real Estate -
Residential
Mortgage
 
Real Estate -
Construction
 Consumer 
Leasing
and other
and
overdrafts
 
Unallocated
(1)
 Total
Real Estate -
Commercial
Mortgage
 
Commercial -
Industrial,
Financial and
Agricultural
 
Real Estate -
Home
Equity
 
Real Estate -
Residential
Mortgage
 
Real Estate -
Construction
 Consumer 
Leasing
and other
and
overdrafts
 
Unallocated
(1)
 Total
(in thousands)(in thousands)
Allowance for loan losses at March 31, 2015:              
Allowance for loan losses at June 30, 2015:Allowance for loan losses at June 30, 2015:              
Measured for impairment under FASB ASC Subtopic 450-20$38,916
 $40,027
 $16,937
 $9,162
 $6,037
 $2,504
 $1,653
 $8,308
 $123,544
$37,228
 $38,090
 $15,838
 $8,763
 $5,430
 $2,588
 $1,615
 $10,370
 $119,922
Evaluated for impairment under FASB ASC Section 310-10-3513,944
 17,123
 6,544
 14,073
 2,450
 23
 
 N/A
 54,157
13,452
 11,080
 6,668
 14,024
 2,319
 20
 
 N/A
 47,563
$52,860
 $57,150
 $23,481
 $23,235
 $8,487
 $2,527
 $1,653
 $8,308
 $177,701
$50,680
 $49,170
 $22,506
 $22,787
 $7,749
 $2,608
 $1,615
 $10,370
 $167,485
                                  
Loans, net of unearned income at March 31, 2015:              
Loans, net of unearned income at June 30, 2015:Loans, net of unearned income at June 30, 2015:              
Measured for impairment under FASB ASC Subtopic 450-20$5,157,342
 $3,716,037
 $1,688,869
 $1,312,861
 $656,021
 $257,265
 $124,255
 N/A
 $12,912,650
$5,172,333
 $3,764,999
 $1,676,410
 $1,315,908
 $712,975
 $272,463
 $136,521
 N/A
 $13,051,609
Evaluated for impairment under FASB ASC Section 310-10-3569,759
 46,594
 12,754
 51,927
 21,785
 36
 
 N/A
 202,855
65,467
 41,700
 13,278
 53,195
 18,950
 31
 
 N/A
 192,621
$5,227,101
 $3,762,631
 $1,701,623
 $1,364,788
 $677,806
 $257,301
 $124,255
 N/A
 $13,115,505
$5,237,800
 $3,806,699
 $1,689,688
 $1,369,103
 $731,925
 $272,494
 $136,521
 N/A
 $13,244,230
                                  
Allowance for loan losses at March 31, 2014:              
Allowance for loan losses at June 30, 2014:Allowance for loan losses at June 30, 2014:              
Measured for impairment under FASB ASC Subtopic 450-20$37,363
 $36,859
 $22,969
 $11,618
 $7,256
 $3,309
 $2,011
 $11,803
 $133,188
$33,388
 $36,603
 $22,234
 $11,450
 $7,163
 $3,285
 $1,851
 $11,486
 $127,460
Evaluated for impairment under FASB ASC Section 310-10-3516,394
 13,704
 9,491
 21,711
 2,586
 15
 
 N/A
 63,901
16,454
 12,481
 9,807
 21,294
 4,168
 21
 
 N/A
 64,225
$53,757
 $50,563
 $32,460
 $33,329
 $9,842
 $3,324
 $2,011
 $11,803
 $197,089
$49,842
 $49,084
 $32,041
 $32,744
 $11,331
 $3,306
 $1,851
 $11,486
 $191,685
                                  
Loans, net of unearned income at March 31, 2014:              
Loans, net of unearned income at June 30, 2014:Loans, net of unearned income at June 30, 2014:              
Measured for impairment under FASB ASC Subtopic 450-20$5,075,556
 $3,528,857
 $1,726,342
 $1,279,783
 $555,852
 $270,004
 $96,009
 N/A
 $12,532,403
$5,067,400
 $3,558,788
 $1,715,953
 $1,309,739
 $606,221
 $280,534
 $102,008
 N/A
 $12,640,643
Evaluated for impairment under FASB ASC Section 310-10-3561,898
 45,273
 14,154
 51,682
 28,365
 17
 
 N/A
 201,389
61,334
 42,933
 14,544
 52,237
 27,797
 23
 
 N/A
 198,868
$5,137,454
 $3,574,130
 $1,740,496
 $1,331,465
 $584,217
 $270,021
 $96,009
 N/A
 $12,733,792
$5,128,734
 $3,601,721
 $1,730,497
 $1,361,976
 $634,018
 $280,557
 $102,008
 N/A
 $12,839,511
 
(1)The unallocated allowance, which was approximately 5% and 6% of the total allowance for credit losses as of March 31,both June 30, 2015 and March 31,June 30, 2014, 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"). 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$1.5 million negative provision for credit losses during the threesix months ended March 31,June 30, 2015, compared to a $2.5$6.0 million provision for credit losses for the same period in 2014. The $6.2$7.5 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 onamong 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 March 31,June 30, 2015 and December 31, 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 March 31,June 30, 2015 and 2014, approximately 78%72% and 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 appraisals are not obtained for loans 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 an acceptable

18


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%.
The following table presents total impaired loans by class segment:
March 31, 2015 December 31, 2014June 30, 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$35,586
 $30,462
 $
 $25,802
 $23,236
 $
$29,836
 $24,357
 $
 $25,802
 $23,236
 $
Commercial - secured17,832
 14,769
 
 17,599
 14,582
 
24,250
 17,557
 
 17,599
 14,582
 
Real estate - residential mortgage4,858
 4,858
 
 4,873
 4,873
 
6,630
 6,223
 
 4,873
 4,873
 
Construction - commercial residential16,448
 13,643
 
 18,041
 14,801
 
13,581
 10,699
 
 18,041
 14,801
 
Construction - commercial829
 694
 
 1,707
 1,581
 
1,299
 1,156
 
 1,707
 1,581
 
75,553
 64,426
 
 68,022
 59,073
 
75,596
 59,992
 
 68,022
 59,073
 
With a related allowance recorded:With a related allowance recorded:          With a related allowance recorded:          
Real estate - commercial mortgage48,636
 39,297
 13,944
 49,619
 40,023
 16,715
49,792
 41,110
 13,452
 49,619
 40,023
 16,715
Commercial - secured35,825
 30,565
 16,315
 24,824
 19,335
 12,165
26,694
 21,239
 10,020
 24,824
 19,335
 12,165
Commercial - unsecured1,417
 1,260
 808
 1,241
 1,089
 865
3,062
 2,904
 1,060
 1,241
 1,089
 865
Real estate - home equity18,035
 12,754
 6,544
 19,392
 13,458
 9,224
18,752
 13,278
 6,668
 19,392
 13,458
 9,224
Real estate - residential mortgage56,684
 47,069
 14,073
 56,607
 46,478
 18,592
56,048
 46,972
 14,024
 56,607
 46,478
 18,592
Construction - commercial residential13,267
 6,590
 2,169
 14,007
 7,903
 2,675
11,976
 5,472
 1,771
 14,007
 7,903
 2,675
Construction - commercial867
 577
 178
 1,501
 1,023
 459
1,879
 1,342
 445
 1,501
 1,023
 459
Construction - other452
 281
 103
 452
 281
 137
452
 281
 103
 452
 281
 137
Consumer - direct17
 17
 11
 19
 19
 17
15
 15
 10
 19
 19
 17
Consumer - indirect41
 19
 12
 20
 19
 18
16
 16
 10
 20
 19
 18
175,241
 138,429
 54,157
 167,682
 129,628
 60,867
168,686
 132,629
 47,563
 167,682
 129,628
 60,867
Total$250,794
 $202,855
 $54,157
 $235,704
 $188,701
 $60,867
$244,282
 $192,621
 $47,563
 $235,704
 $188,701
 $60,867
As of March 31,June 30, 2015 and December 31, 2014, there were $64.4$60.0 million and $59.1 million, respectively, of impaired loans that did not have a related allowance for loan loss. The estimated fair values of the collateral securing these loans exceeded their carrying amount, or they were previously charged down to realizable collateral values. Accordingly, no specific valuation allowance was considered to be necessary.

1719


The following table presents average impaired loans by class segment:
Three months ended March 31Three months ended June 30 Six months ended June 30
2015 20142015 2014 2015 2014
Average
Recorded
Investment
 Interest
Income
Recognized (1)
 Average
Recorded
Investment
 Interest
Income
Recognized (1)
Average
Recorded
Investment
 Interest
Income (1)
 Average
Recorded
Investment
 Interest
Income (1)
 Average
Recorded
Investment
 Interest
Income (1)
 Average
Recorded
Investment
 Interest
Income (1)
(in thousands)(in thousands)
With no related allowance recorded:                      
Real estate - commercial mortgage$26,849
 $91
 $23,993
 $86
$27,410
 $87
 $23,162
 $80
 $26,018
 $178
 $23,606
 166
Commercial - secured14,676
 21
 21,125
 35
16,163
 24
 21,695
 34
 15,636
 45
 21,591
 69
Real estate - home equity
 
 300
 

 
 300
 1
 
 
 300
 1
Real estate - residential mortgage4,866
 28
 159
 1
5,541
 32
 857
 5
 5,318
 60
 571
 6
Construction - commercial residential14,222
 55
 17,223
 60
12,171
 40
 17,853
 62
 13,048
 95
 16,482
 122
Construction - commercial1,138
 
 1,969
 
925
 
 1,418
 
 1,144
 
 1,604
 
61,751
 195
 64,769
 182
62,210
 183
 65,285
 182
 61,164
 378
 64,154
 364
With a related allowance recorded:                      
Real estate - commercial mortgage39,660
 133
 37,119
 132
40,204
 126
 38,455
 132
 40,143
 259
 37,580
 264
Commercial - secured24,950
 36
 23,045
 38
25,902
 38
 21,652
 33
 23,713
 74
 21,876
 71
Commercial - unsecured1,175
 1
 845
 1
2,082
 2
 757
 1
 1,751
 3
 854
 2
Real estate - home equity13,106
 31
 14,096
 20
13,016
 33
 14,049
 28
 13,163
 64
 14,145
 48
Real estate - residential mortgage46,774
 273
 51,231
 294
47,020
 270
 51,153
 300
 46,839
 543
 51,134
 594
Construction - commercial residential7,247
 28
 9,771
 35
6,031
 21
 7,676
 27
 6,655
 49
 9,977
 62
Construction - commercial800
 
 193
 
960
 
 723
 
 981
 
 547
 
Construction - other281
 
 546
 
281
 
 413
 
 281
 
 458
 
Consumer - direct18
 
 13
 
17
 
 16
 
 18
 
 14
 
Consumer - indirect19
 
 2
 
17
 
 4
 
 17
 
 3
 
134,030
 502
 136,861
 520
135,530
 490
 134,898
 521
 133,561
 992
 136,588
 1,041
Total$195,781
 $697
 $201,630
 $702
$197,740
 $673
 $200,183
 $703
 $194,725
 $1,370
 $200,742
 1,405
                      
(1)All impaired loans, excluding accruing TDRs, were non-accrual loans. Interest income recognized for the three and six months ended March 31,June 30, 2015 and 2014 represents amounts earned on accruing TDRs.


1820


Credit Quality Indicators and Non-performing Assets

The following table presents internal credit risk ratings for real estate - commercial mortgages, commercial - secured loans, commercial - unsecured loans, construction - commercial residential loans and construction - commercial loans:
Pass Special Mention Substandard or Lower TotalPass Special Mention Substandard or Lower Total
March 31, 2015 December 31, 2014 March 31, 2015 December 31, 2014 March 31, 2015 December 31, 2014 March 31, 2015 December 31, 2014June 30, 2015 December 31, 2014 June 30, 2015 December 31, 2014 June 30, 2015 December 31, 2014 June 30, 2015 December 31, 2014
(dollars in thousands)(dollars in thousands)
Real estate - commercial mortgage$4,919,760
 $4,899,016
 $123,644
 $127,302
 $183,697
 $170,837
 $5,227,101
 $5,197,155
$4,943,773
 $4,899,016
 $114,385
 $127,302
 $179,642
 $170,837
 $5,237,800
 $5,197,155
Commercial - secured3,344,506
 3,333,486
 151,724
 120,584
 112,156
 110,544
 3,608,386
 3,564,614
3,419,331
 3,333,486
 123,663
 120,584
 110,666
 110,544
 3,653,660
 3,564,614
Commercial - unsecured142,536
 146,680
 3,331
 7,463
 8,378
 6,810
 154,245
 160,953
141,431
 146,680
 3,667
 7,463
 7,941
 6,810
 153,039
 160,953
Total commercial - industrial, financial and agricultural3,487,042
 3,480,166
 155,055
 128,047
 120,534
 117,354
 3,762,631
 3,725,567
3,560,762
 3,480,166
 127,330
 128,047
 118,607
 117,354
 3,806,699
 3,725,567
Construction - commercial residential173,833
 136,109
 20,662
 27,495
 37,038
 40,066
 231,533
 203,670
138,834
 136,109
 17,526
 27,495
 30,588
 40,066
 186,948
 203,670
Construction - commercial378,131
 409,631
 11,802
 12,202
 3,475
 5,586
 393,408
 427,419
469,515
 409,631
 13,314
 12,202
 5,587
 5,586
 488,416
 427,419
Total construction (excluding Construction - other)551,964
 545,740
 32,464
 39,697
 40,513
 45,652
 624,941
 631,089
608,349
 545,740
 30,840
 39,697
 36,175
 45,652
 675,364
 631,089
$8,958,766
 $8,924,922
 $311,163
 $295,046
 $344,744
 $333,843
 $9,614,673
 $9,553,811
$9,112,884
 $8,924,922
 $272,555
 $295,046
 $334,424
 $333,843
 $9,719,863
 $9,553,811
% of Total93.2% 93.4% 3.2% 3.1% 3.6% 3.5% 100.0% 100.0%93.8% 93.4% 2.8% 3.1% 3.4% 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.Theaccounts. 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 Corporation does not assign internal risk ratings to smaller balance, homogeneous loans, such as home equity, residential mortgage, consumer, lease 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 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.

1921


The following table presents a summary of delinquency and non-performing status for home equity, real estate - residential mortgages, construction loans to individuals and consumer, leasing and other loans by class segment:
Performing Delinquent (1) Non-performing (2) TotalPerforming Delinquent (1) Non-performing (2) Total
March 31, 2015 December 31, 2014 March 31, 2015 December 31, 2014 March 31, 2015 December 31, 2014 March 31, 2015 December 31, 2014June 30, 2015 December 31, 2014 June 30, 2015 December 31, 2014 June 30, 2015 December 31, 2014 June 30, 2015 December 31, 2014
(dollars in thousands)(dollars in thousands)
Real estate - home equity$1,674,544
 $1,711,017
 $12,624
 $10,931
 $14,455
 $14,740
 $1,701,623
 $1,736,688
$1,665,771
 $1,711,017
 $9,285
 $10,931
 $14,632
 $14,740
 $1,689,688
 $1,736,688
Real estate - residential mortgage1,312,299
 1,321,139
 23,894
 26,934
 28,595
 28,995
 1,364,788
 1,377,068
1,316,650
 1,321,139
 20,891
 26,934
 31,562
 28,995
 1,369,103
 1,377,068
Construction - other52,119
 59,180
 417
 
 329
 332
 52,865
 59,512
55,864
 59,180
 
 
 697
 332
 56,561
 59,512
Consumer - direct97,959
 104,018
 2,919
 2,891
 2,390
 2,414
 103,268
 109,323
103,985
 104,018
 2,886
 2,891
 2,326
 2,414
 109,197
 109,323
Consumer - indirect152,286
 153,358
 1,653
 2,574
 94
 176
 154,033
 156,108
161,201
 153,358
 1,839
 2,574
 257
 176
 163,297
 156,108
Total consumer250,245
 257,376
 4,572
 5,465
 2,484
 2,590
 257,301
 265,431
265,186
 257,376
 4,725
 5,465
 2,583
 2,590
 272,494
 265,431
Leasing and other and overdrafts122,255
 118,550
 1,976
 523
 24
 133
 124,255
 119,206
135,895
 118,550
 553
 523
 73
 133
 136,521
 119,206
$3,411,462
 $3,467,262
 $43,483
 $43,853
 $45,887
 $46,790
 $3,500,832
 $3,557,905
$3,439,366
 $3,467,262
 $35,454
 $43,853
 $49,547
 $46,790
 $3,524,367
 $3,557,905
% of Total97.5% 97.5% 1.2% 1.2% 1.3% 1.3% 100.0% 100.0%97.6% 97.5% 1.0% 1.2% 1.4% 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:
March 31,
2015
 December 31,
2014
June 30,
2015
 December 31,
2014
(in thousands)(in thousands)
Non-accrual loans$129,929
 $121,080
$129,152
 $121,080
Accruing loans greater than 90 days past due19,365
 17,402
Accruing loans 90 days or more past due20,353
 17,402
Total non-performing loans149,294
 138,482
149,505
 138,482
Other real estate owned (OREO)14,251
 12,022
12,763
 12,022
Total non-performing assets$163,545
 $150,504
$162,268
 $150,504
The following table presents TDRs, by class segment:
March 31,
2015
 December 31,
2014
June 30,
2015
 December 31,
2014
(in thousands)(in thousands)
Real-estate - residential mortgage$31,574
 $31,308
$31,584
 $31,308
Real-estate - commercial mortgage23,468
 18,822
17,482
 18,822
Commercial - secured6,417
 5,170
Construction - commercial residential7,791
 9,241
4,482
 9,241
Commercial - secured6,786
 5,170
Real estate - home equity3,084
 2,975
3,299
 2,975
Commercial - unsecured189
 67
174
 67
Consumer - indirect17
 19
16
 19
Consumer - direct17
 19
15
 19
Total accruing TDRs72,926
 67,621
63,469
 67,621
Non-accrual TDRs (1)29,392
 24,616
27,230
 24,616
Total TDRs$102,318
 $92,237
$90,699
 $92,237
 
(1)Included within non-accrual loans in the preceding table detailing non-performing assets.

As of March 31,June 30, 2015 and December 31, 2014, there were $7.1$6.0 million and $3.9 million, respectively, of commitments to lend additional funds to borrowers whose loans were modified under TDRs.


2022


The following table presents TDRs, by class segment as of March 31,June 30, 2015 and 2014 that were modified during the three and six months ended March 31,June 30, 2015 and 2014:
Three months ended June 30 Six months ended June 30
2015 20142015 2014 2015 2014
Number of Loans Recorded Investment Number of Loans Recorded InvestmentNumber of Loans Recorded Investment Number of Loans Recorded Investment Number of Loans Recorded Investment Number of Loans Recorded Investment
(dollars in thousands)(dollars in thousands)
Commercial - secured8 $6,776
  $
3 $1,047
 1 $143
 11 $7,823
 1 $143
Real estate - home equity15 739
 10 334
 25 1,231
 20 863
Real estate - residential mortgage4 456
 9 1,130
 8 1,066
 15 1,836
Real estate - commercial mortgage3 2,495
 7 7,470
1 132
 2 2,334
 4 2,627
 9 9,804
Construction - commercial residential1 889
 1 548
 
 1 1,366
 1 889
 2 1,914
Real estate - residential mortgage4 610
 6 706
Real estate - home equity10 492
 10 529
Commercial - unsecured1 42
  
 
  
 1 42
  
Consumer - indirect1 13
 3 1
 
 1 6
 1 13
 4 7
Consumer - direct 
 4 4
 
 2 4
  
 6 8
Total28 $11,317
 31 $9,258
23 $2,374
 26 $5,317
 51 $13,691
 57 $14,575

The following table presents TDRs, by class segment, as of March 31,June 30, 2015 and 2014 that were modified within the previous 12 months and had a post-modification payment default during the threesix months ended March 31,June 30, 2015 and 2014. The Corporation defines a payment default as a single missed payment.
2015 20142015 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
8 $4,779
 1 $10
Real estate - residential mortgage6 652
 9 1,204
Real estate - home equity7 614
 9 777
Real estate - commercial mortgage2 1,659
 3 126
2 191
 2 35
Construction - commercial residential1 1,366
 1 619
 
 1 619
Real estate - home equity7 816
 14 1,432
Real estate - residential mortgage8 748
 12 2,522
Total25 $12,477
 31 $4,710
23 $6,236
 22 $2,645

2123


The following table presents past due status and non-accrual loans by portfolio segment and class segment:
March 31, 2015June 30, 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$20,528
 $5,620
 $40
 $46,291
 $46,331
 $72,479
 $5,154,622
 $5,227,101
$16,139
 $1,848
 $1,947
 $47,985
 $49,932
 $67,919
 $5,169,881
 $5,237,800
Commercial - secured8,056
 1,002
 3,646
 38,548
 42,194
 51,252
 3,557,134
 3,608,386
6,489
 1,463
 730
 32,379
 33,109
 41,061
 3,612,599
 3,653,660
Commercial - unsecured832
 58
 
��1,071
 1,071
 1,961
 152,284
 154,245
307
 80
 
 2,730
 2,730
 3,117
 149,922
 153,039
Total commercial - industrial, financial and agricultural8,888
 1,060
 3,646
 39,619
 43,265
 53,213
 3,709,418
 3,762,631
6,796
 1,543
 730
 35,109
 35,839
 44,178
 3,762,521
 3,806,699
Real estate - home equity10,347
 2,277
 4,785
 9,670
 14,455
 27,079
 1,674,544
 1,701,623
7,161
 2,124
 4,653
 9,979
 14,632
 23,917
 1,665,771
 1,689,688
Real estate - residential mortgage16,375
 7,519
 8,242
 20,353
 28,595
 52,489
 1,312,299
 1,364,788
16,835
 4,056
 9,951
 21,611
 31,562
 52,453
 1,316,650
 1,369,103
Construction - commercial residential1,559
 151
 98
 12,442
 12,540
 14,250
 217,283
 231,533
151
 
 
 11,689
 11,689
 11,840
 175,108
 186,948
Construction - commercial
 
 
 1,271
 1,271
 1,271
 392,137
 393,408

 
 
 2,498
 2,498
 2,498
 485,918
 488,416
Construction - other417
 
 48
 281
 329
 746
 52,119
 52,865

 
 416
 281
 697
 697
 55,864
 56,561
Total real estate - construction1,976
 151
 146
 13,994
 14,140
 16,267
 661,539
 677,806
151
 
 416
 14,468
 14,884
 15,035
 716,890
 731,925
Consumer - direct1,978
 941
 2,390
 
 2,390
 5,309
 97,959
 103,268
2,159
 727
 2,326
 
 2,326
 5,212
 103,985
 109,197
Consumer - indirect1,422
 231
 92
 2
 94
 1,747
 152,286
 154,033
1,719
 120
 257
 
 257
 2,096
 161,201
 163,297
Total consumer3,400
 1,172
 2,482
 2
 2,484
 7,056
 250,245
 257,301
3,878
 847
 2,583
 
 2,583
 7,308
 265,186
 272,494
Leasing and other and overdrafts1,666
 310
 24
 
 24
 2,000
 122,255
 124,255
468
 85
 73
 
 73
 626
 135,895
 136,521
Total$63,180
 $18,109
 $19,365
 $129,929
 $149,294
 $230,583
 $12,884,922
 $13,115,505
$51,428
 $10,503
 $20,353
 $129,152
 $149,505
 $211,436
 $13,032,794
 $13,244,230
 December 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
 (in thousands)
Real estate - commercial mortgage$14,399
 $3,677
 $800
 $44,437
 $45,237
 $63,313
 $5,133,842
 $5,197,155
Commercial - secured4,839
 958
 610
 28,747
 29,357
 35,154
 3,529,460
 3,564,614
Commercial - unsecured395
 65
 9
 1,022
 1,031
 1,491
 159,462
 160,953
Total commercial - industrial, financial and agricultural5,234
 1,023
 619
 29,769
 30,388
 36,645
 3,688,922
 3,725,567
Real estate - home equity8,048
 2,883
 4,257
 10,483
 14,740
 25,671
 1,711,017
 1,736,688
Real estate - residential mortgage18,789
 8,145
 8,952
 20,043
 28,995
 55,929
 1,321,139
 1,377,068
Construction - commercial residential160
 
 
 13,463
 13,463
 13,623
 190,047
 203,670
Construction - commercial
 
 
 2,604
 2,604
 2,604
 424,815
 427,419
Construction - other
 
 51
 281
 332
 332
 59,180
 59,512
Total real estate - construction160
 
 51
 16,348
 16,399
 16,559
 674,042
 690,601
Consumer - direct2,034
 857
 2,414
 
 2,414
 5,305
 104,018
 109,323
Consumer - indirect2,156
 418
 176
 
 176
 2,750
 153,358
 156,108
Total consumer4,190
 1,275
 2,590
 
 2,590
 8,055
 257,376
 265,431
Leasing and other and overdrafts357
 166
 133
 
 133
 656
 118,550
 119,206
Total$51,177
 $17,169
 $17,402
 $121,080
 $138,482
 $206,828
 $12,904,888
 $13,111,716


2224


NOTE 6 – Mortgage Servicing Rights
The following table summarizes the changes in mortgage servicing rights ("MSRs"), which are included in other assets on the consolidated balance sheets:
Three months ended March 31Three months ended June 30 Six months ended June 30
2015 20142015 2014 2015 2014
(in thousands)(in thousands)
Amortized cost:          
Balance at beginning of period$42,148
 $42,452
$41,803
 $41,668
 $42,148
 $42,452
Originations of mortgage servicing rights1,557
 1,115
1,956
 1,236
 3,513
 2,351
Amortization(1,902) (1,899)(2,161) (318) (4,063) (2,217)
Balance at end of period$41,803
 $41,668
$41,598
 $42,586
 $41,598
 $42,586
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 valuation allowance was necessary as of March 31,June 30, 2015 or 2014.
The Corporation accounts for MSRs at the lower of amortized cost or fair value. As of March 31,June 30, 2015, the estimated fair value of MSRs was $43.6$45.7 million, which exceeded their book value.

NOTE 7 – 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. Compensation 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 defined performance measures.

The Corporation also grants equity awards to non-employee members of its board of directors under the 2011 Directors’ Equity Participation Plan ("Directors’ Plan"). Under the Directors’ Plan, the Corporation can grant equity awards to non-employee holding company and subsidiary bank directors in the form of stock options, restricted stock or common stock.

Equity awards issued under the Employee Equity Plan are generally granted annually and become fully vested over or after a three-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 Equity Plan and the Directors' Plan, result in the acceleration of the vesting of equity awards.

The following table presents compensation expense and the related tax benefits for equity awards recognized in the consolidated statements of income:
Three months ended March 31Three months ended June 30 Six months ended June 30
2015 20142015 2014 2015 2014
(in thousands)(in thousands)
Stock-based compensation expense$1,071
 $1,033
$1,767
 $1,989
 $2,838
 $3,022
Tax benefit(292) (263)(622) (446) (914) (709)
Stock-based compensation expense, net of tax$779
 $770
$1,145
 $1,543
 $1,924
 $2,313

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. Fair values for restricted stock, RSUs and a majority of PSUs are based on the trading price

25


of the Corporation’s stock on the date of 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.

As of March 31,June 30, 2015, the Employee Equity Plan had 11.511.6 million shares reserved for future grants through 2023 and the Directors’ Plan had approximately 410,000396,000 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 8 – Employee Benefit Plans
The Corporation maintains a defined benefit pension plan ("Pension Plan") for certain employees, which was curtailed effective January 1, 2008. Contributions to the Pension Plan are actuarially determined and funded annually, if required. Pension Plan assets are invested in: money markets; fixed income securities, including corporate bonds, U.S. Treasury securities and common trust funds; and equity securities, including common stocks and common stock mutual funds.
The net periodic benefit cost for the Corporation’s Pension Plan consisted of the following components:
Three months ended March 31Three months ended June 30 Six months ended June 30
2015 20142015 2014 2015 2014
(in thousands)(in thousands)
Service cost (1)$145
 $92
$145
 $92
 $290
 $184
Interest cost851
 853
851
 853
 1,702
 1,706
Expected return on plan assets(752) (811)(752) (810) (1,504) (1,621)
Net amortization and deferral782
 244
782
 244
 1,564
 488
Net periodic benefit cost$1,026
 $378
$1,026
 $379
 $2,052
 $757
 
(1)
The Pension Plan service cost recorded for the threesix months ended March 31,June 30, 2015 and 2014 was related to administrative costs associated with the plan and was not due to the accrual of additional participant benefits.
The Corporation currently provides medical and life insurance benefits under a postretirement benefits plan ("Postretirement Plan") to certain retired full-time employees who were employees of the Corporation prior to January 1, 1998.
Effective February 1, 2014, the Corporation amended the Postretirement Plan, making all active full-time employees ineligible for benefits under this plan. As a result of this amendment, the Corporation recorded a $1.5 million gain during the threesix months ended March 31,June 30, 2014, as a reduction 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 $3.4 million decrease in the accumulated postretirement benefit obligation and a corresponding increase in unrecognized prior service cost credits.
The net periodic cost (benefit) of the Corporation’s Postretirement Plan consisted of the following components, excluding the $1.5 million plan amendment gain in 2014:
Three months ended March 31Three months ended June 30 Six months ended June 30
2015 20142015 2014 2015 2014
(in thousands)(in thousands)
Service cost (1)$
 $15
$
 $
 $
 $15
Interest cost52
 61
52
 48
 104
 109
Net accretion and deferral(65) (95)(65) (84) (130) (179)
Net periodic benefit$(13) $(19)$(13) $(36) $(26) $(55)

(1)As a result of the plan amendment, additional participant benefits are not accrued under the Postretirement Plan after February 1, 2014.
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.

2426


NOTE 9 – 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 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 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 value 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.

2527


The following table presents a summary of the notional amounts and fair values of derivative financial instruments:
March 31, 2015 December 31, 2014June 30, 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$151,389
 $2,509
 $89,655
 $1,391
$126,063
 $1,268
 $89,655
 $1,391
Negative fair values187
 (2) 301
 (6)2,240
 (48) 301
 (6)
Net interest rate locks with customers
 2,507
 
 1,385

 1,220
 
 1,385
Forward Commitments              
Positive fair values111,387
 1,705
 
 
Negative fair values144,370
 (610) 93,802
 (1,164)27,107
 (24) 93,802
 (1,164)
Net forward commitments  1,681
   (1,164)
Interest Rate Swaps with Customers              
Positive fair values535,786
 29,035
 468,080
 19,716
558,750
 19,317
 468,080
 19,716
Negative fair values8,000
 (113) 25,418
 (198)46,937
 (234) 25,418
 (198)
Net interest rate swaps with customers  28,922
   19,518
  19,083
   19,518
Interest Rate Swaps with Dealer Counterparties              
Positive fair values8,000
 113
 25,418
 198
46,937
 234
 25,418
 198
Negative fair values535,786
 (29,035) 468,080
 (19,716)558,750
 (19,317) 468,080
 (19,716)
Net interest rate swaps with dealer counterparties  (28,922)   (19,518)  (19,083)   (19,518)
Foreign Exchange Contracts with Customers              
Positive fair values12,642
 1,411
 11,616
 810
8,200
 572
 11,616
 810
Negative fair values7,033
 (475) 5,250
 (441)7,128
 (384) 5,250
 (441)
Net foreign exchange contracts with customers  936
   369
  188
   369
Foreign Exchange Contracts with Correspondent Banks              
Positive fair values8,053
 952
 5,287
 446
9,296
 629
 5,287
 446
Negative fair values14,825
 (1,706) 13,572
 (876)9,824
 (672) 13,572
 (876)
Net foreign exchange contracts with correspondent banks  (754)   (430)  (43)   (430)
Net derivative fair value asset  $2,079
   $160
  $3,046
   $160

The following table presents a summary of the fair value gains and losses on derivative financial instruments:
Three months ended March 31Three months ended June 30 Six months ended June 30
2015 20142015 2014 2015 2014
(in thousands)(in thousands)
Interest rate locks with customers$1,122
 $389
$(1,287) $1,203
 $(165) $1,592
Forward commitments554
 (1,498)2,291
 (1,503) 2,845
 (3,001)
Interest rate swaps with customers9,404
 4,205
(9,839) 6,135
 (435) 10,340
Interest rate swaps with dealer counterparties(9,404) (4,205)9,839
 (6,135) 435
 (10,340)
Foreign exchange contracts with customers567
 192
(748) 105
 (181) 297
Foreign exchange contracts with correspondent banks(324) (268)711
 (98) 387
 (366)
Net fair value gains (losses) on derivative financial instruments$1,919
 $(1,185)$967
 $(293) $2,886
 $(1,478)


2628


NOTE 10 – 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 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 classified within interest income on the consolidated statements of income.
The following table presents a summary of the Corporation’s mortgage loans held for sale:
March 31,
2015
 December 31,
2014
June 30,
2015
 December 31,
2014
(in thousands)(in thousands)
Cost$33,421
 $17,080
$33,760
 $17,080
Fair value34,124
 17,522
33,980
 17,522
During the three and six months ended March 31,June 30, 2015, the Corporation recorded losses related to changes in fair values of mortgage loans held for sale of $483,000 and $222,000, respectively. During the three and six months ended June 30, 2014, the Corporation recorded gains related to changes in fair values of mortgage loans held for sale of $261,000$518,000 and $297,000,$815,000, respectively.

NOTE 11 – 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 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.
The Corporation is also a party to foreign currency exchange contracts with financial institution counterparties, under which the Corporation has the right to net settle multiple contracts with the same counterparty in the event of default on, or termination of, any one contract. As with interest rate swap contracts, cash collateral is posted by the party with a net liability position in accordance with contract thresholds and can be used to settle the fair value of the foreign currency exchange contracts in the event of default. For additional details, see Note 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.













2729


The following table presents the Corporation's financial instruments that are eligible for offset, and the effects of offsetting, on the consolidated balance sheets:
Gross Amounts Gross Amounts Not Offset  Gross Amounts Gross Amounts Not Offset  
Recognized  on the Consolidated  Recognized  on the Consolidated  
on the Balance Sheets  on the Balance Sheets  
Consolidated Financial Cash NetConsolidated Financial Cash Net
Balance Sheets Instruments (1) Collateral (2) AmountBalance Sheets Instruments (1) Collateral (2) Amount
(in thousands)(in thousands)
March 31, 2015       
June 30, 2015       
Interest rate swap derivative assets$29,148
 $(113) $
 $29,035
$19,551
 $(235) $
 $19,316
Foreign exchange derivative assets with correspondent banks952
 (952) 
 
629
 (629) 
 
Total$30,100
 $(1,065) $
 $29,035
$20,180
 $(864) $
 $19,316
              
Interest rate swap derivative liabilities$29,148
 $(113) $(28,070) $965
$19,551
 $(235) $(19,290) $26
Foreign exchange derivative liabilities with correspondent banks1,706
 (952) (940) (186)672
 (629) 
 43
Total$30,854
 $(1,065) $(29,010) $779
$20,223
 $(864) $(19,290) $69
              
December 31, 2014              
Interest rate swap derivative assets$19,914
 $(206) $
 $19,708
$19,914
 $(206) $
 $19,708
Foreign exchange derivative assets with correspondent banks446
 (446) 
 
446
 (446) 
 
Total$20,360
 $(652) $
 $19,708
$20,360
 $(652) $
 $19,708
              
Interest rate swap derivative liabilities$19,914
 $(206) $(19,210) $498
$19,914
 $(206) $(19,210) $498
Foreign exchange derivative liabilities with correspondent banks876
 (446) (310) 120
876
 (446) (310) 120
Total$20,790
 $(652) $(19,520) $618
$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 12 – 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:
March 31,
2015
 December 31, 2014June 30,
2015
 December 31, 2014
(in thousands)(in thousands)
Commitments to extend credit$4,575,869
 $4,389,064
$5,071,983
 $4,389,064
Standby letters of credit379,947
 382,465
387,996
 382,465
Commercial letters of credit36,049
 32,304
35,769
 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 5, "Loans and Allowance for Credit Losses," for additional details.
Residential Lending
Residential mortgages originated and sold by the Corporation consist primarily of conforming, prime loans sold to government sponsored agencies, such as the Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac"). The Corporation also sells a portion of prime loans to non-government sponsored agency investors.

2830



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 met. Such repurchases or reimbursements generally result from an underwriting or documentation deficiency. As of March 31,June 30, 2015 and December 31, 2014, total outstanding repurchase requests totaled $803,000were $918,000 and $917,000,$543,000, respectively.

From 2000 to 2011, the Corporation sold loans to the Federal Home Loan Bank of Pittsburgh under its Mortgage Partnership Finance Program ("MPF Program"). No loans were sold under this program during the threesix months ended March 31,June 30, 2015 or 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," 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 March 31,June 30, 2015, the unpaid principal balance of loans sold under the MPF Program was approximately $148$140 million. As of March 31,June 30, 2015 and December 31, 2014, the reserve for estimated credit losses related to loans sold under the MPF Program was $2.2$2.1 million and $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 for residential mortgage loans.

As of March 31,June 30, 2015 and December 31, 2014, the total reserve for losses on residential mortgage loans sold was $3.0$2.9 million and $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 March 31,June 30, 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

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 filed with the SEC on February 25, 2015, in February 2015, Fulton Bank of New Jersey ("FBNJ"), a wholly owned banking subsidiary of the Corporation, entered into a Stipulation and Consent to the Issuance of a Consent Order with the FDIC 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 Commissioner of Banking and Insurance for the State 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"). 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 Current Reports on Form 8-K filed with the SEC on July 18, September 9, and 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.

29



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. Refer also to Part II. Other Information, Item 1. Legal Proceedings.

NOTE 13 – 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.







31


The following tables present summaries of the Corporation’s assets and liabilities measured at fair value on a recurring basis and reported on the consolidated balance sheets:
 March 31, 2015
 Level 1 Level 2 Level 3 Total
 (in thousands)
Mortgage loans held for sale$
 $34,124
 $
 $34,124
Available for sale investment securities:       
Equity securities40,608
 
 
 40,608
U.S. Government sponsored agency securities
 203
 
 203
State and municipal securities
 224,342
 
 224,342
Corporate debt securities
 92,778
 4,904
 97,682
Collateralized mortgage obligations
 867,876
 
 867,876
Mortgage-backed securities
 930,159
 
 930,159
Auction rate securities
 
 98,932
 98,932
Total available for sale investments40,608
 2,115,358
 103,836
 2,259,802
Other assets19,198
 31,657
 
 50,855
Total assets$59,806
 $2,181,139
 $103,836
 $2,344,781
Other liabilities$19,009
 $29,760
 $
 $48,769

30


 June 30, 2015
 Level 1 Level 2 Level 3 Total
 (in thousands)
Mortgage loans held for sale$
 $33,980
 $
 $33,980
Available for sale investment securities:       
Equity securities33,041
 
 
 33,041
U.S. Government sponsored agency securities
 48,260
 
 48,260
State and municipal securities
 236,517
 
 236,517
Corporate debt securities
 92,822
 4,350
 97,172
Collateralized mortgage obligations
 918,232
 
 918,232
Mortgage-backed securities
 1,008,664
 
 1,008,664
Auction rate securities
 
 98,606
 98,606
Total available for sale investments33,041
 2,304,495
 102,956
 2,440,492
Other assets18,002
 22,524
 
 40,526
Total assets$51,043
 $2,360,999
 $102,956
 $2,514,998
Other liabilities$17,848
 $19,622
 $
 $37,470
 December 31, 2014
 Level 1 Level 2 Level 3 Total
 (in thousands)
Mortgage loans held for sale$
 $17,522
 $
 $17,522
Available for sale investment securities:       
Equity securities47,623
 
 
 47,623
U.S. Government securities
 200
 
 200
U.S. Government sponsored agency securities
 214
 
 214
State and municipal securities
 245,215
 
 245,215
Corporate debt securities
 90,126
 7,908
 98,034
Collateralized mortgage obligations
 902,313
 
 902,313
Mortgage-backed securities
 928,831
 
 928,831
Auction rate securities
 
 100,941
 100,941
Total available for sale investments47,623
 2,166,899
 108,849
 2,323,371
Other assets17,682
 21,305
 
 38,987
Total assets$65,305
 $2,205,726
 $108,849
 $2,379,880
Other liabilities$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 March 31,June 30, 2015 and December 31, 2014 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.

32



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 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 ($34.727.2 million at March 31,June 30, 2015 and $41.8 million at December 31, 2014) and other equity investments ($5.95.8 million at March 31,both June 30, 2015 and $5.8 million at December 31, 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 ($50.249.7 million at March 31,June 30, 2015 and $50.0 million at December 31, 2014), single-issuer trust preferred securities issued by financial institutions ($42.943.4 million at March 31,June 30, 2015 and $42.0 million at December 31, 2014), pooled trust preferred securities issued by financial institutions ($1.1 million530,000 at March 31,June 30, 2015 and $4.1 million at December 31, 2014) and other corporate debt issued by non-financial institutions ($3.63.5 million at March 31,June 30, 2015 and $1.9 million at December 31, 2014).
Level 2 investments include the Corporation’s holdings of subordinated debt, other corporate debt issued by non-financial institutions and $39.0$39.6 million and $38.2 million of single-issuer trust preferred securities held at

31


March 31, June 30, 2015 and December 31, 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 ($3.8 million at March 31,June 30, 2015 and December 31, 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 ($16.8 million at March 31,June 30, 2015 and $16.4 million at December 31, 2014) and the fair value of foreign currency exchange contracts ($2.41.2 million at March 31,June 30, 2015 and $1.3 million at December 31, 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 ($2.53.0 million at March 31,June 30, 2015 and $1.4 million at December 31, 2014) and the fair value of interest rate swaps ($29.119.6 million at March 31,June 30, 2015 and $19.9 million at December 31, 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 9, "Derivative Financial Instruments," for additional information.

33


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 ($16.8 million at March 31,June 30, 2015 and $16.4 million at December 31, 2014) and the fair value of foreign currency exchange contracts ($2.21.0 million at March 31,June 30, 2015 and $1.3 million at December 31, 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 ($612,00072,000 at March 31,June 30, 2015 and $1.2 million at December 31, 2014) and the fair value of interest rate swaps ($29.119.6 million at March 31,June 30, 2015 and $19.9 million at December 31, 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.



























3234


The following table presents the changes in the Corporation’s available for sale investment securities measured at fair value on a recurring basis using unobservable inputs (Level 3):
Three months ended June 30, 2015
Pooled Trust
Preferred
Securities
 Single-issuer
Trust Preferred
Securities
 ARCs
(in thousands)
Balance at March 31, 2015$1,084
 $3,820
 $98,932
Sales(554) 
 
Unrealized adjustment to fair value (1)
 (2) (420)
Discount accretion (2)
 2
 94
Balance at June 30, 2015$530
 $3,820
 $98,606
     
Three months ended June 30, 2014
Balance at March 31, 2014$5,659
 $3,820
 $147,713
Sales(1,394) 
 
Unrealized adjustment to fair value (1)38
 (2) 124
Settlements - calls(28) 
 (1,081)
Discount accretion (2)
 2
 175
Balance at June 30, 2014$4,275
 $3,820
 $146,931
     
Three months ended March 31, 2015Six months ended June 30, 2015
Pooled Trust
Preferred
Securities
 Single-issuer
Trust Preferred
Securities
 ARCsPooled Trust
Preferred
Securities
 Single-issuer
Trust Preferred
Securities
 ARCs
(in thousands)(in thousands)
Balance at December 31, 2014$4,088
 $3,820
 $100,941
$4,088
 $3,820
 $100,941
Sales(3,079) 
 
(3,633) 
 
Unrealized adjustment to fair value (1)190
 (2) 332
Unrealized adjustment to fair value (2)190
 (4) (88)
Settlements - calls(117) 
 (2,446)(117) 
 (2,446)
Discount accretion (2)2
 2
 105
Balance at March 31, 2015$1,084
 $3,820
 $98,932
Discount accretion (3)2
 4
 199
Balance at June 30, 2015$530
 $3,820
 $98,606
          
Three months ended March 31, 2014Six months ended June 30, 2014
Balance at December 31, 2013$5,306
 $3,781
 $159,274
$5,306
 $3,781
 $159,274
Sales
 
 (11,912)(1,394) 
 (11,912)
Unrealized adjustment to fair value (1)521
 38
 124
Unrealized adjustment to fair value (2)559
 36
 248
Settlements - calls(172) 
 
(200) 
 (1,081)
Discount accretion (2)4
 1
 227
Balance at March 31, 2014$5,659
 $3,820
 $147,713
Discount accretion (3)4
 3
 402
Balance at June 30, 2014$4,275
 $3,820
 $146,931
     

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





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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:
March 31, 2015June 30, 2015
Level 1 Level 2 Level 3 TotalLevel 1 Level 2 Level 3 Total
(in thousands)(in thousands)
Net loans$
 $
 $148,698
 $148,698
$
 $
 $145,058
 $145,058
Other financial assets
 
 56,054
 56,054

 
 54,361
 54,361
Total assets$
 $
 $204,752
 $204,752
$
 $
 $199,419
 $199,419
 December 31, 2014
 Level 1 Level 2 Level 3 Total
 (in thousands)
Net loans$
 $
 $127,834
 $127,834
Other financial assets
 
 54,170
 54,170
Total assets$
 $
 $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 5, "Loans and Allowance for Credit Losses," for additional details.
Other financial assets – This category includes OREO ($14.312.8 million at March 31,June 30, 2015 and $12.0 million at December 31, 2014) and MSRs ($41.841.6 million at March 31,June 30, 2015 and $42.1 million at December 31, 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 March 31,June 30, 2015 valuation were 12.6%11.3% and 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 March 31,June 30, 2015 and December 31, 2014. In addition, a general description of the methods and assumptions used to estimate such fair values is also provided.
March 31, 2015 December 31, 2014June 30, 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$91,870
 $91,870
 $105,702
 $105,702
$100,455
 $100,455
 $105,702
 $105,702
Interest-bearing deposits with other banks637,973
 637,973
 358,130
 358,130
322,218
 322,218
 358,130
 358,130
Federal Reserve Bank and Federal Home Loan Bank stock65,694
 65,694
 64,953
 64,953
65,106
 65,106
 64,953
 64,953
Loans held for sale (1)34,124
 34,124
 17,522
 17,522
33,980
 33,980
 17,522
 17,522
Available for sale investment securities (1)2,259,802
 2,259,802
 2,323,371
 2,323,371
2,440,492
 2,440,492
 2,323,371
 2,323,371
Loans, net of unearned income (1)13,115,505
 13,078,115
 13,111,716
 13,030,543
13,244,230
 13,129,521
 13,111,716
 13,030,543
Accrued interest receivable42,216
 42,216
 41,818
 41,818
41,193
 41,193
 41,818
 41,818
Other financial assets (1)178,496
 178,496
 169,764
 169,764
157,792
 157,792
 169,764
 169,764
FINANCIAL LIABILITIES              
Demand and savings deposits$10,467,077
 $10,467,077
 $10,296,055
 $10,296,055
$10,501,956
 $10,501,956
 $10,296,055
 $10,296,055
Time deposits3,047,420
 3,058,030
 3,071,451
 3,069,883
3,003,753
 2,999,352
 3,071,451
 3,069,883
Short-term borrowings410,105
 410,105
 329,719
 329,719
409,035
 409,035
 329,719
 329,719
Accrued interest payable18,357
 18,357
 18,045
 18,045
15,172
 15,172
 18,045
 18,045
Other financial liabilities (1)193,924
 193,924
 172,786
 172,786
175,220
 175,220
 172,786
 172,786
Federal Home Loan Bank advances and long-term debt1,094,517
 1,104,738
 1,139,413
 1,142,980
1,132,641
 1,152,810
 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


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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 14 – Common Stock Repurchase Plans

In 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 is authorized to repurchase up to $50.0 million of its outstanding shares of common stock, or approximately 2.3% of its outstanding shares, through December 31, 2015. Repurchased shares may 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 transactions. The share repurchase program may be discontinued at any time. Through June 30, 2015, 1.5 million shares had been repurchased under this program for a total cost of $19.0 million, or $12.36 per share.

NOTE 1415 – Subsequent EventsEvent

On April 1,In June 2015, $100.0the Corporation issued $150 million of the Corporation's outstandingten-year subordinated debt originally issued in Marchnotes, which mature on November 15, 2024 and carry a fixed rate of 2005 with4.50% and an effective rate of approximately 4.70% as a result of issuance costs. Interest is paid semi-annually in May and November.

The proceeds from the issuance of the subordinated notes were used to redeem $150 million of trust preferred securities in July 2015. The redeemed securities carried a fixed interest rate of 5.49%6.29% and an effective rate of 6.52%, matured and was fully repaid with available liquidity.had a scheduled maturity of February 1, 2036. As a result of this transaction, the Corporation recorded a $5.6 million loss on redemption, included as a component of non-interest expense, in July 2015.

In 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 is authorized to repurchase up to $50.0 million of its outstanding shares of common stock, or approximately 2.3% of its outstanding shares, through December 31, 2015. Repurchased shares may 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 transactions. The share repurchase program may be 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") relates to Fulton Financial Corporation (the "Corporation"), a financial holding company registered under the Bank Holding Company Act of 1956 and incorporated under the laws of the Commonwealth of Pennsylvania in 1982, and its wholly owned subsidiaries. Management’s Discussion should be read in conjunction with the consolidated financial statements and notes presented in this report.

FORWARD-LOOKING STATEMENTS

The Corporation has made, and may continue to make, certain forward-looking statements with respect to its financial condition and results of operations. Do not unduly rely on forward-looking statements. Forward-looking statements can be identified by the use of words such as "may," "should," "will," "could," "estimates," "predicts," "potential," "continue," "anticipates," "believes," "plans," "expects," "future," "intends" and similar expressions which are intended to identify forward-looking statements.  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 conditions in the economy and capital markets on the performance of the Corporation’s loan portfolio and 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 off loans and incur elevated collection and carrying costs related to such non-performing assets;
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 operational risks, including the risk of human error, inadequate or failed internal processes and systems, computer and telecommunications systems failures, faulty or incomplete data and an inadequate risk 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 failure to identify and to address cyber-security risks;
the Corporation’s ability to keep pace with technological changes;
the Corporation’s ability to attract and retain talented personnel;

3639


capital and liquidity strategies, including the Corporation’s ability to comply with applicable capital and liquidity requirements, and the Corporation’s ability to 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 any downgrade in the Corporation’s credit ratings on its borrowing costs or access to capital markets.

RESULTS OF OPERATIONS

Overview and Outlook
Fulton Financial Corporation is a financial holding company comprised of six wholly owned banking subsidiaries which provide a full range of retail and commercial financial services in Pennsylvania, Delaware, Maryland, New Jersey and Virginia. The Corporation generates the majority of its revenue through net interest income, or the difference between interest earned on loans and investments and interest paid on deposits and borrowings. Growth in net interest income is dependent upon balance sheet growth and/or maintaining or increasing the net interest margin, which is net interest income (fully taxable-equivalent, or "FTE") as a percentage of average interest-earning assets. The Corporation also generates revenue through fees earned on the various 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
March 31
As of or for the
Three months ended
June 30
 As of or for the
Six months ended
June 30
2015 20142015 2014 2015 2014
Income before income taxes (in thousands)$53,540
 $56,017
$48,855
 $53,096
 $102,395
 $109,113
Net income (in thousands)$40,036
 $41,783
$36,680
 $39,596
 $76,716
 $81,379
Diluted net income per share$0.22
 $0.22
$0.21
 $0.21
 $0.43
 $0.43
Return on average assets0.95% 1.01%0.86% 0.94% 0.90% 0.97%
Return on average equity8.05% 8.21%7.24% 7.63% 7.64% 7.92%
Net interest margin (1)3.27% 3.47%3.20% 3.41% 3.24% 3.44%
Non-performing assets to total assets0.94% 1.01%0.93% 0.96% 0.93% 0.96%
Annualized net charge-offs to average loans0.08% 0.26%0.38% 0.28% 0.23% 0.27%
 
(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 first quarter ofthree months and six months ended June 30, 2015 decreased $2.5$4.2 million, or 4.4%8.0%, and $6.7 million, or 6.2%, respectively compared to the first quartersame periods of 2014. The Corporation's results for the three and six months ended March 31,June 30, 2015 in comparison to the same periodperiods in 2014 were most significantly impacted by a a declinedeclines in net interest income and an increaseincreases in non-interest expense, partially offset by a decreasedecreases in the provision for credit losses and higher non-interest income.
Following is a summary of financial highlights for the three and six months ended March 31,June 30, 2015:
Net Interest Income and Net Interest Margin - For the three and six months ended March 31,June 30, 2015, net interest income decreased $6.0$5.0 million, or 4.6%3.9%, and $11.0 million, or 4.3%, respectively, in comparison to the same periodperiods in 2014. The
For both the three and six month periods, the decrease in net interest income resulted from the impact of lower net interest margins, partially offset by the impact of growth in interest-earning assets.The second quarter of 2015 saw a 2021 basis point decrease in the net interest margin in comparison to the same period in 2014, as yields on interest-earning assets declined 1418 basis points, while the cost of interest-bearing liabilities increased 116 basis points. For the first six months of 2015, the net interest margin decreased 20 basis points in comparison to the same period in 2014.2014 as yields on interest-earning assets decreased 16 basis points and the cost of interest-bearing liabilities increased 8 basis points.
Average interest-earning assets increased $247.8$383.3 million, or 1.6%2.5%, in the firstsecond quarter of 2015 in comparison to the same period of 2014, mainly due to a $333.2$396.9 million, or 2.6%3.1%, increase in average loans and a $215.2$200.5 million, or 83.2%83.9%, increase in other earningsinterest-earning assets, partially offset by a $304.1$222.9 million, or 11.8%8.9%, decrease in average investment securities.securities.

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Average interest-earning assets increased $315.9 million, or 2.0%, in the first half of 2015 in comparison to the same period of 2014, primarily as a result of a $365.2 million, or 2.9%, increase in average loans and a $207.8 million, or 83.5%, increase in other interest-earning assets, partially offset by a $263.3 million, or 10.4%, decrease in average investment securities.
Average interest-bearing liabilities decreased $174.2$69.3 million, or 1.5%0.6%, in the firstsecond quarter of 2015 in comparison to the firstsecond quarter of 2014, primarily due to a $659.2$667.7 million, or 31.5%63.7%, decrease in short-term borrowings, offset by a $485.0$465.9 million, or 5.3%5.0%, increase in interest-bearing deposits and a $132.5 million, or 14.8%, increase in FHLB advances and long-term debt. Additional funding to support the increase in interest-earning assets was provided by a $412.7 million, or 12.4%, increase in noninterest-bearing deposits.
During the first half of 2015, average interest-bearing liabilities decreased $121.4 million, or 1.1%, in comparison to the first half of 2014 primarily due to a $783.1 million, or 69.4%, decrease in average short-term borrowings, offset by a $475.4 million, or 5.1%, increase in interest-bearing deposits and a $186.2 million, or 20.9%, increase in FHLB advances and long-term debt. Additional funding to support the increase in interest-earning assets was provided by a $415.6 million, or 12.7%, increase in noninterest-bearing deposits.
Asset Quality - The Corporation recorded a $3.7$2.2 million negative provision for credit losses during the three months ended March 31,June 30, 2015, compared to a $2.5$3.5 million provision for credit losses for the same period in 2014. The $6.2During the six months ended June 30, 2015, the Corporation recorded a $1.5 million improvement in the

37


negative 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 $8.4a $6.0 million provision for credit losses for the same period in 2014, while the allowance for loan loss allocations on impaired loans decreased $9.7 million, or 15.2%.2014.
Annualized net charge-offs to average loans outstanding were 0.08%0.38% for the firstsecond quarter of 2015, compared to 0.26%0.28% for the second quarter of 2014. For the first quartersix months of 2015, annualized net charge-off to average loans outstanding were 0.23% compared to 0.27% for the same period of 2014. Non-performing loans decreased $5.6 million, or 3.6%,increased $193,000 since March 31,June 30, 2014. The total delinquency rate was 1.76%1.60% as of March 31,June 30, 2015, compared to 1.78%1.75% as of March 31,June 30, 2014.
Non-interest Income - For the three and six months ended March 31,June 30, 2015, non-interest income, excluding investment securities gains, increased $2.1$314,000, or 0.7%, and $2.4 million, or 5.4%2.9%, respectively, in comparison to the same periodperiods in 2014, due to increases across a number of fee categories, including a $1.1 million, or 30.0%,2014. The increase in the second quarter of 2015 compared to the second quarter of 2014 was primarily a result of an increase in other service charges and fees, partially offset by lower mortgage banking income. The increase realized during the first half of 2015 compared to the first half of 2014 resulted from other service charges and fees, mortgage banking income and other income.
Gains on sales of investment securities for the first quarter ofthree and six months ended June 30, 2015 were $4.1 million due to gains on sales of debt and equity securities of $2.1$2.4 million and $2.0$6.6 million, respectively.respectively, as compared to $1.1 million for both the three and six months ended June 30, 2014.
Non-interest Expense - For the three and six months ended March 31,June 30, 2015, non-interest expense increased $8.9$2.2 million, or 8.1%1.9%, and $11.1 million, or 4.9%, in comparison to the same periodperiods in 2014. During the first quarter of 2014, certain expense categories, most notably incentive compensation,Increases in both comparative periods were seen primarily in salaries and employee benefits, data processing and other outside services expense,services. These increases were significantlymitigated by lower than quarterly expense levels experienced duringprofessional fees in both periods and a decrease in operating risk loss in 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 2013 and 2012.six-month period.
In the first quarters ofboth 2015 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 employee benefits and reductions in staffing.
InDuring the first six months of 2015, these initiatives included the consolidation of nine branches, modifications to retirement benefits and the elimination of certain 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$520,000 in the firstsecond quarter of 2015 with anand $2.0 million for the first six months of 2015. In July 2015, the Corporation consolidated two additional $700,000 of suchbranches, which are expected to result in approximately $200,000 additional implementation expenses expected in the secondthird quarter of 2015. The annualized expense reductions from all of these 2015 initiatives, when completed, are projected to be approximately $6.5 million, with $5.3$4.8 million expected to be realized in 2015.2015

41


.
In 2014, cost savings initiatives resulted in implementation expenses, net of associated gains, of $980,000 during the first quartersix months and cost savings for the full year of approximately $7 million, or ana projected annualized rate orof $7.9 million.
The following table presents a summary of the 2015 and 2014 cost savings initiatives:
Three months ended March 31, 2015    Three months ended June 30, 2015 Six months ended June 30, 2015    
Implementation Expenses Expense Reductions Estimated Expense Reductions for the Year Ending December 31, 2015 Annualized Cost SavingsImplementation Expenses Expense Reductions Implementation Expenses Expense Reductions Estimated Expense Reductions for the Year Ending December 31, 2015 Projected Annualized Cost Savings
(in thousands)(in thousands)
Branch consolidations$1,050
 $
 $(2,350) $(3,050)$520
 $(165) $1,570
 $(165) $(1,690) $(3,050)
Modification of retirement benefits and staffing reductions450
 (710) (2,950) (3,470)
 (740) 450
 (1,495) (3,065) (3,470)
2015 cost savings initiatives$1,500
 $(710) $(5,300) $(6,520)$520
 $(905) $2,020
 $(1,660) $(4,755) $(6,520)
                  
Three months ended March 31, 2014    Three months ended June 30, 2014 Six months ended June 30, 2014    
Implementation Expenses (Gains) Expense Reductions Actual Expense Reductions for the Year Ending December 31, 2014 Annualized Cost SavingsImplementation Expenses (Gains) Expense Reductions Implementation Expenses (Gains) Expense Reductions Actual Expense Reductions for the Year Ended December 31, 2014 Projected Annualized Cost Savings
(in thousands)(in thousands)
Branch consolidations$2,080
 $
 $(2,400) $(3,200)$
 $(800) $2,080
 $(800) $(2,400) $(3,200)
Subsidiary bank management reductions and other employee benefit reductions(1,100) (1,020) (4,550) (4,700)
 (1,175) (1,100) (2,195) (4,550) (4,700)
2014 cost savings initiatives$980
 $(1,020) $(6,950) $(7,900)$
 $(1,975) $980
 $(2,995) $(6,950) $(7,900)

38


Regulatory Enforcement Orders -During 2014 and 2015, the Corporation and each of its banking subsidiaries became subject to regulatory enforcement orders (the "Regulatory Orders") issued by banking regulatory agencies relating 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"). The Regulatory Orders are described in more detail in Part II. Other Information, Item 1. Legal Proceedings under the heading “Regulatory Matters.”Proceedings.

The Regulatory Orders require, among other things, that the Corporation and its banking subsidiaries review, assess and take actions to strengthen and enhance the BSA/AML Compliance Program, and, in some cases, conduct retrospective reviews of past account activity and transactions, as well as certain reports filed in accordance with the BSA/AML Requirements, to determine whether suspicious activity and certain transactions in currency were properly identified and reported in accordance with the BSA/AML Requirements.

In addition to requiring strengthening and enhancement of the BSA/AML Compliance Program, while the Regulatory Orders remain in effect, the Corporation 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 the 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.

Additional expenses and investments have been incurred as the Corporation expanded its hiring of personnel and use of outside professionals, such as consulting and legal services, and 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 Regulatory Orders, have had an adverse effect on the Corporation’s results of operations in recent periods and could have a material adverse effect on the Corporation’s results of operations in future periods.




42


2015 Outlook

The Corporation's original outlook for 2015 includesincluded the following:

Anticipatedanticipated 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 singlehigh-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.

Based on results for the first six months of 2015 and expectations for the remainder of 2015, the Corporation has updated its 2015 outlook. The updated outlook for 2015 is as follows:

anticipated annual average loan and deposit growth rates of 3% to 7%, with loan growth likely to be at the lower end of the range;
net interest margin compression at a rate of 5 to 8 basis points over the remaining six months of 2015;
continued modest provision for credit losses, although provisions could be impacted by the performance of individual credits;
non-interest income growth is expected to be at the lower end of the mid- to high-single digit range; and
In July 2015, the Corporation incurred a $5.6 million loss on the redemption of the $150 million of trust preferred securities (see Note 15, "Subsequent Event," in the Notes to the Consolidated Financial Statements). Excluding this loss, the original outlook for non-interest expense growth remains unchanged.


3943


Quarter Ended March 31,June 30, 2015 compared to the Quarter Ended March 31,June 30, 2014
Net Interest Income
Fully-taxable equivalent (FTE) net interest income decreased $5.8$4.7 million, to $128.1$127.4 million, in the firstsecond quarter of 2015, from $133.8$132.2 million in the firstsecond quarter of 2014. This decrease was primarily due to a 2021 basis point, or 5.8%6.2%, decrease in the net interest margin, to 3.27%3.20% for the firstsecond quarter of 2015 from 3.47%3.41% for the firstsecond quarter of 2014.2014, partially offset by the impact of an increase in average interest-earning assets. The following table provides a comparative average balance sheet and net interest income analysis for the firstsecond quarter of 2015 as compared to the same period in 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 March 31Three months ended June 30
2015 20142015 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)$13,095,528
 $133,055
 4.11% $12,762,357
 $134,749
 4.28%$13,192,600
 $133,339
 4.05% $12,795,747
 $134,387
 4.21%
Taxable investment securities (3)2,005,542
 11,282
 2.25
 2,257,773
 13,266
 2.35
2,048,558
 10,944
 2.14
 2,211,004
 12,418
 2.25
Tax-exempt investment securities (3)229,082
 3,212
 5.61
 279,278
 3,613
 5.17
216,355
 2,894
 5.35
 270,482
 3,534
 5.23
Equity securities (3)32,210
 450
 5.66
 33,922
 429
 5.11
27,618
 379
 5.50
 33,922
 419
 4.95
Total investment securities2,266,834
 14,944
 2.64
 2,570,973
 17,308
 2.70
2,292,531
 14,217
 2.48
 2,515,408
 16,371
 2.60
Loans held for sale17,002
 173
 4.07
 13,426
 134
 4.00
26,335
 265
 4.03
 17,540
 214
 4.87
Other interest-earning assets474,033
 2,105
 1.78
 258,803
 882
 1.36
439,425
 933
 0.85
 238,921
 1,207
 2.02
Total interest-earning assets15,853,397
 150,277
 3.83% 15,605,559
 153,073
 3.97%15,950,891
 148,754
 3.74% 15,567,616
 152,179
 3.92%
Noninterest-earning assets:                      
Cash and due from banks105,271
     199,641
    104,723
     198,291
    
Premises and equipment226,391
     226,295
    226,569
     224,586
    
Other assets1,114,078
     1,032,071
    1,094,071
     1,037,654
    
Less: Allowance for loan losses(183,927)     (203,201)    (176,085)     (196,462)    
Total Assets$17,115,210
     $16,860,365
    $17,200,169
     $16,831,685
    
LIABILITIES AND EQUITY                      
Interest-bearing liabilities:                      
Demand deposits$3,135,927
 $983
 0.13% $2,945,211
 $909
 0.13%$3,152,697
 $987
 0.13% $2,914,887
 $904
 0.12%
Savings deposits3,517,057
 1,119
 0.13
 3,351,871
 1,035
 0.13
3,568,579
 1,247
 0.14
 3,355,929
 1,031
 0.12
Time deposits3,061,593
 7,721
 1.02
 2,932,456
 5,952
 0.82
3,027,520
 7,819
 1.04
 3,012,061
 6,750
 0.90
Total interest-bearing deposits9,714,577
 9,823
 0.41
 9,229,538
 7,896
 0.35
9,748,796
 10,053
 0.41
 9,282,877
 8,685
 0.38
Short-term borrowings309,215
 77
 0.10
 1,208,953
 633
 0.21
379,988
 103
 0.11
 1,047,684
 540
 0.21
Federal Home Loan Bank advances and long-term debt1,124,074
 12,291
 4.40
 883,532
 10,698
 4.88
1,026,987
 11,153
 4.35
 894,511
 10,779
 4.83
Total interest-bearing liabilities11,147,866
 22,191
 0.80% 11,322,023
 19,227
 0.69%11,155,771
 21,309
 0.77% 11,225,072
 20,004
 0.71%
Noninterest-bearing liabilities:
          
          
Demand deposits3,662,040
     3,243,424
    3,734,880
     3,322,195
    
Other289,341
     232,004
    277,730
     202,520
    
Total Liabilities15,099,247
     14,797,451
    15,168,381
     14,749,787
    
Shareholders’ equity2,015,963
     2,062,914
    2,031,788
     2,081,898
    
Total Liabilities and Shareholders’ Equity$17,115,210
     $16,860,365
    $17,200,169
     $16,831,685
    
Net interest income/net interest margin (FTE)  128,086
 3.27%   133,846
 3.47%  127,445
 3.20%   132,175
 3.41%
Tax equivalent adjustment  (4,505)     (4,281)    (4,525)     (4,277)  
Net interest income  $123,581
     $129,565
    $122,920
     $127,898
  
(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.

4044


The following table summarizes the changes in FTE interest income and interest expense resulting from changes in average balances (volume) and changes in rates for the three months ended March 31:June 30:
2015 vs. 2014
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$3,572
 $(5,266) $(1,694)$4,116
 $(5,164) $(1,048)
Taxable investment securities(1,264) (720) (1,984)(885) (589) (1,474)
Tax-exempt investment securities(1,292) 891
 (401)(719) 79
 (640)
Equity securities(23) 44
 21
(84) 44
 (40)
Loans held for sale40
 (1) 39
93
 (42) 51
Other interest-earning assets916
 307
 1,223
663
 (937) (274)
Total interest income$1,949
 $(4,745) $(2,796)$3,184
 $(6,609) $(3,425)
Interest expense on:          
Demand deposits$74
 $
 $74
$41
 $42
 $83
Savings deposits87
 (3) 84
59
 157
 216
Time deposits270
 1,499
 1,769
34
 1,035
 1,069
Short-term borrowings(326) (230) (556)(250) (187) (437)
Federal Home Loan Bank advances and long-term debt2,707
 (1,114) 1,593
1,505
 (1,131) 374
Total interest expense$2,812
 $152
 $2,964
$1,389
 $(84) $1,305
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 14an 18 basis point, or 3.5%4.6%, decrease in yields on average interest-earningsinterest-earning assets, primarily loans, resulted in a $4.7$6.6 million decrease in FTE interest income, partially offset by a $1.9$3.2 million increase in FTE interest income as a result of an increase in averageinterest-earning assets, primarily loans and other interest-earning assets, partially offset by a decrease in investment securities.
Average investmentsinvestment securities decreased $304.1$222.9 million, or 11.8%8.9%, as portfolio cash flows were not fully reinvested. The yield on average investmentsinvestment securities decreased 612 basis points, or 2.2%4.6%, to 2.64%2.48% in the firstsecond quarter of 2015 from 2.70%2.60% in the firstsecond quarter of 2014. The decrease in average investmentsinvestment securities was partially offset by a $215.2$200.5 million, or 83.2%83.9%, increase in 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 to low-yielding interest-bearing Federal Reserve Bank accounts.
TheAs a result, average other interest-earning assets increased $200.5 million, however, the average yield on other interest-earning assets increased 42decreased 117 basis points, or 30.9%, due to an increase in dividends on Federal Home Loan Bank 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 March 31, 2015, the Corporation held $46.4 million of FHLB stock.

41



57.9%
Average loans and average FTE yields, by type, are summarized in the following table:
Three months ended March 31 Increase (Decrease) inThree months ended June 30 Increase (Decrease) in
2015 2014 Balance2015 2014 Balance
Balance Yield Balance Yield $ %Balance Yield Balance Yield $ %
(dollars in thousands)(dollars in thousands)
Real estate – commercial mortgage$5,163,845
 4.22% $5,085,128
 4.44% $78,717
 1.5%$5,210,540
 4.15% $5,138,537
 4.36% $72,003
 1.4%
Commercial – industrial, financial and agricultural3,770,187
 3.87
 3,637,075
 4.03
 133,112
 3.7
3,836,397
 3.79
 3,617,977
 3.95
 218,420
 6.0
Real estate – home equity1,721,300
 4.14
 1,755,346
 4.18
 (34,046) (1.9)1,695,171
 4.11
 1,735,767
 4.18
 (40,596) (2.3)
Real estate – residential mortgage1,370,376
 3.84
 1,336,323
 3.99
 34,053
 2.5
1,356,464
 3.82
 1,339,034
 3.97
 17,430
 1.3
Real estate – construction688,690
 3.93
 576,346
 4.08
 112,344
 19.5
698,685
 3.97
 588,176
 4.17
 110,509
 18.8
Consumer259,138
 5.26
 274,910
 4.82
 (15,772) (5.7)265,354
 5.48
 276,444
 4.56
 (11,090) (4.0)
Leasing and other121,992
 8.41
 97,229
 10.26
 24,763
 25.5
129,989
 6.94
 99,812
 9.20
 30,177
 30.2
Total$13,095,528
 4.11% $12,762,357
 4.28% $333,171
 2.6%$13,192,600
 4.05% $12,795,747
 4.21% $396,853
 3.1%

45


Average loans increased $333.2$396.9 million, or 2.6%3.1%, compared to the firstsecond quarter of 2014, mainly in commercial loans, commercial mortgages, construction loans and residential mortgages.leasing and other. The growth in commercial loans and commercial mortgagesleasing and other was driven by a combination of loans and leases 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 1716 basis points, or 4.0%3.8%, to 4.11%4.05% in 2015 from 4.28%4.21% 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 $3.0$1.3 million, or 15.4%6.5%, to $22.2$21.3 million in the firstsecond quarter of 2015 from $19.2$20.0 million in the firstsecond quarter of 2014. Although average interest-bearing liabilities decreased $174.2$69.3 million, or 1.5%0.6%, compared to the firstsecond quarter of 2014, a change in funding mix from lower cost short-term Federal funds purchased and short-term FHLB advances to higher cost time deposits and long-term FHLB advances and subordinated debt resulted in a $2.8$1.4 million increase in interest expense.
Average deposits and average interest rates, by type, are summarized in the following table:
Three months ended March 31 Increase (Decrease) inThree months ended June 30 Increase in Balance
2015 2014 Balance2015 2014 
Balance Rate Balance Rate $ %Balance Rate Balance Rate $ %
(dollars in thousands)(dollars in thousands)
Noninterest-bearing demand$3,662,040
 % $3,243,424
 % $418,616
 12.9%$3,734,880
 % $3,322,195
 % $412,685
 12.4%
Interest-bearing demand3,135,927
 0.13
 2,945,211
 0.13
 190,716
 6.5
3,152,697
 0.13
 2,914,887
 0.12
 237,810
 8.2
Savings3,517,057
 0.13
 3,351,871
 0.13
 165,186
 4.9
3,568,579
 0.14
 3,355,929
 0.12
 212,650
 6.3
Total demand and savings10,315,024
 0.08
 9,540,506
 0.08
 774,518
 8.1
10,456,156
 0.09
 9,593,011
 0.08
 863,145
 9.0
Time deposits3,061,593
 1.02
 2,932,456
 0.82
 129,137
 4.4
3,027,520
 1.04
 3,012,061
 0.90
 15,459
 0.5
Total deposits$13,376,617
 0.30% $12,472,962
 0.26% $903,655
 7.2%$13,483,676
 0.30% $12,605,072
 0.28% $878,604
 7.0%
The $774.5$863.1 million, or 8.1%9.0%, increase in total demand and savings accounts was primarily due to a $422.1$399.2 million, or 13.1%12.2%, increase in business account balances, a $198.2$281.6 million, or 4.3%6.0%, increase in personal account balances and a $156.2$180.7 million, or 9.3%11.2%, increase in municipal account balances. The average cost of total deposits increased fourtwo basis points largely due to 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 March 31 Increase (Decrease) inThree months ended June 30 Increase (Decrease) in
2015 2014 Balance2015 2014 Balance
Balance Rate Balance Rate $ %Balance Rate Balance Rate $ %
(dollars in thousands)(dollars in thousands)
Short-term borrowings:                      
Customer repurchase agreements$173,625
 0.10% $187,362
 0.11% $(13,737) (7.3)%$179,804
 0.10% $216,212
 0.11% $(36,408) (16.8)%
Customer short-term promissory notes86,258
 0.03
 102,000
 0.06
 (15,742) (15.4)80,073
 
 81,823
 0.05
 (1,750) (2.1)
Total short-term customer funding259,883
 0.08
 289,362
 0.09
 (29,479) (10.2)259,877
 0.07
 298,035
 0.09
 (38,158) (12.8)
Federal funds purchased25,054
 0.15
 416,230
 0.21
 (391,176) (94.0)108,078
 0.17
 444,429
 0.22
 (336,351) (75.7)
Short-term FHLB advances (1)24,278
 0.28
 503,361
 0.28
 (479,083) (95.2)12,033
 0.34
 305,220
 0.30
 (293,187) (96.1)
Total short-term borrowings309,215
 0.10
 1,208,953
 0.21
 (899,738) (74.4)379,988
 0.11
 1,047,684
 0.21
 (667,696) (63.7)
Long-term debt:
   
   
 

   
   
 
FHLB advances657,697
 3.49
 513,790
 4.14
 143,907
 28.0
627,939
 3.51
 524,782
 4.07
 103,157
 19.7
Other long-term debt466,377
 5.69
 369,742
 5.90
 96,635
 26.1
399,048
 5.67
 369,729
 5.90
 29,319
 7.9
Total long-term debt1,124,074
 4.40
 883,532
 4.88
 240,542
 27.2
1,026,987
 4.35
 894,511
 4.83
 132,476
 14.8
Total borrowings$1,433,289
 3.47% $2,092,485
 2.20% $(659,196) (31.5)%$1,406,975
 3.20% $1,942,195
 2.33% $(535,220) (27.6)%
                      
(1) Represents FHLB advances with an original maturity term of less than one year.
Total short-term borrowings decreased $899.7$667.7 million, or 74.4%63.7%, primarily in Federal 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.interest-earning assets.

46


The $143.9$103.2 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$29.3 million increase in other long-term debt was a result of the issuance of $100.0$150.0 million of subordinated debt in June 2015. The issuance of $100 million of subordinated debt in November 2014.2014 and the maturity of $100 million of subordinated debt on April 1, 2015 had no net impact on comparative average balances for the quarter.
The average cost of total borrowings increased 12787 basis points, or 57.7%37.3%, to 3.47%3.20% in 2015 from 2.20%2.33% in 2014, primarily due to the weighted average cost impact of a decrease in lower-cost, short-term borrowings, which were 21.6%27.0% of total borrowings in the firstsecond quarter of 2015, compared to 57.8%53.9% for the same period in 2014.

Provision for Credit Losses
The provision for credit losses was a negative $3.7$2.2 million for the firstsecond quarter of 2015, a decrease of $6.2$1.3 million from the firstsecond quarter of 2014. This decrease resulted from an improvement in net charge-off levels, particularly on pooled impaired loans.lower allowance for credit losses allocation needs as asset quality improved.
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 March 31 Increase (Decrease)Three months ended June 30 Increase (Decrease)
2015 2014 $ %2015 2014 $ %
(dollars in thousands)(dollars in thousands)
Service charges on deposit accounts:              
Overdraft fees$4,801
 $5,297
 $(496) (9.4)%$5,353
 $5,542
 $(189) (3.4)%
Cash management fees3,217
 3,105
 112
 3.6
3,369
 3,293
 76
 2.3
Other3,551
 3,309
 242
 7.3
3,915
 3,717
 198
 5.3
Total service charges on deposit accounts11,569
 11,711
 (142) (1.2)12,637
 12,552
 85
 0.7
Investment management and trust services10,889
 10,958
 (69) (0.6)11,011
 11,339
 (328) (2.9)
Other service charges and fees:              
Merchant fees3,177
 2,723
 454
 16.7
4,088
 3,843
 245
 6.4
Debit card income2,389
 2,210
 179
 8.1
2,626
 2,435
 191
 7.8
Letter of credit fees1,157
 1,101
 56
 5.1
1,174
 1,184
 (10) (0.8)
Commercial swap fees811
 1,013
 (202) (19.9)1,026
 994
 32
 3.2
Other1,829
 1,880
 (51) (2.7)2,074
 2,070
 4
 0.2
Total other service charges and fees9,363
 8,927
 436
 4.9
10,988
 10,526
 462
 4.4
Mortgage banking income:              
Gain on sales of mortgage loans3,533
 2,422
 1,111
 45.9
4,428
 2,974
 1,454
 48.9
Mortgage servicing income1,155
 1,183
 (28) (2.4)911
 2,767
 (1,856) (67.1)
Total mortgage banking income4,688
 3,605
 1,083
 30.0
5,339
 5,741
 (402) (7.0)
Credit card income2,235
 2,171
 64
 2.9
2,474
 2,353
 121
 5.1
Other income1,848
 1,134
 714
 63.0
1,625
 1,249
 376
 30.1
Total, excluding gains on sales of investment securities40,592
 38,506
 2,086
 5.4
44,074
 43,760
 314
 0.7
Net gains on sales of investment securities4,145
 
 4,145
 N/M
2,415
 1,112
 1,303
 117.2
Total$44,737
 $38,506
 $6,231
 16.2 %$46,489
 $44,872
 $1,617
 3.6 %

N/M - Not meaningful

47


Excluding net gains on sales of investment securities, non-interest income increased $314,000, or 0.7%, the net effect of modest increases in certain income categories being partially offset by modest decreases in others. The following is a discussion of some of the more noteworthy items.
The $496,000,$189,000, or 9.4%3.4%, decrease in overdraft fee income consisted of a $251,000$158,000 decrease in fees assessed on commercialpersonal accounts and a $245,000$31,000 decrease in fees assessed on personalcommercial accounts. The overall decline in these fees resulted from a reduction in the number of overdrafts, partially driven by changes in customer behavior. Partially offsetting the decrease in overdraft fee income was a $242,000,$198,000, or 7.3%5.3%, increase in other service charges on deposits.
Investment management and trust services income decreased $328,000, or 2.9%, mainly in brokerage income as a result of declines in retail referrals.
The $454,000,$245,000, or 16.7%6.4%, increase in merchant fee income and the $179,000,$191,000, or 8.1%7.8%, increase in debit card income arewere due to an increase in the volumes of transactions while $202,000, or 19.9%, decrease in commercial swap fees was due to a decrease in the number of new swap transactions in comparison to the firstsecond quarter of 2014.2015.
Gains on sales of mortgage loans increased $1.1$1.5 million, or 45.9%48.9%, due to a $128.141.6% increase in pricing spreads and a $13.5 million, or 66.8%5.2%, increase in new loan commitments partially offset by a 12.6% decrease in pricing spreads compared to the firstsecond quarter of 2014. TheMortgage servicing income decreased $1.9 million, or 67.1%, due to an increase in new loan commitments was mainly in refinancing volumes, which totaled approximately $209.2 million, or 65.4%amortization of mortgage servicing rights (MSRs), of new loan commitments, in the first quarter of 2015 compared to $63.5 million, or 33.1%, during the first quarter of 2014.as prepayments were higher.
The $714,000,$376,000, or 63.0%30.1%, increase in other income was due to increases in values of bank owned life insurance policies andhigher gains on the salesales of two branch properties.fixed assets.
Investment securities gains for the firstsecond quarter of 2015 were from the sales of financial institution stocks and pooled trust preferred securities. There were noInvestment securities gains in the firstsecond quarter of 2014.2014 were from sales of debt securities. See Note 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 March 31 Increase (Decrease)Three months ended June 30 Increase (Decrease)
2015 2014 $ %2015 2014 $ %
(dollars in thousands)(dollars in thousands)
Salaries and employee benefits$64,990
 $59,566
 $5,424
 9.1%$65,067
 $63,623
 $1,444
 2.3%
Net occupancy expense13,692
 13,603
 89
 0.7
11,809
 11,464
 345
 3.0
Other outside services5,750
 3,812
 1,938
 50.8
8,125
 7,240
 885
 12.2
Data processing4,768
 3,796
 972
 25.6
4,894
 4,331
 563
 13.0
Software3,376
 3,209
 167
 5.2
Equipment expense3,958
 3,602
 356
 9.9
3,335
 3,360
 (25) (0.7)
Software3,318
 2,925
 393
 13.4
FDIC insurance expense2,885
 2,615
 270
 10.3
Professional fees2,871
 2,904
 (33) (1.1)2,731
 3,559
 (828) (23.3)
FDIC insurance expense2,822
 2,689
 133
 4.9
Supplies and postage2,369
 2,326
 43
 1.8
2,726
 2,451
 275
 11.2
Marketing2,235
 2,337
 (102) (4.4)
Telecommunications1,716
 1,819
 (103) (5.7)1,617
 1,787
 (170) (9.5)
Operating risk loss674
 716
 (42) (5.9)
Other real estate owned and repossession expense1,362
 983
 379
 38.6
129
 748
 (619) (82.8)
Marketing1,233
 1,584
 (351) (22.2)
Operating risk loss827
 1,828
 (1,001) (54.8)
Intangible amortization130
 315
 (185) (58.7)106
 315
 (209) (66.3)
Other8,672
 7,802
 870
 11.2
8,645
 8,419
 226
 2.7
Total$118,478
 $109,554
 $8,924
 8.1%$118,354
 $116,174
 $2,180
 1.9%
In comparison to the first quarter of 2014, non-interest expenses increased $8.9The $1.4 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.
The $5.4 million, or 9.1%2.3%, increase in salaries and employee benefits resulted from a $2.4$2.2 million, or 4.8%4.2%, increase in salaries andpartially offset by a $3.0 million,$781,000, or 34.8%7.2%, increasedecrease in employee benefits. The increase in salaries was primarily due to higher average salaries per full-time equivalent employee and an increase in incentive compensation, partially offset by the impact of a decrease in the number of full-time equivalent employees, to 3,4803,470 as of March 31,June 30, 2015 from 3,5403,530 as of March 31,June 30, 2014. The increasedecrease in employee benefits was primarily due to an increasedecreases in employee healthcare costs and profit sharing expense, partially offset by an increase in defined benefit plan expense and a $1.5 million gain realized on the post retirement plan amendment in 2014.expense.

48


The $1.9 million,$885,000, or 50.8%12.2%, increase in other outside services resulted from the timing of engagements related to 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 $1.4 million,$730,0000, or 20.3%9.7%, combined increase in data processing and software resulted from increased expenses related to the core processing system and amortization of software.capitalized software investments. The $870,000,$828,000, 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%23.3%, decrease in operating risk lossprofessional fees was due to a $1.5 million,decrease in legal fees primarily resulting from the timing of engagements with outside counsel.
The $619,000, or 85.1%82.8%, decrease in losses relatedother real estate expense was primarily due to check fraud, partially offset bya decrease in repossession expense. This expense category can experience volatility from period to period based on the impacttiming of $600,000sales of gains recorded in the first quarterproperties and payments of 2014 related to the settlement with a third-party investor of outstanding repurchase requests related to certain previously sold residential mortgages.expenses, such as real estate taxes.

45


Income Taxes

Income tax expense for the firstsecond quarter of 2015 was $13.5$12.2 million, a $730,000,$1.3 million, or 5.1%9.8%, decrease from $14.2$13.5 million for the firstsecond quarter of 2014.

The Corporation’s effective tax rate was 25.2%24.9% in the firstsecond quarter of 2015, as compared to 25.4% in the firstsecond quarter of 2014. The effective tax 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.


49


Six Months Ended June 30, 2015 compared to the Six Months Ended June 30, 2014

Net Interest Income

FTE net interest income decreased $10.5 million, or 3.9%, to $255.5 million in the first six months of 2015 from $266.0 million in the same period of 2014. Net interest margin decreased 20 basis points, or 5.8%, to 3.24% for the first six months of 2015 from 3.44% for the first six months of 2014. The decrease in net interest margin was the result of a 16 basis point, or 4.1%, decrease in yields on interest-earning assets, as well as an 8 basis point, or 11.4%, increase in funding costs.
 Six months ended June 30
 2015 2014
ASSETSAverage
Balance
 Interest  (1) Yield/
Rate
 Average
Balance
 Interest  (1) Yield/
Rate
Interest-earning assets:           
Loans, net of unearned income (2)$13,144,332
 $266,394
 4.08% $12,779,145
 $269,131
 4.24%
Taxable investment securities (3)2,027,170
 22,226
 2.19
 2,234,259
 25,684
 2.30
Tax-exempt investment securities (3)222,684
 6,106
 5.48
 274,856
 7,147
 5.20
Equity securities (3)29,901
 829
 5.58
 33,922
 848
 5.03
Total investment securities2,279,755
 29,161
 2.56
 2,543,037
 33,679
 2.65
Loans held for sale21,694
 438
 4.04
 15,494
 348
 4.49
Other interest-earning assets456,633
 3,038
 1.33
 248,807
 2,089
 1.68
Total interest-earning assets15,902,414
 299,031
 3.79% 15,586,483
 305,247
 3.95%
Noninterest-earning assets:           
Cash and due from banks104,996
     198,962
    
Premises and equipment226,480
     225,436
    
Other assets1,104,019
     1,034,877
    
Less: Allowance for loan losses(179,985)     (199,813)    
Total Assets$17,157,924
     $16,845,945
    
LIABILITIES AND EQUITY           
Interest-bearing liabilities:           
Demand deposits$3,144,358
 $1,970
 0.13% $2,929,965
 $1,813
 0.12%
Savings deposits3,542,960
 2,366
 0.13
 3,353,910
 2,066
 0.12
Time deposits3,044,463
 15,540
 1.03
 2,972,480
 12,702
 0.86
Total interest-bearing deposits9,731,781
 19,876
 0.41
 9,256,355
 16,581
 0.36
Short-term borrowings344,797
 180
 0.10
 1,127,872
 1,173
 0.21
FHLB advances and long-term debt1,075,262
 23,444
 4.38
 889,051
 21,477
 4.85
Total interest-bearing liabilities11,151,840
 43,500
 0.78% 11,273,278
 39,231
 0.70%
Noninterest-bearing liabilities:           
Demand deposits3,698,661
     3,283,027
    
Other283,504
     217,181
    
Total Liabilities15,134,005
     14,773,486
    
Shareholders’ equity2,023,919
     2,072,459
    
Total Liabilities and Shareholders’ Equity$17,157,924
     $16,845,945
    
Net interest income/net interest margin (FTE)  255,531
 3.24%   266,016
 3.44%
Tax equivalent adjustment  (9,030)     (8,553)  
Net interest income  $246,501
     $257,463
  
(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.






4650


The following table summarizes the changes in FTE interest income and expense for the first six months of 2015 as compared to the same period in 2014 due to changes in average balances (volume) and changes in rates:
 2015 vs. 2014
Increase (Decrease) due
to change in
 Volume Rate Net
 (in thousands)
Interest income on:     
Loans, net of unearned income$7,755
 $(10,492) $(2,737)
Taxable investment securities(2,166) (1,292) (3,458)
Tax-exempt investment securities(1,362) 321
 (1,041)
Equity securities(106) 87
 (19)
Loans held for sale130
 (40) 90
Other interest-earning assets1,468
 (519) 949
Total interest income$5,719
 $(11,935) $(6,216)
Interest expense on:     
Demand deposits$134
 $23
 $157
Savings deposits120
 180
 300
Time deposits315
 2,523
 2,838
Short-term borrowings(566) (427) (993)
FHLB advances and long-term debt4,252
 (2,285) 1,967
Total interest expense$4,255
 $14
 $4,269
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 16 basis point, or 4.1%, decrease in yields on average interest-earning assets resulted in an $11.9 million decrease in FTE interest income, which was partially offset by a $5.7 million increase in FTE interest income resulting from a $315.9 million, or 2.0%, increase in average interest-earning assets, primarily loans and other interest-earning assets, partially offset by a decrease in investment securities.

Average investment securities decreased $263.3 million, or 10.4%, as portfolio cash flows were not fully reinvested. The yield on average investments decreased 9 basis points, or 3.4%, to 2.56% in 2015 from 2.65% in 2014. The decrease in average investment securities was partially offset by a $207.8 million, or 83.5%, increase in 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 to low-yielding interest-bearing Federal Reserve Bank accounts, which contributed to a decrease in the yield on other interest-earning assets.
Average loans, by type, are summarized in the following table:
 Six months ended June 30 Increase (Decrease) in
 2015 2014 Balance
 Balance Yield Balance Yield $ %
 (dollars in thousands)
Real estate – commercial mortgage$5,187,322
 4.19% $5,111,979
 4.40% $75,343
 1.5%
Commercial – industrial, financial and agricultural3,803,475
 3.83
 3,627,471
 3.99
 176,004
 4.9
Real estate – home equity1,708,163
 4.13
 1,745,503
 4.18
 (37,340) (2.1)
Real estate – residential mortgage1,363,382
 3.83
 1,337,686
 3.98
 25,696
 1.9
Real estate – construction693,715
 3.95
 582,294
 4.13
 111,421
 19.1
Consumer262,265
 5.37
 275,682
 4.69
 (13,417) (4.9)
Leasing and other126,010
 7.64
 98,530
 9.72
 27,480
 27.9
Total$13,144,332
 4.08% $12,779,145
 4.24% $365,187
 2.9%


51


The average yield on loans decreased 16 basis points, or 3.8%, to 4.08% in 2015 from 4.24% in 2014. 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. Average loan balances increased $365.2 million, or 2.9%. The $176.0 million, or 4.9%, increase in commercial loans and the $111.4 million, or 19.1%, increase in real estate construction loans were from both new and existing customers.
Interest expense increased $4.3 million, or 10.9%, to $43.5 million in the first six months of 2015 from $39.2 million in the first six months of 2014. Although total average interest-bearing liabilities decreased $121.4 million, or 1.1%, compared to the first six months of 2014, a change in funding mix from lower cost short-term Federal funds purchased and short-term FHLB advances to higher cost deposits and long-term FHLB advances and subordinated debt drove the $4.3 million increase in interest expense.
Average deposits, by type, are summarized in the following table:
 Six months ended June 30 Increase in Balance
 2015 2014 
 Balance Rate Balance Rate $ %
 (dollars in thousands)
Noninterest-bearing demand$3,698,661
 % $3,283,027
 % $415,634
 12.7%
Interest-bearing demand3,144,358
 0.13
 2,929,965
 0.12
 214,393
 7.3
Savings3,542,960
 0.13
 3,353,910
 0.12
 189,050
 5.6
Total demand and savings10,385,979
 0.08
 9,566,902
 0.08
 819,077
 8.6
Time deposits3,044,463
 1.03
 2,972,480
 0.86
 71,983
 2.4
Total deposits$13,430,442
 0.30% $12,539,382
 0.27% $891,060
 7.1%
The $819.1 million, or 8.6%, increase in total demand and savings account balances was primarily due to a $410.6 million, or 12.6%, increase in business account balances, a $240.1 million, or 5.2%, increase in personal account balances and a $168.5 million, or 10.3%, increase in municipal account balances. The average cost of deposits increased 3 basis points, or 11.1%, to 0.30% in 2015 from 0.27% in 2014, primarily due to an increase in higher-cost time deposits.
The following table summarizes changes in average short-term borrowings and long-term debt, by type:
 Six months ended June 30 Increase (Decrease) in
 2015 2014 Balance
 Balance Rate Balance Rate $ %
 (dollars in thousands)
Short-term borrowings:           
Customer repurchase agreements$176,732
 0.10% $201,866
 0.11% $(25,134) (12.5)%
Customer short-term promissory notes83,148
 0.02
 91,856
 0.06
 (8,708) (9.5)
Total short-term customer funding259,880
 0.07
 293,722
 0.09
 (33,842) (11.5)
Federal funds purchased66,795
 0.17
 430,407
 0.21
 (363,612) (84.5)
Short-term FHLB advances (1)18,122
 0.30
 403,743
 0.29
 (385,621) (95.5)
Total short-term borrowings344,797
 0.10
 1,127,872
 0.21
 (783,075) (69.4)
Long-term debt:           
FHLB advances642,736
 3.50
 519,316
 4.11
 123,420
 23.8
Other long-term debt432,526
 5.68
 369,735
 5.90
 62,791
 17.0
Total long-term debt1,075,262
 4.38
 889,051
 4.85
 186,211
 20.9
Total$1,420,059
 3.34% $2,016,923
 2.26% $(596,864) (29.6)%
(1) Represents FHLB advances with an original maturity term of less than one year.
Total short-term borrowings decreased $783.1 million, or 69.4%, primarily in federal funds purchased and in short-term FHLB advances. Total borrowings decreased $596.9 million, or 29.6%. The cost of borrowings increased 108 basis points, or 47.8%, 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.



52



Provision for Credit Losses
The provision for credit losses was a negative $1.5 million for the first six months of 2015, a decrease of $7.5 million, or 125.0%, in comparison to the first six months of 2014, reflecting improvements in asset quality. In the first quarter of 2015, a negative provision of $3.7 million was recorded, primarily due to an improvement in net charge-off levels, particularly among pooled impaired loans. 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:
 Six months ended June 30 Increase (Decrease)
 2015 2014 $ %
 (dollars in thousands)
Service charges on deposit accounts:       
Overdraft fees$10,154
 $10,839
 $(685) (6.3)%
Cash management fees6,586
 6,398
 188
 2.9
Other7,466
 7,026
 440
 6.3
         Total service charges on deposit accounts24,206
 24,263
 (57) (0.2)
Investment management and trust services21,900
 22,297
 (397) (1.8)
Other service charges and fees:       
Merchant fees7,265
 6,566
 699
 10.6
Debit card income5,015
 4,645
 370
 8.0
Letter of credit fees2,331
 2,285
 46
 2.0
Commercial swap fees1,837
 2,007
 (170) (8.5)
Other3,903
 3,950
 (47) (1.2)
        Total other service charges and fees20,351
 19,453
 898
 4.6
Mortgage banking income:       
Gain on sales of mortgage loans7,961
 5,396
 2,565
 47.5
Mortgage servicing income2,066
 3,950
 (1,884) (47.7)
        Total mortgage banking income10,027
 9,346
 681
 7.3
Credit card income4,709
 4,524
 185
 4.1
Other income3,473
 2,383
 1,090
 45.7
        Total, excluding gains on sales of investment securities84,666
 82,266
 2,400
 2.9
Net gains on sales of investment securities6,560
 1,112
 5,448
 489.9
              Total$91,226
 $83,378
 $7,848
 9.4 %

The $685,000, or 6.3%, decrease in overdraft fee income consisted of a $356,000 decrease in fees assessed on commercial accounts and a $329,000 decrease in fees assessed on personal accounts. The overall decline in these fees resulted from a reduction in the number of overdrafts. Partially offsetting these decreases was a $440,000, or 6.3%, increase in other service charges on deposits.
The $699,000, or 10.6%, increase in merchant fee income and the $370,000, or 8.0%, increase in debit card income were due to an increase in the volumes of transactions in comparison to 2014.

Gains on sales of mortgage loans increased $2.6 million, or 47.5%, due to a $141.5 million, or 31.4%, increase in new loan commitments and a 12.3% increase in pricing spreads compared to the prior year. The increase in new loan commitments was largely in refinancing volumes, which were $318.8 million, or 53.7%, of new loan commitments in 2015 compared to $130.1 million, or 28.8%, during 2014. Mortgage servicing income decreased $1.9 million, or 47.7%, due to an increase in amortization of mortgage servicing rights (MSRs), as prepayments increased when compared to 2014.

The $1.1 million, or 45.7%, increase in other income was due to higher gains on sales of fixed assets in 2015.


53


Investment securities gains of $6.6 million for the first six months of 2015 were a result of $4.3 million of net realized gains on the sales of financial institution stocks and $2.3 million of net realized gains on the sales of debt securities. The $1.1 million of investment securities gains for first six months of 2014 included $1.1 million of net realized gains on debt securities.
Non-Interest Expense
The following table presents the components of non-interest expense:

 Six months ended June 30 Increase (Decrease)
 2015 2014 $ %
 (dollars in thousands)
Salaries and employee benefits$130,057
 $123,189
 $6,868
 5.6 %
Net occupancy expense25,501
 25,067
 434
 1.7
Other outside services13,875
 11,052
 2,823
 25.5
Data processing9,662
 8,127
 1,535
 18.9
Equipment expense7,293
 6,962
 331
 4.8
Software6,694
 6,134
 560
 9.1
FDIC insurance expense5,707
 5,304
 403
 7.6
Professional fees5,602
 6,463
 (861) (13.3)
Supplies and postage5,095
 4,777
 318
 6.7
Marketing3,468
 3,921
 (453) (11.6)
Telecommunications3,333
 3,606
 (273) (7.6)
Other real estate owned and repossession expense1,491
 1,731
 (240) (13.9)
Operating risk loss1,501
 2,544
 (1,043) (41.0)
Intangible amortization236
 630
 (394) (62.5)
Other17,317
 16,221
 1,096
 6.8
Total$236,832
 $225,728
 $11,104
 4.9 %

Salaries and employee benefits increased $6.9 million, or 5.6%, with salaries increasing $4.7 million, or 4.5%, and employee benefits increasing $2.2 million, or 11.4%. The increase in salaries was primarily due to higher average salaries per full-time equivalent employee and an increase in incentive compensation, partially offset by a decrease in the average number of full-time equivalent employees to 3,470 for the six months ended June 30, 2015, compared to 3,540 for the six months ended June 30, 2014. The increase in employee benefits was primarily due to an increase in defined benefit plan expense in 2015, while 2014 included a $1.5 million gain realized on the post-retirement plan amendment in 2014.
Other outside services increased $2.8 million, or 25.5%, due to an increase in consulting services related to the Corporation’s 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 million, or 14.7%, combined increase in data processing and software resulted from increased expenses related to the core processing system and amortization of software.
The $1.0 million, or 41.0%, decrease in operating risk loss was due to a $1.4 million decrease in check card fraud losses, partially offset by a $607,000 increase in losses associated with previously sold residential mortgages. See Note 12 "Commitments and Contingencies," in the Notes to Consolidated Financial Statements for additional details related to repurchases of previously sold residential mortgages.
Income Taxes
Income tax expense for the first six months of 2015 was $25.7 million, a $2.1 million, or 7.4%, decrease from $27.7 million in 2014.
The Corporation’s effective tax rate was 25.1% in 2015, as compared to 25.4% in 2014. The effective tax 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.


54


FINANCIAL CONDITION
The table below presents condensed consolidated ending balance sheets for the Corporation.
   Increase (Decrease)
 March 31, 2015 December 31, 2014 $ %
 (dollars in thousands)
Assets       
Cash and due from banks$91,870
 $105,702
 $(13,832) (13.1)%
Other interest-earning assets703,667
 423,083
 280,584
 66.3
Loans held for sale34,124
 17,522
 16,602
 94.7
Investment securities2,259,802
 2,323,371
 (63,569) (2.7)
Loans, net of allowance12,937,804
 12,927,572
 10,232
 0.1
Premises and equipment226,241
 226,027
 214
 0.1
Goodwill and intangible assets531,672
 531,803
 (131) 
Other assets578,161
 569,687
 8,474
 1.5
Total Assets$17,363,341
 $17,124,767
 $238,574
 1.4 %
Liabilities and Shareholders’ Equity       
Deposits$13,514,497
 $13,367,506
 $146,991
 1.1 %
Short-term borrowings410,105
 329,719
 80,386
 24.4
Long-term debt1,094,517
 1,139,413
 (44,896) (3.9)
Other liabilities312,709
 291,464
 21,245
 7.3
Total Liabilities15,331,828
 15,128,102
 203,726
 1.3
Total Shareholders’ Equity2,031,513
 1,996,665
 34,848
 1.7
Total Liabilities and Shareholders’ Equity$17,363,341
 $17,124,767
 $238,574
 1.4 %
Other interest-earning assets
The $280.6 million, or 66.3%, increase in other interest-earning assets was due to an increase in interest-bearing deposits with other banks.
   Increase (Decrease)
 June 30, 2015 December 31, 2014 $ %
 (dollars in thousands)
Assets       
Cash and due from banks$100,455
 $105,702
 $(5,247) (5.0)%
Other interest-earning assets387,324
 423,083
 (35,759) (8.5)
Loans held for sale33,980
 17,522
 16,458
 93.9
Investment securities2,440,492
 2,323,371
 117,121
 5.0
Loans, net of allowance13,076,745
 12,927,572
 149,173
 1.2
Premises and equipment226,794
 226,027
 767
 0.3
Goodwill and intangible assets531,567
 531,803
 (236) 
Other assets568,116
 569,687
 (1,571) (0.3)
Total Assets$17,365,473
 $17,124,767
 $240,706
 1.4 %
Liabilities and Shareholders’ Equity       
Deposits$13,505,709
 $13,367,506
 $138,203
 1.0 %
Short-term borrowings409,035
 329,719
 79,316
 24.1
Long-term debt1,132,641
 1,139,413
 (6,772) (0.6)
Other liabilities293,271
 291,464
 1,807
 0.6
Total Liabilities15,340,656
 15,128,102
 212,554
 1.4
Total Shareholders’ Equity2,024,817
 1,996,665
 28,152
 1.4
Total Liabilities and Shareholders’ Equity$17,365,473
 $17,124,767
 $240,706
 1.4 %
Investment Securities
The following table presents the carrying amount of investment securities:
  Increase (Decrease)  Increase (Decrease)
March 31, 2015 December 31, 2014 $ %June 30, 2015 December 31, 2014 $ %
(dollars in thousands)(dollars in thousands)
U.S. Government securities$
 $200
 $(200) (100.0)%$
 $200
 $(200) (100.0)%
U.S. Government sponsored agency securities203
 214
 (11) (5.1)48,260
 214
 48,046
 N/M
State and municipal securities224,342
 245,215
 (20,873) (8.5)236,517
 245,215
 (8,698) (3.5)
Corporate debt securities97,682
 98,034
 (352) (0.4)97,172
 98,034
 (862) (0.9)
Collateralized mortgage obligations867,876
 902,313
 (34,437) (3.8)918,232
 902,313
 15,919
 1.8
Mortgage-backed securities930,159
 928,831
 1,328
 0.1
1,008,664
 928,831
 79,833
 8.6
Auction rate securities98,932
 100,941
 (2,009) (2.0)98,606
 100,941
 (2,335) (2.3)
Total debt securities2,219,194
 2,275,748
 (56,554) (2.5)2,407,451
 2,275,748
 131,703
 5.8
Equity securities40,608
 47,623
 (7,015) (14.7)33,041
 47,623
 (14,582) (30.6)
Total$2,259,802
 $2,323,371
 $(63,569) (2.7)%$2,440,492
 $2,323,371
 $117,121
 5.0 %

N/M - Not meaningful
Total investment securities decreased $63.6increased $117.1 million, or 2.7%5.0%, in comparison to December 31, 2014, mainly in collateralized mortgage obligations and state and municipal securities, as prior period portfolio cash flows were not fully reinvested due to relatively low yields available on current investment options.in mortgage-backed securities and U.S. Government sponsored agency securities. The $14.6 million, or 30.6%, decrease in equity securities reflects the sales of certain financial institutions stocks during the first six months of 2015.



4755


The net pre-tax unrealized gain on available for sale investment securities was $22.7 million as of March 31, 2015, compared to a $11.3 million pre-tax unrealized gain as of December 31, 2014.The $11.4 million increase in the net pre-tax unrealized gain 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)
March 31, 2015 December 31, 2014 $ %June 30, 2015 December 31, 2014 $ %
(in thousands)  (in thousands)  
Real-estate – commercial mortgage$5,227,101
 $5,197,155
 $29,946
 0.6 %$5,237,800
 $5,197,155
 $40,645
 0.8 %
Commercial – industrial, financial and agricultural3,762,631
 3,725,567
 37,064
 1.0
3,806,699
 3,725,567
 81,132
 2.2
Real-estate – home equity1,701,623
 1,736,688
 (35,065) (2.0)1,689,688
 1,736,688
 (47,000) (2.7)
Real-estate – residential mortgage1,364,788
 1,377,068
 (12,280) (0.9)1,369,103
 1,377,068
 (7,965) (0.6)
Real-estate – construction677,806
 690,601
 (12,795) (1.9)731,925
 690,601
 41,324
 6.0
Consumer257,301
 265,431
 (8,130) (3.1)272,494
 265,431
 7,063
 2.7
Leasing and other124,255
 119,206
 5,049
 4.2
136,521
 119,206
 17,315
 14.5
Loans, net of unearned income$13,115,505
 $13,111,716
 $3,789
  %$13,244,230
 $13,111,716
 $132,514
 1.0 %
The Corporation does not have a significant concentration of credit risk with any single borrower, industry or geographical location. Approximately $5.9$6.0 billion, or 45.0%45.1%, of the loan portfolio was in commercial mortgage and construction loans as of March 31,June 30, 2015. The Corporation's maximum total lending commitment to an individual borrower was $50.0 million as of March 31,June 30, 2015. In addition to its policy of 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 March 31,June 30, 2015, the Corporation had 7392 relationships with total borrowing commitments between $20.0 million and $50.0 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:
March 31, 2015 December 31, 2014June 30, 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$393,408
 0.3% 58.0% $427,419
 0.6% 61.9%$488,416
 0.5% 66.7% $427,419
 0.6% 61.9%
Commercial - residential231,533
 6.2
 34.2
 203,670
 6.6
 29.5
186,948
 6.3
 25.6
 203,670
 6.6
 29.5
Other52,865
 1.4
 7.8
 59,512
 0.6
 8.6
56,561
 1.2
 7.7
 59,512
 0.6
 8.6
Total Real estate - construction$677,806
 2.4% 100.0% $690,601
 2.4% 100.0%$731,925
 2.1% 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 decreased $12.8increased $41.3 million, or 1.9%6.0%, in comparison to December 31, 2014 and comprised 5.2%5.5% of the total loan portfolio at March 31,June 30, 2015 as compared to 5.3% at December 31, 2014.The decreaseincrease in construction loans was primarily in loans secured by commercial real estate, partially offset by an increase in loans to commercial borrowers secured by residential real estate. Geographically, the decreaseincrease in real estate construction loans was primarily in the MarylandPennsylvania ($40.368.7 million, or 46.7%18.9%) market and New Jersey ($13.5 million, or 14.8%) market, partially offset by an increasea decrease in the PennsylvaniaMaryland ($25.830.7 million, or 7.1%35.6%) market.
The $37.1$81.1 million, or 1.0%2.2%, increase in commercial loans was primarily in the Pennsylvania ($82.0 million, or 3.1%), New Jersey ($6.7 million, or 1.2%) and VirginiaMaryland ($3.6 million, or 1.2%) markets offset by decreases in the Virginia ($7.1 million, or 4.8%) and Delaware and New Jersey($3.8 million, or 4.0%) markets. Commercial mortgage loans increased $29.9$40.6 million, or 0.6%0.8%, in comparison to December 31, 2014. Geographically, the increase in was in all markets with the Maryland ($38.1exception of the New Jersey market, which decreased $13.4 million, or 6.7%), Delaware ($12.8 million, or 5.7 %) and Virginia ($3.7 million, or 0.9%) markets, partially offset by decreases in the Pennsylvania ($13.9 million, or 0.5%) and New Jersey ($10.7 million, or 0.8%) markets.1.0%.







4856



The following table summarizes the percentage of commercial loans, by industry:
March 31,
2015
 December 31, 2014June 30,
2015
 December 31, 2014
Services18.8% 19.2%19.5% 19.2%
Manufacturing13.1
 13.1
13.2
 13.1
Construction (1)10.7
 11.0
10.6
 11.0
Health care9.1
 9.0
Retail9.4
 9.6
9.0
 9.6
Wholesale9.1
 8.7
8.7
 8.7
Health care8.9
 9.0
Real estate (2)7.3
 7.6
7.6
 7.6
Agriculture5.0
 5.5
5.1
 5.5
Arts and entertainment3.1
 3.4
3.0
 3.4
Transportation2.5
 2.4
2.3
 2.4
Financial services1.9
 1.9
2.1
 1.9
Other10.2
 8.6
9.8
 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:
March 31, 2015 December 31, 2014June 30, 2015 December 31, 2014
(dollars in thousands)(dollars in thousands)
Commercial - industrial, financial and agricultural$123,647
 $116,705
$128,808
 $116,705
Real estate - commercial mortgage136,511
 137,952
137,709
 137,952
$260,158
 $254,657
$266,517
 $254,657
Total shared national credits increased $5.5$11.9 million, or 2.2%4.7%, in comparison to December 31, 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 March 31,June 30, 2015, twoone of the shared national credits, or 2.6%1.2% of the total balance, werewas past due. There were no shared national credits past due at December 31, 2014.
Home equity loans decreased $35.1$47.0 million, or 2.0%2.7%, which was due, in part, to an increase in residential refinance activityprimarily as a result of customers rolledrolling outstanding home equity loans into residential mortgages.










4957


Provision for Credit Losses and Allowance for Credit Losses
The following table presents the activity in the allowance for credit losses:
Three months ended March 31Three months ended June 30 Six months ended June 30
2015 20142015 2014 2015 2014
(dollars in thousands)(dollars in thousands)
Average balance of loans, net of unearned income$13,095,528
 $12,762,357
$13,192,600
 $12,795,747
 $13,144,332
 $12,779,145
          
Balance of allowance for credit losses at beginning of period$185,931
 $204,917
$179,658
 $199,006
 $185,931
 $204,917
Loans charged off:
 

 
    
Commercial – industrial, financial and agricultural1,863
 5,125
11,166
 5,512
 13,029
 10,637
Real estate – commercial mortgage1,642
 2,141
 2,351
 3,527
Real estate – home equity870
 1,234
 1,639
 2,885
Real estate – residential mortgage1,281
 846
783
 1,089
 2,064
 1,935
Consumer780
 751
357
 449
 1,136
 1,200
Real estate – home equity768
 1,651
Real estate – commercial mortgage709
 1,386
Real estate – construction
 214
87
 218
 87
 432
Leasing and other363
 295
467
 833
 830
 1,128
Total loans charged off5,764
 10,268
15,372
 11,476
 21,136
 21,744
Recoveries of loans previously charged off:          
Commercial – industrial, financial and agricultural786
 744
1,471
 775
 2,257
 1,519
Real estate – commercial mortgage451
 430
 887
 474
Real estate – home equity189
 177
 440
 533
Real estate – residential mortgage159
 116
187
 108
 346
 224
Consumer241
 209
368
 402
 609
 611
Real estate – home equity251
 356
Real estate – commercial mortgage436
 44
Real estate – construction1,147
 224
231
 158
 1,378
 382
Leasing and other171
 164
70
 362
 241
 526
Total recoveries3,191
 1,857
2,967
 2,412
 6,158
 4,269
Net loans charged off2,573
 8,411
12,405
 9,064
 14,978
 17,475
Provision for credit losses(3,700) 2,500
2,200
 3,500
 (1,500) 6,000
Balance of allowance for credit losses at end of period$179,658
 $199,006
$169,453
 $193,442
 $169,453
 $193,442
          
Net charge-offs to average loans (annualized)0.08% 0.26%0.38% 0.28% 0.23% 0.27%
The following table presents the components of the allowance for credit losses:
March 31,
2015
 December 31,
2014
June 30,
2015
 December 31,
2014
(dollars in thousands)(dollars in thousands)
Allowance for loan losses$177,701
 $184,144
$167,485
 $184,144
Reserve for unfunded lending commitments1,957
 1,787
1,968
 1,787
Allowance for credit losses$179,658
 $185,931
$169,453
 $185,931
      
Allowance for credit losses to loans outstanding1.37% 1.42%1.28% 1.42%
The provision for credit losses for the three months ended March 31,June 30, 2015 was a negative $3.7$2.2 million, a decrease of $6.2$1.3 million in comparison to the same period in 2014. Based on an evaluation of all relevant credit quality factors,For the Corporation recorded a $3.7 million negativesix months ended June 30, 2015, the provision for credit losses during the three months ended March 31, 2015,was a negative $1.5 million, a decrease of $7.5 million compared to a $2.5 million provision for credit losses for the same period in 2014. The $6.2 million improvementdecrease in the provision for credit losses was based on the evaluation of all relevant credit quality factors. The $7.5 million year to date 2015 decrease compared to the same period in 2014 was driven by an improvement in net charge-off levels particularly a decreaseand improvements in net charge-offs on pooled impaired loans across all loan portfolio segments.credit quality.
Net charge-offs decreased $5.8increased $3.3 million, or 69.4%36.9%, to $2.6$12.4 million for the firstsecond quarter of 2015, compared to $8.4$9.1 million for the firstsecond quarter of 2014.The decreaseincrease in net charge-offs was primarily due to a $3.3$5.0 million or 75.4%, decreaseincrease in commercial loan net charge-offs attributable to two impaired loans which had migrated to non-accrual status during the first quarter of 2015. Of the

5058


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. Of the $2.6$12.4 million of net charge-offs recorded in the firstsecond quarter of 2015, the majority were for loans originated in Pennsylvania and New Jersey,Jersey.
During the first half of 2015, net charge-offs decreased $2.5 million, or 14.3%, to $15.0 million compared to $17.5 million for the first half of 2014. The decrease in net charge-offs was primarily due to a $1.6 million, or 52.0%, decrease in commercial mortgage net charge-offs, a $1.3 million decrease in real estate construction net charge-offs largely due to recoveries and a $1.2 million, or 49.0%, decrease in home equity net charges-offs, partially offset by a $1.7 million, or 18.1%, increase in commercial loan net recoveriescharge-offs. Of the $15.0 million of net charge-offs recorded in the first half of 2015, the majority were for loans originated in Maryland.Pennsylvania and New Jersey.

The following table summarizes non-performing assets as of the indicated dates:
March 31, 2015 March 31, 2014 December 31, 2014June 30, 2015 June 30, 2014 December 31, 2014
(dollars in thousands)(dollars in thousands)
Non-accrual loans$129,929
 $133,705
 $121,080
$129,152
 $129,934
 $121,080
Loans 90 days past due and accruing19,365
 21,225
 17,402
Loans 90 days or more past due and accruing20,353
 19,378
 17,402
Total non-performing loans149,294
 154,930
 138,482
149,505
 149,312
 138,482
Other real estate owned (OREO)14,251
 15,300
 12,022
12,763
 13,482
 12,022
Total non-performing assets$163,545
 $170,230
 $150,504
$162,268
 $162,794
 $150,504
Non-accrual loans to total loans0.99% 1.05% 0.92%0.98% 1.01% 0.92%
Non-performing assets to total assets0.94% 1.01% 0.88%0.93% 0.96% 0.88%
Allowance for credit losses to non-performing loans120.34% 128.45% 134.26%113.34% 129.56% 134.26%

The following table presents accruing loans whose terms have been modified under troubled debt restructurings ("TDRs"), by type, as of the indicated dates:
March 31, 2015 March 31, 2014 December 31, 2014June 30, 2015 June 30, 2014 December 31, 2014
(in thousands)(in thousands)
Real estate – residential mortgage$31,574
 $30,363
 $31,308
$31,584
 $31,184
 $31,308
Real estate – commercial mortgage23,468
 19,514
 18,822
17,482
 19,398
 18,822
Real estate – construction7,791
 8,430
 9,241
4,482
 8,561
 9,241
Commercial – industrial, financial and agricultural6,975
 6,755
 5,237
6,591
 6,953
 5,237
Real estate – home equity3,084
 2,606
 2,975
3,299
 2,815
 2,975
Consumer34
 16
 38
31
 23
 38
Total accruing TDRs72,926
 67,684
 67,621
63,469
 68,934
 67,621
Non-accrual TDRs (1)29,392
 27,487
 24,616
27,230
 25,526
 24,616
Total TDRs$102,318
 $95,171
 $92,237
$90,699
 $94,460
 $92,237
(1) Included with non-accrual loans in the preceding table.

TDRs modified during the first threesix months of 2015 and still outstanding as of March 31,June 30, 2015 totaled $11.3$13.7 million. During the first threesix months of 2015, $12.5$6.2 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 six months ended March 31,June 30, 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)
Balance of non-accrual loans at December 31, 2014$29,769
 $44,437
 $16,348
 $20,043
 $10,483
 $
 $
 $121,080
Three months ended June 30, 2015Three months ended June 30, 2015              
Balance of non-accrual loans at March 31, 2015$39,619
 $46,291
 $13,994
 $20,353
 $9,670
 $2
 $
 $129,929
Additions16,586
 6,934
 698
 3,609
 1,532
 782
 132
 30,273
11,115
 11,004
 1,780
 3,360
 2,062
 357
 225
 29,903
Payments(4,181) (4,123) (3,052) (933) (420) 
 
 (12,709)(4,459) (7,176) (1,219) (502) (278) (2) 
 (13,636)
Charge-offs(1,863) (709) 
 (1,281) (768) (780) (132) (5,533)(11,166) (1,642) (87) (783) (870) (357) (225) (15,130)
Transfers to accrual status
 (44) 
 (304) (213) 
 
 (561)
 
 
 
 (251) 
 
 (251)
Transfers to OREO status(692) (204) 
 (781) (944) 
 
 (2,621)
 (492) 
 (817) (354) 
 
 (1,663)
Balance of non-accrual loans at March 31, 2015$39,619
 $46,291
 $13,994
 $20,353
 $9,670
 $2
 $
 $129,929
Balance of non-accrual loans at June 30, 2015$35,109
 $47,985
 $14,468
 $21,611
 $9,979
 $
 $
 $129,152
               
Six months ended June 30, 2015Six months ended June 30, 2015              
Balance of non-accrual loans as of December 31, 2014$29,769
 $44,437
 $16,348
 $20,043
 $10,483
 $
 $
 $121,080
Additions27,701
 17,938
 2,478
 6,969
 3,594
 1,139
 357
 60,176
Payments(8,640) (11,299) (4,271) (1,435) (698) (2) 
 (26,345)
Charge-offs(13,029) (2,351) (87) (2,064) (1,638) (1,137) (357) (20,663)
Transfers to accrual status
 (44) 
 (304) (464) 
 
 (812)
Transfers to OREO status(692) (696) 
 (1,598) (1,298) 
 
 (4,284)
Balance of non-accrual loans at June 30, 2015$35,109
 $47,985
 $14,468
 $21,611
 $9,979
 $
 $
 $129,152


51


Non-accrual loans decreased $3.8 million,$782,000, or 2.8%0.6%, in comparison to March 31,June 30, 2014 and increased $8.8$8.1 million, or 7.3%6.7%, in comparison to December 31, 2014. The increase in non-accrual loans during the first quarter of 2015 was primarily attributable to the addition of two specific credits totaling approximately $15 million.

The following table summarizes non-performing loans, by type, as of the indicated dates:
March 31, 2015 March 31, 2014 December 31, 2014June 30, 2015 June 30, 2014 December 31, 2014
(in thousands)(in thousands)
Real estate – commercial mortgage$46,331
 $45,876
 $45,237
$49,932
 $44,015
 $45,237
Commercial – industrial, financial and agricultural43,265
 38,830
 30,388
35,839
 38,163
 30,388
Real estate – residential mortgage28,595
 29,305
 28,995
31,562
 27,887
 28,995
Real estate – construction14,884
 20,268
 16,399
Real estate – home equity14,455
 17,088
 14,740
14,632
 16,094
 14,740
Real estate – construction14,140
 20,758
 16,399
Consumer2,484
 2,999
 2,590
2,583
 2,825
 2,590
Leasing24
 74
 133
73
 60
 133
Total non-performing loans$149,294
 $154,930
 $138,482
$149,505
 $149,312
 $138,482

Non-performing loans were largely unchanged, in total, in comparison to June 30, 2014, the net effect of increases in some types being offset by decreases in others. Non-performing commercial mortgages increased $5.9 million, or 13.4%, and non-performing residential mortgages increased $3.7 million, or 13.2%, while non-performing construction loans decreased $6.6$5.4 million, or 31.9%26.6%, non-performing commercial loans decreased $2.3 million, or 6.1%, and non-performing home equity loans decreased $1.5 million, or 9.1%, in comparison to 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, New Jersey and Maryland markets. Partially offsetting these decreases was an increase of $4.4 million, or 11.4%, in non-performing commercial loans, in comparison to March 31, 2014, across all markets except for New Jersey.June 30, 2014.






60



The following table summarizes the Corporation’s OREO, by property type, as of the indicated dates:
March 31, 2015 March 31, 2014 December 31, 2014June 30, 2015 June 30, 2014 December 31, 2014
(in thousands)(in thousands)
Residential properties$8,055
 $8,026
 $6,656
$7,992
 $8,279
 $6,656
Commercial properties3,254
 5,412
 3,453
2,123
 3,262
 3,453
Undeveloped land2,942
 1,862
 1,913
2,648
 1,941
 1,913
Total OREO$14,251
 $15,300
 $12,022
$12,763
 $13,482
 $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. 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 $9.7 billion as of June 30, 2015 and $9.6 billion as of March 31, 2015 and December 31, 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
March 31, 2015 December 31, 2014 $ % March 31, 2015 December 31, 2014 $ % March 31, 2015 December 31, 2014June 30, 2015 December 31, 2014 $ % June 30, 2015 December 31, 2014 $ % June 30, 2015 December 31, 2014
(dollars in thousands)(dollars in thousands)
Real estate - commercial mortgage$123,644
 $127,302
 $(3,658) (2.9)% $183,697
 $170,837
 $12,860
 7.5 % $307,341
 $298,139
$114,385
 $127,302
 $(12,917) (10.1)% $179,642
 $170,837
 $8,805
 5.2 % $294,027
 $298,139
Commercial - secured151,724
 120,584
 31,140
 25.8
 112,156
 110,544
 1,612
 1.5
 263,880
 231,128
123,663
 120,584
 3,079
 2.6
 110,666
 110,544
 122
 0.1
 234,329
 231,128
Commercial -unsecured3,331
 7,463
 (4,132) (55.4) 8,378
 6,810
 1,568
 23.0
 11,709
 14,273
3,667
 7,463
 (3,796) (50.9) 7,941
 6,810
 1,131
 16.6
 11,608
 14,273
Total Commercial - industrial, financial and agricultural155,055
 128,047
 27,008
 21.1
 120,534
 117,354
 3,180
 2.7
 275,589
 245,401
127,330
 128,047
 (717) (0.6) 118,607
 117,354
 1,253
 1.1
 245,937
 245,401
Construction - commercial residential20,662
 27,495
 (6,833) (24.9) 37,038
 40,066
 (3,028) (7.6) 57,700
 67,561
17,526
 27,495
 (9,969) (36.3) 30,588
 40,066
 (9,478) (23.7) 48,114
 67,561
Construction - commercial11,802
 12,202
 (400) (3.3) 3,475
 5,586
 (2,111) (37.8) 15,277
 17,788
13,314
 12,202
 1,112
 9.1
 5,587
 5,586
 1
 
 18,901
 17,788
Total real estate - construction (excluding construction - other)32,464
 39,697
 (7,233) (18.2) 40,513
 45,652
 (5,139) (11.3) 72,977
 85,349
30,840
 39,697
 (8,857) (22.3) 36,175
 45,652
 (9,477) (20.8) 67,015
 85,349
Total$311,163
 $295,046
 $16,117
 5.5 % $344,744
 $333,843
 $10,901
 3.3 % $655,907
 $628,889
$272,555
 $295,046
 $(22,491) (7.6)% $334,424
 $333,843
 $581
 0.2 % $606,979
 $628,889
                                      
% of total risk rated loans3.2% 3.1%     3.6% 3.5%     6.8% 6.6%2.8% 3.1%     3.4% 3.5%     6.2% 6.6%

As of March 31,June 30, 2015, total loans with risk ratings of Substandard or lower increased $10.9 million,$581,000, or 3.3%0.2%, in comparison to December 31, 2014, primarily due to an increaseincreases in substandard commercial mortgages.mortgages and commercial loans, partially offset by a decrease in real estate construction loans. Special mentionMention loans increased $16.1decreased $22.5 million, or 5.5%7.6%, in comparison to December 31, 2014 primarily due to an increase in special mention commercial loans, partially offset by decreases in special mention construction loans to commercial borrowersmortgages and commercial mortgages.residential construction loans.







61


The following table summarizes loan delinquency rates, by type, as of the dates indicated:
March 31, 2015 March 31, 2014 December 31, 2014June 30, 2015 June 30, 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 mortgage0.50% 0.89% 1.39% 0.35% 0.89% 1.24% 0.35% 0.87% 1.22%0.34% 0.96% 1.30% 0.30% 0.86% 1.16% 0.35% 0.87% 1.22%
Commercial – industrial, financial and agricultural0.26% 1.15% 1.41% 0.33% 1.09% 1.42% 0.17% 0.81% 0.98%0.22% 0.93% 1.15% 0.47% 1.05% 1.52% 0.17% 0.81% 0.98%
Real estate – construction0.31% 2.09% 2.40% 0.43% 3.55% 3.98% 0.02% 2.38% 2.40%0.02% 2.04% 2.06% 0.10% 3.20% 3.30% 0.02% 2.38% 2.40%
Real estate – residential mortgage1.75% 2.10% 3.85% 1.53% 2.20% 3.73% 1.96% 2.10% 4.06%1.53% 2.30% 3.83% 1.78% 2.05% 3.83% 1.96% 2.10% 4.06%
Real estate – home equity0.74% 0.85% 1.59% 0.69% 0.98% 1.67% 0.63% 0.85% 1.48%0.55% 0.87% 1.42% 0.68% 0.93% 1.61% 0.63% 0.85% 1.48%
Consumer, leasing and other1.72% 0.65% 2.37% 1.87% 0.84% 2.71% 1.56% 0.70% 2.26%1.29% 0.65% 1.94% 1.55% 0.76% 2.31% 1.56% 0.70% 2.26%
Total0.62% 1.14% 1.76% 0.56% 1.22% 1.78% 0.52% 1.06% 1.58%0.47% 1.13% 1.60% 0.58% 1.17% 1.75% 0.52% 1.06% 1.58%
Total dollars (in thousands)$81,289
 $149,294
 $230,583
 $71,410
 $154,930
 $226,340
 $68,346
 $138,482
 $206,828
$61,931
 $149,505
 $211,436
 $74,955
 $149,312
 $224,267
 $68,346
 $138,482
 $206,828
 
(1)Includes non-accrual loans.
Management believes that the allowance for credit losses of $179.7$169.5 million as of March 31,June 30, 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 (Decrease)    Increase (Decrease)
March 31, 2015 December 31, 2014 $ %June 30, 2015 December 31, 2014 $ %
(dollars in thousands)(dollars in thousands)
Noninterest-bearing demand$3,765,677
 $3,640,623
 $125,054
 3.4 %$3,805,165
 $3,640,623
 $164,542
 4.5 %
Interest-bearing demand3,133,748
 3,150,612
 (16,864) (0.5)3,129,903
 3,150,612
 (20,709) (0.7)
Savings3,567,652
 3,504,820
 62,832
 1.8
3,566,888
 3,504,820
 62,068
 1.8
Total demand and savings10,467,077
 10,296,055
 171,022
 1.7
10,501,956
 10,296,055
 205,901
 2.0
Time deposits3,047,420
 3,071,451
 (24,031) (0.8)3,003,753
 3,071,451
 (67,698) (2.2)
Total deposits$13,514,497
 $13,367,506
 $146,991
 1.1 %$13,505,709
 $13,367,506
 $138,203
 1.0 %

Non-interest bearing demand deposits increased $125.1$164.5 million, or 3.4%4.5%, primarily as a result of increases in business account balances of $77.0$149.4 million, or 2.8%5.4%, and personal account balances of $33.9$16.8 million, or 4.6%, and municipal account balances of $10.2 million, or 10.2%2.3%.

Interest-bearing demand accounts decreased $16.9$20.7 million, or 0.5%0.7%, due to a $47.3$91.6 million, or 3.9%7.6%, seasonal decrease in municipal account balances, partially offset by a $29.6$71.9 million, or 1.6%56.2%, increase in personalbusiness account balances. The $62.8$62.1 million, or 1.8%, increase in savings account balances was primarily due to a $119.4$154.7 million, or 5.5%7.1%, 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$72.6 million, or 10.6%12.6%, in municipal account balances and a $20.0 million, or 2.7%, decrease in business account balances. The $24.0$67.7 million, or 0.8%2.2%, decrease in time deposits was primarily due to a decrease in time deposits with original maturities of less than two years.











62


The following table summarizes the changes in ending borrowings, by type:
  Increase (Decrease)  Increase (Decrease)
March 31, 2015 December 31, 2014 $ %June 30, 2015 December 31, 2014 $ %
(dollars in thousands)(dollars in thousands)
Short-term borrowings:              
Customer repurchase agreements$161,886
 $158,394
 $3,492
 2.2%$169,918
 $158,394
 $11,524
 7.3%
Customer short-term promissory notes93,176
 95,106
 (1,930) (2.0)74,059
 95,106
 (21,047) (22.1)
Total short-term customer funding255,062
 253,500
 1,562
 0.6
243,977
 253,500
 (9,523) (3.8)
Federal funds purchased43
 6,219
 (6,176) (99.3)5,058
 6,219
 (1,161) (18.7)
Short-term FHLB advances (1)155,000
 70,000
 85,000
 121.4
160,000
 70,000
 90,000
 128.6
Total short-term borrowings410,105
 329,719
 80,386
 24.4
409,035
 329,719
 79,316
 24.1
Long-term debt:              
FHLB advances628,070
 673,107
 (45,037) (6.7)618,033
 673,107
 (55,074) (8.2)
Other long-term debt466,447
 466,306
 141
 
514,608
 466,306
 48,302
 10.4
Total long-term debt1,094,517
 1,139,413
 (44,896) (3.9)1,132,641
 1,139,413
 (6,772) (0.6)
Total borrowings$1,504,622
 $1,469,132
 $35,490
 2.4%$1,541,676
 $1,469,132
 $72,544
 4.9%
              
(1) Represents FHLB advances with an original maturity term of less than one year.

The $80.4$79.3 million increase in total short-term borrowings was largely due to an $85.0a $90.0 million, or 121.4%128.6%, increase in short-term FHLB advances. The $44.9$55.1 million decrease in long-term debt was due to a $45.0 million decrease in FHLB advances as a result ofresulted from maturities that were replaced with short-term advances. Other long-term debt increased by $48.3 million, or 10.4%, the net effect of the issuance of $150 million of ten-year subordinated debt in June 2015, and the maturity of $100 million of subordinated debt in April 2015.






54


Shareholders' Equity
Total shareholders’ equity increased $34.8$28.2 million, or 1.7%1.4%, during the first threesix months of 2015. The increase was due primarily to $40.0$76.7 million of net income and a $7.4 million increase in after-tax unrealized holding gains on available for sale investment securities, partially offset by $16.1$31.9 million of common stock cash dividends.dividends and $19.0 million in treasury stock purchases.

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. 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 became effective for the Corporation on January 1, 2015, and will be fully phased in on January 1, 2019.

The U.S. Basel III Capital Rules 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; 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, are 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.


63


The U.S. Basel III Capital Rules use a standardized approach for risk weightings that expands the risk-weightings for assets and off balanceoff-balance sheet exposures from the previous 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 March 31,June 30, 2015, the Corporation and each of its bank 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,June 30, 2015, the Corporation's capital levels also 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
June 30, 2015 December 31, 2014 Regulatory
Minimum
for Capital
Adequacy
Common Equity Tier I (to Risk-Weighted Assets)11.2% N/A
 4.5%10.7% N/A
 4.5%
Total Capital (to Risk-Weighted Assets)14.6% 14.7% 8.0%14.8% 14.7% 8.0%
Tier I Capital (to Risk-Weighted Assets)11.4% 12.3% 6.0%10.9% 12.3% 6.0%
Tier I Capital (to Average Assets)9.4% 10.0% 4.0%9.4% 10.0% 4.0%

The June 30, 2015 capital ratios presented above were determined in accordance with the Basel III Capital Rules while the December 31, 2014 capital ratios were calculated under the prior capital standards. The impact of transitioning to the Basel III Capital Rules was a decrease of approximately 15 basis points in the risk-based capital ratios, primarily as a result of the changes in risk-weightings. In addition, $124.5 million of capital instruments that were previously included in Tier I capital are now only included in Total capital under the Basel III Capital Rules. This transition resulted in an additional 90 basis point decrease in the Tier I capital ratio.

The $150 million of subordinated debt issued in June 2015 is a component of Total capital, which increased this capital ratio by 110 basis points. The proceeds from this issuance were used to redeem $150 million of trust preferred securities, which are also a component of Total capital, in July 2015. Accordingly, because of the timing difference between the subordinated debt issuance in the second quarter and the redemption of the trust preferred securities in the third quarter, this ratio will decrease as of September 30, 2015.

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, may 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 the rates of interest rates.paid on those accounts and borrowings. The positive impact to liquidity resulting from paying 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 March 31,June 30, 2015, the Corporation had $783.1$778.0 million of short and long-term advances outstanding from the FHLB with an additional borrowing capacity of approximately $2.6$2.7 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 March 31,June 30, 2015, the Corporation had aggregate availability under Federal funds lines of $1.4$1.2 billion with $43,000no borrowings outstanding on those lines. As of that amount outstanding.June 30, 2015, the Corporation had a repurchase agreement relationship with a community bank, with a balance of $5.1 million, classified as Federal funds purchased. 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

64


Window borrowings. As of March 31,June 30, 2015, the Corporation had $1.2 billion of collateralized borrowing availability at the Discount Window, and no outstanding borrowings.

Liquidity must also be managed at the Fulton Financial Corporation parent company level. For safety and soundness reasons, banking regulations limit the amount of cash that can be transferred from subsidiary banks to the parent company in the form of loans and dividends. Generally, these limitations are based on the subsidiary banks’ regulatory capital levels and their net income. Management continues to monitor the liquidity and capital needs of the parent company and will implement appropriate strategies, as necessary, to remain adequately capitalized and to meet its cash needs.

The Corporation’s sources and uses of funds were discussed in general terms in the net interest income section of Management’s Discussion and Analysis. The consolidated statements of cash flows provide additional information. The Corporation’s operating activities during the first threesix months of 2015 generated $30.5$77.0 million of cash, mainly due to net income, partially offset by the impact of non-cash expenses, most notably a net increase in loans held for sale. Cash used in investing activities was $214.4$248.3 million, due mainly to a net increase in short-term investments,investment securities and an increase in loans, partially offset by proceeds from the maturities and sales of investment securitiesa decrease in excess of purchases.short-term investments. Net cash provided by financing activities was $170.1$166.0 million due to increases in deposits, and short-term borrowings and additions to long-term debt, partially offset by repayments of long-term debt, and common stock cash dividends.

dividends and purchases of treasury stock.

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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 March 31,June 30, 2015, equity investments consisted of $34.7$27.2 million of common stocks of publicly traded financial institutions, and $5.9$5.8 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 $23.4$18.2 million and a fair value of $34.7$27.2 million at March 31,June 30, 2015, including an investment in a single financial institution with a cost basis of $15.7$10.7 million and a fair value of $23.2$15.7 million. The fair value of this investment accounted for 66.7%57.7% of the fair value of the common stocks of publicly traded financial institutions. No other investment in a single financial institution within the financial institutions stock portfolio exceeded 5% of the portfolio's fair value. In total,As of June 30, 2015, the financial institutions stock portfolio had gross$9.0 million of net unrealized gains, comprised mostly of $11.3 million and gross unrealized losses of $4,000 as of March 31, 2015.gains.
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. securities markets in general or otherwise, the Corporation’s revenue would be negatively impacted. In addition, the Corporation’s ability to sell its brokerage services in the future will be dependent, in part, upon consumers’ level of confidence in financial markets.

Debt Security Market Price Risk
Debt security market price risk is the risk that changes in the values of debt securities, unrelated to interest rate changes, could have a material impact on the financial position or results of operations of the Corporation. The Corporation’s debt security investments consist primarily of U.S. government sponsored agency issued mortgage-backed securities and collateralized mortgage obligations, state and municipal securities, U.S. government debt securities, auction rate securities and corporate debt securities. All of the Corporation's investments in mortgage-backed securities and collateralized mortgage obligations have principal payments that are guaranteed by U.S. government sponsored agencies.
Municipal Securities
As of March 31,June 30, 2015, the Corporation owned municipal securities issued by various municipalities with a total fair value of $224.3$236.5 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 March 31,June 30, 2015, approximately 95% of municipal securities were supported by the general obligation of corresponding municipalities. Approximately 88%82% of these securities were school district issuances, which are also supported by the states of the issuing municipalities.
Auction Rate Certificates
As of March 31,June 30, 2015, the Corporation’s investments in student loan auction rate certificates (ARCs), had a cost basis of $106.4$106.5 million and a fair value of $98.9$98.6 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 insince early 2008, market auctions for these securities began to failfailed due to an insufficient number of buyers, resulting in an illiquid market. Therefore, as of March 31,June 30, 2015, the fair values of the ARCs currently in the portfolio were derived using

57


significant unobservable inputs based on an expected cash flows model which produced fair values whichthat were materially different from those that would be expected from settlement of these investments in the current market. The expected cash flows model, prepared by

66


a third-party valuation expert, produced fair values whichthat assumed a return to market liquidity sometime within the next five years. The Corporation believes that the trusts underlying the ARCs will self-liquidate as student loans are repaid.
The credit quality of the underlying debt associated with ARCs is also a factor in the determination of their estimated fair value. As of March 31,June 30, 2015, all of the ARCs were rated above investment grade, with approximately $6 million, or 5%6%, "AAA" rated and $93 million, or 95%94%, "AA" rated. All of the loans underlying the ARCs have principal payments that are guaranteed by the federal government. As of March 31,June 30, 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 March 31,June 30, 2015:
Amortized
cost
 
Estimated
fair value
Amortized
cost
 
Estimated
fair value
(in thousands)(in thousands)
Single-issuer trust preferred securities$47,590
 $42,863
$47,613
 $43,378
Subordinated debt47,563
 50,173
47,595
 49,716
Pooled trust preferred securities405
 1,084

 530
Corporate debt securities issued by financial institutions$95,558
 $94,120
$95,208
 $93,624

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 $4.7$4.2 million at March 31,June 30, 2015. The Corporation did not record any other-than-temporary impairment charges for single-issuer trust preferred securities during the three and six months ended March 31,June 30, 2015 or 2014. Seven of the Corporation's 2019 single-issuer trust preferred securities were rated below investment grade by at least one ratings agency, with an amortized cost of $14.5 million and an estimated fair value of $12.8$13.1 million as of March 31,June 30, 2015. All of the single-issuer trust preferred securities rated below investment grade were rated "BB" or "Ba". Single-issuer trust preferred securities with an amortized cost of $4.7 million and an estimated fair value of $3.8 million at March 31,June 30, 2015 were not rated by any ratings agency.
As of March 31,June 30, 2015, all three of the Corporation'sCorporation held two pooled trust preferred securities with an amortized cost of $405,000$0 and an estimated fair value of $1.1 million,$530,000, that were rated below investment grade by at least one ratings agency, and with ratings ranging from "C" to "Ca". The class of securities held by the Corporation was below the most senior tranche, with the Corporation’s interests being subordinate to other investors in the pool.
The 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.
See Note 10,13, "Fair Value Measurements," in the Notes to Consolidated Financial Statements for further discussion related to the fair values of debt securities.

Interest Rate Risk, Asset/Liability Management and Liquidity
Interest rate risk creates exposure in two primary areas. First, changes in rates have an impact on the Corporation’s liquidity position and could affect its ability to meet obligations and continue to grow. Second, movements in interest rates can create fluctuations in the Corporation’s net interest income and changes in the economic value of its equity.
The Corporation employs various management techniques to minimize its exposure to interest rate risk. An Asset/Liability Management Committee ("ALCO"), consisting of key financial and senior management personnel, meets on a regular basis. The ALCO is responsible for reviewing the interest rate sensitivity and liquidity positions of the Corporation, approving asset and liability management policies, and overseeing the formulation and implementation of strategies regarding balance sheet positions.

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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, may need credit availability. Liquidity is provided on a continuous basis through scheduled and unscheduled principal and interest payments on outstanding loans and investments and

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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 March 31,June 30, 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)$944,463
 $491,060
 $354,616
 $384,681
 $191,213
 $637,266
 $3,003,299
 $3,004,169
$946,054
 $481,703
 $353,811
 $383,730
 $211,854
 $645,324
 $3,022,476
 $3,009,913
Average rate3.91% 4.35% 4.26% 4.51% 4.49% 3.82% 4.12% 
3.70% 4.32% 4.16% 4.54% 4.47% 3.76% 4.03% 
                              
Floating rate loans (1) (2)2,309,708
 1,520,146
 1,232,654
 1,056,653
 1,353,835
 2,637,489
 10,110,485
 10,072,225
2,334,773
 1,564,927
 1,269,282
 1,078,292
 1,320,279
 2,651,559
 10,219,112
 10,116,966
Average rate3.73% 3.88% 3.90% 3.90% 3.80% 3.86% 3.83% 
3.66% 3.80% 3.82% 3.84% 3.78% 3.79% 3.77% 
                              
Fixed rate investments (3)334,511
 294,958
 251,396
 204,945
 182,151
 783,344
 2,051,305
 2,074,789
422,647
 326,186
 253,320
 222,175
 205,633
 828,371
 2,258,332
 2,263,077
Average rate2.92% 2.89% 2.76% 2.65% 2.52% 2.60% 2.71% 
2.80% 2.88% 2.73% 2.57% 2.51% 2.57% 2.67% 
                              
Floating rate investments (3)
 4,974
 111,401
 33
 
 40,509
 156,917
 144,751
4,979
 4,964
 106,538
 24
 
 40,185
 156,690
 144,699
Average rate% 0.97% 1.55% 1.87% % 1.46% 1.51% 
0.98% 0.96% 0.87% 2.01% % 1.47% 1.03% 
                              
Other interest-earning assets672,097
 
 
 
 
 65,694
 737,791
 737,791
356,198
 
 
 
 
 65,106
 421,304
 421,304
Average rate0.41% % % % % 4.45% 0.77% 
0.52% % % % % 5.07% 1.22% 
                              
Total$4,260,779
 $2,311,138
 $1,950,067
 $1,646,312
 $1,727,199
 $4,164,302
 $16,059,797
 $16,033,725
$4,064,651
 $2,377,780
 $1,982,951
 $1,684,221
 $1,737,766
 $4,230,545
 $16,077,914
 $15,955,959
Average rate3.18% 3.85% 3.68% 3.89% 3.74% 3.60% 3.58% 
3.30% 3.78% 3.58% 3.83% 3.71% 3.54% 3.57% 
                              
Fixed rate deposits (4)$1,318,918
 $466,560
 $332,354
 $263,137
 $306,143
 $20,934
 $2,708,046
 $2,726,933
$1,306,608
 $475,613
 $284,195
 $335,383
 $252,582
 $22,974
 $2,677,355
 $2,697,218
Average rate0.71% 1.05% 1.34% 1.99% 2.09% 1.93% 1.14% 
0.70% 1.08% 1.37% 2.04% 2.06% 1.93% 1.14% 
                              
Floating rate deposits (5)4,921,235
 823,303
 466,474
 388,074
 322,837
 118,851
 7,040,774
 7,032,497
4,794,360
 844,410
 550,886
 302,838
 278,652
 252,043
 7,023,189
 6,998,925
Average rate0.15% 0.11% 0.09% 0.08% 0.09% 0.15% 0.13% 
0.16% 0.11% 0.10% 0.08% 0.08% 0.11% 0.15% 
                              
Fixed rate borrowings (6)141,389
 451,709
 100,596
 774
 125,046
 258,506
 1,078,020
 1,098,095
181,399
 551,684
 630
 50,660
 75,047
 256,725
 1,116,145
 1,146,794
Average rate3.90% 4.21% 5.74% 4.64% 1.84% 5.59% 4.37% 
5.44% 4.49% 4.66% 1.88% 1.84% 4.58% 4.37% 
                              
Floating rate borrowings (7)410,106
 
 
 
 
 16,496
 426,602
 416,748
409,035
 
 
 
 
 16,496
 425,531
 415,051
Average rate0.19% % % % % 2.40% 0.28% 
0.20% % % % % 2.41% 0.28% 
                              
Total$6,791,648
 $1,741,572
 $899,424
 $651,985
 $754,026
 $414,787
 $11,253,442
 $11,274,273
$6,691,402
 $1,871,707
 $835,711
 $688,881
 $606,281
 $548,238
 $11,242,220
 $11,257,988
Average rate0.34% 1.42% 1.19% 0.86% 1.19% 3.72% 0.79% 
0.41% 1.64% 0.53% 1.17% 1.12% 2.35% 0.81% 
 
(1)Amounts are based on contractual payments and maturities, adjusted for expected prepayments. Excludes $1.7$2.6 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.
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 $10.1$10.2 billion of floating rate loans above are $3.4 billion of loans, or 34.3%33.3% of the total, that float with the prime interest rate, $2.1$2.2 billion, or 20.5%21.6%, of loans that float with other interest rates, primarily the London Interbank Offered Rate ("LIBOR"), and $4.6 billion, or 45.2%45.1%, of adjustable rate loans. The $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 March 31,June 30, 2015, stratified by the period until their next repricing:
 Percent of Total
Adjustable Rate
Loans
One year30.9%32.4%
Two years18.117.9
Three years17.117.9
Four years14.313.0
Five years10.611.2
Greater than five years9.07.6
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 changes 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 + $ 83.775.7 million    +17.2%+15.6%
+200 bp + $ 54.248.6 million +11.110.0
+100 bp + $ 23.821.2 million +4.94.4
–100 bp – $ 19.519.2 million –4.0
 
(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. Abrupt changes or "shocks" in interest rates, both upward and downward, are used to determine the comparative effect of such interest rate movements relative to the unchanged environment. This measurement tool is used primarily to evaluate the longer-term repricing risks and options in the Corporation’s balance sheet. The Corporation's policy limits the economic value of equity that may be at risk, in a non-parallel instantaneous shock, to 10% of the base case economic value of equity for a 100 basis point shock in interest rates, 20% for a 200 basis point shock and 30% for a 300 basis point shock. As of March 31,June 30, 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 During the second quarter 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.

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 filed with the SEC on February 25, 2015, in February 2015, Fulton Bank, of New Jersey ("FBNJ"N.A. (the "Bank"), a wholly ownedthe Corporation’s largest banking subsidiary, received a letter from the U.S. Department of Justice (the "Department") indicating that the Corporation, entered into a StipulationDepartment had initiated an investigation regarding potential violations of fair lending laws by the Bank in certain of its geographies. The Bank is cooperating with the Department and Consentresponding to the IssuanceDepartment’s request for information. Although this matter appears to be at a preliminary stage, it could result in legal proceedings the resolution of which could potentially involve a Consent Order with the FDIC consentingsettlement, fines or other remedial actions.

The Corporation and each of its banking subsidiaries are subject to the issuanceregulatory enforcement orders issued during 2014 and 2015 by the FDIC of a Consent Order (the "FDIC Consent Order"). In addition, in February 2015, FBNJ entered into a Consent Order with the Commissioner of Bankingtheir respective Federal and Insurance for the State 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 relatestate bank regulatory agencies relating to identified deficiencies in athe Corporation’s 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"). The regulatory enforcement orders, which are in the form of consent orders or orders to cease and desist issued upon consent ("Consent OrdersOrders"), generally require, among other things, that FBNJ review, assessthe Corporation and takeits subsidiary banks undertake a number of required 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 acceptableProgram. Further information pertaining 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 2014Consent Orders was previously disclosed by the Corporation in Part II, Item 9B of its Annual Report on Form 10-K and in its Form 10-K/A each for the year ended December 31, 2014 and filed with the SEC on February 27, 2015 and June 8, 2015, respectively; in its Form 10-Q for the quarter-ended March 31, 2015 filed with the SEC on May 11, 2015; and in Current Reports on Form 8-K filed with the SEC on July 18, September 9, and December 29, 2014.

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 of the Corporation. However, legal proceedings are often unpredictable, and it is possible that the ultimate resolution of any such matters, if unfavorable, may be material to the Corporation’s results of operations for any particular period, depending, in part, upon the size of the loss or liability imposed and the operating results for the applicable period.

Item 1A. Risk Factors

There have been no 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, 2014.

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

Not Applicable.The following table presents the Corporation's monthly repurchases of its common stock during the second quarter of 2015:

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 Approximate Dollar Value that May Yet Be Purchased Under the Plans or Programs
April 1, 2015 to April 30, 2015 2,510,174
 $11.47 2,510,174
 $41,217,080
May 1, 2015 to May 31, 2015 818,000
 $12.51 818,000
 $30,987,418
June 1, 2015 to June 30, 2015 
  
 $30,987,418

In 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, pursuant to a share repurchase program for a like amount of the Corporation's outstanding common stock announced on November 12, 2014. 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.

On April 21, 2015, the Corporation announced that its board of directors had approved a share repurchase program pursuant to which the Corporation is authorized to repurchase up to $50.0 million of its outstanding shares of common stock, or approximately 2.3% of its outstanding shares, through December 31, 2015. Repurchased shares may 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 transactions. The share repurchase program may be discontinued at any time. Through June 30, 2015, 1.5 million shares had been repurchased under this program for a total cost of $19.0 million, or $12.36 per share.

No stock repurchases were made outside the programs 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: May 11,August 7, 2015 /s/ E. Philip Wenger
    E. Philip Wenger
    Chairman, Chief Executive Officer and President
     
Date: May 11,August 7, 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.
  ��
10.1Fulton Financial Corporation Deferred Compensation Plan, as amended and restated effective July 1, 2015.
 
31.1  Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
    
31.2  Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
    
32.1  Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
    
32.2  Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
    
101 
Financial statements from the Quarterly Report on Form 10-Q of Fulton Financial Corporation for the period ended March 31,June 30, 2015, filed on May 11,August 7, 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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