Fulton Financial - 10-Q quarterly report FY2014 Q3

Fulton Financial - 10-Q quarterly report FY2014 Q3

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20459

FORM 10-Q

(Mark One)



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

For the quarterly period ended September 30, 2014, or



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

For the transition period from to

Commission File No. 0-10587

FULTON FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)



PENNSYLVANIA		23-2195389
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

One Penn Square, P.O. Box 4887, Lancaster, Pennsylvania		17604
(Address of principal executive offices)		(Zip Code)

(717) 291-2411

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

Common Stock, $2.50 Par Value –185,265,000 shares outstanding as of October 31, 2014.

FULTON FINANCIAL CORPORATION

FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014

INDEX



Description		Page

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited):

(a)	Consolidated Balance Sheets - September 30, 2014 and December 31, 2013	3

(b)	Consolidated Statements of Income - Three and nine months ended September 30, 2014 and 2013	4

(c)	Consolidated Statements of Comprehensive Income - Three and nine months ended September 30, 2014 and 2013	5

(d)	Consolidated Statements of Shareholders’ Equity - Nine months ended September 30, 2014 and 2013	6

(e)	Consolidated Statements of Cash Flows - Nine months ended September 30, 2014 and 2013	7

(f)	Notes to Consolidated Financial Statements	8

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		39

Item 3. Quantitative and Qualitative Disclosures about Market Risk		66

Item 4. Controls and Procedures		70

PART II. OTHER INFORMATION

Item 1. Legal Proceedings		71

Item 1A. Risk Factors		71

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		72

Item 3. Defaults Upon Senior Securities		72

Item 4. Mine Safety Disclosures		72

Item 5. Other Information		72

Item 6. Exhibits		72

Signatures		73

Exhibit Index		74

Item 1. Financial Statements

CONSOLIDATED BALANCE SHEETS

(in thousands, except per-share data)



	September 30, 2014			December 31, 2013
	(unaudited)
ASSETS
Cash and due from banks	$	220,946		$	218,540
Interest-bearing deposits with other banks	291,523			163,988
Federal Reserve Bank and Federal Home Loan Bank stock	86,056			84,173
Loans held for sale	25,212			21,351
Available for sale investment securities	2,470,609			2,568,434
Loans, net of unearned income	13,030,405			12,782,220
Less: Allowance for loan losses	(189,477		)	(202,780		)
Net Loans	12,840,928			12,579,440
Premises and equipment	224,441			226,021
Accrued interest receivable	43,544			44,037
Goodwill and intangible assets	532,117			533,076
Other assets	502,798			495,574
Total Assets	$	17,238,174		$	16,934,634
LIABILITIES
Deposits:
Noninterest-bearing	$	3,556,810		$	3,283,172
Interest-bearing	9,776,817			9,208,014
Total Deposits	13,333,627			12,491,186
Short-term borrowings:
Federal funds purchased	6,606			582,436
Other short-term borrowings	558,346			676,193
Total Short-Term Borrowings	564,952			1,258,629
Accrued interest payable	17,425			15,218
Other liabilities	225,875			222,830
Federal Home Loan Bank advances and long-term debt	1,018,289			883,584
Total Liabilities	15,160,168			14,871,447
SHAREHOLDERS’ EQUITY
Common stock, $2.50 par value, 600 million shares authorized, 218.1 million shares issued in 2014 and 217.8 million shares issued in 2013	545,207			544,568
Additional paid-in capital	1,438,343			1,432,974
Retained earnings	538,749			463,843
Accumulated other comprehensive loss	(11,948		)	(37,341		)
Treasury stock, at cost, 32.9 million shares in 2014 and 25.2 million shares in 2013	(432,345		)	(340,857		)
Total Shareholders’ Equity	2,078,006			2,063,187
Total Liabilities and Shareholders’ Equity	$	17,238,174		$	16,934,634

See Notes to Consolidated Financial Statements

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)



(in thousands, except per-share data)	Three months ended September 30						Nine months ended September 30
	2014			2013			2014			2013
INTEREST INCOME
Loans, including fees	$	133,741		$	136,150		$	397,011		$	405,312
Investment securities:
Taxable	12,278			12,977			37,962			40,890
Tax-exempt	2,219			2,327			6,865			7,151
Dividends	339			337			996			1,091
Loans held for sale	237			382			585			1,261
Other interest income	976			659			3,065			1,527
Total Interest Income	149,790			152,832			446,484			457,232
INTEREST EXPENSE
Deposits	8,998			8,743			25,579			28,642
Short-term borrowings	297			691			1,470			1,900
Long-term debt	11,129			10,865			32,606			32,448
Total Interest Expense	20,424			20,299			59,655			62,990
Net Interest Income	129,366			132,533			386,829			394,242
Provision for credit losses	3,500			9,500			9,500			38,000
Net Interest Income After Provision for Credit Losses	125,866			123,033			377,329			356,242
NON-INTEREST INCOME
Service charges on deposit accounts	12,801			13,938			37,064			42,700
Investment management and trust services	11,120			10,420			33,417			31,117
Other service charges and fees	9,954			9,518			29,407			27,536
Mortgage banking income	4,038			7,123			13,384			26,293
Other	3,906			3,725			10,813			11,315
Investment securities gains, net:
Other-than-temporary impairment losses	(84		)	(125		)	(122		)	(146		)
Less: Portion of gain recognized in other comprehensive income (loss) (before taxes)	66			28			92			22
Net other-than-temporary impairment losses	(18		)	(97		)	(30		)	(124		)
Net gains on sales of investment securities	99			2,730			1,223			8,095
Investment securities gains, net	81			2,633			1,193			7,971
Total Non-Interest Income	41,900			47,357			125,278			146,932
NON-INTEREST EXPENSE
Salaries and employee benefits	62,434			63,344			185,623			188,046
Net occupancy expense	11,582			11,519			36,649			34,810
Other outside services	8,632			5,048			19,684			13,223
Data processing	4,689			4,757			12,816			13,169
Software	3,353			3,268			9,487			9,110
Equipment expense	3,307			3,646			10,269			11,447
Professional fees	3,252			3,329			9,715			9,771
FDIC insurance expense	2,882			2,918			8,186			8,766
Marketing	1,798			2,251			5,719			6,045
Other real estate owned and repossession expense	1,303			1,453			3,034			6,248
Operating risk loss	1,242			3,297			3,786			6,923
Intangible amortization	314			534			944			1,603
Other	11,010			11,241			35,614			35,510
Total Non-Interest Expense	115,798			116,605			341,526			344,671
Income Before Income Taxes	51,968			53,785			161,081			158,503
Income taxes	13,402			13,837			41,136			38,746
Net Income	$	38,566		$	39,948		$	119,945		$	119,757

PER SHARE:
Net Income (Basic)	$	0.21		$	0.21		$	0.64		$	0.62
Net Income (Diluted)	0.21			0.21			0.64			0.61
Cash Dividends	0.08			0.08			0.24			0.24
See Notes to Consolidated Financial Statements

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(in thousands)



	Three months ended September 30						Nine months ended September 30,
	2014			2013			2014			2013

Net Income	$	38,566		$	39,948		$	119,945		$	119,757
Other Comprehensive Income (Loss), net of tax:
Unrealized gain (loss) on securities	(3,011		)	(6,951		)	23,912			(43,784		)
Reclassification adjustment for postretirement amendment gains included in net income	—			—			(944		)	—
Reclassification adjustment for securities gains included in net income	(52		)	(1,711		)	(775		)	(5,181		)
Non-credit related unrealized gain on other-than-temporarily impaired debt securities	138			(106		)	650			1,332
Unrealized gain on derivative financial instruments	34			34			102			102
Unrecognized pension and postretirement income	—			—			2,144			—
Amortization of net unrecognized pension and postretirement items	104			329			304			985
Other Comprehensive Income (Loss)	(2,787		)	(8,405		)	25,393			(46,546		)
Total Comprehensive Income	$	35,779		$	31,543		$	145,338		$	73,211

See Notes to Consolidated Financial Statements

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)

NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013

(in thousands, except per-share data)



	Common Stock						Retained Earnings						Treasury Stock			Total
	Shares Outstanding		Amount		Additional Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total

Balance at December 31, 2013	192,652		$	544,568	$	1,432,974	$	463,843		$	(37,341	)	$	(340,857	)	$	2,063,187
Net income							119,945									119,945
Other comprehensive income (loss)										25,393						25,393
Stock issued, including related tax benefits	506		639		1,059								3,767			5,465
Stock-based compensation awards					4,310											4,310
Acquisition of treasury stock	(8,000	)											(95,255		)	(95,255		)
Common stock cash dividends - $0.24 per share							(45,039		)							(45,039		)
Balance at September 30, 2014	185,158		$	545,207	$	1,438,343	$	538,749		$	(11,948	)	$	(432,345	)	$	2,078,006

Balance at December 31, 2012	199,225		$	542,093	$	1,426,267	$	363,937		$	5,675		$	(256,316	)	$	2,081,656
Net income							119,757									119,757
Other comprehensive income (loss)										(46,546		)				(46,546		)
Stock issued, including related tax benefits	1,107		1,959		562								4,838			7,359
Stock-based compensation awards					4,186											4,186
Acquisition of treasury stock	(8,000	)											(90,927		)	(90,927		)
Common stock cash dividends - $0.24 per share							(46,521		)							(46,521		)
Balance at September 30, 2013	192,332		$	544,052	$	1,431,015	$	437,173		$	(40,871	)	$	(342,405	)	$	2,028,964

See Notes to Consolidated Financial Statements

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)



	Nine months ended September 30
	2014			2013
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income	$	119,945		$	119,757
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses	9,500			38,000
Depreciation and amortization of premises and equipment	18,412			19,165
Net amortization of investment securities premiums	4,399			8,749
Investment securities gains, net	(1,193		)	(7,971		)
Net (increase) decrease in loans held for sale	(3,861		)	28,626
Amortization of intangible assets	944			1,603
Stock-based compensation	4,310			4,186
Excess tax benefits from stock-based compensation	(54		)	(237		)
Decrease in accrued interest receivable	493			1,071
(Increase) decrease in other assets	(1,909		)	37,129
Increase (decrease) in accrued interest payable	2,207			(2,673		)
Decrease in other liabilities	(5,315		)	(24,207		)
Total adjustments	27,933			103,441
Net cash provided by operating activities	147,878			223,198
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale	15,219			268,259
Proceeds from maturities of securities held to maturity	—			86
Proceeds from maturities of securities available for sale	273,688			526,393
Purchase of securities available for sale	(164,676		)	(691,362		)
Increase in short-term investments	(129,418		)	(63,965		)
Net increase in loans	(271,494		)	(684,529		)
Net purchases of premises and equipment	(16,832		)	(18,741		)
Net cash used in investing activities	(293,513		)	(663,859		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand and savings deposits	768,979			595,722
Net increase (decrease) in time deposits	73,462			(358,764		)
(Decrease) increase in short-term borrowings	(693,677		)	330,178
Additions to long-term debt	140,000			—
Repayments of long-term debt	(5,295		)	(5,131		)
Net proceeds from issuance of common stock	5,411			7,122
Excess tax benefits from stock-based compensation	54			237
Dividends paid	(45,638		)	(31,138		)
Acquisition of treasury stock	(95,255		)	(90,927		)
Net cash provided by financing activities	148,041			447,299
Net Increase in Cash and Due From Banks	2,406			6,638
Cash and Due From Banks at Beginning of Period	218,540			256,300
Cash and Due From Banks at End of Period	$	220,946		$	262,938
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest	$	57,448		$	65,663
Income taxes	16,632			29,964
See Notes to Consolidated Financial Statements

FULTON FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE A – Basis of Presentation

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

Recent Accounting Standards

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

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

In June 2014, the FASB issued ASC Update 2014-11, "Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures." In addition to new disclosure requirements, ASC Update 2014-11 requires that all repurchase-to-maturity transactions be accounted for as secured borrowings rather than as sales of financial assets. Also, all transfers of financial assets executed contemporaneously with a repurchase agreement with the same counterparty must be accounted for separately, the result of which would be the treatment of such transactions as secured borrowings. ASC Update 2014-11 is effective for public business entities’ interim and annual reporting periods beginning after December 15, 2014. For the Corporation, this standards update is effective with its March 31, 2015 quarterly report on Form 10-Q. The adoption of ASC Update 2014-11 is not expected to have a material impact on the Corporation’s consolidated financial statements.

In June 2014, the FASB issued ASC Update 2014-12, "Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period." ASC Update 2014-12 clarifies guidance related to accounting for share-based payment awards with terms that allow an employee to vest in the award regardless of whether the employee is rendering service on the date a performance target is achieved. ASC Update 2014-12 requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. ASC Update 2014-12 is effective for public business entities’ interim and annual reporting periods beginning after December 15, 2014, with earlier adoption permitted. For the Corporation, this standards update is effective with its March 31, 2015 quarterly report on Form 10-Q. The adoption of ASC Update 2014-12 is not expected to have a material impact on the Corporation’s consolidated financial statements.

In August 2014, the FASB issued ASC Update 2014-14, "Receivables - Troubled Debt Restructuring by Creditors." ASC Update 2014-14 clarifies troubled debt restructuring guidance related to the classification and measurement of certain government-sponsored loan guarantee programs upon foreclosure. ASC Update 2014-14 is effective for public business entities’ interim and annual reporting periods beginning after December 15, 2014, with earlier adoption permitted. For the Corporation, this standards

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

In August 2014, the FASB issued ASC Update 2014-15, "Presentation of Financial Statements - Going Concern." ASC Update 2014-15 provides guidance regarding management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related disclosures. The standards update describes how an entity's management should assess whether there are conditions and events, considered in the aggregate, that raise substantial doubt about an entity's ability to continue as a going concern within one year after the date that the financial statements are issued. ASC Update 2014-15 is effective for public business entities’ annual reporting periods ending after December 15, 2016, with earlier adoption permitted. For the Corporation, this standards update is effective with its December 31, 2016 annual report on Form 10-K. The adoption of ASC Update 2014-15 is not expected to have a material impact on the Corporation’s consolidated financial statements.

Reclassifications

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

NOTE B – Net Income Per Share

Basic net income per share is calculated as net income divided by the weighted average number of shares outstanding.

Diluted net income per share is calculated as net income divided by the weighted average number of shares outstanding plus the incremental number of shares added as a result of converting common stock equivalents, calculated using the treasury stock method. The Corporation’s common stock equivalents consist of outstanding stock options, restricted stock, restricted stock units (RSUs) and performance-based restricted stock 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 September 30		Nine months ended September 30
	2014	2013	2014	2013
	(in thousands)
Weighted average shares outstanding (basic)	186,109	192,251	187,893	193,926
Impact of common stock equivalents	846	1,008	970	1,000
Weighted average shares outstanding (diluted)	186,955	193,259	188,863	194,926

For the three and nine months ended September 30, 2014, 2.5 million and 2.9 million shares issuable under stock options, respectively, were excluded from the diluted net income per share computation as their effect would have been anti-dilutive. For the three and nine months ended September 30, 2013, 3.2 million and 3.7 million shares issuable under stock options, respectively, were excluded from the diluted net income per share computation as their effect would have been anti-dilutive.

NOTE C – Accumulated Other Comprehensive Income (Loss)

The following table presents changes in other comprehensive income (loss):



	Before-Tax Amount			Tax Effect			Net of Tax Amount
	(in thousands)
Three months ended September 30, 2014
Unrealized gain (loss) on securities	$	(4,629	)	$	1,618		$	(3,011	)
Reclassification adjustment for securities gains included in net income (1)	(81		)	29			(52		)
Non-credit related unrealized gains (losses) on other-than-temporarily impaired debt securities	212			(74		)	138
Unrealized gain on derivative financial instruments	52			(18		)	34
Amortization of net unrecognized pension and postretirement items (2)	160			(56		)	104
Total Other Comprehensive Income (Loss)	$	(4,286	)	$	1,499		$	(2,787	)
Three months ended September 30, 2013
Unrealized gain (loss) on securities	$	(10,691	)	$	3,740		$	(6,951	)
Reclassification adjustment for securities gains included in net income (1)	(2,633		)	922			(1,711		)
Non-credit related unrealized gains (losses) on other-than-temporarily impaired debt securities	(163		)	57			(106		)
Unrealized gain on derivative financial instruments	52			(18		)	34
Amortization of net unrecognized pension and postretirement items (2)	505			(176		)	329
Total Other Comprehensive Income (Loss)	$	(12,930	)	$	4,525		$	(8,405	)

Nine months ended September 30, 2014
Unrealized gain (loss) on securities	$	36,790		$	(12,878	)	$	23,912
Reclassification adjustment for postretirement gains included in net income (2)	(1,452		)	508			(944		)
Reclassification adjustment for securities gains included in net income (1)	(1,193		)	418			(775		)
Non-credit related unrealized gains (losses) on other-than-temporarily impaired debt securities	1,000			(350		)	650
Unrealized gain on derivative financial instruments	157			(55		)	102
Unrecognized pension and postretirement income	3,291			(1,147		)	2,144
Amortization of net unrecognized pension and postretirement items (2)	469			(165		)	304
Total Other Comprehensive Income (Loss)	$	39,062		$	(13,669	)	$	25,393
Nine months ended September 30, 2013
Unrealized gain (loss) on securities	$	(67,357	)	$	23,573		$	(43,784	)
Reclassification adjustment for securities gains included in net income (1)	(7,971		)	2,790			(5,181		)
Non-credit related unrealized gains (losses) on other-than-temporarily impaired debt securities	2,049			(717		)	1,332
Unrealized gain on derivative financial instruments	157			(55		)	102
Amortization of net unrecognized pension and postretirement items (2)	1,515			(530		)	985
Total Other Comprehensive Income (Loss)	$	(71,607	)	$	25,061		$	(46,546	)


(1)	Amounts reclassified out of accumulated other comprehensive income. Before-tax amounts included within "Investment securities gains, net" on the consolidated statements of income. See Note D, "Investment Securities," for additional details.


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

The following table presents changes in each component of accumulated other comprehensive income (loss), net of tax:



	Unrealized Gains (Losses) on Investment Securities Not Other-Than-Temporarily Impaired			Unrealized Non-Credit Gains (Losses) on Other-Than-Temporarily Impaired Debt Securities			Unrealized Effective Portions of Losses on Forward-Starting Interest Rate Swaps			Unrecognized Pension and Postretirement Plan Income (Costs)			Total
	(in thousands)
Three months ended September 30, 2014
Balance at June 30, 2014	$	(580	)	$	1,434		$	(2,614	)	$	(7,401	)	$	(9,161	)
Other comprehensive income (loss) before reclassifications	(3,011		)	138			—			—			(2,873		)
Amounts reclassified from accumulated other comprehensive income (loss)	(63		)	11			34			104			86
Balance at September 30, 2014	$	(3,654	)	$	1,583		$	(2,580	)	$	(7,297	)	$	(11,948	)
Three months ended September 30, 2013
Balance at June 30, 2013	$	(12,941	)	$	1,050		$	(2,750	)	$	(17,825	)	$	(32,466	)
Other comprehensive income (loss) before reclassifications	(6,951		)	(106		)	—			—			(7,057		)
Amounts reclassified from accumulated other comprehensive income (loss)	(1,774		)	63			34			329			(1,348		)
Balance at September 30, 2013	$	(21,666	)	$	1,007		$	(2,716	)	$	(17,496	)	$	(40,871	)

Nine months ended September 30, 2014
Balance at December 31, 2013	$	(27,510	)	$	1,652		$	(2,682	)	$	(8,801	)	$	(37,341	)
Other comprehensive income (loss) before reclassifications	23,912			650			—			2,144			26,706
Amounts reclassified from accumulated other comprehensive income (loss)	(56		)	(719		)	102			(640		)	(1,313		)
Balance at September 30, 2014	$	(3,654	)	$	1,583		$	(2,580	)	$	(7,297	)	$	(11,948	)
Nine months ended September 30, 2013
Balance at December 31, 2012	$	26,361		$	613		$	(2,818	)	$	(18,481	)	$	5,675
Other comprehensive income (loss) before reclassifications	(43,784		)	1,332			—			—			(42,452		)
Amounts reclassified from accumulated other comprehensive income (loss)	(4,243		)	(938		)	102			985			(4,094		)
Balance at September 30, 2013	$	(21,666	)	$	1,007		$	(2,716	)	$	(17,496	)	$	(40,871	)

NOTE D – Investment Securities

The following table presents the amortized cost and estimated fair values of investment securities, which were all classified as available for sale:



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(in thousands)
September 30, 2014
Equity securities	$	34,380	$	10,927	$	(29	)	$	45,278
U.S. Government securities	200		—		—			200
U.S. Government sponsored agency securities	235		5		—			240
State and municipal securities	250,195		7,917		(496		)	257,616
Corporate debt securities	99,670		5,777		(4,020		)	101,427
Collateralized mortgage obligations	975,971		6,700		(27,631		)	955,040
Mortgage-backed securities	954,412		14,201		(6,278		)	962,335
Auction rate securities	158,725		1		(10,253		)	148,473
	$	2,473,788	$	45,528	$	(48,707	)	$	2,470,609



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(in thousands)
December 31, 2013
Equity securities	$	33,922	$	12,355	$	(76	)	$	46,201
U.S. Government securities	525		—		—			525
U.S. Government sponsored agency securities	720		7		(1		)	726
State and municipal securities	281,810		6,483		(3,444		)	284,849
Corporate debt securities	100,468		5,685		(7,404		)	98,749
Collateralized mortgage obligations	1,069,138		8,036		(44,776		)	1,032,398
Mortgage-backed securities	949,328		13,881		(17,497		)	945,712
Auction rate securities	172,299		234		(13,259		)	159,274
	$	2,608,210	$	46,681	$	(86,457	)	$	2,568,434

Securities carried at $1.8 billion as of September 30, 2014 and $1.7 billion as of December 31, 2013 were pledged as collateral to secure public and trust deposits and customer repurchase agreements.

Equity securities include common stocks of financial institutions (estimated fair value of $39.3 million at September 30, 2014 and $40.6 million at December 31, 2013) and other equity investments (estimated fair value of $6.0 million at September 30, 2014 and $5.6 million at December 31, 2013).

As of September 30, 2014, the financial institutions stock portfolio had a cost basis of $28.6 million and an estimated fair value of $39.3 million, including an investment in a single financial institution with a cost basis of $20.0 million and an estimated fair value of $27.5 million. The estimated fair value of this investment accounted for 70.0% of the fair value of the Corporation's investments in the common stocks of publicly traded financial institutions. No other investment within the financial institutions stock portfolio exceeded 5% of the portfolio's estimated fair value.

The amortized cost and estimated fair values of debt securities as of September 30, 2014, by contractual maturity, are shown in the following table. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.



		Amortized Cost		Estimated Fair Value
	(in thousands)
Due in one year or less		$	13,218	$	13,284
Due from one year to five years		75,307		78,967
Due from five years to ten years		187,966		193,537
Due after ten years		232,534		222,168
		509,025		507,956
Collateralized mortgage obligations		975,971		955,040
Mortgage-backed securities		954,412		962,335
		$	2,439,408	$	2,425,331

The following table presents information related to the gross realized gains and losses on the sales of equity and debt securities:



	Gross Realized Gains		Gross Realized Losses			Other-than- temporary Impairment Losses			Net Gains (Losses)
Three months ended September 30, 2014	(in thousands)
Equity securities	$	99	$	—		$	—		$	99
Debt securities	—		—			(18		)	(18		)
Total	$	99	$	—		$	(18	)	$	81
Three months ended September 30, 2013
Equity securities	$	2,135	$	—		$	—		$	2,135
Debt securities	617		(22		)	(97		)	498
Total	$	2,752	$	(22	)	$	(97	)	$	2,633

Nine months ended September 30, 2014
Equity securities	$	100	$	—		$	(12	)	$	88
Debt securities	1,446		(323		)	(18		)	1,105
Total	$	1,546	$	(323	)	$	(30	)	$	1,193
Nine months ended September 30, 2013
Equity securities	$	4,357	$	(28	)	$	(27	)	$	4,302
Debt securities	3,788		(22		)	(97		)	3,669
Total	$	8,145	$	(50	)	$	(124	)	$	7,971

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

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

The following table presents a summary of the cumulative credit related other-than-temporary impairment charges, recognized as components of earnings, for debt securities held by the Corporation at September 30, 2014 and 2013:



	Three months ended September 30						Nine months ended September 30
	2014			2013			2014			2013
	(in thousands)
Balance of cumulative credit losses on debt securities, beginning of period	$	(17,214	)	$	(20,607	)	$	(20,691	)	$	(23,079	)
Additions for credit losses recorded which were not previously recognized as components of earnings	(18		)	(97		)	(18		)	(97		)
Reductions for securities sold during the period	—			—			3,472			2,468
Reductions for increases in cash flows expected to be collected that are recognized over the remaining life of the security	—			—			5			4
Balance of cumulative credit losses on debt securities, end of period	$	(17,232	)	$	(20,704	)	$	(17,232	)	$	(20,704	)

The following table presents the gross unrealized losses and estimated fair values of investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2014:



	Less than 12 months					12 months or longer					Total
	Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses
	(in thousands)
State and municipal securities	$	7,996	$	(37	)	$	26,484	$	(459	)	$	34,480	$	(496	)
Corporate debt securities	—		—			38,900		(4,020		)	38,900		(4,020		)
Collateralized mortgage obligations	53,189		(248		)	652,396		(27,383		)	705,585		(27,631		)
Mortgage-backed securities	241,707		(527		)	291,712		(5,751		)	533,419		(6,278		)
Auction rate securities	—		—			148,380		(10,253		)	148,380		(10,253		)
Total debt securities	302,892		(812		)	1,157,872		(47,866		)	1,460,764		(48,678		)
Equity securities	269		(17		)	77		(12		)	346		(29		)
	$	303,161	$	(829	)	$	1,157,949	$	(47,878	)	$	1,461,110	$	(48,707	)

The Corporation’s collateralized mortgage obligations and mortgage-backed securities have contractual terms that generally do not permit the issuer to settle the securities at a price less than the amortized cost of the investment. Because the decline in market value of these securities is attributable to changes in interest rates and not credit quality, and because the Corporation does not have the intent to sell and does not believe it will more likely than not be required to sell any of these securities prior to a recovery of their fair value to amortized cost, the Corporation does not consider these investments to be other-than-temporarily impaired as of September 30, 2014.

The unrealized holding losses on auction rate securities, or auction rate certificates (ARCs), are attributable to liquidity issues resulting from the failure of periodic auctions. The Corporation had previously purchased ARCs for investment management and trust customers as short-term investments with fair values that could be derived based on periodic auctions under normal market conditions. During 2008 and 2009, the Corporation purchased ARCs from these customers due to the failure of these periodic auctions, which made these previously short-term investments illiquid.

As of September 30, 2014, approximately $144 million, or 97%, of the ARCs were rated above investment grade, with approximately $6 million, or 4%, AAA rated and $104 million, or 72%, AA rated. Approximately $4 million, or 3%, of ARCs were either not rated or rated below investment grade by at least one ratings agency. Of this amount, approximately $3 million of the student loans underlying these ARCs have principal payments which are guaranteed by the federal government. In total, approximately $147 million, or 99%, of the student loans underlying the ARCs have principal payments that are guaranteed by the federal government.

During the nine months ended September 30, 2014, the Corporation sold ARCs with a total book value of $11.9 million, with no gain or loss upon sale. As of September 30, 2014, all ARCs were current and making scheduled interest payments. Based on management’s evaluations, ARCs with a fair value of $148.5 million were not subject to any other-than-temporary impairment charges as of September 30, 2014. The Corporation does not have the intent to sell and does not believe it will more likely than not be required to sell any of these securities prior to a recovery of their fair value to amortized cost, which may be at maturity.

For its investments in equity securities, particularly its investments in stocks of financial institutions, management evaluates the near-term prospects of the issuers in relation to the severity and duration of the impairment. Based on that evaluation and the Corporation’s ability and intent to hold those investments for a reasonable period of time sufficient for a recovery of fair value, the Corporation does not consider those investments with unrealized holding losses as of September 30, 2014 to be other-than-temporarily impaired.

The majority of the Corporation's available for sale corporate debt securities are issued by financial institutions. The following table presents the amortized cost and estimated fair value of corporate debt securities:



	September 30, 2014				December 31, 2013
	Amortized cost		Estimated fair value		Amortized cost		Estimated fair value
	(in thousands)
Single-issuer trust preferred securities	$	47,546	$	44,075	$	47,481	$	40,531
Subordinated debt	47,498		50,289		47,405		50,327
Pooled trust preferred securities	2,050		4,487		2,997		5,306
Corporate debt securities issued by financial institutions	97,094		98,851		97,883		96,164
Other corporate debt securities	2,576		2,576		2,585		2,585
Available for sale corporate debt securities	$	99,670	$	101,427	$	100,468	$	98,749

The Corporation’s investments in single-issuer trust preferred securities had an unrealized loss of $3.5 million at September 30, 2014. The Corporation did not record any other-than-temporary impairment charges for single-issuer trust preferred securities during the three or nine months ended September 30, 2014 or 2013. Six of the Corporation's 20 single-issuer trust preferred securities were rated below investment grade by at least one ratings agency, with an amortized cost of $13.5 million and an estimated fair value of $12.3 million at September 30, 2014. All of the single-issuer trust preferred securities rated below investment grade were rated BB or Ba. Three single-issuer trust preferred securities with an amortized cost of $4.7 million and an estimated fair value of $3.9 million at September 30, 2014 were not rated by any ratings agency.

During the nine months ended September 30, 2014, the Corporation sold two pooled trust preferred securities with a total amortized cost of $728,000, for a gain of $1.1 million. As of September 30, 2014, all six of the Corporation's pooled trust preferred securities, with an amortized cost of $2.1 million and an estimated fair value of $4.5 million, were rated below investment grade by at least one ratings agency, with ratings ranging from C to Ca. The class of securities held by the Corporation was below the most senior tranche, with the Corporation’s interests being subordinate to other investors in the pool. The Corporation determines the fair value of pooled trust preferred securities based on quotes provided by third-party brokers.

The amortized cost of pooled trust preferred securities is the purchase price of the securities, net of cumulative credit related other-than-temporary impairment charges, determined using an expected cash flows model. The most significant input to the expected cash flows model is the expected payment deferral rate for each pooled trust preferred security. The Corporation evaluates the financial metrics, such as capital ratios and non-performing assets ratios, of the individual financial institution issuers that comprise each pooled trust preferred security to estimate its expected deferral rate.

Based on management’s evaluations, corporate debt securities with a fair value of $101.4 million were not subject to any additional other-than-temporary impairment charges as of September 30, 2014. The Corporation does not have the intent to sell and does not believe it will more likely than not be required to sell any of these securities prior to a recovery of their fair value to amortized cost, which may be at maturity.

As mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), in December 2013, five regulatory bodies issued final rulings (Final Rules) implementing certain prohibitions and restrictions on the ability of a banking entity and non-bank financial company supervised by the Federal Reserve Board to engage in proprietary trading and have certain ownership interests in, or relationships with, a "covered fund" (the so-called "Volcker Rule"). The Final Rules generally treat as a covered fund any entity that would be an investment company under the Investment Company Act of 1940 (1940 Act) but for the application of the exemptions from SEC registration set forth in Section 3(c)(1) (fewer than 100 beneficial owners) or Section 3(c)(7) (qualified purchasers) of the 1940 Act. The Final Rules also require regulated entities to establish an internal compliance program that is consistent with the extent to which it engages in activities covered by the Volcker Rule, which must include making regular reports about those activities to regulators. Although the Final Rules provide some tiering of compliance and reporting obligations based on size, the fundamental prohibitions of the Volcker Rule apply to banking entities of any size, including the Corporation. Banking entities have until July 21, 2015 to conform their activities and investments to the requirements of the Final Rules. The Corporation does not engage in proprietary trading or in any other activities prohibited by the Final Rules. Based on the Corporation's evaluation of its investments, none fall within the definition of a "covered fund" and would need to be disposed

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

NOTE E – Loans and Allowance for Credit Losses

Loans, Net of Unearned Income

Loans, net of unearned income are summarized as follows:



	September 30, 2014			December 31, 2013
	(in thousands)
Real-estate - commercial mortgage	$	5,156,979		$	5,101,922
Commercial - industrial, financial and agricultural	3,691,262			3,628,420
Real-estate - home equity	1,733,036			1,764,197
Real-estate - residential mortgage	1,372,033			1,337,380
Real-estate - construction	687,728			573,672
Consumer	278,219			283,124
Leasing and other	120,144			99,256
Overdrafts	2,646			4,045
Loans, gross of unearned income	13,042,047			12,792,016
Unearned income	(11,642		)	(9,796		)
Loans, net of unearned income	$	13,030,405		$	12,782,220

Allowance for Credit Losses

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

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

The Corporation segments its loan portfolio by general loan type, or "portfolio segments," as presented in the table under the heading, "Loans, Net of Unearned Income," above. Certain portfolio segments are further disaggregated and evaluated collectively for impairment based on "class segments," which are largely based on the type of collateral underlying each loan. For commercial loans, class segments include loans secured by collateral and unsecured loans. Construction loan class segments include loans secured by commercial real estate, loans to commercial borrowers secured by residential real estate and loans to individuals secured by residential real estate. Consumer loan class segments include direct consumer installment loans and indirect automobile loans.

The following table presents the components of the allowance for credit losses:



	September 30, 2014		December 31, 2013
	(in thousands)
Allowance for loan losses	$	189,477	$	202,780
Reserve for unfunded lending commitments	1,631		2,137
Allowance for credit losses	$	191,108	$	204,917

The following table presents the activity in the allowance for credit losses:



	Three months ended September 30						Nine months ended September 30
	2014			2013			2014			2013
	(in thousands)
Balance at beginning of period	$	193,442		$	217,626		$	204,917		$	225,439
Loans charged off	(9,604		)	(18,108		)	(31,348		)	(61,597		)
Recoveries of loans previously charged off	3,770			3,820			8,039			10,996
Net loans charged off	(5,834		)	(14,288		)	(23,309		)	(50,601		)
Provision for credit losses	3,500			9,500			9,500			38,000
Balance at end of period	$	191,108		$	212,838		$	191,108		$	212,838

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
	(in thousands)
Three months ended September 30, 2014
Balance at June 30, 2014	$	49,842		$	49,084		$	32,041		$	32,744		$	11,331		$	3,306		$	1,851		$	11,486		$	191,685
Loans charged off	(1,557		)	(5,167		)	(1,492		)	(231		)	(313		)	(538		)	(306		)	—			(9,604		)
Recoveries of loans previously charged off	1,167			1,013			336			95			470			448			241			—			3,770
Net loans charged off	(390		)	(4,154		)	(1,156		)	(136		)	157			(90		)	(65		)	—			(5,834		)
Provision for loan losses (1)	(278		)	6,110			406			397			(312		)	244			180			(3,121		)	3,626
Balance at September 30, 2014	$	49,174		$	51,040		$	31,291		$	33,005		$	11,176		$	3,460		$	1,966		$	8,365		$	189,477
Three months ended September 30, 2013
Balance at June 30, 2013	$	58,696		$	57,557		$	25,736		$	32,684		$	14,471		$	2,497		$	2,925		$	21,865		$	216,431
Loans charged off	(3,724		)	(9,394		)	(2,365		)	(767		)	(598		)	(473		)	(787		)	—			(18,108		)
Recoveries of loans previously charged off	185			2,295			198			245			379			294			224			—			3,820
Net loans charged off	(3,539		)	(7,099		)	(2,167		)	(522		)	(219		)	(179		)	(563		)	—			(14,288		)
Provision for loan losses (1)	3,470			1,437			4,451			1,595			(1,221		)	610			620			(2,619		)	8,343
Balance at September 30, 2013	$	58,627		$	51,895		$	28,020		$	33,757		$	13,031		$	2,928		$	2,982		$	19,246		$	210,486
Nine months ended September 30, 2014
Balance at December 31, 2013	$	55,659		$	50,330		$	28,222		$	33,082		$	12,649		$	3,260		$	3,370		$	16,208		$	202,780
Loans charged off	(5,084		)	(15,804		)	(4,377		)	(2,166		)	(745		)	(1,738		)	(1,434		)	—			(31,348		)
Recoveries of loans previously charged off	1,641			2,532			869			319			852			1,059			767			—			8,039
Net loans charged off	(3,443		)	(13,272		)	(3,508		)	(1,847		)	107			(679		)	(667		)	—			(23,309		)
Provision for loan losses (1)	(3,042		)	13,982			6,577			1,770			(1,580		)	879			(737		)	(7,843		)	10,006
Balance at September 30, 2014	$	49,174		$	51,040		$	31,291		$	33,005		$	11,176		$	3,460		$	1,966		$	8,365		$	189,477
Nine months ended September 30, 2013
Balance at December 31, 2012	$	62,928		$	60,205		$	22,776		$	34,536		$	17,287		$	2,367		$	2,752		$	21,052		$	223,903
Loans charged off	(13,050		)	(24,856		)	(6,735		)	(8,282		)	(5,181		)	(1,456		)	(2,037		)	—			(61,597		)
Recoveries of loans previously charged off	2,754			3,430			721			442			1,794			1,206			649			—			10,996
Net loans charged off	(10,296		)	(21,426		)	(6,014		)	(7,840		)	(3,387		)	(250		)	(1,388		)	—			(50,601		)
Provision for loan losses (1)	5,995			13,116			11,258			7,061			(869		)	811			1,618			(1,806		)	37,184
Balance at September 30, 2013	$	58,627		$	51,895		$	28,020		$	33,757		$	13,031		$	2,928		$	2,982		$	19,246		$	210,486

(1)

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

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
	(in thousands)
Allowance for loan losses at September 30, 2014:
Measured for impairment under FASB ASC Subtopic 450-20	$	32,951	$	39,098	$	21,666	$	11,503	$	6,009	$	3,439	$	1,966	$	8,365	$	124,997
Evaluated for impairment under FASB ASC Section 310-10-35	16,223		11,942		9,625		21,502		5,167		21		—		N/A		64,480
	$	49,174	$	51,040	$	31,291	$	33,005	$	11,176	$	3,460	$	1,966	$	8,365	$	189,477

Loans, net of unearned income at September 30, 2014:
Measured for impairment under FASB ASC Subtopic 450-20	$	5,095,263	$	3,655,162	$	1,719,049	$	1,319,333	$	658,822	$	278,196	$	111,148	N/A		$	12,836,973
Evaluated for impairment under FASB ASC Section 310-10-35	61,716		36,100		13,987		52,700		28,906		23		—		N/A		193,432
	$	5,156,979	$	3,691,262	$	1,733,036	$	1,372,033	$	687,728	$	278,219	$	111,148	N/A		$	13,030,405

Allowance for loan losses at September 30, 2013:
Measured for impairment under FASB ASC Subtopic 450-20	$	43,262	$	38,025	$	18,482	$	11,494	$	8,648	$	2,911	$	2,982	$	19,246	$	145,050
Evaluated for impairment under FASB ASC Section 310-10-35	15,365		13,870		9,538		22,263		4,383		17		—		N/A		65,436
	$	58,627	$	51,895	$	28,020	$	33,757	$	13,031	$	2,928	$	2,982	$	19,246	$	210,486

Loans, net of unearned income at September 30, 2013:
Measured for impairment under FASB ASC Subtopic 450-20	$	5,001,851	$	3,593,038	$	1,758,492	$	1,277,200	$	543,268	$	296,122	$	97,749	N/A		$	12,567,720
Evaluated for impairment under FASB ASC Section 310-10-35	61,522		52,232		15,062		50,269		34,074		20		—		N/A		213,179
	$	5,063,373	$	3,645,270	$	1,773,554	$	1,327,469	$	577,342	$	296,142	$	97,749	N/A		$	12,780,899


(1)	The unallocated allowance, which was approximately 4% and 9% of the total allowance for credit losses as of September 30, 2014 and September 30, 2013, respectively, was, in the opinion of management, reasonable and appropriate given that the estimates used in the allocation process are inherently imprecise.

N/A – Not applicable.

Impaired Loans

A loan is considered to be impaired if it is probable that all amounts will not be collected according to the contractual terms of the loan agreement. Impaired loans consist of all loans on non-accrual status and accruing troubled debt restructurings (TDRs). 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. As of September 30, 2014 and December 31, 2013, substantially all of the Corporation’s individually evaluated impaired loans with total outstanding balances greater than or equal to $1.0 million were measured based on the estimated fair value of each loan’s collateral. Collateral could be in the form of real estate, in the case of impaired commercial mortgages and construction loans, or business assets, such as accounts receivable or inventory, in the case of commercial and industrial loans. Commercial and industrial loans may also be secured by real property.

As of September 30, 2014 and 2013, approximately 77% and 89%, respectively, of impaired loans with principal balances greater than or equal to $1.0 million, whose primary collateral is real estate, were measured at estimated fair value using state certified third-party appraisals that had been updated within the preceding 12 months.

When updated certified appraisals are not obtained for loans to commercial borrowers evaluated for impairment under FASB ASC Section 310-10-35 that are secured by real estate, fair values are estimated based on the original appraisal values, as long as the original appraisal indicated a strong loan-to-value position and, in the opinion of the Corporation's internal loan evaluation staff, there has not been a significant deterioration in the collateral value since the original appraisal was performed. Original appraisals are typically used only when the estimated collateral value, as adjusted appropriately for the age of the appraisal, results in a current loan-to-value ratio that is lower than the Corporation's loan-to-value requirements for new loans, generally less than 70%.

The following table presents total impaired loans by class segment:



	September 30, 2014						December 31, 2013
	Unpaid Principal Balance		Recorded Investment		Related Allowance		Unpaid Principal Balance		Recorded Investment		Related Allowance
	(in thousands)
With no related allowance recorded:
Real estate - commercial mortgage	$	26,102	$	23,280	$	—	$	28,892	$	24,494	$	—
Commercial - secured	19,100		15,283		—		23,890		21,383		—
Real estate - home equity	—		—		—		399		300		—
Real estate - residential mortgage	1,075		1,075		—		—		—		—
Construction - commercial residential	20,725		14,761		—		18,943		13,740		—
Construction - commercial	1,361		1,245		—		2,996		1,976		—
	68,363		55,644				75,120		61,893
With a related allowance recorded:
Real estate - commercial mortgage	47,938		38,436		16,223		43,282		35,830		14,444
Commercial - secured	29,939		19,990		11,336		34,267		22,324		13,315
Commercial - unsecured	974		827		606		1,113		1,048		752
Real estate - home equity	19,810		13,987		9,625		20,383		14,337		9,059
Real estate - residential mortgage	62,182		51,625		21,502		63,682		51,097		21,745
Construction - commercial residential	18,046		11,990		4,769		25,769		14,579		3,493
Construction - commercial	1,834		629		260		485		195		77
Construction - other	452		281		138		719		548		301
Consumer - direct	18		18		16		11		11		10
Consumer - indirect	5		5		5		2		2		2
	181,198		137,788		64,480		189,713		139,971		63,198
Total	$	249,561	$	193,432	$	64,480	$	264,833	$	201,864	$	63,198

As of September 30, 2014 and December 31, 2013, there were $55.6 million and $61.9 million, respectively, of impaired loans that did not have a related allowance for loan loss. The estimated fair values of the collateral for these loans exceeded their carrying amount, or they were previously charged down to realizable collateral values. Accordingly, no specific valuation allowance was considered to be necessary.

The following table presents average impaired loans by class segment:



	Three months ended September 30								Nine months ended September 30
	2014				2013				2014				2013
	Average Recorded Investment		Interest Income Recognized (1)		Average Recorded Investment		Interest Income Recognized (1)		Average Recorded Investment		Interest Income Recognized (1)		Average Recorded Investment		Interest Income Recognized (1)
	(in thousands)
With no related allowance recorded:
Real estate - commercial mortgage	$	23,056	$	78	$	27,120	$	113	$	23,524	$	244	$	29,630	394
Commercial - secured	18,903		29		33,644		49		20,014		98		32,528		131
Commercial - unsecured	—		—		—		—		—		—		33		—
Real estate - home equity	150		—		300		—		225		1		253		1
Real estate - residential mortgage	1,236		7		747		4		697		13		869		25
Construction - commercial residential	14,881		51		20,809		66		16,052		173		21,730		200
Construction - commercial	1,060		—		2,021		—		1,514		—		3,500		2
	59,286		165		84,641		232		62,026		529		88,543		753
With a related allowance recorded:
Real estate - commercial mortgage	38,469		130		37,962		158		37,794		394		46,213		563
Commercial - secured	19,764		30		22,771		34		21,404		101		29,317		115
Commercial - unsecured	850		1		1,260		1		847		3		1,502		4
Real estate - home equity	14,116		30		14,761		17		14,106		78		14,031		49
Real estate - residential mortgage	51,283		298		51,365		290		51,257		894		52,581		924
Construction - commercial residential	11,189		38		12,053		39		10,480		100		11,774		121
Construction - commercial	942		—		525		—		567		—		1,641		3
Construction - other	281		—		501		—		414		—		517		1
Consumer - direct	18		—		18		—		15		—		21		—
Consumer - indirect	6		—		3		—		4		—		1		—
Leasing and other and overdrafts	—		—		—		—		—		—		14		—
	136,918		527		141,219		539		136,888		1,570		157,612		1,780
Total	$	196,204	$	692	$	225,860	$	771	$	198,914	$	2,099	$	246,155	2,533


(1)	All impaired loans, excluding accruing TDRs, were non-accrual loans. Interest income recognized for the three and nine months ended September 30, 2014 and 2013 represents amounts earned on accruing TDRs.

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						Total
	September 30, 2014			December 31, 2013			September 30, 2014			December 31, 2013			September 30, 2014			December 31, 2013			September 30, 2014			December 31, 2013
	(dollars in thousands)
Real estate - commercial mortgage	$	4,877,904		$	4,763,987		$	113,650		$	141,013		$	165,425		$	196,922		$	5,156,979		$	5,101,922
Commercial - secured	3,243,731			3,167,168			138,136			111,613			129,273			125,382			3,511,140			3,404,163
Commercial - unsecured	162,620			209,836			12,246			11,666			5,256			2,755			180,122			224,257
Total commercial - industrial, financial and agricultural	3,406,351			3,377,004			150,382			123,279			134,529			128,137			3,691,262			3,628,420
Construction - commercial residential	170,027			146,041			28,517			31,522			42,875			57,806			241,419			235,369
Construction - commercial	370,187			258,441			1,469			2,932			5,550			8,124			377,206			269,497
Total construction (excluding Construction - other)	540,214			404,482			29,986			34,454			48,425			65,930			618,625			504,866
	$	8,824,469		$	8,545,473		$	294,018		$	298,746		$	348,379		$	390,989		$	9,466,866		$	9,235,208
% of Total	93.2		%	92.6		%	3.1		%	3.2		%	3.7		%	4.2		%	100.0		%	100.0		%

The following is a summary of the Corporation's internal risk rating categories:


•	Pass: These loans do not currently pose undue credit risk and can range from the highest to average quality, depending on the degree of potential risk.


•	Special Mention: These loans constitute an undue and unwarranted credit risk, but not to a point of justifying a classification of substandard. Loans in this category are currently acceptable, but are nevertheless potentially weak.


•	Substandard or Lower: These loans are inadequately protected by current sound worth and paying capacity of the borrower. There exists a well-defined weakness or weaknesses that jeopardize the normal repayment of the debt.

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

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

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)						Total
	September 30, 2014			December 31, 2013			September 30, 2014			December 31, 2013			September 30, 2014			December 31, 2013			September 30, 2014			December 31, 2013
	(dollars in thousands)
Real estate - home equity	$	1,707,659		$	1,731,185		$	10,306		$	16,029		$	15,071		$	16,983		$	1,733,036		$	1,764,197
Real estate - residential mortgage	1,319,002			1,282,754			24,896			23,279			28,135			31,347			1,372,033			1,337,380
Construction - other	68,822			68,258			—			—			281			548			69,103			68,806
Consumer - direct	115,449			126,666			3,025			3,586			2,359			2,391			120,833			132,643
Consumer - indirect	155,027			147,017			2,203			3,312			156			152			157,386			150,481
Total consumer	270,476			273,683			5,228			6,898			2,515			2,543			278,219			283,124
Leasing and other and overdrafts	110,491			92,876			269			581			388			48			111,148			93,505
	$	3,476,450		$	3,448,756		$	40,699		$	46,787		$	46,390		$	51,469		$	3,563,539		$	3,547,012
% of Total	97.6		%	97.2		%	1.2		%	1.3		%	1.3		%	1.5		%	100.0		%	100.0		%


(1)	Includes all accruing loans 31 days to 89 days past due.


(2)	Includes all accruing loans 90 days or more past due and all non-accrual loans.

The following table presents non-performing assets:



	September 30, 2014		December 31, 2013
	(in thousands)
Non-accrual loans	$	126,420	$	133,753
Accruing loans greater than 90 days past due	17,428		20,524
Total non-performing loans	143,848		154,277
Other real estate owned (OREO)	13,489		15,052
Total non-performing assets	$	157,337	$	169,329

The following table presents TDRs, by class segment:



	September 30, 2014		December 31, 2013
	(in thousands)
Real-estate - residential mortgage	$	30,850	$	28,815
Real-estate - commercial mortgage	18,869		19,758
Construction - commercial residential	9,251		10,117
Commercial - secured	5,042		7,933
Real estate - home equity	2,904		1,365
Commercial - unsecured	73		112
Consumer - direct	18		11
Consumer - indirect	5		—
Total accruing TDRs	67,012		68,111
Non-accrual TDRs (1)	27,724		30,209
Total TDRs	$	94,736	$	98,320


(1)	Included within non-accrual loans in the preceding table detailing non-performing assets.

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

The following table presents TDRs, by class segment, as of September 30, 2014 and 2013 that were modified during the three and nine months ended September 30, 2014 and 2013:



	Three months ended September 30						Nine months ended September 30
	2014			2013			2014			2013
	Number of Loans	Recorded Investment		Number of Loans	Recorded Investment		Number of Loans	Recorded Investment		Number of Loans	Recorded Investment
	(dollars in thousands)
Real estate - commercial mortgage	1	$	391	4	$	3,774	10	$	10,195	13	$	8,428
Construction - commercial residential	—	—		2	4,427		2	1,914		5	9,542
Real estate - residential mortgage	3	256		5	836		18	2,092		44	6,861
Real estate - home equity	6	764		14	1,071		26	1,627		42	2,928
Commercial - secured	3	1,214		—	—		4	1,357		8	592
Consumer - indirect	—	—		—	—		4	7		—	—
Consumer - direct	—	—		—	—		6	8		9	2
Commercial - unsecured	—	—		—	—		—	—		1	15
Total	13	$	2,625	25	$	10,108	70	$	17,200	122	$	28,368

The following table presents TDRs, by class segment, as of September 30, 2014 and 2013 that were modified within the previous 12 months and had a post-modification payment default during the nine months ended September 30, 2014 and 2013. The Corporation defines a payment default as a single missed payment.



	2014			2013
	Number of Loans	Recorded Investment		Number of Loans	Recorded Investment
	(dollars in thousands)
Real estate - residential mortgage	8	$	1,147	20	$	3,460
Real estate - home equity	5	724		18	1,419
Construction - commercial residential	3	2,509		1	608
Real estate - commercial mortgage	1	35		5	2,062
Commercial - secured	3	415		1	100
Consumer - direct	—	—		3	1
Total	20	$	4,830	48	$	7,650

The following table presents past due status and non-accrual loans by portfolio segment and class segment:



	September 30, 2014
	31-59 Days Past Due		60-89 Days Past Due		≥ 90 Days Past Due and Accruing		Non- accrual		Total ≥ 90 Days		Total Past Due		Current		Total
	(in thousands)
Real estate - commercial mortgage	$	19,506	$	5,074	$	1,755	$	42,847	$	44,602	$	69,182	$	5,087,797	$	5,156,979
Commercial - secured	7,530		1,215		2,292		30,231		32,523		41,268		3,469,872		3,511,140
Commercial - unsecured	1,528		209		—		754		754		2,491		177,631		180,122
Total commercial - industrial, financial and agricultural	9,058		1,424		2,292		30,985		33,277		43,759		3,647,503		3,691,262
Real estate - home equity	8,094		2,212		3,988		11,083		15,071		25,377		1,707,659		1,733,036
Real estate - residential mortgage	17,102		7,794		6,285		21,850		28,135		53,031		1,319,002		1,372,033
Construction - commercial residential	215		—		205		17,500		17,705		17,920		223,499		241,419
Construction - commercial	—		—		—		1,874		1,874		1,874		375,332		377,206
Construction - other	—		—		—		281		281		281		68,822		69,103
Total real estate - construction	215		—		205		19,655		19,860		20,075		667,653		687,728
Consumer - direct	2,032		993		2,359		—		2,359		5,384		115,449		120,833
Consumer - indirect	1,815		388		156		—		156		2,359		155,027		157,386
Total consumer	3,847		1,381		2,515		—		2,515		7,743		270,476		278,219
Leasing and other and overdrafts	185		84		388		—		388		657		110,491		111,148
Total	$	58,007	$	17,969	$	17,428	$	126,420	$	143,848	$	219,824	$	12,810,581	$	13,030,405



	December 31, 2013
	31-59 Days Past Due		60-89 Days Past Due		≥ 90 Days Past Due and Accruing		Non- accrual		Total ≥ 90 Days		Total Past Due		Current		Total
	(in thousands)
Real estate - commercial mortgage	$	15,474	$	4,009	$	3,502	$	40,566	$	44,068	$	63,551	$	5,038,371	$	5,101,922
Commercial - secured	8,916		1,365		1,311		35,774		37,085		47,366		3,356,797		3,404,163
Commercial - unsecured	332		125		—		936		936		1,393		222,864		224,257
Total commercial - industrial, financial and agricultural	9,248		1,490		1,311		36,710		38,021		48,759		3,579,661		3,628,420
Real estate - home equity	13,555		2,474		3,711		13,272		16,983		33,012		1,731,185		1,764,197
Real estate - residential mortgage	16,969		6,310		9,065		22,282		31,347		54,626		1,282,754		1,337,380
Construction - commercial residential	—		645		346		18,202		18,548		19,193		216,176		235,369
Construction - commercial	14		—		—		2,171		2,171		2,185		267,312		269,497
Construction - other	—		—		—		548		548		548		68,258		68,806
Total real estate - construction	14		645		346		20,921		21,267		21,926		551,746		573,672
Consumer - direct	2,091		1,495		2,391		—		2,391		5,977		126,666		132,643
Consumer - indirect	2,864		448		150		2		152		3,464		147,017		150,481
Total consumer	4,955		1,943		2,541		2		2,543		9,441		273,683		283,124
Leasing and other and overdrafts	559		22		48		—		48		629		92,876		93,505
Total	$	60,774	$	16,893	$	20,524	$	133,753	$	154,277	$	231,944	$	12,550,276	$	12,782,220

NOTE F – Mortgage Servicing Rights

The following table summarizes the changes in mortgage servicing rights (MSRs), which are included in other assets on the consolidated balance sheets:



	Three months ended September 30						Nine months ended September 30
	2014			2013			2014			2013
	(in thousands)
Amortized cost:
Balance at beginning of period	$	42,586		$	41,750		$	42,452		$	39,737
Originations of mortgage servicing rights	1,456			2,909			3,807			10,371
Amortization	(1,664		)	(2,031		)	(3,881		)	(7,480		)
Balance at end of period	$	42,378		$	42,628		$	42,378		$	42,628

Valuation allowance:
Balance at beginning of period	$	—		$	(1,690	)	$	—		$	(3,680	)
Reversals	—			1,690			—			3,680
Balance at end of period	$	—		$	—		$	—		$	—

Net MSRs at end of period	$	42,378		$	42,628		$	42,378		$	42,628

MSRs represent the economic value of existing contractual rights to service mortgage loans that have been sold. Accordingly, actual and expected prepayments of the underlying mortgage loans can impact the value of MSRs.

The Corporation estimates the fair value of its MSRs by discounting the estimated cash flows from servicing income, net of expense, over the expected life of the underlying loans at a discount rate commensurate with the risk associated with these assets. Expected life is based on the contractual terms of the loans, as adjusted for prepayment projections. No adjustment to the valuation allowance was necessary for three and nine months ended September 30, 2014. A decrease to the valuation allowance of $1.7 million and $3.7 million was recorded for the three and nine months ended September 30, 2013.

The Corporation accounts for MSRs at the lower of amortized cost or fair value. As of September 30, 2014, the estimated fair value of MSRs was $47.9 million, which exceeded their book value. Therefore, no increase to the valuation allowance was necessary during the three or nine months ended September 30, 2014.

NOTE G – Stock-Based Compensation

The fair value of equity awards granted to employees is recognized as compensation expense over the period during which employees are required to provide service in exchange for such awards. The Corporation grants equity awards to employees, consisting of stock options, restricted stock, RSUs and PSUs under its Amended and Restated Equity and Cash Incentive Compensation Plan (Employee Option Plan). In addition, employees may purchase stock under the Corporation’s Employee Stock Purchase Plan.

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

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

The following table presents compensation expense and the related tax benefits for equity awards recognized in the consolidated statements of income:



	Three months ended September 30						Nine months ended September 30
	2014			2013			2014			2013
	(in thousands)
Stock-based compensation expense	$	1,288		$	979		$	4,310		$	4,186
Tax benefit	(358		)	(272		)	(1,067		)	(1,183		)
Stock-based compensation expense, net of tax	$	930		$	707		$	3,243		$	3,003

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

During the three and nine months ended September 30, 2014, the Corporation granted approximately 389,000 PSUs, 289,000 stock options and 105,000 RSUs under its Employee Option Plan. The fair value of RSUs and a majority of PSUs are based on the trading price of the Corporation's stock on the date of grant. The fair value of certain PSUs are estimated through the use of the Monte Carlo valuation methodology as of the date of grant. RSUs become fully vested over or after a three year vesting period, however, certain events, as defined in the Employee Option Plan, can result in the acceleration of the vesting of RSUs. RSUs and PSUs earn dividends during the vesting period, which are forfeitable if the awards do not vest. The fair value of PSUs, which is recognized as compensation expense over the period during which employees are required to provide service in exchange for such awards, may vary, based on the expectations for actual performance relative to defined performance measures. As of September 30, 2014, the Employee Option Plan had 11.2 million shares reserved for future grants through 2023. During the nine months ended September 30, 2014, the Corporation granted approximately 13,000 shares of stock under its Directors' Plan. As of September 30, 2014, the Directors’ Plan had approximately 424,000 shares reserved for future grants through 2021.

NOTE H – Employee Benefit Plans

The Corporation maintains a defined benefit pension plan (Pension Plan) for certain employees, which was curtailed effective January 1, 2008. Contributions to the Pension Plan are actuarially determined and funded annually, if required. Pension Plan assets are invested in: money markets; fixed income securities, including corporate bonds, U.S. Treasury securities and common trust funds; and equity securities, including common stocks and common stock mutual funds.

The net periodic benefit cost for the Corporation’s Pension Plan, as determined by a third-party actuary, consisted of the following components:



	Three months ended September 30						Nine months ended September 30
	2014			2013			2014			2013
	(in thousands)
Service cost (1)	$	92		$	51		$	276		$	153
Interest cost	853			772			2,559			2,316
Expected return on plan assets	(811		)	(800		)	(2,432		)	(2,400		)
Net amortization and deferral	244			596			732			1,788
Net periodic benefit cost	$	378		$	619		$	1,135		$	1,857


(1)	The Pension Plan service cost recorded for the three and nine months ended September 30, 2014 and 2013, respectively, was related to administrative costs associated with the plan and was not due to the accrual of additional participant benefits.

The Corporation currently provides medical and life insurance benefits under a postretirement benefits plan (Postretirement Plan) to certain retired full-time employees who were employees of the Corporation prior to January 1, 1998.

Effective February 1, 2014, the Corporation amended the Postretirement Plan, making all active full-time employees ineligible for benefits under this plan. As a result of this amendment, the Corporation recorded a $1.5 million gain in 2014, as determined by a third-party actuary and included as a component of salaries and employee benefits on the consolidated statements of income. The gain resulted from the recognition of the remaining prior service cost prior to the amendment date as of December 31, 2013. In addition, this amendment resulted in a $3.3 million decrease in the accumulated postretirement benefit obligation and a corresponding increase in unrecognized prior service cost credits.

The net periodic benefit (income) cost of the Corporation’s Postretirement Plan as determined by consulting actuaries, consisted of the following components, excluding the impact of the $1.5 million plan amendment gain:



	Three months ended September 30						Nine months ended September 30
	2014			2013			2014			2013
	(in thousands)
Service cost (1)	$	—		$	57		$	15		$	171
Interest cost	48			81			157			243
Net accretion and deferral	(84		)	(91		)	(263		)	(273		)
Net periodic benefit (income) cost	$	(36	)	$	47		$	(91	)	$	141


(1)	As a result of the plan amendment, additional participant benefits are not accrued under the Postretirement Plan after February 1, 2014. Service costs recorded after the effective date of the amendment represent administrative costs associated with the plan.

The Corporation recognizes the funded status of its Pension Plan and Postretirement Plan on the consolidated balance sheets and recognizes the change in that funded status through other comprehensive income.

NOTE I – Derivative Financial Instruments

The Corporation manages its exposure to certain interest rate and foreign currency risks through the use of derivatives. None of the Corporation's outstanding derivative contracts are designated as hedges and none are entered into for speculative purposes. Derivative instruments are carried at fair value, with changes in fair values recognized in earnings as components of non-interest income and non-interest expense on the consolidated statements of income.

Derivative contracts create counterparty credit risk with both the Corporation's customers and with institutional derivative counterparties. The Corporation manages credit risk through its credit approval processes, monitoring procedures and obtaining adequate collateral, when the Corporation determines it is appropriate to do so.

Mortgage Banking Derivatives

In connection with its mortgage banking activities, the Corporation enters into commitments to originate certain fixed rate residential mortgage loans for customers, also referred to as interest rate locks. In addition, the Corporation enters into forward commitments for the future sales or purchases of mortgage-backed securities to or from third-party counterparties to hedge the effect of changes in interest rates on the values of both the interest rate locks and mortgage loans held for sale. Forward sales commitments may also be in the form of commitments to sell individual mortgage loans or interest rate locks at a fixed price at a future date. The amount necessary to settle each interest rate lock is based on the price that secondary market investors would pay for loans with similar characteristics, including interest rate and term, as of the date fair value is measured. Gross derivative assets and liabilities are recorded within other assets and other liabilities, respectively, on the consolidated balance sheets, with changes in fair values during the period recorded within mortgage banking income on the consolidated statements of income.

Interest Rate Swaps

The Corporation enters into interest rate swaps with certain qualifying commercial loan customers to meet their interest rate risk management needs. The Corporation simultaneously enters into interest rate swaps with dealer counterparties, with identical notional amounts and terms. The net result of these interest rate swaps is that the customer pays a fixed rate of interest and the Corporation receives a floating rate. These interest rate swaps are derivative financial instruments that are recorded at their fair values within other assets and liabilities on the consolidated balance sheets. Changes in fair value during the period are recorded within other non-interest expense on the consolidated statements of income.

Foreign Exchange Contracts

The Corporation enters into foreign exchange contracts to accommodate the needs of its customers. Foreign exchange contracts are commitments to buy or sell foreign currency on a future date at a contractual price. The Corporation offsets its foreign exchange contract exposure with customers by entering into contracts with third-party correspondent financial institutions to mitigate its exposure to fluctuations in foreign currency exchange rates. The Corporation also holds certain amounts of foreign currency with international correspondent banks. The Corporation's policy limits the total net foreign currency open positions, which includes all outstanding contracts and foreign account balances, to $500,000. Gross derivative assets and liabilities are recorded within other assets and other liabilities, respectively, on the consolidated balance sheets, with changes in fair values during the period recorded within other service charges and fees on the consolidated statements of income.

The following table presents a summary of the notional amounts and fair values of derivative financial instruments:



	September 30, 2014					December 31, 2013
	Notional Amount		Asset (Liability) Fair Value			Notional Amount		Asset (Liability) Fair Value
	(in thousands)
Interest Rate Locks with Customers
Positive fair values	$	92,136	$	1,324		$	75,217	$	867
Negative fair values	937		(16		)	11,393		(59		)
Net interest rate locks with customers			1,308					808
Forward Commitments
Positive fair values	6,165		23			87,904		1,263
Negative fair values	98,323		(392		)	2,373		(5		)
Net forward commitments			(369		)			1,258
Interest Rate Swaps with Customers
Positive fair values	360,442		10,027			111,899		2,105
Negative fair values	54,308		(615		)	105,673		(2,993		)
Net interest rate swaps with customers			9,412					(888		)
Interest Rate Swaps with Dealer Counterparties
Positive fair values	54,308		615			105,673		2,993
Negative fair values	360,442		(10,027		)	111,899		(2,105		)
Net interest rate swaps with dealer counterparties			(9,412		)			888
Foreign Exchange Contracts with Customers
Positive fair values	17,434		959			2,150		24
Negative fair values	6,273		(424		)	12,775		(343		)
Net foreign exchange contracts with customers			535					(319		)
Foreign Exchange Contracts with Correspondent Banks
Positive fair values	6,554		428			17,348		498
Negative fair values	16,988		(871		)	5,872		(48		)
Net foreign exchange contracts with correspondent banks			(443		)			450
Net derivative fair value asset			$	1,031				$	2,197

The following table presents a summary of the fair value gains and losses on derivative financial instruments:



	Three months ended September 30						Nine months ended September 30
	2014			2013			2014			2013
	(in thousands)
Interest rate locks with customers	$	(1,092	)	$	4,717		$	500		$	(3,707	)
Forward commitments	1,374			(12,244		)	(1,627		)	(1,969		)
Interest rate swaps with customers	(40		)	1,009			10,300			(5,270		)
Interest rate swaps with dealer counterparties	40			(1,009		)	(10,300		)	5,270
Foreign exchange contracts with customers	557			(344		)	854			(175		)
Foreign exchange contracts with correspondent banks	(527		)	(50		)	(893		)	910
Net fair value gains (losses) on derivative financial instruments	$	312		$	(7,921	)	$	(1,166	)	$	(4,941	)

NOTE J – Fair Value Option

U.S. GAAP permits entities to measure many financial instruments and certain other items at fair value and requires certain disclosures for amounts for which the fair value option is applied. The Corporation has elected to measure mortgage loans held for sale at fair value to more accurately reflect the financial results of its mortgage banking activities in its consolidated financial statements. Derivative financial instruments related to these activities are also recorded at fair value, as noted within Note I, "Derivative Financial Instruments." The Corporation determines fair value for its mortgage loans held for sale based on the price that secondary market investors would pay for loans with similar characteristics, including interest rate and term, as of the date fair value is measured. Changes in fair values during the period are recorded as components of mortgage banking income on the consolidated statements of income. Interest income earned on mortgage loans held for sale is recorded within interest income on the consolidated statements of income.

The following table presents a summary of the Corporation’s mortgage loans held for sale:



	September 30, 2014		December 31, 2013
	(in thousands)
Cost	$	24,690	$	21,172
Fair value	25,212		21,351

During the three months ended September 30, 2014, losses related to changes in fair values of mortgage loans held for sale were $472,000, compared to $343,000 of gains for the nine months ended September 30, 2014. During the three months ended September 30, 2013, gains related to changes in fair values of mortgage loans held for sale were $2.6 million, compared to losses of $784,000 for the nine months ended September 30, 2013.

NOTE K – Balance Sheet Offsetting

Certain financial assets and liabilities may be eligible for offset on the consolidated balance sheets as they are subject to master netting arrangements or similar agreements. The Corporation elects to not offset assets and liabilities subject to such arrangements on the consolidated financial statements.

The Corporation is a party to interest rate swap transactions with financial institution counterparties and customers, disclosed in detail within Note I, "Derivative Financial Instruments." Under these agreements, the Corporation has the right to net settle multiple contracts with the same counterparty in the event of default on, or termination of, any one contract. Cash collateral is posted by the party with a net liability position in accordance with contract thresholds and can be used to settle the fair value of the interest rate swap agreements in the event of default.

Beginning in the first quarter of 2014, the Corporation is also a party to foreign currency exchange contracts with financial institution counterparties, under which the Corporation has the right to net settle multiple contracts with the same counterparty in the event of default on, or termination of, any one contract. As with interest rate swap contracts, cash collateral is posted by the party with a net liability position in accordance with contract thresholds and can be used to settle the fair value of the interest rate swap agreements in the event of default. For additional details, see Note I, "Derivative Financial Instruments."

The Corporation also enters into agreements with customers in which it sells securities subject to an obligation to repurchase the same or similar securities, referred to as repurchase agreements. Under these agreements, the Corporation may transfer legal control over the assets but still maintain effective control through agreements that both entitle and obligate the Corporation to repurchase the assets. Therefore, repurchase agreements are reported as secured borrowings, classified within short-term borrowings on the consolidated balance sheets, while the securities underlying the repurchase agreements remain classified with investment securities on the consolidated balance sheets. The Corporation has no intention of setting off these amounts, therefore, these repurchase agreements are not eligible for offset.

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
	Recognized		on the Consolidated
	on the		Balance Sheets
	Consolidated		Financial			Cash			Net
	Balance Sheets		Instruments (1)			Collateral (2)			Amount
	(in thousands)
September 30, 2014
Interest rate swap derivative assets	$	10,642	$	(636	)	$	—		$	10,006
Foreign exchange derivative assets with correspondent banks	428		(428		)	—			—
Total	$	11,070	$	(1,064	)	$	—		$	10,006

Interest rate swap derivative liabilities	$	10,642	$	(636	)	$	(9,480	)	$	526
Foreign exchange derivative liabilities with correspondent banks	871		(428		)	(310		)	133
Total	$	11,513	$	(1,064	)	$	(9,790	)	$	659

December 31, 2013
Interest rate swap derivative assets	$	5,098	$	(2,104	)	$	—		$	2,994

Interest rate swap derivative liabilities	$	5,098	$	(2,104	)	$	(730	)	$	2,264


(1)	For interest rate swap and foreign exchange derivative assets, amounts represent any derivative liability fair values that could be offset in the event of counterparty or customer default. For interest rate swap and foreign exchange derivative liabilities, amounts represent any derivative asset fair values that could be offset in the event of counterparty or customer default.


(2)	Amounts represent cash collateral posted on interest rate swap transactions with financial institution counterparties. Interest rate swaps with customers are collateralized by the underlying loans to those borrowers.

NOTE L – Commitments and Contingencies

Commitments

The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers.

Those financial instruments include commitments to extend credit and letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized on the Corporation’s consolidated balance sheets. Exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and letters of credit is represented by the outstanding amount of those instruments.

The outstanding amounts of commitments to extend credit and letters of credit were as follows:



	September 30, 2014		December 31, 2013
	(in thousands)
Commitments to extend credit	$	4,437,607	$	4,379,578
Standby letters of credit	382,526		391,445
Commercial letters of credit	30,067		36,344

The Corporation records a reserve for unfunded lending commitments, which represents management’s estimate of losses associated with unused commitments to extend credit. See Note E, "Loans and Allowance for Credit Losses," for additional details.

Residential Lending

Residential mortgages are originated and sold by the Corporation and consist primarily of conforming, prime loans sold to government sponsored agencies, such as the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). The Corporation also sells a portion of prime loans to non-government sponsored agency investors.

The Corporation provides customary representations and warranties to investors that specify, among other things, that the loans have been underwritten to the standards established by the investor. The Corporation may be required to repurchase a loan or 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 September 30, 2014 and December 31, 2013, total outstanding repurchase requests totaled $543,000 and $8.8 million, respectively. During the first quarter of 2014, the Corporation entered into a settlement agreement with a secondary market investor. Under this agreement, the Corporation agreed to pay this investor $4.5 million to settle all outstanding and potential future repurchase requests under a series of specified loan purchase agreements with that secondary market investor. The result of this settlement was a reduction to outstanding repurchase requests of $7.5 million and a reduction to reserves for repurchases of $5.1 million, resulting in a $600,000 reduction to operating risk loss on the consolidated statements of income during the nine months ended September 30, 2014.

From 2000 to 2011, the Corporation sold loans to the Federal Home Loan Bank of Pittsburgh under its Mortgage Partnership Finance Program (MPF Program). No loans were sold under this program during the nine months ended September 30, 2014 or during 2013 or 2012. The Corporation provided a "credit enhancement" for residential mortgage loans sold under the MPF Program whereby it would assume credit losses in excess of a defined "First Loss Account" (FLA) balance, up to specified amounts. The FLA is funded by the Federal Home Loan Bank of Pittsburgh based on a percentage of the outstanding principal balance of loans sold. As of September 30, 2014, the unpaid principal balance of loans sold under the MPF Program was approximately $158 million. As of September 30, 2014 and December 31, 2013, the reserve for estimated credit losses related to loans sold under the MPF Program was $2.4 million and $2.5 million, respectively. Required reserves are calculated based on delinquency status and estimated loss rates established through the Corporation's existing allowance for credit losses methodology.

As of September 30, 2014 and December 31, 2013, the total reserve for losses on residential mortgage loans sold was $3.3 million and $8.6 million, respectively, including both reserves for credit losses under the MPF Program and reserves for representation and warranty exposures. Management believes that the reserves recorded as of September 30, 2014 are adequate. However, declines in collateral values, the identification of additional loans to be repurchased, or a deterioration in the credit quality of loans sold under the MPF Program could necessitate additional reserves in the future.

Regulatory Matters

In July 2014, three wholly owned banking subsidiaries of the Corporation, Fulton Bank, N.A., Swineford National Bank and FNB Bank, N.A., each entered into a Stipulation and Consent to the Issuance of a Consent Order (Consent Order) with their primary Federal bank regulatory agency, the Office of the Comptroller of the Currency, relating to identified deficiencies in a centralized Bank Secrecy Act and anti-money laundering compliance program, which was designed to comply with the requirements of the Bank Secrecy Act, the USA Patriot Act of 2001 and related anti-money laundering regulations (collectively, the "BSA/AML Requirements") as disclosed by the Corporation in a Current Report on Form 8-K filed with the SEC on July 18, 2014. The Consent Orders require, among other things, that the banking subsidiaries review, assess and take actions to strengthen and enhance their compliance programs related to the BSA/AML Requirements (BSA/AML Compliance Program).

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

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.

As of the date of this report, the Corporation believes that any liabilities, individually or in the aggregate, which may result from the final outcomes of pending proceedings will not have a material adverse effect on the financial condition, the operating results and/or the liquidity of the Corporation. However, legal proceedings are often unpredictable, and the actual results of such proceedings cannot be determined with certainty.

NOTE M – Fair Value Measurements

FASB ASC Topic 820 establishes a fair value hierarchy for the inputs to valuation techniques used to measure assets and liabilities at fair value using the following three categories (from highest to lowest priority):


•	Level 1 – Inputs that represent quoted prices for identical instruments in active markets.


•	Level 2 – Inputs that represent quoted prices for similar instruments in active markets, or quoted prices for identical instruments in non-active markets. Also includes valuation techniques whose inputs are derived principally from observable market data other than quoted prices, such as interest rates or other market-corroborated means.


•	Level 3 – Inputs that are largely unobservable, as little or no market data exists for the instrument being valued.

The Corporation has categorized all assets and liabilities measured at fair value on both a recurring and nonrecurring basis into the above three levels.

The following tables present summaries of the Corporation’s assets and liabilities measured at fair value on a recurring basis and reported on the consolidated balance sheets:



	September 30, 2014
	Level 1		Level 2		Level 3		Total
	(in thousands)
Mortgage loans held for sale	$	—	$	25,212	$	—	$	25,212
Available for sale investment securities:
Equity securities	45,278		—		—		45,278
U.S. Government securities	—		200		—		200
U.S. Government sponsored agency securities	—		240		—		240
State and municipal securities	—		257,616		—		257,616
Corporate debt securities	—		93,071		8,356		101,427
Collateralized mortgage obligations	—		955,040		—		955,040
Mortgage-backed securities	—		962,335		—		962,335
Auction rate securities	—		—		148,473		148,473
Total available for sale investments	45,278		2,268,502		156,829		2,470,609
Other assets	17,475		11,988		—		29,463
Total assets	$	62,753	$	2,305,702	$	156,829	$	2,525,284
Other liabilities	$	17,376	$	11,050	$	—	$	28,426



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

The valuation techniques used to measure fair value for the items in the preceding tables are as follows:


•	Mortgage loans held for sale – This category consists of mortgage loans held for sale that the Corporation has elected to measure at fair value. Fair values as of September 30, 2014 and December 31, 2013 were measured based on the price that secondary market investors were offering for loans with similar characteristics.

•

Available for sale investment securities – Included within this asset category are both equity and debt securities. Level 2 available for sale debt securities are valued by a third-party pricing service commonly used in the banking industry. The pricing service uses pricing models that vary based on asset class and incorporate available market information, including quoted prices of investment securities with similar characteristics. Because many fixed income securities do not trade on a daily basis, pricing models use available information, as applicable, through processes such as benchmark yield curves, benchmarking of like securities, sector groupings, and matrix pricing.

Standard market inputs include: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data, including market research publications. For certain security types, additional inputs may be used, or some of the standard market inputs may not be applicable.

Management tests the values provided by the pricing service by obtaining securities prices from an alternative third-party source and comparing the results. This test is done for approximately 75% of the securities valued by the pricing service. Generally, differences by security in excess of 5% are researched to reconcile the difference.


•	Equity securities – Equity securities consist of common stocks of financial institutions ($39.3 million at September 30, 2014 and $40.6 million at December 31, 2013) and other equity investments ($6.0 million at September 30, 2014 and $5.6 million at December 31, 2013). These Level 1 investments are measured at fair value based on quoted prices for identical securities in active markets.


•	U.S. Government securities/U.S. Government sponsored agency securities/State and municipal securities/Collateralized mortgage obligations/Mortgage-backed securities – These debt securities are classified as Level 2 investments. Fair values are determined by a third-party pricing service, as detailed above.

•

Corporate debt securities – This category consists of subordinated debt issued by financial institutions ($50.3 million at September 30, 2014 and December 31, 2013), single-issuer trust preferred securities issued by financial institutions ($44.1 million at September 30, 2014 and $40.5 million at December 31, 2013), pooled trust preferred securities issued by financial institutions ($4.5 million at September 30, 2014 and $5.3 million at December 31, 2013) and other corporate debt issued by non-financial institutions ($2.6 million at September 30, 2014 and December 31, 2013).

Level 2 investments include the Corporation’s holdings of subordinated debt, other corporate debt issued by non-financial institutions and $40.2 million and $36.7 million of single-issuer trust preferred securities held at

September 30, 2014 and December 31, 2013, respectively. The fair values for these corporate debt securities are determined by a third-party pricing service, as detailed above.

Level 3 investments include the Corporation’s investments in pooled trust preferred securities and certain single-issuer trust preferred securities ($3.9 million at September 30, 2014 and $3.8 million at December 31, 2013). The fair values of these securities were determined based on quotes provided by third-party brokers who determined fair values based predominantly on internal valuation models which were not indicative prices or binding offers. The Corporation’s third-party pricing service cannot derive fair values for these securities primarily due to inactive markets for similar investments. Level 3 values are tested by management primarily through trend analysis, by comparing current values to those reported at the end of the preceding calendar quarter, and determining if they are reasonable based on price and spread movements for this asset class.

•

Auction rate securities – Due to their illiquidity, ARCs are classified as Level 3 investments and are valued through the use of an expected cash flows model prepared by a third-party valuation expert. The assumptions used in preparing the expected cash flows model include estimates for coupon rates, time to maturity and market rates of return. The most significant unobservable input to the expected cash flows model is an assumed return to market liquidity sometime within the next five years. If the assumed return to market liquidity was lengthened beyond the next five years, this would result in a decrease in the fair value of these ARCs. The Corporation believes that the trusts underlying the ARCs will self-liquidate as student loans are repaid. Level 3 values are tested by management through the performance of a trend analysis of the market price and discount rate. Changes in the price and discount rates are compared to changes in market data, including bond ratings, parity ratios, balances and delinquency levels.


•	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 ($16.1 million at September 30, 2014 and $15.3 million at December 31, 2013) and the fair value of foreign currency exchange contracts ($1.4 million at September 30, 2014 and $522,000 at December 31, 2013). The mutual funds and foreign exchange prices used to measure these items at fair value are based on quoted prices for identical instruments in active markets.

•

Level 2 assets include the fair value of mortgage banking derivatives in the form of interest rate locks and forward commitments with secondary market investors ($1.3 million at September 30, 2014 and $2.1 million at December 31, 2013) and the fair value of interest rate swaps ($10.6 million at September 30, 2014 and $5.1 million at December 31, 2013). The fair values of the Corporation’s interest rate locks, forward commitments and interest rate swaps represent the amounts that would be required to settle the derivative financial instruments at the balance sheet date. See Note I, "Derivative Financial Instruments," for additional information.


•	Other liabilities – Included within this category are the following:

•

Level 1 liabilities include employee deferred compensation liabilities which represent amounts due to employees under deferred compensation plans ($16.1 million at September 30, 2014 and $15.3 million at December 31, 2013) and the fair value of foreign currency exchange contracts ($1.3 million at September 30, 2014 and $391,000 at December 31, 2013). The fair value of these liabilities are determined in the same manner as the related assets, as described under the heading "Other assets" above.

•

Level 2 liabilities include the fair value of mortgage banking derivatives in the form of interest rate locks and forward commitments with secondary market investors ($408,000 at September 30, 2014 and $64,000 at December 31, 2013) and the fair value of interest rate swaps ($10.6 million at September 30, 2014 and $5.1 million at December 31, 2013). The fair values of these liabilities are determined in the same manner as the related assets, as described under the heading "Other assets" above.

The following table presents the changes in the Corporation’s available for sale investment securities measured at fair value on a recurring basis using unobservable inputs (Level 3):



	Three months ended September 30, 2014
	Pooled Trust Preferred Securities			Single-issuer Trust Preferred Securities		ARCs
	(in thousands)
Balance at June 30, 2014	$	4,275		$	3,820	$	146,931
Realized adjustment to fair value (1)	(18		)	—		—
Unrealized adjustment to fair value (2)	230			47		1,280
Discount accretion (3)	—			2		262
Balance at September 30, 2014	$	4,487		$	3,869	$	148,473

	Three months ended September 30, 2013
Balance at June 30, 2013	$	5,391		$	3,670	$	152,592
Sales	—			—		(25		)
Realized adjustment to fair value (1)	(97		)	—		—
Unrealized adjustment to fair value (2)	(103		)	108		1,983
Settlements - calls	—			—		(317		)
Discount accretion (3)	—			2		277
Balance at September 30, 2013	$	5,191		$	3,780	$	154,510

	Nine months ended September 30, 2014
	Pooled Trust Preferred Securities			Single-issuer Trust Preferred Securities		ARCs
	(in thousands)
Balance at December 31, 2013	$	5,306		$	3,781	$	159,274
Sales	(1,394		)	—		(11,912		)
Realized adjustment to fair value (1)	(18		)	—		—
Unrealized adjustment to fair value (2)	789			83		1,528
Settlements - calls	(200		)	—		(1,081		)
Discount accretion (3)	4			5		664
Balance at September 30, 2014	$	4,487		$	3,869	$	148,473

	Nine months ended September 30, 2013
Balance at December 31, 2012	$	6,927		$	3,360	$	149,339
Sales	(4,987		)	—		(25		)
Realized adjustment to fair value (1)	1,604			—		—
Unrealized adjustment to fair value (2)	1,771			412		7,171
Settlements - calls	(124		)	—		(2,725		)
Discount accretion (3)	—			8		750
Balance at September 30, 2013	$	5,191		$	3,780	$	154,510


(1)	Realized adjustments to fair value represent credit related other-than-temporary impairment charges and gains on sales of investment securities, both included

as components of investment securities gains on the consolidated statements of income.


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


(3)	Included as a component of net interest income on the consolidated statements of income.

Certain financial assets are not measured at fair value on an ongoing basis, but are subject to fair value measurement in certain circumstances, such as upon their acquisition or when there is evidence of impairment. The following table presents the Corporation’s financial assets measured at fair value on a nonrecurring basis and reported on the Corporation’s consolidated balance sheets:



	September 30, 2014
	Level 1		Level 2		Level 3		Total
	(in thousands)
Net loans	$	—	$	—	$	128,952	$	128,952
Other financial assets	—		—		55,867		55,867
Total assets	$	—	$	—	$	184,819	$	184,819



	December 31, 2013
	Level 1		Level 2		Level 3		Total
	(in thousands)
Net loans	$	—	$	—	$	138,666	$	138,666
Other financial assets	—		—		57,504		57,504
Total assets	$	—	$	—	$	196,170	$	196,170

The valuation techniques used to measure fair value for the items in the table above are as follows:


•	Net loans – This category consists of loans that were evaluated for impairment under FASB ASC Section 310-10-35 and have been classified as Level 3 assets. The amount shown is the balance of impaired loans, net of the related allowance for loan losses. See Note E, "Loans and Allowance for Credit Losses," for additional details.


•	Other financial assets – This category includes OREO ($13.5 million at September 30, 2014 and $15.1 million at December 31, 2013) and MSRs ($42.4 million at September 30, 2014 and $42.5 million at December 31, 2013), both classified as Level 3 assets.

Fair values for OREO were based on estimated selling prices less estimated selling costs for similar assets in active markets.

MSRs are initially recorded at fair value upon the sale of residential mortgage loans to secondary market investors. MSRs are amortized as a reduction to servicing income over the estimated lives of the underlying loans. MSRs are stratified and evaluated for impairment by comparing each stratum's carrying amount to its estimated fair value. Fair values are determined at the end of each quarter through a discounted cash flows valuation performed by a third-party valuation expert. Significant inputs to the valuation included expected net servicing income, the discount rate and the expected life of the underlying loans. Expected life is based on the contractual terms of the loans, as adjusted for prepayment projections. The weighted average annual constant prepayment rate and the weighted average discount rate used in the September 30, 2014 valuation were 12.0% and 9.1%, respectively. Management tests the reasonableness of the significant inputs to the third-party valuation in comparison to market data.

As required by FASB ASC Section 825-10-50, the following table details the book values and estimated fair values of the Corporation’s financial instruments as of September 30, 2014 and December 31, 2013. In addition, a general description of the methods and assumptions used to estimate such fair values is also provided.



	September 30, 2014				December 31, 2013
	Book Value		Estimated Fair Value		Book Value		Estimated Fair Value
	(in thousands)
FINANCIAL ASSETS
Cash and due from banks	$	220,946	$	220,946	$	218,540	$	218,540
Interest-bearing deposits with other banks	291,523		291,523		163,988		163,988
Federal Reserve Bank and Federal Home Loan Bank stock	86,056		86,056		84,173		84,173
Loans held for sale (1)	25,212		25,212		21,351		21,351
Available for sale investment securities (1)	2,470,609		2,470,609		2,568,434		2,568,434
Loans, net of unearned income (1)	13,030,405		12,909,164		12,782,220		12,688,774
Accrued interest receivable	43,544		43,544		44,037		44,037
Other financial assets (1)	157,664		157,664		146,933		146,933
FINANCIAL LIABILITIES
Demand and savings deposits	$	10,342,243	$	10,342,243	$	9,573,264	$	9,573,264
Time deposits	2,991,384		2,986,545		2,917,922		2,927,374
Short-term borrowings	564,952		564,952		1,258,629		1,258,629
Accrued interest payable	17,425		17,425		15,218		15,218
Other financial liabilities (1)	147,121		147,121		124,440		124,440
Federal Home Loan Bank advances and long-term debt	1,018,289		1,012,741		883,584		875,984


(1)	These financial instruments, or certain financial instruments within these categories, are measured at fair value on the Corporation’s consolidated balance sheets. Descriptions of the fair value determinations for these financial instruments are disclosed above.

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

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.

NOTE N – Common Stock Repurchase Plans

In October 2013, the Corporation announced that its board of directors had approved a share repurchase program pursuant to which the Corporation was authorized to repurchase up to 4.0 million shares, or approximately 2.1% of its outstanding shares, through March 2014. During the first quarter of 2014, the Corporation repurchased 4.0 million shares under this repurchase plan at an average cost of $12.45 per share, completing this repurchase program on February 19, 2014.

In May 2014, the Corporation announced that its board of directors had approved a share repurchase program pursuant to which the Corporation was authorized to repurchase up to 4.0 million shares, or approximately 2.1% of its outstanding shares, through December 31, 2014. During the third quarter of 2014, the Corporation repurchased 4.0 million shares under this repurchase plan at an average cost of $11.36 per share, completing this repurchase program on August 25, 2014.

NOTE O - Subsequent Event

Dividend Declaration

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

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

FORWARD-LOOKING STATEMENTS

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

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

Many factors could affect future financial results including, without limitation:


•	the impact of adverse changes in the economy and real estate markets, including protracted periods of low-growth and sluggish loan demand;


•	increases in non-performing assets, which may require the Corporation to increase the allowance for credit losses, charge-off loans and incur elevated collection and carrying costs related to such non-performing assets;


•	the effects of market interest rates, particularly a continuing period of low market interest rates, and relative balances of rate-sensitive assets to rate-sensitive liabilities, on net interest margin and net interest income;


•	capital and liquidity strategies, including the Corporation’s ability to comply with applicable capital and liquidity requirements (including the finalized Basel III capital standards), and the Corporation’s ability to generate capital internally or raise capital on favorable terms;


•	investment securities gains and losses, including other-than-temporary declines in the value of securities which may result in charges to earnings;


•	the impact of non-interest income growth, including the impact of potential regulatory changes;


•	the impact of increased regulatory scrutiny of the banking industry;


•	the effects of the increasing time and expense associated with regulatory compliance and risk management;


•	the additional time, expense and investment required to comply with, and the restrictions on potential growth and investment activities resulting from, the issuance of enforcement orders by federal bank regulatory agencies;


•	the Corporation’s ability to manage the uncertainty and lack of clear regulatory guidance associated with the delay in implementing many of the regulations mandated by the Dodd-Frank Act;


•	the impact of operational risk, i.e. the risk of loss resulting from human error, inadequate or failed internal processes and systems, outsourcing arrangements, compliance and legal risk and external events;


•	the Corporation’s ability to manage the level of non-interest expenses, including salaries and employee benefits expenses, operating risk losses, amortization of intangible assets and goodwill impairment;


•	the Corporation’s ability to keep pace with technological changes and to identify and to address cyber-security risks;


•	the effects of competition on rates of deposit, loan growth and net interest margin; and


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

RESULTS OF OPERATIONS

Overview and Summary Financial Results

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

as a percentage of average interest-earning assets. The Corporation also generates revenue through fees earned on the various services and products offered to its customers and through gains on sales of assets, such as loans, investments, lines of business or properties. Offsetting these revenue sources are provisions for credit losses on loans, non-interest expenses and income taxes.

The following table presents a summary of the Corporation’s earnings and selected performance ratios:



	As of or for the Three months ended September 30						As of or for the Nine months ended September 30
	2014			2013			2014			2013
Income before income taxes (in thousands)	$	51,968		$	53,785		$	161,081		$	158,503
Net income (in thousands)	$	38,566		$	39,948		$	119,945		$	119,757
Diluted net income per share	$	0.21		$	0.21		$	0.64		$	0.61
Return on average assets	0.90		%	0.93		%	0.95		%	0.95		%
Return on average equity	7.32		%	7.81		%	7.72		%	7.79		%
Net interest margin (1)	3.39		%	3.45		%	3.42		%	3.51		%
Non-performing assets to total assets	0.91		%	1.09		%	0.91		%	1.09		%
Annualized net charge-offs to average loans	0.18		%	0.45		%	0.24		%	0.54		%


(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 third quarter of 2014 decreased $1.8 million, or 3.4%, compared to the third quarter of 2013. For the first nine months of 2014, income before taxes increased $2.6 million, or 1.6%, compared to the same period in 2013. The Corporation's results for the three and nine months ended September 30, 2014 in comparison to the same periods in 2013 were most significantly impacted by decreases in the provision for credit losses, as a result of improved asset quality, a decline in net interest income, and lower non-interest income, partially offset by decreases in non-interest expense.

Following is a summary of financial highlights for the three and nine months ended September 30, 2014:

Asset Quality - For the three and nine months ended September 30, 2014, the Corporation's provision for credit losses decreased $6.0 million, or 63.2%, and $28.5 million, or 75.0%, respectively, in comparison to the same periods in 2013. These decreases were due to an overall improvement in asset quality.

Non-performing loans decreased $24.4 million, or 14.5%, since September 30, 2013. The total delinquency rate was 1.69% as of September 30, 2014, compared to 1.97% as of September 30, 2013. Annualized net charge-offs to average loans outstanding were 0.18% for the third quarter of 2014, compared to 0.45% for the third quarter of 2013.

Net Interest Income and Net Interest Margin - For the three and nine months ended September 30, 2014, net interest income decreased $3.2 million, or 2.4%, and $7.4 million, or 1.9%, respectively, in comparison to the same periods in 2013. Net interest income for the three and nine months ended September 30, 2014 was negatively impacted by net interest margin compression as yields on interest-earning assets declined more significantly than the cost of interest-bearing liabilities in comparison to the same periods in 2013. The net interest margin for the third quarter of 2014 decreased 6 basis points, or 1.7%, in comparison to the third quarter of 2013. For the nine months ended September 30, 2014, net interest margin decreased 9 basis points, or 2.6%, in comparison to the same period of 2013.

Average interest-earning assets decreased $56.5 million, or 0.4%, in the third quarter of 2014 in comparison to the same period of 2013, mainly due to a $295.6 million, or 10.7%, decrease in average investment securities partially offset by a $194.7 million, or 1.5%, increase in average loans. Average interest-earning assets for the first nine months of 2014 increased $110.0 million, or 0.7%, compared to the same period in 2013, primarily as a result of a $321.2 million, or 2.6%, increase in average loans, partially offset by a $233.1 million, or 8.5%, decrease in average investment securities.

Non-interest Income - For the three and nine months ended September 30, 2014, non-interest income, excluding investment securities gains, decreased $2.9 million, or 6.5%, and $14.9 million, 10.7%, respectively, in comparison to the same periods in 2013. The decreases in non-interest income were primarily due to decreases in mortgage banking income, with declines in service charges on deposits, particularly overdraft fee income, also contributing to the decreases.

Non-interest Expense - For the three and nine months ended September 30, 2014, non-interest expense decreased $807,000, or 0.7%, and $3.1 million, or 0.9%, respectively, in comparison to the same periods in 2013. These decreases were primarily driven by decreases in other real estate owned (OREO) and repossession expense, due to improved asset quality, and decreases in operating risk losses, partially offset by increases in other outside services as a result of consulting expense incurred primarily for risk management and regulatory compliance initiatives, as discussed under the heading, "Regulatory Compliance and Risk Management Matters" below.

During the first quarter of 2014, the Corporation implemented a series of initiatives intended to reduce non-interest expenses by approximately $7 million in 2014 and approximately $8 million on an annualized basis. These initiatives included the consolidation of 13 branches, streamlining of subsidiary bank management structures and other employee compensation and benefit reductions.

The branch consolidations resulted in the transfer of deposits, employees and other branch resources to existing branch locations. During the first quarter of 2014, $2.1 million of expenses, consisting mainly of lease termination costs and the write-off of leasehold improvements, were incurred. Total expense reductions to be realized in 2014 as a result of the branch consolidations are approximately $2.4 million, including $800,000 and $1.6 million, respectively, during the three and nine months ended September 30, 2014.

The streamlining of subsidiary bank management structures resulted in the elimination of five subsidiary bank divisional executive positions, while other employee compensation and benefit reductions were realized from changes to certain employee benefits plans, most notably an amendment to the postretirement benefits plan (Postretirement Plan). During the first quarter of 2014, $1.1 million of net implementation gains were recognized from these actions. Total expense reductions to be realized in 2014 as a result of these actions are approximately $4.6 million, including $1.2 million and $3.4 million, respectively, during the three and nine months ended September 30, 2014.

Regulatory Compliance and Risk Management Matters - Virtually every aspect of the Corporation’s operations is subject to extensive regulation, and in recent years, a combination of financial reform legislation and heightened scrutiny by banking regulators has significantly increased expectations regarding what constitutes an effective risk and compliance management infrastructure. Bank regulators are scrutinizing banks through longer and more extensive bank examinations in both the safety and soundness and compliance areas.

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

In July 2014, three of the Corporation’s banking subsidiaries, Fulton Bank, N.A., Swineford National Bank and FNB Bank, N.A., each entered into a Stipulation and Consent to the Issuance of a Consent Order (Consent Order) with their primary Federal bank regulatory agency, the Office of the Comptroller of the Currency, relating to identified deficiencies in a centralized compliance program (BSA/AML Compliance Program) designed to comply with the BSA/AML Requirements, as disclosed by the Corporation in a Current Report on Form 8-K filed with the Securities and Exchange Commission on July 18, 2014. The Consent Orders require, among other things, that the banking subsidiaries in question review, assess and take actions to strengthen and enhance the BSA/AML Compliance Program.

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

In addition to requiring strengthening and enhancement of the BSA/AML Compliance Program, the Consent Orders and the Cease and Desist Order impose certain restrictions on expansion activities of the Corporation and its subsidiary banks. Further, any failure to comply with the requirements of any of these enforcement actions involving the Corporation or its subsidiary banks could result in further enforcement actions, the imposition of material restrictions on the activities of the Corporation or its subsidiary banks, or the assessment of fines or penalties.

During the three and nine months ended September 30, 2014 the Corporation incurred approximately $3 million and $6 million, respectively, of outside services expense related to strengthening and enhancing the BSA/AML Compliance Program. Additional expenses and investments may be required as the Corporation further expands its hiring of personnel and use of outside professionals, such as consulting and legal services, and possibly for capital investments in operating systems to strengthen and support the BSA/AML Compliance Program, as well as the Corporation’s broader compliance and risk management infrastructures. The expense and capital investment associated with all of these efforts, including in connection with the Consent Orders and the the Cease and Desist Order could have a material adverse effect on the Corporation’s results of operations in future periods.

Quarter Ended September 30, 2014 compared to the Quarter Ended September 30, 2013

Net Interest Income

Fully-taxable equivalent (FTE) net interest income decreased $3.2 million to $133.7 million in the third quarter of 2014, from $136.9 million in the third quarter of 2013. This decrease was primarily due to a 6 basis point, or 1.7%, decrease in the net interest margin, to 3.39% for the third quarter of 2014 from 3.45% for the third quarter of 2013. The following table provides a comparative average balance sheet and net interest income analysis for the third quarter of 2014 as compared to the same period in 2013. Interest income and yields are presented on an FTE basis, using a 35% Federal tax rate and statutory interest expense disallowances. The discussion following this table is based on these FTE amounts. All dollar amounts are in thousands.



	Three months ended September 30
	2014								2013
ASSETS	Average Balance			Interest (1)			Yield/ Rate		Average Balance			Interest (1)			Yield/ Rate
Interest-earning assets:
Loans, net of unearned income (2)	$	12,922,821		$	136,773		4.20	%	$	12,728,162		$	139,141		4.34	%
Taxable investment securities (3)	2,181,099			12,278			2.25		2,446,583			12,977			2.12
Tax-exempt investment securities (3)	256,303			3,414			5.33		284,372			3,581			5.04
Equity securities (3)	34,002			438			5.12		35,999			435			4.82
Total investment securities	2,471,404			16,130			2.61		2,766,954			16,993			2.46
Loans held for sale	23,699			237			4.01		36,450			382			4.19
Other interest-earning assets	293,286			976			1.33		236,185			659			1.12
Total interest-earning assets	15,711,210			154,116			3.90	%	15,767,751			157,175			3.96	%
Noninterest-earning assets:
Cash and due from banks	203,134								210,525
Premises and equipment	224,241								224,837
Other assets	1,055,521								1,009,162
Less: Allowance for loan losses	(192,163		)						(220,342		)
Total Assets	$	17,001,943							$	16,991,933
LIABILITIES AND EQUITY
Interest-bearing liabilities:
Demand deposits	$	3,047,191		$	953		0.12	%	$	2,895,156		$	938		0.13	%
Savings deposits	3,468,958			1,061			0.12		3,359,795			1,015			0.12
Time deposits	3,009,225			6,984			0.92		3,065,210			6,790			0.88
Total interest-bearing deposits	9,525,374			8,998			0.37		9,320,161			8,743			0.37
Short-term borrowings	667,397			297			0.18		1,337,742			691			0.20
Federal Home Loan Bank advances and long-term debt	995,486			11,129			4.45		889,141			10,865			4.87
Total interest-bearing liabilities	11,188,257			20,424			0.73	%	11,547,044			20,299			0.70	%
Noninterest-bearing liabilities:
Demand deposits	3,514,033								3,221,648
Other	210,194								194,163
Total Liabilities	14,912,484								14,962,855
Shareholders’ equity	2,089,459								2,029,078
Total Liabilities and Shareholders’ Equity	$	17,001,943							$	16,991,933
Net interest income/net interest margin (FTE)				133,692			3.39	%				136,876			3.45	%
Tax equivalent adjustment				(4,326		)						(4,343		)
Net interest income				$	129,366							$	132,533


(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.

The following table summarizes the changes in FTE interest income and interest expense resulting from changes in average balances (volume) and changes in rates for the three months ended September 30:



	2014 vs. 2013 Increase (Decrease) due to change in
	Volume			Rate			Net
	(in thousands)
Interest income on:
Loans, net of unearned income	$	2,127		$	(4,495	)	$	(2,368	)
Taxable investment securities	(1,471		)	772			(699		)
Tax-exempt investment securities	(368		)	201			(167		)
Equity securities	(24		)	27			3
Loans held for sale	(129		)	(16		)	(145		)
Other interest-earning assets	178			139			317
Total interest income	$	313		$	(3,372	)	$	(3,059	)
Interest expense on:
Demand deposits	$	65		$	(50	)	$	15
Savings deposits	46			—			46
Time deposits	(121		)	315			194
Short-term borrowings	(329		)	(65		)	(394		)
Federal Home Loan Bank advances and long-term debt	1,245			(981		)	264
Total interest expense	$	906		$	(781	)	$	125

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 6 basis point, or 1.5%, decrease in yields on average interest-earnings assets resulted in a $3.4 million decrease in FTE interest income, partially offset by a $313,000 increase in FTE interest income as a result of a shift in the mix of average interest-earning assets.

Average investments decreased $295.6 million, or 10.7%, as portfolio cash flows were not fully reinvested. The yield on average investments increased 15 basis points, or 6.1%, to 2.61% in the third quarter of 2014 from 2.46% in the third quarter of 2013. A $1.2 million, or 41.5%, decrease in net premium amortization on mortgage-backed securities and collateralized mortgage obligations had a 14 basis point positive impact on the overall change in portfolio yield.

Average loans and average FTE yields, by type, are summarized in the following table:



	Three months ended September 30								Increase (Decrease) in
	2014				2013				Balance
	Balance		Yield		Balance		Yield		$			%
	(dollars in thousands)
Real estate – commercial mortgage	$	5,114,221	4.35	%	$	4,961,871	4.57	%	$	152,350		3.1	%
Commercial – industrial, financial and agricultural	3,657,047		3.97		3,706,113		4.04		(49,066		)	(1.3	)
Real estate – home equity	1,727,253		4.18		1,767,095		4.19		(39,842		)	(2.3	)
Real estate – residential mortgage	1,369,087		3.93		1,323,972		4.15		45,115			3.4
Real estate – construction	663,922		3.98		576,222		4.10		87,700			15.2
Consumer	284,630		5.39		299,057		4.76		(14,427		)	(4.8	)
Leasing and other	106,661		7.16		93,832		9.42		12,829			13.7
Total	$	12,922,821	4.20	%	$	12,728,162	4.34	%	$	194,659		1.5	%

Average loans increased $194.7 million, or 1.5%, compared to the third quarter of 2013, mainly in commercial mortgages, real estate - construction and residential mortgages. The growth in commercial mortgages was driven by a combination of loans to new customers and increased borrowings from existing customers. The average yield on loans decreased 14 basis points, or 3.2%, to 4.20% in 2014 from 4.34% in 2013. The decrease in average yields on loans was primarily in commercial mortgages and 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 other interest-earning assets increased $57.1 million, or 24.2%, primarily due to an increase in average interest-bearing deposits with other banks. The average yield on other interest-earning assets increased 21 basis points, or 18.8%, due to increases in dividends on Federal Home Loan Bank stock. Each of the Corporation’s subsidiary banks is a member of the Federal Home Loan Bank for the region encompassing the headquarters of the subsidiary bank. Memberships are maintained with the Atlanta, New York and Pittsburgh regional Federal Home Loan Banks (collectively referred to as the "FHLB"). As of September 30, 2014, the Corporation held $66.8 million of FHLB stock.

Interest expense increased $125,000, or 0.6%, to $20.4 million in the third quarter of 2014 from $20.3 million in the third quarter of 2013. Although average interest-bearing liabilities decreased $358.8 million, or 3.1%, compared to the third quarter of 2013, a change in funding mix from lower cost short-term federal funds and short-term FHLB advances to higher rate interest bearing non-maturity deposits and higher-cost long-term FHLB advances resulted in a $906,000 increase in interest expense.

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



	Three months ended September 30								Increase (Decrease) in
	2014				2013				Balance
	Balance		Rate		Balance		Rate		$			%
	(dollars in thousands)
Noninterest-bearing demand	$	3,514,033	—	%	$	3,221,648	—	%	$	292,385		9.1	%
Interest-bearing demand	3,047,191		0.12		2,895,156		0.13		152,035			5.3
Savings	3,468,958		0.12		3,359,795		0.12		109,163			3.2
Total demand and savings	10,030,182		0.08		9,476,599		0.08		553,583			5.8
Time deposits	3,009,225		0.92		3,065,210		0.88		(55,985		)	(1.8	)
Total deposits	$	13,039,407	0.27	%	$	12,541,809	0.28	%	$	497,598		4.0	%

The $553.6 million, or 5.8%, increase in total demand and savings accounts was primarily due to a $251.5 million, or 7.6%, increase in business account balances, a $190.1 million, or 4.3%, increase in personal account balances and a $129.4 million, or 7.8% increase in municipal account balances. The average cost of total deposits decreased one basis point due to a higher concentration in demand and savings accounts, partially offset by an increase in rates on average time deposits.

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



	Three months ended September 30								Increase (Decrease) in
	2014				2013				Balance
	Balance		Rate		Balance		Rate		$			%
	(dollars in thousands)
Short-term borrowings:
Customer repurchase agreements	$	202,809	0.11	%	$	196,503	0.11	%	$	6,306		3.2	%
Customer short-term promissory notes	83,734		0.05		91,573		0.06		(7,839		)	(8.6	)
Total short-term customer funding	286,543		0.09		288,076		0.09		(1,533		)	(0.5	)
Federal funds purchased	224,930		0.19		559,992		0.23		(335,062		)	(59.8	)
Short-term FHLB advances (1)	155,924		0.32		489,674		0.23		(333,750		)	(68.2	)
Total short-term borrowings	667,397		0.18		1,337,742		0.20		(670,345		)	(50.1	)
Long-term debt:
FHLB advances	625,712		3.60		519,520		4.14		106,192			20.4
Other long-term debt	369,774		5.89		369,621		5.89		153			—
Total long-term debt	995,486		4.45		889,141		4.87		106,345			12.0
Total borrowings	$	1,662,883	2.74	%	$	2,226,883	2.07	%	$	(564,000	)	(25.3	)%

(1) Represents FHLB advances with an original maturity term of less than one year.

Total short-term borrowings decreased $670.3 million, or 50.1%, 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.

The average cost of total borrowings increased 67 basis points, or 32.4%, to 2.74% in 2014 from 2.07% in 2013, primarily due to the weighted average cost impact of a decrease in lower-cost, short-term borrowings, which were 40.1% of total borrowings in 2014 and 60.1% in 2013. This reflects the Corporation's continuing efforts to lengthen maturities and lock in longer term rates.

Provision for Credit Losses

The provision for credit losses was $3.5 million for the third quarter of 2014, a decrease of $6.0 million, or 63.2%, from the third quarter of 2013 due to improvements in asset quality, as shown by reductions in non-performing loans and overall delinquency rates.

The provision for credit losses is recognized as an expense in the consolidated statements of income and is the amount necessary to adjust the allowance for credit losses to its appropriate balance, as determined through the Corporation's allowance methodology. The Corporation determines the appropriate level of the allowance for credit losses based on many quantitative and qualitative factors, including, but not limited to: the size and composition of the loan portfolio, changes in risk ratings, changes in collateral values, delinquency levels, historical losses and economic conditions. See the "Financial Condition" section of Management's Discussion under the heading "Provision for Credit Losses and Allowance for Credit Losses" for details related to the Corporation's allowance and provision for credit losses.

Non-Interest Income

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



	Three months ended September 30				Increase (Decrease)
	2014		2013		$			%
	(dollars in thousands)
Service charges on deposit accounts:
Overdraft fees	$	5,806	$	7,191	$	(1,385	)	(19.3	)%
Cash management fees	3,191		3,001		190			6.3
Other	3,804		3,746		58			1.5
Total service charges on deposit accounts	12,801		13,938		(1,137		)	(8.2	)
Investment management and trust services	11,120		10,420		700			6.7
Other service charges and fees:
Merchant fees	3,774		3,396		378			11.1
Debit card income	2,407		2,394		13			0.5
Letter of credit fees	1,163		1,255		(92		)	(7.3	)
Commercial swap fees	537		447		90			20.1
Other	2,073		2,026		47			2.3
Total other service charges and fees	9,954		9,518		436			4.6
Mortgage banking income:
Gain on sales of mortgage loans	2,613		4,457		(1,844		)	(41.4	)
Mortgage servicing income	1,425		2,666		(1,241		)	(46.5	)
Total mortgage banking income	4,038		7,123		(3,085		)	(43.3	)
Credit card income	2,331		2,229		102			4.6
Other income	1,575		1,496		79			5.3
Total, excluding investment securities gains	41,819		44,724		(2,905		)	(6.5	)
Investment securities gains	81		2,633		(2,552		)	(96.9	)
Total	$	41,900	$	47,357	$	(5,457	)	(11.5	)%

The $1.4 million, or 19.3%, decrease in overdraft fee income consisted of a $974,000 decrease in fees assessed on personal accounts and a $411,000 decrease in fees assessed on commercial accounts. The overall decline in these fees resulted from a reduction in the number of overdrafts, partially driven by changes in customer behavior and a reduction in the maximum number of overdraft fees that may be assessed each day.

The $700,000, or 6.7%, increase in investment management and trust services income was due to a $350,000, or 7.7%, increase in brokerage revenue and a $350,000, or 6.0%, increase in trust commissions. These increases resulted from new trust business

sales, improved market conditions that increased the values of existing assets under management and additional recurring revenue generated through the brokerage business due to growth in new accounts.

Gains on sales of mortgage loans decreased $1.8 million, or 41.4%, due to a $94.4 million, or 32.4%, decrease in new loan commitments and a 13.3% decrease in pricing spreads compared to the third quarter of 2013. The decline in new loan commitments was mainly in refinancing volumes, which totaled approximately $56.4 million, or 28.6%, of new loan commitments, in the third quarter of 2014 compared to $93.6 million, or 32.1%, during the third quarter of 2013. Mortgage servicing income decreased $1.2 million, or 46.5%, due to the absence of a $1.7 million reversal of the mortgage servicing rights valuation allowance, which occurred in the third quarter of 2013.

Merchant fees increased $377,000, or 11.1%, due to an increase in volumes. Investment securities gains for the third quarter of 2014 were a result of net realized gains on sales of financial institution stocks, partially offset by $18,000 of other-than-temporary impairment charges on pooled trust preferred securities. Investment securities gains of $2.6 million for the third quarter of 2013 included $2.1 million of realized gains on financial institution stocks and $595,000 of net realized gains on the sales of debt securities, partially offset by $97,000 of other-than temporary impairment charges on pooled trust preferred debt securities. See Note D, "Investment Securities," in the Notes to Consolidated Financial Statements for additional details.

Non-Interest Expense

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



	Three months ended September 30				Increase (Decrease)
	2014		2013		$			%
	(dollars in thousands)
Salaries and employee benefits	$	62,434	$	63,344	$	(910	)	(1.4	)%
Net occupancy expense	11,582		11,519		63			0.5
Other outside services	8,632		5,048		3,584			71.0
Data processing	4,689		4,757		(68		)	(1.4	)
Software	3,353		3,268		85			2.6
Equipment expense	3,307		3,646		(339		)	(9.3	)
Professional fees	3,252		3,329		(77		)	(2.3	)
FDIC insurance expense	2,882		2,918		(36		)	(1.2	)
Marketing	1,798		2,251		(453		)	(20.1	)
Telecommunications	1,587		2,046		(459		)	(22.4	)
Postage	1,415		1,163		252			21.7
Other real estate owned and repossession expense	1,303		1,453		(150		)	(10.3	)
Operating risk loss	1,242		3,297		(2,055		)	(62.3	)
Supplies	1,145		1,504		(359		)	(23.9	)
Intangible amortization	314		534		(220		)	(41.2	)
Other	6,863		6,528		335			5.1
Total	$	115,798	$	116,605	$	(807	)	(0.7	)%

Salaries and employee benefits decreased $910,000, or 1.4%, as a result of a $601,000, or 1.2%, increase in salaries offset by a $1.5 million, or 13.9%, decrease in employee benefits. The increase in salaries was mostly due to normal merit increases, partially offset by lower salaries expense resulting from the 2014 cost savings initiatives. The decrease in employee benefits was primarily a result of the Corporation's cost savings initiatives, which included the elimination and reduction of certain employee benefit plans, most notably a decrease in profit sharing contributions and an amendment to the Postretirement Plan. For additional information related to the amendment to the Postretirement Plan, see Note H, "Employee Benefit Plans" in the Notes to Consolidated Financial Statements.

Other outside services increased $3.6 million, or 71.0%, due to an increase in consulting services related to the acceleration of risk management and compliance efforts, including those in connection with the enhancement of the Corporation’s program for compliance with the BSA/AML Requirements. The $2.1 million, or 62.3%, decrease in operating risk loss was due to a $2.0 million decrease in losses associated with previously sold residential mortgages.

Income Taxes

Income tax expense for the third quarter of 2014 was $13.4 million, a $435,000, or 3.1%, decrease from $13.8 million for the third quarter of 2013.

The Corporation’s effective tax rate was 25.8% in the third quarter of 2014, as compared to 25.7% in the third quarter of 2013. The effective rate is generally lower than the Federal statutory rate of 35% due to investments in tax-free municipal securities and credits earned from investments in partnerships that generate tax credits under various federal programs.

Nine Months Ended September 30, 2014 compared to the Nine Months Ended September 30, 2013

Net Interest Income

FTE net interest income decreased $7.5 million, or 1.8%, to $399.7 million in the first nine months of 2014 from $407.2 million in the same period of 2013.

Net interest margin decreased 9 basis points, or 2.6%, to 3.42% for the first nine months of 2014 from 3.51% for the first nine months of 2013. The decrease in net interest margin was the result of a 12 basis point, or 3.0%, decrease in yields on interest-earning assets, partially offset by a 3 basis point, or 4.1%, decrease in funding costs.

The following table provides a comparative average balance sheet and net interest income analysis for the first nine months of 2014 as compared to the same period in 2013. Interest income and yields are presented on an FTE basis, using a 35% Federal tax rate and statutory interest expense disallowances. The discussion following this table is based on these FTE amounts. All dollar amounts are in thousands.



	Nine months ended September 30
	2014								2013
ASSETS	Average Balance			Interest (1)			Yield/ Rate		Average Balance			Interest (1)			Yield/ Rate
Interest-earning assets:
Loans, net of unearned income (2)	$	12,827,563		$	405,904		4.23	%	$	12,506,393		$	414,091		4.43	%
Taxable investment securities (3)	2,216,344			37,962			2.28		2,426,015			40,890			2.25
Tax-exempt investment securities (3)	268,604			10,561			5.24		285,638			11,003			5.14
Equity securities (3)	33,949			1,286			5.06		40,352			1,416			4.69
Total investment securities	2,518,897			49,809			2.64		2,752,005			53,309			2.58
Loans held for sale	18,259			585			4.27		42,122			1,261			3.99
Other interest-earning assets	263,797			3,065			1.55		217,975			1,527			0.93
Total interest-earning assets	15,628,516			459,363			3.93	%	15,518,495			470,188			4.05	%
Noninterest-earning assets:
Cash and due from banks	200,368								206,403
Premises and equipment	225,033								225,733
Other assets	1,041,834								1,047,122
Less: Allowance for loan losses	(197,235		)						(223,220		)
Total Assets	$	16,898,516							$	16,774,533
LIABILITIES AND EQUITY
Interest-bearing liabilities:
Demand deposits	$	2,969,470		$	2,766		0.12	%	$	2,773,917		$	2,687		0.13	%
Savings deposits	3,392,681			3,127			0.12		3,348,413			3,054			0.12
Time deposits	2,984,861			19,686			0.88		3,184,281			22,901			0.96
Total interest-bearing deposits	9,347,012			25,579			0.37		9,306,611			28,642			0.41
Short-term borrowings	972,694			1,470			0.20		1,228,882			1,900			0.20
FHLB advances and long-term debt	924,920			32,606			4.71		889,826			32,448			4.87
Total interest-bearing liabilities	11,244,626			59,655			0.71	%	11,425,319			62,990			0.74	%
Noninterest-bearing liabilities:
Demand deposits	3,360,876								3,103,381
Other	214,826								190,976
Total Liabilities	14,820,328								14,719,676
Shareholders’ equity	2,078,188								2,054,857
Total Liabilities and Shareholders’ Equity	$	16,898,516							$	16,774,533
Net interest income/net interest margin (FTE)				399,708			3.42	%				407,198			3.51	%
Tax equivalent adjustment				(12,879		)						(12,956		)
Net interest income				$	386,829							$	394,242


(1)	Includes dividends earned on equity securities.


(2)	Includes non-performing loans.


(3)	Balances include amortized historical cost for available for sale securities. The related unrealized holding gains (losses) are included in other assets.

The following table summarizes the changes in FTE interest income and expense for the first nine months of 2014 as compared to the same period in 2013 due to changes in average balances (volume) and changes in rates:



	2014 vs. 2013 Increase (Decrease) due to change in
	Volume			Rate			Net
	(in thousands)
Interest income on:
Loans, net of unearned income	$	10,461		$	(18,648	)	$	(8,187	)
Taxable investment securities	(3,425		)	497			(2,928		)
Tax-exempt investment securities	(650		)	208			(442		)
Equity securities	(237		)	107			(130		)
Loans held for sale	(759		)	83			(676		)
Other interest-earning assets	365			1,173			1,538
Total interest income	$	5,755		$	(16,580	)	$	(10,825	)
Interest expense on:
Demand deposits	$	184		$	(105	)	$	79
Savings deposits	41			32			73
Time deposits	(1,383		)	(1,832		)	(3,215		)
Short-term borrowings	(467		)	37			(430		)
FHLB advances and long-term debt	1,218			(1,060		)	158
Total interest expense	$	(407	)	$	(2,928	)	$	(3,335	)

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

The yield on average investments increased 6 basis points, or 2.3%, to 2.64% in 2014 from 2.58% in 2013. A $5.4 million, or 52.1%, decrease in net premium amortization on mortgage-backed securities and collateralized mortgage obligations had a 13 basis point positive impact on the overall change in portfolio yield. This positive impact was partially offset by the impact of purchases of mortgage-backed securities and collateralized mortgage obligations at yields that were lower than the overall portfolio yield.

Average loans, by type, are summarized in the following table:



	Nine months ended September 30								Increase (Decrease) in
	2014				2013				Balance
	Balance		Yield		Balance		Yield		$			%
	(dollars in thousands)
Real estate – commercial mortgage	$	5,112,735	4.38	%	$	4,796,557	4.71	%	$	316,178		6.6	%
Commercial – industrial, financial and agricultural	3,637,440		3.98		3,694,612		4.14		(57,172		)	(1.5	)
Real estate – home equity	1,739,352		4.18		1,721,041		4.24		18,311			1.1
Real estate – residential mortgage	1,348,269		3.96		1,305,434		4.17		42,835			3.3
Real estate – construction	609,803		4.08		594,991		4.10		14,812			2.5
Consumer	278,697		4.93		303,127		4.88		(24,430		)	(8.1	)
Leasing and other	101,267		8.54		90,631		8.99		10,636			11.7
Total	$	12,827,563	4.23	%	$	12,506,393	4.43	%	$	321,170		2.6	%

The $316.2 million, or 6.6%, increase in commercial mortgages was from both new and existing customers. The average yield on loans decreased 20 basis points, or 4.5%, to 4.23% in 2014 from 4.43% in 2013. The decrease in average yields on loans was attributable to repayments of higher-yielding loans and new loan production at lower rates and elimination of interest rate floors on certain loans.

Interest expense decreased $3.3 million, or 5.3%, to $59.7 million in the first nine months of 2014 from $63.0 million in the first nine months of 2013. Interest expense decreased $2.9 million as a result of a 3 basis point, or 4.1%, decrease in the average cost of interest-bearing liabilities, primarily a result of a decrease in average costs of time deposits. A $180.7 million, or 1.6%, decrease in average interest-bearing liabilities resulted in an additional $407,000 decrease in interest expense.

Average deposits, by type, are summarized in the following table:



	Nine months ended September 30								Increase (Decrease) in
	2014				2013				Balance
	Balance		Rate		Balance		Rate		$			%
	(dollars in thousands)
Noninterest-bearing demand	$	3,360,876	—	%	$	3,103,381	—	%	$	257,495		8.3	%
Interest-bearing demand	2,969,470		0.12		2,773,917		0.13		195,553			7.0
Savings	3,392,681		0.12		3,348,413		0.12		44,268			1.3
Total demand and savings	9,723,027		0.08		9,225,711		0.08		497,316			5.4
Time deposits	2,984,861		0.88		3,184,281		0.96		(199,420		)	(6.3	)
Total deposits	$	12,707,888	0.27	%	$	12,409,992	0.31	%	$	297,896		2.4	%

The $497.3 million, or 5.4%, increase in total demand and savings account balances was primarily due to a $233.4 million, or 7.5%, increase in business account balances, a $207.0 million, or 4.7%, increase in personal account balances and a $74.3 million, or 4.5%, increase in municipal account balances. The $199.4 million, or 6.3%, decrease in average time deposits was in accounts with balances less than $100,000 with original maturity terms of less than three years, partially offset by increases in accounts with balances of $100,000 or more and accounts with original maturity terms longer than 3 years.

The average cost of deposits decreased 4 basis points, or 12.9%, to 0.27% in 2014 from 0.31% in 2013, primarily due to a decrease in higher-cost time deposits and an increase in non-interest bearing deposits and lower-cost interest-bearing savings and demand balances.

The following table summarizes changes in average short-term borrowings and long-term debt, by type:



	Nine months ended September 30								Increase (Decrease) in
	2014				2013				Balance
	Balance		Rate		Balance		Rate		$			%
	(dollars in thousands)
Short-term borrowings:
Customer repurchase agreements	$	202,184	0.11	%	$	183,432	0.11	%	$	18,752		10.2	%
Customer short-term promissory notes	89,119		0.05		100,532		0.05		(11,413		)	(11.4	)
Total short-term customer funding	291,303		0.09		283,964		0.09		7,339			2.6
Federal funds purchased	361,162		0.21		681,576		0.24		(320,414		)	(47.0	)
Short-term FHLB advances (1)	320,229		0.29		263,342		0.23		56,887			21.6
Total short-term borrowings	972,694		0.20		1,228,882		0.20		(256,188		)	(20.8	)
Long-term debt:
FHLB advances	555,172		3.92		520,278		4.14		34,894			6.7
Other long-term debt	369,748		5.90		369,548		5.90		200			0.1
Total long-term debt	924,920		4.71		889,826		4.87		35,094			3.9
Total	$	1,897,614	2.40	%	$	2,118,708	2.16	%	$	(221,094	)	(10.4	)%

(1) Represents FHLB advances with an original maturity term of less than one year.

Total short-term borrowings decreased $256.2 million, or 20.8%, primarily in federal funds purchased, partially offset by an increase in short-term FHLB advances. Total borrowings decreased $221.1 million, or 10.4%. The cost of borrowings increased

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

Provision for Credit Losses

The provision for credit losses was $9.5 million for the first nine months of 2014, a decrease of $28.5 million, or 75.0%, in comparison to the first nine months of 2013, reflecting improvements in asset quality. For details related to the Corporation's allowance and provision for credit losses, see the "Financial Condition" section of Management's Discussion under the heading "Provision for Credit Losses and Allowance for Credit Losses."

Non-Interest Income

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



	Nine months ended September 30				Increase (Decrease)
	2014		2013		$			%
	(dollars in thousands)
Service charges on deposit accounts:
Overdraft fees	$	16,645	$	22,276	$	(5,631	)	(25.3	)%
Cash management fees	9,589		8,803		786			8.9
Other	10,830		11,621		(791		)	(6.8	)
Total service charges on deposit accounts	37,064		42,700		(5,636		)	(13.2	)
Investment management and trust services	33,417		31,117		2,300			7.4
Other service charges and fees:
Merchant fees	10,340		10,070		270			2.7
Debit card income	7,052		6,852		200			2.9
Letter of credit fees	3,448		3,721		(273		)	(7.3	)
Commercial swap fees	2,544		986		1,558			158.0
Other	6,023		5,907		116			2.0
Total other service charges and fees	29,407		27,536		1,871			6.8
Mortgage banking income:
Gain on sales of mortgage loans	8,009		21,472		(13,463		)	(62.7	)
Mortgage servicing income	5,375		4,821		554			11.5
Total mortgage banking income	13,384		26,293		(12,909		)	(49.1	)
Credit card income	6,855		6,535		320			4.9
Other income	3,958		4,780		(822		)	(17.2	)
Total, excluding investment securities gains	124,085		138,961		(14,876		)	(10.7	)
Investment securities gains	1,193		7,971		(6,778		)	(85.0	)
Total	$	125,278	$	146,932	$	(21,654	)	(14.7	)%

The $5.6 million, or 25.3%, decrease in overdraft fee income consisted of a $3.6 million decrease in fees assessed on personal accounts and a $2.0 million decrease in fees assessed on commercial accounts. The overall decline in these fees resulted from a reduction in the number of overdrafts.

The $2.3 million, or 7.4%, increase in investment management and trust services income was primarily due to a $1.6 million, or 11.7%, increase in brokerage revenue and a $731,000, or 4.1%, increase in trust commissions. These increases resulted from new trust business sales, improved market conditions that increased the values of existing assets under management, and additional recurring revenue generated through the brokerage business due to growth in new accounts.

Commercial swap fees increased $1.6 million, or 158.0%, due to the favorable interest rate environment for this product and the Corporation's introduction of this product by all of the Corporation's banking subsidiaries. For additional details see Note I, "Derivative Financial Instruments" in the Notes to Consolidated Financial Statements.

Gains on sales of mortgage loans decreased $13.5 million, or 62.7%, due to a $648.0 million, or 50.0%, decrease in new loan commitments and a 25.4% decrease in pricing spreads compared to the prior year. Both decreases resulted primarily from an increase in mortgage interest rates in the second half of 2013. The decline in new loan commitments was mainly in refinancing volumes, which were $186.5 million, or 28.8%, of new loan commitments in 2014 compared to $652.2 million, or 50.3%, during 2013.

Investment securities gains of $1.2 million for the first nine months of 2014 were a result of $1.1 million of net realized gains on the sales of debt securities and $100,000 of net realized gains on the sales of financial institution stocks. The $8.0 million of investment securities gains for first nine months of 2013 included $4.3 million of net realized gains on financial institution stocks and $3.8 million of realized gains on the sales of debt securities, partially offset by $124,000 of other-than-temporary impairment charges for certain financial institution stocks and pooled trust preferred debt securities.

Non-Interest Expense

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



	Nine months ended September 30				Increase (Decrease)
	2014		2013		$			%
	(dollars in thousands)
Salaries and employee benefits	$	185,623	$	188,046	$	(2,423	)	(1.3	)%
Net occupancy expense	36,649		34,810		1,839			5.3
Other outside services	19,684		13,223		6,461			48.9
Data processing	12,816		13,169		(353		)	(2.7	)
Equipment expense	10,269		11,447		(1,178		)	(10.3	)
Professional fees	9,715		9,771		(56		)	(0.6	)
Software	9,487		9,110		377			4.1
FDIC insurance expense	8,186		8,766		(580		)	(6.6	)
Marketing	5,719		6,045		(326		)	(5.4	)
Telecommunications	5,193		5,586		(393		)	(7.0	)
Postage	4,014		3,633		381			10.5
Operating risk loss	3,786		6,923		(3,137		)	(45.3	)
Supplies	3,323		4,096		(773		)	(18.9	)
Other real estate owned and repossession expense	3,034		6,248		(3,214		)	(51.4	)
Intangible amortization	944		1,603		(659		)	(41.1	)
Other	23,084		22,195		889			4.0
Total	$	341,526	$	344,671	$	(3,145	)	(0.9	)%

Salaries and employee benefits decreased $2.4 million, or 1.3%, with salaries increasing $953,000, or 0.6%, and employee benefits decreasing $3.4 million, or 10.5%. The decrease in employee benefits was primarily due to the cost savings initiatives, which included the elimination and reduction of certain employee benefit plans, most notably a decrease in profit sharing contributions and an amendment to the Postretirement Plan, partially offset by an increase in healthcare expenses and severance.

The $1.8 million, or 5.3%, increase in net occupancy expense was primarily due to an increase in snow removal costs in 2014, partially offset by savings from the branch consolidations. Other outside services increased $6.5 million, or 48.9%, due to an increase in consulting services related to the Corporation’s acceleration of risk management and compliance efforts, including those in connection with the enhancement of the Corporation's program for compliance with the BSA/AML requirements. The $1.2 million, or 10.3%, decrease in equipment expense was primarily due to a decrease in depreciation expense as certain assets became fully depreciated.

The $3.1 million, or 45.3%, decrease in operating risk loss was due to a $3.7 million decrease in losses associated with previously sold residential mortgages, partially offset by a net decrease in debit card and check fraud losses. See Note L "Commitments and Contingencies," in the Notes to Consolidated Financial Statements for additional details related to repurchases of previously sold residential mortgages.

OREO and repossession expense decreased $3.2 million, or 51.4%, primarily due to an increase in net gains on sales of properties and a decrease in valuation provisions, which reflect the continued improvement in overall asset quality. The $659,000, or 41.1%, decrease in intangible amortization was primarily due to core deposit intangible assets, which are amortized on an accelerated basis.

Income Taxes

Income tax expense for the first nine months of 2014 was $41.1 million, a $2.4 million, or 6.2%, increase from $38.7 million in 2013.

The Corporation’s effective tax rate was 25.5% in 2014, as compared to 24.4% in 2013. The effective rate is generally lower than the Federal statutory rate of 35% due to investments in tax-free municipal securities, tax credits earned from investments in partnerships that generate such credits under various federal programs and the effect of state income taxes. The increase in the effective tax rate in comparison to the first nine months of 2013 was due primarily to a $2.1 million ($1.4 million, net of federal tax) decrease in the valuation allowance for certain state deferred tax assets that was recorded as a credit to income tax expense in 2013.

FINANCIAL CONDITION

The table below presents condensed consolidated ending balance sheets for the Corporation.



					Increase (Decrease)
	September 30, 2014		December 31, 2013		$			%
	(dollars in thousands)
Assets
Cash and due from banks	$	220,946	$	218,540	$	2,406		1.1	%
Other interest-earning assets	377,579		248,161		129,418			52.2
Loans held for sale	25,212		21,351		3,861			18.1
Investment securities	2,470,609		2,568,434		(97,825		)	(3.8	)
Loans, net of allowance	12,840,928		12,579,440		261,488			2.1
Premises and equipment	224,441		226,021		(1,580		)	(0.7	)
Goodwill and intangible assets	532,117		533,076		(959		)	(0.2	)
Other assets	546,342		539,611		6,731			1.2
Total Assets	$	17,238,174	$	16,934,634	$	303,540		1.8	%
Liabilities and Shareholders’ Equity
Deposits	$	13,333,627	$	12,491,186	$	842,441		6.7	%
Short-term borrowings	564,952		1,258,629		(693,677		)	(55.1	)
Long-term debt	1,018,289		883,584		134,705			15.2
Other liabilities	243,300		238,048		5,252			2.2
Total Liabilities	15,160,168		14,871,447		288,721			1.9
Total Shareholders’ Equity	2,078,006		2,063,187		14,819			0.7
Total Liabilities and Shareholders’ Equity	$	17,238,174	$	16,934,634	$	303,540		1.8	%

Other interest-earning assets

The $129.4 million, or 52.2%, increase in other interest-earning assets was due to an increase in interest-bearing deposits with other banks.

Investment Securities

The following table presents the carrying amount of investment securities:



					Increase (Decrease)
	September 30, 2014		December 31, 2013		$			%
	(dollars in thousands)
U.S. Government securities	$	200	$	525	$	(325	)	(61.9	)%
U.S. Government sponsored agency securities	240		726		(486		)	(66.9	)
State and municipal securities	257,616		284,849		(27,233		)	(9.6	)
Corporate debt securities	101,427		98,749		2,678			2.7
Collateralized mortgage obligations	955,040		1,032,398		(77,358		)	(7.5	)
Mortgage-backed securities	962,335		945,712		16,623			1.8
Auction rate securities	148,473		159,274		(10,801		)	(6.8	)
Total debt securities	2,425,331		2,522,233		(96,902		)	(3.8	)
Equity securities	45,278		46,201		(923		)	(2.0	)
Total	$	2,470,609	$	2,568,434	$	(97,825	)	(3.8	)%

Total investment securities decreased $97.8 million, or 3.8%, in comparison to December 31, 2013, mainly in collateralized mortgage obligations and state and municipal securities, as portfolio cash flows were not fully reinvested due to relatively low yields available on current investment options. Cash flows that were reinvested during the first nine months of 2014 were used to purchase securities with average lives of approximately five years to provide for more structured cash flows, thereby limiting price and extension risk in a rising interest rate environment. State and municipal securities decreased primarily due to maturities that

were not fully reinvested. The decrease in ARCs was primarily due to the sales of securities with a total book value of $11.9 million, resulting in no gain or loss.

The net pre-tax unrealized loss on available for sale investment securities was $3.2 million as of September 30, 2014, compared to a $39.8 million pre-tax unrealized loss as of December 31, 2013. The $36.6 million decrease in the net pre-tax unrealized loss 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)
	September 30, 2014		December 31, 2013		$			%
	(in thousands)
Real-estate – commercial mortgage	$	5,156,979	$	5,101,922	$	55,057		1.1	%
Commercial – industrial, financial and agricultural	3,691,262		3,628,420		62,842			1.7
Real-estate – home equity	1,733,036		1,764,197		(31,161		)	(1.8	)
Real-estate – residential mortgage	1,372,033		1,337,380		34,653			2.6
Real-estate – construction	687,728		573,672		114,056			19.9
Consumer	278,219		283,124		(4,905		)	(1.7	)
Leasing and other	111,148		93,505		17,643			18.9
Loans, net of unearned income	$	13,030,405	$	12,782,220	$	248,185		1.9	%

The Corporation does not have a concentration of credit risk with any single borrower, industry or geographical location. As of September 30, 2014, the Corporation's maximum total lending commitment to an individual borrower was $50.0 million. In addition to limiting the maximum total lending commitment to any individual borrower to $50.0 million, the Corporation has established lower total lending limits for certain types of lending commitments, and lower total lending limits based on the Corporation's internal risk rating of an individual borrower at the time the lending commitment is approved. As of September 30, 2014, the Corporation had 66 relationships with total borrowing commitments between $20.0 million and $50.0 million.

Approximately $5.8 billion, or 44.9%, of the loan portfolio was in commercial mortgage and construction loans as of September 30, 2014. The performance of these loans can be adversely impacted by fluctuations in real estate values. The Corporation limits its maximum non-owner occupied commercial real estate exposure to $33.0 million to any one borrower, based on the Corporation's internal risk rating at the time the lending commitment is approved, and limits its exposure to any one development project to $15.0 million.

Construction loans include loans to commercial borrowers secured by commercial real estate, loans to commercial borrowers secured by residential real estate, and other construction loans, which represent loans to individuals secured by residential real estate. The following table presents outstanding construction loans and their delinquency rates by these class segments:



	September 30, 2014						December 31, 2013
	Balance		Delinquency Rate (1)		% of Total		Balance		Delinquency Rate (1)		% of Total
	(dollars in thousands)
Commercial	$	377,206	0.5	%	54.9	%	$	269,497	0.8	%	47.0	%
Commercial - residential	241,419		7.4		35.1		235,369		8.2		41.0
Other	69,103		0.4		10.0		68,806		0.8		12.0
Total Real estate - construction	$	687,728	2.9	%	100.0	%	$	573,672	3.8	%	100.0	%


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

Construction loans increased $114.1 million, or 19.9%, in comparison to December 31, 2013 and comprised 5.3% of the total loan portfolio at September 30, 2014 as compared to 4.5% at December 31, 2013. Over the past five years, the Corporation reduced its exposure in its construction portfolio, which accounted 8.2% of its total loan portfolio as of December 31, 2009. The growth during the first nine months of 2014 was primarily in commercial construction, which increased $107.7 million, or 40.0%.

Geographically, the increase in real estate construction loans was primarily in the Pennsylvania ($58.1 million, or 20.1%), Maryland ($25.5 million, or 41.8%) and New Jersey ($20.6, or 22.7%) markets.

The $62.8 million, or 1.7%, increase in commercial loans was primarily in the New Jersey market. Commercial mortgage loans increased $55.1 million in comparison to December 31, 2013. Geographically, the increase in was in the New Jersey ($74.2 million, or 5.8%), Maryland ($35.0 million, or 6.5%) and Delaware ($22.1 million, or 11.3%) markets, partially offset by a decrease in the Pennsylvania ($76.0 million, or 2.9%) market.

The following table summarizes the percentage of commercial loans, by industry:



	September 30, 2014		December 31, 2013
Services	18.7	%	19.2	%
Manufacturing	14.0		13.5
Construction (1)	11.5		10.0
Retail	10.0		11.0
Wholesale	9.4		9.7
Real estate (2)	7.9		7.0
Health care	7.6		8.1
Agriculture	4.7		5.8
Arts and entertainment	3.5		2.7
Transportation	2.4		2.5
Financial services	1.9		1.6
Other	8.4		8.9
	100.0	%	100.0	%


(1)	Includes commercial loans to borrowers engaged in the construction industry.


(2)	Includes commercial loans to borrowers engaged in the business of: renting, leasing or managing real estate for others; selling and/or buying real estate for others; and appraising real estate.

Commercial loans and commercial mortgage loans also include shared national credits, which are participations in loans or loan commitments of at least $20 million that are shared by three or more banks. Below is a summary of the Corporation's outstanding purchased shared national credits:



	September 30, 2014		December 31, 2013
	(dollars in thousands)
Commercial - industrial, financial and agricultural	$	141,100	$	129,840
Real estate - commercial mortgage	137,501		87,868
	$	278,601	$	217,708

Total shared national credits increased $60.9 million, or 28.0%, in comparison to December 31, 2013. The Corporation's shared national credits are to borrowers located in its geographical markets and the increase was due to normal lending activities consistent with the Corporation's underwriting policies. As of September 30, 2014 and December 31, 2013, none of the shared national credits were past due.

The $34.7 million, or 2.6%, increase in residential mortgages was due to the retention of certain 15-year fixed rate mortgages in the portfolio instead of selling those mortgages to third-party investors.

Provision for Credit Losses and Allowance for Credit Losses

The following table presents the activity in the allowance for credit losses:



	Three months ended September 30						Nine months ended September 30
	2014			2013			2014			2013
	(dollars in thousands)
Average balance of loans, net of unearned income	$	12,922,821		$	12,728,162		$	12,827,563		$	12,506,393

Balance of allowance for credit losses at beginning of period	$	193,442		$	217,626		$	204,917		$	225,439
Loans charged off:
Commercial – industrial, financial and agricultural	5,167			9,394			15,804			24,856
Real estate – commercial mortgage	1,557			3,724			5,084			13,050
Real estate – home equity	1,492			2,365			4,377			6,735
Real estate – residential mortgage	231			767			2,166			8,282
Consumer	538			473			1,738			1,456
Real estate – construction	313			598			745			5,181
Leasing and other	306			787			1,434			2,037
Total loans charged off	9,604			18,108			31,348			61,597
Recoveries of loans previously charged off:
Commercial – industrial, financial and agricultural	1,013			2,295			2,532			3,430
Real estate – commercial mortgage	1,167			185			1,641			2,754
Real estate – home equity	336			198			869			721
Real estate – residential mortgage	95			245			319			442
Consumer	448			294			1,059			1,206
Real estate – construction	470			379			852			1,794
Leasing and other	241			224			767			649
Total recoveries	3,770			3,820			8,039			10,996
Net loans charged off	5,834			14,288			23,309			50,601
Provision for credit losses	3,500			9,500			9,500			38,000
Balance of allowance for credit losses at end of period	$	191,108		$	212,838		$	191,108		$	212,838

Net charge-offs to average loans (annualized)	0.18		%	0.45		%	0.24		%	0.54		%

The following table presents the components of the allowance for credit losses:



	September 30, 2014			December 31, 2013
	(dollars in thousands)
Allowance for loan losses	$	189,477		$	202,780
Reserve for unfunded lending commitments	1,631			2,137
Allowance for credit losses	$	191,108		$	204,917

Allowance for credit losses to loans outstanding	1.47		%	1.60		%

For the three and nine months ended September 30, 2014, the Corporation's provision for credit losses decreased $6.0 million, or 63.2%, and $28.5 million, or 75.0%, respectively, in comparison to the same periods in 2013. The decreases in the provision for credit losses were due to improvements in credit quality, as shown by a reduction in non-performing loans and overall delinquency.

Net charge-offs decreased $8.5 million, or 59.2%, to $5.8 million for the third quarter of 2014, compared to $14.3 million for the third quarter of 2013. The decrease in net charge-offs was primarily due to a $3.1 million, or 89.0%, decrease in commercial mortgage net charge-offs and a $2.9 million, or 41.5%, decrease in commercial loan net charge-offs. Of the $5.8 million of net charge-offs recorded in the third quarter of 2014, 40.8% were for loans originated in Maryland, 32.6% were for loans originated in New Jersey and 26.5% were for loans originated in Pennsylvania.

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

The following table summarizes non-performing assets as of the indicated dates:



	September 30, 2014			September 30, 2013			December 31, 2013
	(dollars in thousands)
Non-accrual loans	$	126,420		$	143,012		$	133,753
Loans 90 days past due and accruing	17,428			25,271			20,524
Total non-performing loans	143,848			168,283			154,277
Other real estate owned (OREO)	13,489			18,173			15,052
Total non-performing assets	$	157,337		$	186,456		$	169,329
Non-accrual loans to total loans	0.97		%	1.12		%	1.05		%
Non-performing assets to total assets	0.91		%	1.09		%	1.00		%
Allowance for credit losses to non-performing loans	132.85		%	126.48		%	132.82		%

The following table presents accruing loans whose terms have been modified under troubled debt restructurings (TDRs), by type, as of the indicated dates:



	September 30, 2014		September 30, 2013		December 31, 2013
	(in thousands)
Real estate – residential mortgage	$	30,850	$	27,820	$	28,815
Real estate – commercial mortgage	18,869		22,644		19,758
Real estate – construction	9,251		9,841		10,117
Commercial – industrial, financial and agricultural	5,115		8,184		8,045
Real estate – home equity	2,904		1,667		1,365
Consumer	23		11		11
Total accruing TDRs	67,012		70,167		68,111
Non-accrual TDRs (1)	27,724		30,501		30,209
Total TDRs	$	94,736	$	100,668	$	98,320

(1) Included with non-accrual loans in the preceding table.

TDRs modified during the first nine months of 2014 and still outstanding as of September 30, 2014 totaled $17.2 million. During the first nine months of 2014, $4.8 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.

The following table presents the changes in non-accrual loans for the three and nine months ended September 30, 2014:



	Commercial - Industrial, Financial and Agricultural			Real Estate - Commercial Mortgage			Real Estate - Construction			Real Estate - Residential Mortgage			Real Estate - Home Equity			Consumer			Leasing			Total
	(in thousands)
Three months ended September 30, 2014
Balance of non-accrual loans at June 30, 2014	$	35,980		$	41,936		$	19,236		$	21,053		$	11,729		$	—		$	—		$	129,934
Additions	6,885			8,766			2,813			1,796			2,846			538			—			23,644
Payments	(4,400		)	(5,353		)	(1,850		)	(178		)	(1,132		)	—			—			(12,913		)
Charge-offs	(5,167		)	(1,557		)	(313		)	(231		)	(1,492		)	(533		)	—			(9,293		)
Transfers to accrual status	(2,302		)	—			—			(30		)	(160		)	(5		)	—			(2,497		)
Transfers to OREO status	(11		)	(945		)	(231		)	(560		)	(708		)	—			—			(2,455		)
Balance of non-accrual loans as of September 30, 2014	$	30,985		$	42,847		$	19,655		$	21,850		$	11,083		$	—		$	—		$	126,420

Nine months ended September 30, 2014
Balance of non-accrual loans as of December 31, 2013	$	36,710		$	40,566		$	20,921		$	22,282		$	13,272		$	2		$	—		$	133,753
Additions	27,054			23,190			3,964			8,601			8,397			1,742			407			73,355
Payments	(13,910		)	(13,965		)	(4,185		)	(1,624		)	(2,512		)	(6		)	—			(36,202		)
Charge-offs	(15,804		)	(5,084		)	(745		)	(2,166		)	(4,377		)	(1,733		)	(407		)	(30,316		)
Transfers to accrual status	(2,302		)	(54		)	—			(2,358		)	(1,718		)	(5		)	—			(6,437		)
Transfers to OREO status	(763		)	(1,806		)	(300		)	(2,885		)	(1,979		)	—			—			(7,733		)
Balance of non-accrual loans as of September 30, 2014	$	30,985		$	42,847		$	19,655		$	21,850		$	11,083		$	—		$	—		$	126,420

Non-accrual loans decreased $16.6 million, or 11.6%, in comparison to September 30, 2013 and $7.3 million in comparison to December 31, 2013. Total non-accrual additions for the three and nine months ended September 30, 2014 were $23.6 million and $73.4 million, respectively, compared to additions for the three and nine months ended September 30, 2013 of $22.1 million and $105.7 million, respectively.

The following table summarizes non-performing loans, by type, as of the indicated dates:



	September 30, 2014		September 30, 2013		December 31, 2013
	(in thousands)
Real estate – commercial mortgage	$	44,602	$	42,623	$	44,068
Commercial – industrial, financial and agricultural	33,277		45,184		38,021
Real estate – residential mortgage	28,135		34,309		31,347
Real estate – construction	19,860		24,396		21,267
Real estate – home equity	15,071		18,691		16,983
Leasing	388		67		48
Consumer	2,515		3,013		2,543
Total non-performing loans	$	143,848	$	168,283	$	154,277

Non-performing commercial loans decreased $11.9 million, or 26.4%, in comparison to September 30, 2013, primarily in the Pennsylvania market. Non-performing residential mortgages decreased $6.2 million, or 18.0%, in comparison to September 30, 2013. Geographically, the decrease was primarily in the New Jersey ($4.2 million, or 39.9%) market. Non-performing construction loans decreased $4.5 million, or 18.6%, in comparison to September 30, 2013. Geographically, the decrease occurred primarily in the Pennsylvania ($2.4 million, or 18.3%) and Maryland ($1.9 million, or 32.0%) markets.

The following table summarizes the Corporation’s OREO, by property type, as of the indicated dates:



	September 30, 2014		September 30, 2013		December 31, 2013
	(in thousands)
Residential properties	$	8,121	$	5,836	$	7,052
Commercial properties	3,758		9,514		5,586
Undeveloped land	1,610		2,823		2,414
Total OREO	$	13,489	$	18,173	$	15,052

The Corporation's ability to identify potential problem loans in a timely manner is important to maintaining an adequate allowance for credit losses. For commercial loans, commercial mortgages and construction loans to commercial borrowers, an internal risk rating process is used to monitor credit quality. For a description of the Corporation's risk ratings, see Note E, "Loans and Allowance for Credit Losses," in the Notes to Consolidated Financial Statements. The evaluation of credit risk for residential mortgages, home equity loans, construction loans to individuals, consumer loans and lease receivables is based on payment history, through the monitoring of delinquency levels and trends.

Total internally risk rated loans were $9.5 billion as of September 30, 2014 and $9.2 billion as of December 31, 2013. The following table presents internal risk ratings for commercial loans, commercial mortgages and construction loans to commercial borrowers with internal risk ratings of Special Mention (considered criticized loans) or Substandard or lower (considered classified loans), by class segment:



	Special Mention						Increase (decrease)					Substandard or lower						Increase (decrease)					Total Criticized and Classified Loans
	September 30, 2014			December 31, 2013			$			%		September 30, 2014			December 31, 2013			$			%		September 30, 2014			December 31, 2013
	(dollars in thousands)
Real estate - commercial mortgage	$	113,650		$	141,013		$	(27,363	)	(19.4	)%	$	165,425		$	196,922		$	(31,497	)	(16.0	)%	$	279,075		$	337,935
Commercial - secured	138,136			111,613			26,523			23.8		129,273			125,382			3,891			3.1		267,409			236,995
Commercial -unsecured	12,246			11,666			580			5.0		5,256			2,755			2,501			90.8		17,502			14,421
Total Commercial - industrial, financial and agricultural	150,382			123,279			27,103			22.0		134,529			128,137			6,392			5.0		284,911			251,416
Construction - commercial residential	28,517			31,522			(3,005		)	(9.5	)	42,875			57,806			(14,931		)	(25.8	)	71,392			89,328
Construction - commercial	1,469			2,932			(1,463		)	(49.9	)	5,550			8,124			(2,574		)	(31.7	)	7,019			11,056
Total real estate - construction (excluding construction - other)	29,986			34,454			(4,468		)	(13.0	)	48,425			65,930			(17,505		)	(26.6	)	78,411			100,384
Total	$	294,018		$	298,746		$	(4,728	)	(1.6	)%	$	348,379		$	390,989		$	(42,610	)	(10.9	)%	$	642,397		$	689,735

% of total risk rated loans	3.1		%	3.2		%						3.7		%	4.2		%						6.8		%	7.4		%

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

The following table summarizes loan delinquency rates, by type, as of the dates indicated:



	September 30, 2014									September 30, 2013									December 31, 2013
	31-89 Days			≥ 90 Days (1)			Total			31-89 Days			≥ 90 Days (1)			Total			31-89 Days			≥ 90 Days (1)			Total
Real estate – commercial mortgage	0.48		%	0.86		%	1.34		%	0.40		%	0.84		%	1.24		%	0.38		%	0.87		%	1.25		%
Commercial – industrial, financial and agricultural	0.28		%	0.91		%	1.19		%	0.32		%	1.24		%	1.56		%	0.30		%	1.04		%	1.34		%
Real estate – construction	0.03		%	2.89		%	2.92		%	0.40		%	4.22		%	4.62		%	0.11		%	3.71		%	3.82		%
Real estate – residential mortgage	1.81		%	2.06		%	3.87		%	1.82		%	2.58		%	4.40		%	1.74		%	2.34		%	4.08		%
Real estate – home equity	0.59		%	0.87		%	1.46		%	1.03		%	1.05		%	2.08		%	0.91		%	0.96		%	1.87		%
Consumer, leasing and other	1.41		%	0.75		%	2.16		%	1.91		%	0.79		%	2.70		%	1.99		%	0.68		%	2.67		%
Total	0.58		%	1.11		%	1.69		%	0.66		%	1.31		%	1.97		%	0.61		%	1.20		%	1.81		%
Total dollars (in thousands)	$	75,976		$	143,848		$	219,824		$	83,941		$	168,283		$	252,224		$	77,667		$	154,277		$	231,944


(1)	Includes non-accrual loans.

The Corporation believes that the allowance for credit losses of $191.1 million as of September 30, 2014 is sufficient to cover incurred losses in both the loan portfolio and the unfunded lending commitments as of that date and is appropriate based on applicable accounting standards.

Deposits and Borrowings

The following table presents ending deposits, by type:



					Increase
	September 30, 2014		December 31, 2013		$		%
	(dollars in thousands)
Noninterest-bearing demand	$	3,556,810	$	3,283,172	$	273,638	8.3	%
Interest-bearing demand	3,164,514		2,945,210		219,304		7.4
Savings	3,620,919		3,344,882		276,037		8.3
Total demand and savings	10,342,243		9,573,264		768,979		8.0
Time deposits	2,991,384		2,917,922		73,462		2.5
Total deposits	$	13,333,627	$	12,491,186	$	842,441	6.7	%

Non-interest bearing demand deposits increased $273.6 million, or 8.3%, due primarily to a $258.1 million, or 10.6%, increase in business account balances and a $13.7 million, or 13.2%, increase in municipal account balances.

Interest-bearing demand accounts increased $219.3 million, or 7.4%, primarily due to a $228.0 million, or 21.0%, seasonal increase in municipal account balances and a $31.0 million, or 28.4%, increase in business account balances, partially offset by $39.6 million, or 2.3%, decrease in personal account balances. The $276.0 million, or 8.3%, increase in savings account balances was due to a $240.7 million, or 50.4%, seasonal increase in municipal account balances and a $34.8 million, or 1.6%, increase in personal account balances. The $73.5 million, or 2.5%, increase in time deposits was due to an increase in time deposits with original maturities of 4 to 5 years due to promotional efforts intended to lock in longer-term rates.

The following table summarizes the changes in ending borrowings, by type:



					Increase (Decrease)
	September 30, 2014		December 31, 2013		$			%
	(dollars in thousands)
Short-term borrowings:
Customer repurchase agreements	$	195,121	$	175,621	$	19,500		11.1	%
Customer short-term promissory notes	78,225		100,572		(22,347		)	(22.2	)
Total short-term customer funding	273,346		276,193		(2,847		)	(1.0	)
Federal funds purchased	6,606		582,436		(575,830		)	(98.9	)
Short-term FHLB advances (1)	285,000		400,000		(115,000		)	(28.8	)
Total short-term borrowings	564,952		1,258,629		(693,677		)	(55.1	)
Long-term debt:
FHLB advances	648,477		513,854		134,623			26.2
Other long-term debt	369,812		369,730		82			—
Total long-term debt	1,018,289		883,584		134,705			15.2
Total borrowings	$	1,583,241	$	2,142,213	(558,972		)	(26.1	)%

(1) Represents FHLB advances with an original maturity term of less than one year.

The $693.7 million reduction in total short-term borrowings reflects the use of a portion of the $842.4 million increase in deposits to repay short-term borrowings, as well as a change in funding mix from short-term federal funds purchased and short-term FHLB advances to long-term FHLB advances.

Shareholders' Equity

Total shareholders’ equity increased $14.8 million, or 0.7%, during the first nine months of 2014. The increase was due primarily to $119.9 million of net income and a $23.8 million increase in after-tax unrealized holding gains on available for sale investment securities, partially offset by $95.3 million of stock repurchases and $45.0 million of common stock cash dividends.

In October 2013, the Corporation announced that its board of directors had approved a share repurchase program pursuant to which the Corporation was authorized to repurchase up to 4.0 million shares, or approximately 2.1% of its outstanding shares, through March 2014. During the first quarter of 2014, the Corporation repurchased 4.0 million shares at an average cost of $12.45 per share, completing this repurchase program on February 19, 2014.

In May 2014, the Corporation announced that its board of directors had approved a share repurchase program pursuant to which the Corporation was authorized to repurchase up to 4.0 million shares, or approximately 2.1% of its outstanding shares, through December 31, 2014. During the third quarter of 2014, 4.0 million shares were repurchased by the Corporation at an average cost of $11.36 per share, completing this repurchase program on August 25, 2014.

The Corporation and its subsidiary banks are subject to regulatory capital requirements administered by various banking regulators. Failure to meet minimum capital requirements could result in certain actions by regulators that could have a material effect on the Corporation’s financial statements. The regulations require that banks maintain minimum amounts and ratios of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and Tier I capital to average assets (as defined).

As of September 30, 2014, the Corporation and each of its bank subsidiaries met the minimum requirements. In addition, each of the Corporation’s bank subsidiaries’ capital ratios exceeded the amounts required to be considered "well capitalized" as defined in the regulations.

The following table summarizes the Corporation’s capital ratios in comparison to regulatory requirements:



	September 30, 2014		December 31, 2013		Regulatory Minimum for Capital Adequacy
Total Capital (to Risk-Weighted Assets)	14.5	%	15.0	%	8.0	%
Tier I Capital (to Risk-Weighted Assets)	13.0	%	13.1	%	4.0	%
Tier I Capital (to Average Assets)	10.6	%	10.6	%	4.0	%

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 are effective for the Corporation beginning on January 1, 2015, and become fully phased in on January 1, 2019.

When fully phased in, the U.S. Basel III Capital Rules will require the Corporation and its bank subsidiaries to:


•	Meet a new minimum Common Equity Tier 1 capital ratio of 4.50% of risk-weighted assets and a Tier 1 capital ratio of 6.00% of risk-weighted assets;


•	Continue to require the current minimum Total capital ratio of 8.00% of risk-weighted assets and the minimum Tier 1 leverage capital ratio of 4.00% of average assets;


•	Maintain a "capital conservation buffer" of 2.50% above the minimum risk-based capital requirements, which must be maintained to avoid restrictions on capital distributions and certain discretionary bonus payments; and


•	Comply with a revised definition of capital to improve the ability of regulatory capital instruments to absorb losses. Certain non-qualifying capital instruments, including cumulative preferred stock and trust preferred securities, will be excluded as a component of Tier 1 capital for institutions of the Corporation's size.

The U.S. Basel III Capital Rules use a standardized approach for risk weightings that expands the risk-weightings for assets and off balance sheet exposures from the current 0%, 20%, 50% and 100% categories to a much larger and more risk-sensitive number of categories, depending on the nature of the assets and off-balance sheet exposures and resulting in higher risk weights for a variety of asset categories.

As of September 30, 2014, the Corporation believes its current capital levels would meet the fully-phased in minimum capital requirements, including the capital conservation buffers, as prescribed in the U.S. Basel III Capital Rules.

Liquidity

The Corporation must maintain a sufficient level of liquid assets to meet the cash needs of its customers who, as depositors, may want to withdraw funds or who, as borrowers, need credit availability. Liquidity is provided on a continuous basis through scheduled and unscheduled principal and interest payments on outstanding loans and investments and through the availability of deposits and borrowings. The Corporation also maintains secondary sources that provide liquidity on a secured and unsecured basis to meet short-term and long-term needs.

The Corporation maintains liquidity sources in the form of demand and savings deposits, time deposits, repurchase agreements and short-term promissory notes. The Corporation can access additional liquidity from these sources, if necessary, by increasing interest rates. The positive impact to liquidity resulting from higher interest rates could have a detrimental impact on the net interest margin and net income if rates on interest-earning assets do not experience a proportionate increase.

Borrowing availability with the FHLB and the Federal Reserve Bank, along with Federal funds lines at various correspondent banks, provides the Corporation with additional liquidity.

Each of the Corporation’s subsidiary banks is a member of the FHLB and has access to FHLB overnight and term credit facilities. As of September 30, 2014, the Corporation had $933.5 million of short and long-term advances outstanding from the FHLB with an additional borrowing capacity of approximately $2.1 billion under these facilities. Advances from the FHLB are secured by qualifying commercial real estate and residential mortgage loans, investments and other assets.

As of September 30, 2014, the Corporation had aggregate availability under Federal funds lines of $1.3 billion, with $6.6 million of that amount outstanding. A combination of commercial real estate loans, commercial loans and securities are pledged to the Federal Reserve Bank of Philadelphia to provide access to Federal Reserve Bank Discount Window borrowings. As of September 30, 2014, the Corporation had $1.1 billion of collateralized borrowing availability at the Discount Window, and no outstanding borrowings.

Liquidity must also be managed at the Fulton Financial Corporation parent company level. For safety and soundness reasons, banking regulations limit the amount of cash that can be transferred from subsidiary banks to the parent company in the form of loans and dividends. Generally, these limitations are based on the subsidiary banks’ regulatory capital levels and their net income.

Management continues to monitor the liquidity and capital needs of the parent company and will implement appropriate strategies, as necessary, to remain adequately capitalized and to meet its cash needs.

The Corporation’s sources and uses of funds were discussed in general terms in the net interest income section of Management’s Discussion. The consolidated statements of cash flows provide additional information. The Corporation’s operating activities during the first nine months of 2014 generated $147.9 million of cash, mainly due to net income, as adjusted for non-cash expenses, most notably depreciation and amortization of premises and equipment and the provision for credit losses, partially offset by a net decrease in other liabilities and loans held for sale. Cash used in investing activities was $293.5 million, due mainly to an increase in loans and a net increase in short-term investments, partially offset by proceeds from the maturities and sales of investment securities in excess of purchases. Net cash provided by financing activities was $148.0 million due to increases in deposits and additions to long-term debt, partially offset by a net decrease in short-term borrowings, acquisitions of treasury stock and dividends paid on common shares.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk is the exposure to economic loss that arises from changes in the values of certain financial instruments. The types of market risk exposures generally faced by financial institutions include interest rate risk, equity market price risk, debt security market price risk, foreign currency risk and commodity price risk. Due to the nature of its operations, only equity market price risk, debt security market price risk and interest rate risk are significant to the Corporation.

Equity Market Price Risk

Equity market price risk is the risk that changes in the values of equity investments could have a material impact on the financial position or results of operations of the Corporation. As of September 30, 2014, equity investments consisted of $39.3 million of common stocks of publicly traded financial institutions, and $6.0 million of other equity investments.

The equity investments most susceptible to equity market price risk are the financial institutions stocks, which had a cost basis of approximately $28.6 million and a fair value of $39.3 million at September 30, 2014, including an investment in a single financial institution with a cost basis of $20.0 million and a fair value of $27.5 million. The fair value of this investment accounted for 70.0% of the fair value of the common stocks of publicly traded financial institutions. No other investment within the financial institutions stock portfolio exceeded 5% of the portfolio's fair value. In total, the financial institutions stock portfolio had gross unrealized gains of $10.7 million and gross unrealized losses of $21,000 as of September 30, 2014.

Management continuously monitors the fair value of its equity investments and evaluates current market conditions and operating results of the issuers. Periodic sale and purchase decisions are made based on this monitoring process. None of the Corporation’s equity securities are classified as trading.

In addition to its equity portfolio, investment management and trust services income may be impacted by fluctuations in the equity markets. A portion of this revenue is based on the value of the underlying investment portfolios, many of which include equity investments. If the values of those investment portfolios decrease, whether due to factors influencing U.S. equity markets in general or otherwise, the Corporation’s revenue would be negatively impacted. In addition, the Corporation’s ability to sell its brokerage services in the future will be dependent, in part, upon consumers’ level of confidence in financial markets.

Debt Security Market Price Risk

Debt security market price risk is the risk that changes in the values of debt securities, unrelated to interest rate changes, could have a material impact on the financial position or results of operations of the Corporation. The Corporation’s debt security investments consist primarily of U.S. government sponsored agency issued mortgage-backed securities and collateralized mortgage obligations, state and municipal securities, U.S. government debt securities, auction rate securities and corporate debt securities. All of the Corporation's investments in mortgage-backed securities and collateralized mortgage obligations have principal payments that are guaranteed by U.S. government sponsored agencies.

Municipal Securities

As of September 30, 2014, the Corporation had $257.6 million of securities issued by various municipalities. Ongoing uncertainty with respect to the financial strength of municipal bond insurers places much greater emphasis on the underlying strength of issuers. Continued pressure on local tax revenues of issuers due to adverse economic conditions could have an adverse impact on the underlying credit quality of issuers. The Corporation evaluates existing and potential holdings primarily based on the creditworthiness of the issuing municipality and then, to a lesser extent, on any underlying credit enhancement. Municipal securities can be supported by the general obligation of the issuing municipality, allowing the securities to be repaid by any means available to the issuing municipality. As of September 30, 2014, approximately 95% of municipal securities were supported by the general obligation of corresponding municipalities. Approximately 87% of these securities were school district issuances, which are also supported by the states of the issuing municipalities.

Auction Rate Certificates

As of September 30, 2014, the Corporation’s investments in student loan auction rate certificates (ARCs), had a cost basis of $158.7 million and a fair value of $148.5 million.

ARCs are long-term securities that were structured to allow their sale in periodic auctions, resulting in both the treatment of ARCs as short-term instruments in normal market conditions and fair values that could be derived based on periodic auction prices. However, beginning in 2008, market auctions for these securities began to fail due to an insufficient number of buyers, resulting in an illiquid market. Therefore, as of September 30, 2014, the fair values of the ARCs currently in the portfolio were derived using significant unobservable inputs based on an expected cash flows model which produced fair values which were materially different from those that would be expected from settlement of these investments in the current market. The expected cash flows

model, prepared by a third-party valuation expert, produced fair values which assumed a return to market liquidity sometime within the next five years. The Corporation believes that the trusts underlying the ARCs will self-liquidate as student loans are repaid.

The credit quality of the underlying debt associated with ARCs is also a factor in the determination of their estimated fair value. As of September 30, 2014, approximately $144 million, or 97%, of the ARCs were rated above investment grade, with approximately $6 million, or 4%, AAA rated and $104 million, or 72%, AA rated. Approximately $4 million, or 3%, of ARCs were either not rated or rated below investment grade by at least one ratings agency. Of this amount, approximately $3 million of the student loans underlying these ARCs have principal payments which are guaranteed by the federal government. In total, approximately $147 million, or 99%, of the student loans underlying the ARCs have principal payments which are guaranteed by the federal government. As of September 30, 2014, all ARCs were current and making scheduled interest payments.

Corporate Debt Securities

The Corporation holds corporate debt securities in the form of pooled trust preferred securities, single-issuer trust preferred securities and subordinated debt issued by financial institutions, as presented in the following table as of September 30, 2014:



	Amortized cost		Estimated fair value
	(in thousands)
Single-issuer trust preferred securities	$	47,546	$	44,075
Subordinated debt	47,498		50,289
Pooled trust preferred securities	2,050		4,487
Corporate debt securities issued by financial institutions	$	97,094	$	98,851

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

The Corporation’s investments in single-issuer trust preferred securities had an unrealized loss of $3.5 million at September 30, 2014. The Corporation did not record any other-than-temporary impairment charges for single-issuer trust preferred securities during the nine months ended September 30, 2014 or 2013. Six of the Corporation's 20 single-issuer trust preferred securities were rated below investment grade by at least one ratings agency, with an amortized cost of $13.5 million and an estimated fair value of $12.3 million as of September 30, 2014. All of the single-issuer trust preferred securities rated below investment grade were rated BB or Ba. Single-issuer trust preferred securities with an amortized cost of $4.7 million and an estimated fair value of $3.9 million at September 30, 2014 were not rated by any ratings agency.

As of September 30, 2014, all six of the Corporation's pooled trust preferred securities with an amortized cost of $2.1 million and an estimated fair value of $4.5 million, were rated below investment grade by at least one ratings agency, with ratings ranging from C to Ca. The class of securities held by the Corporation was below the most senior tranche, with the Corporation’s interests being subordinate to other investors in the pools.

The amortized cost of pooled trust preferred securities is the purchase price of the securities, net of cumulative credit related other-than-temporary impairment charges, determined using an expected cash flows model. The most significant input to the expected cash flows model was the expected payment deferral rate for each pooled trust preferred security. The Corporation evaluates the financial metrics, such as capital ratios and non-performing asset ratios, of the individual financial institution issuers that comprise each pooled trust preferred security to estimate its expected deferral rate.

During the nine months ended September 30, 2014, the Corporation recorded $18,000 of other than temporary impairment charges for pooled trust preferred securities. Additional impairment charges for corporate debt securities issued by financial institutions may be necessary in the future depending upon the performance of the individual investments.

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

Interest Rate Risk, Asset/Liability Management and Liquidity

Interest rate risk creates exposure in two primary areas. First, changes in rates have an impact on the Corporation’s liquidity position and could affect its ability to meet obligations and continue to grow. Second, movements in interest rates can create fluctuations in the Corporation’s net interest income and changes in the economic value of its equity.

The Corporation employs various management techniques to minimize its exposure to interest rate risk. An Asset/Liability Management Committee (ALCO), consisting of key financial and senior management personnel, meets on a regular basis. The ALCO is responsible for reviewing the interest rate sensitivity and liquidity positions of the Corporation, approving asset and liability management policies, and overseeing the formulation and implementation of strategies regarding balance sheet positions.

From a liquidity standpoint, the Corporation must maintain a sufficient level of liquid assets to meet the cash needs of its customers, who, as depositors, may want to withdraw funds or who, as borrowers, need credit availability. Liquidity is provided on a continuous basis through scheduled and unscheduled principal and interest payments on outstanding loans and investments and through the availability of deposits and borrowings. The Corporation also maintains secondary sources that provide liquidity on a secured and unsecured basis to meet short-term and long-term needs.

The following table provides information about the Corporation’s interest rate sensitive financial instruments as of September 30, 2014. The table presents expected cash flows and weighted average rates for each of the Corporation's significant interest rate sensitive financial instruments, by expected maturity period. None of the Corporation’s financial instruments are classified as trading. All dollar amounts are in thousands.



	Expected Maturity Period																					Estimated
	Year 1			Year 2			Year 3			Year 4			Year 5			Beyond			Total			Fair Value
Fixed rate loans (1)	$	979,605		$	477,082		$	360,627		$	360,794		$	208,873		$	654,018		$	3,040,999		$	3,025,002
Average rate	3.87		%	4.47		%	4.37		%	4.65		%	4.57		%	3.90		%	4.17		%

Floating rate loans (1) (2)	2,384,919			1,467,374			1,196,069			1,028,622			1,369,511			2,540,265			9,986,760			9,881,516
Average rate	3.81		%	3.96		%	3.98		%	3.97		%	3.83		%	3.97		%	3.91		%

Fixed rate investments (3)	384,258			334,001			270,899			222,095			196,268			822,832			2,230,353			2,229,442
Average rate	2.77		%	2.79		%	2.80		%	2.62		%	2.59		%	2.70		%	2.72		%

Floating rate investments (3)	15			4,963			163,680			41			38			40,690			209,427			196,261
Average rate	1.00		%	0.94		%	1.99		%	1.62		%	2.09		%	1.44		%	1.86		%

Other interest-earning assets	316,735			—			—			—			—			86,056			402,791			402,791
Average rate	0.37		%	—		%	—		%	—		%	—		%	4.42		%	0.37		%

Total	$	4,065,532		$	2,283,420		$	1,991,275		$	1,611,552		$	1,774,690		$	4,143,861		$	15,870,330		$	15,735,012
Average rate	3.46		%	3.89		%	3.73		%	3.94		%	3.78		%	3.69		%	3.70		%

Fixed rate deposits (4)	$	1,410,310		$	465,112		$	313,816		$	98,102		$	314,450		$	22,882		$	2,624,672		$	2,640,788
Average rate	0.70		%	1.02		%	1.29		%	1.50		%	2.08		%	1.84		%	1.03		%

Floating rate deposits (5)	4,947,476			831,604			458,962			398,349			341,540			174,214			7,152,145			7,131,190
Average rate	0.15		%	0.11		%	0.09		%	0.08		%	0.08		%	0.10		%	0.13		%

Fixed rate borrowings (6)	187,323			729			551,539			565			100,452			161,185			1,001,793			1,007,287
Average rate	3.66		%	4.47		%	4.49		%	4.67		%	1.87		%	6.17		%	4.34		%

Floating rate borrowings (7)	564,952			—			—			—			—			16,496			581,448			570,406
Average rate	0.18		%	—		%	—		%	—		%	—		%	2.37		%	0.25		%

Total	$	7,110,061		$	1,297,445		$	1,324,317		$	497,016		$	756,442		$	374,777		$	11,360,058		$	11,349,671
Average rate	0.35		%	0.43		%	2.21		%	0.37		%	1.15		%	2.92		%	0.72		%


(1)	Amounts are based on contractual payments and maturities, adjusted for expected prepayments. Excludes $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 impact of interest rate changes. Certain financial instruments, such as adjustable rate loans, have repricing periods that differ from expected cash flows periods.

Included within the $10.0 billion of floating rate loans above are $3.6 billion of loans, or 35.8% of the total, that float with the prime interest rate, $2.0 billion, or 19.7%, of loans that float with other interest rates, primarily the London Interbank Offered Rate (LIBOR), and $4.4 billion, or 44.5%, of adjustable rate loans. The $4.4 billion of adjustable rate loans include loans that are fixed rate instruments for a certain period of time, and then convert to floating rates.

The following table presents the percentage of adjustable rate loans, at September 30, 2014, stratified by the period until their next repricing:



	Percent of Total Adjustable Rate Loans
One year	29.8%
Two years	17.6
Three years	15.9
Four years	16.2
Five years	11.0
Greater than five years	9.5

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 interest rate shocks on net interest income (due to the current level of interest rates, the 200 and 300 basis point downward shock scenarios are not shown):



Rate Shock (1)	Annual change in net interest income	% Change
+300 bp	+ $ 61.0 million	+12.1%
+200 bp	+ $ 38.2 million	+7.6
+100 bp	+ $ 15.8 million	+3.1
–100 bp	– $ 18.9 million	–3.8


(1)	These results include the effect of implicit and explicit floors that limit further reduction in interest rates.

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

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.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

Regulatory Matters

In July 2014, three wholly owned banking subsidiaries of the Corporation, Fulton Bank, N.A., Swineford National Bank and FNB Bank, N.A., each entered into a Stipulation and Consent to the Issuance of a Consent Order (Consent Order) with their primary Federal bank regulatory agency, the Office of the Comptroller of the Currency relating to identified deficiencies in a centralized Bank Secrecy Act and anti-money laundering compliance program, which was designed to comply with the requirements of the Bank Secrecy Act, the USA Patriot Act of 2001 and related anti-money laundering regulations (collectively, the "BSA/AML Requirements") as disclosed by the Corporation in a Current Report on Form 8-K filed with the SEC on July 18, 2014. The Consent Orders require, among other things that the banking subsidiaries in question review, assess and take actions to strengthen and enhance their compliance programs related to the BSA/AML Requirements (BSA/AML Compliance Program).

Item 1A. Risk Factors

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

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

The following table presents the Corporation's monthly repurchases of its common stock during the third quarter of 2014:



Period	Total Number of Shares Purchased	Average Price Paid per Share	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
July 1, 2014 to July 31, 2014	1,316,158	$11.46	1,316,158	2,683,842
August 1, 2014 to August 31, 2014	2,683,842	$11.32	2,683,842	—
September 1, 2014 to September 30, 2014	—	—	—	—

On May 28,2014, the Corporation announced that its board of directors had approved a share repurchase program pursuant to which the Corporation was authorized to repurchase up to 4.0 million shares, or approximately 2.1% of its outstanding shares, through December 31, 2014. As of September 30, 2014, 4.0 million shares were repurchased, completing this repurchase program. No stock repurchases were made outside the program and all repurchases were made in accordance with the guidelines of Rule 10b-18 and in compliance with Regulation M.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

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.

FULTON FINANCIAL CORPORATION AND SUBSIDIARIES

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



FULTON FINANCIAL CORPORATION

Date:	November 5, 2014	/s/ E. Philip Wenger
		E. Philip Wenger
		Chairman, Chief Executive Officer and President

Date:	November 5, 2014	/s/ Patrick S. Barrett
		Patrick S. Barrett
		Senior Executive Vice President and
		Chief Financial Officer

EXHIBIT INDEX

Exhibits Required Pursuant

to Item 601 of Regulation S-K




3.1		Articles of Incorporation, as amended and restated, of Fulton Financial Corporation– Incorporated by reference to Exhibit 3.1 of the Fulton Financial Corporation Current Report on Form 8-K dated June 24, 2011.

3.2		Bylaws of Fulton Financial Corporation as amended – Incorporated by reference to Exhibit 3.1 of the Fulton Financial Corporation Current Report on an Amended Form 8-K dated September 23, 2014.

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101		Financial statements from the Quarterly Report on Form 10-Q of Fulton Financial Corporation for the quarter ended September 30, 2014, filed on November 5, 2014, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income (iv) the Consolidated Statements of Shareholders' Equity, (v) the Consolidated Statement of Cash Flows and (vi) the Notes to Consolidated Financial Statements - filed herewith.

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Non-accelerated filer

Smaller reporting company