FULT 10-Q Quarterly Report June 30, 2013 | Alphaminr
FULTON FINANCIAL CORP
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FULT 10-Q Quarter ended June 30, 2013

Balance Sheet
Cash Flow
Income Statement
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10-Q 1 fult630201310q.htm 10-Q FULT 6.30.2013 10Q

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 June 30, 2013 , or

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

For the transition period from to

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

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

APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
Common Stock, $2.50 Par Valu e – 193,815,000 shares outstanding as of July 31, 2013.


FULTON FINANCIAL CORPORATION
FORM 10-Q FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2013
INDEX
Description
Page
PART I. FINANCIAL INFORMATION
(a)
Consolidated B alance Sheets - June 30, 2013 and December 31, 2012
(b)
(c)
(d)
(e)
(f)
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

2



Item 1. Financial Statements
FULTON FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except per-share data)
June 30,
2013
December 31,
2012
(unaudited)
ASSETS
Cash and due from banks
$
219,944

$
256,300

Interest-bearing deposits with other banks
130,065

173,257

Loans held for sale
60,909

67,899

Investment securities:
Held to maturity (estimated fair value of $246 in 2013 and $319 in 2012)
227

292

Available for sale
2,915,652

2,793,725

Loans, net of unearned income
12,645,418

12,146,971

Less: Allowance for loan losses
(216,431
)
(223,903
)
Net Loans
12,428,987

11,923,068

Premises and equipment
224,418

227,723

Accrued interest receivable
45,713

45,786

Goodwill
530,614

530,656

Intangible assets
3,838

4,907

Other assets
462,043

509,484

Total Assets
$
17,022,410

$
16,533,097

LIABILITIES
Deposits:
Noninterest-bearing
$
3,168,781

$
3,009,966

Interest-bearing
9,089,028

9,474,197

Total Deposits
12,257,809

12,484,163

Short-term borrowings:
Federal funds purchased
780,459

592,470

Other short-term borrowings
839,859

275,929

Total Short-Term Borrowings
1,620,318

868,399

Accrued interest payable
17,708

19,330

Other liabilities
208,676

185,296

Federal Home Loan Bank advances and long-term debt
889,167

894,253

Total Liabilities
14,993,678

14,451,441

SHAREHOLDERS’ EQUITY
Common stock, $2.50 par value, 600 million shares authorized, 217.5 million shares issued in 2013 and 216.8 million shares issued in 2012
543,637

542,093

Additional paid-in capital
1,429,019

1,426,267

Retained earnings
412,609

363,937

Accumulated other comprehensive income (loss)
(32,466
)
5,675

Treasury stock, at cost, 23.8 million shares in 2013 and 17.6 million shares in 2012
(324,067
)
(256,316
)
Total Shareholders’ Equity
2,028,732

2,081,656

Total Liabilities and Shareholders’ Equity
$
17,022,410

$
16,533,097

See Notes to Consolidated Financial Statements

3

FULTON FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except per-share data)
Three months ended June 30
Six months ended June 30
2013
2012
2013
2012
INTEREST INCOME
Loans, including fees
$
135,032

$
141,541

$
269,162

$
285,887

Investment securities:
Taxable
14,516

18,624

27,913

37,285

Tax-exempt
2,345

2,596

4,824

5,297

Dividends
766

641

1,565

1,340

Loans held for sale
384

538

879

969

Other interest income
35

45

57

98

Total Interest Income
153,078

163,985

304,400

330,876

INTEREST EXPENSE
Deposits
9,498

14,743

19,899

30,993

Short-term borrowings
700

411

1,209

692

Long-term debt
10,815

11,301

21,583

22,966

Total Interest Expense
21,013

26,455

42,691

54,651

Net Interest Income
132,065

137,530

261,709

276,225

Provision for credit losses
13,500

25,500

28,500

53,500

Net Interest Income After Provision for Credit Losses
118,565

112,030

233,209

222,725

NON-INTEREST INCOME
Service charges on deposit accounts
14,651

15,367

28,762

30,209

Mortgage banking income
10,997

11,143

19,170

21,193

Investment management and trust services
10,601

9,822

20,697

19,199

Other service charges and fees
9,508

11,507

18,018

22,062

Other
3,694

3,931

7,590

9,494

Investment securities gains, net:
Net gains on sales of investment securities
2,892

1,595

5,365

2,846

Other-than-temporary impairment losses
(27
)
(57
)
(27
)
(57
)
Investment securities gains, net
2,865

1,538

5,338

2,789

Total Non-Interest Income
52,316

53,308

99,575

104,946

NON-INTEREST EXPENSE
Salaries and employee benefits
63,490

60,091

124,702

120,451

Net occupancy expense
11,447

11,205

23,291

22,140

Other outside services
5,315

5,101

8,175

8,014

Data processing
4,509

3,759

8,412

7,447

Equipment expense
3,893

3,185

7,801

6,554

Professional fees
3,395

2,984

6,442

5,566

Software
3,094

2,272

5,842

4,447

FDIC insurance expense
3,001

3,002

5,848

6,023

Other real estate owned and repossession expense
1,941

3,165

4,795

6,460

Marketing
1,922

2,583

3,794

5,055

Operating risk loss
1,860

2,055

3,626

5,423

Intangible amortization
535

761

1,069

1,562

Other
12,728

11,924

24,269

23,614

Total Non-Interest Expense
117,130

112,087

228,066

222,756

Income Before Income Taxes
53,751

53,251

104,718

104,915

Income taxes
13,169

13,360

24,909

26,892

Net Income
$
40,582

$
39,891

$
79,809

$
78,023

PER SHARE:
Net Income (Basic)
$
0.21

$
0.20

$
0.41

$
0.39

Net Income (Diluted)
0.21

0.20

0.41

0.39

Cash Dividends
0.08

0.07

0.16

0.14

See Notes to Consolidated Financial Statements

4

FULTON FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(in thousands)
Three months ended June 30
Six months ended June 30
2013
2012
2013
2012
Net Income
$
40,582

$
39,891

$
79,809

$
78,023

Other Comprehensive Income (Loss), net of tax:
Unrealized loss on securities
(36,958
)
(10,704
)
(36,833
)
(6,120
)
Reclassification adjustment for securities gains included in net income
(1,862
)
(999
)
(3,470
)
(1,812
)
Non-credit related unrealized gain (loss) on other-than-temporarily impaired debt securities
355

(172
)
1,438

(37
)
Unrealized gain on derivative financial instruments
34

34

68

68

Amortization of net unrecognized pension and postretirement items
328

214

656

428

Other Comprehensive Loss
(38,103
)
(11,627
)
(38,141
)
(7,473
)
Total Comprehensive Income
$
2,479

$
28,264

$
41,668

$
70,550

See Notes to Consolidated Financial Statements


5

FULTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2013 AND 2012
(in thousands, except per-share data)
Common Stock
Retained
Earnings
Treasury
Stock
Total
Shares
Outstanding
Amount
Additional Paid-in
Capital
Accumulated
Other Comprehensive
Income (Loss)
Balance at December 31, 2012
199,225

$
542,093

$
1,426,267

$
363,937

$
5,675

$
(256,316
)
$
2,081,656

Net income



79,809



79,809

Other comprehensive loss




(38,141
)

(38,141
)
Stock issued, including related tax benefits
854

1,544

(455
)


3,586

4,675

Stock-based compensation awards


3,207




3,207

Acquisition of treasury stock
(6,421
)
(71,337
)
(71,337
)
Common stock cash dividends - $0.16 per share



(31,137
)


(31,137
)
Balance at June 30, 2013
193,658

$
543,637

$
1,429,019

$
412,609

$
(32,466
)
$
(324,067
)
$
2,028,732

Balance at December 31, 2011
200,164

$
540,386

$
1,423,727

$
264,059

$
7,955

$
(243,588
)
$
1,992,539

Net income



78,023



78,023

Other comprehensive loss




(7,473
)

(7,473
)
Stock issued, including related tax benefits
716

1,201

(1,740
)


3,696

3,157

Stock-based compensation awards


3,050




3,050

Common stock cash dividends - $0.14 per share



(28,112
)


(28,112
)
Balance at June 30, 2012
200,880

$
541,587

$
1,425,037

$
313,970

$
482

$
(239,892
)
$
2,041,184

See Notes to Consolidated Financial Statements

6

FULTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
Six months ended June 30
2013
2012
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income
$
79,809

$
78,023

Adjustments to reconcile net income to net cash provided by operating activities:


Provision for credit losses
28,500

53,500

Depreciation and amortization of premises and equipment
12,577

10,845

Net amortization of investment securities premiums
6,099

5,251

Investment securities gains, net
(5,338
)
(2,789
)
Net decrease (increase) in loans held for sale
6,990

(24,397
)
Amortization of intangible assets
1,069

1,562

Stock-based compensation
3,207

3,050

Excess tax benefits from stock-based compensation
(148
)
(14
)
Decrease in accrued interest receivable
73

2,815

Decrease in other assets
21,968

3,486

Decrease in accrued interest payable
(1,622
)
(1,961
)
(Decrease) increase in other liabilities
(10,782
)
2,550

Total adjustments
62,593

53,898

Net cash provided by operating activities
142,402

131,921

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale
176,266

210,804

Proceeds from maturities of securities held to maturity
65

121

Proceeds from maturities of securities available for sale
381,807

371,176

Purchase of securities held to maturity
—

(14
)
Purchase of securities available for sale
(674,228
)
(602,642
)
Decrease in short-term investments
43,192

56,868

Net increase in loans
(534,760
)
(88,253
)
Net purchases of premises and equipment
(9,272
)
(20,654
)
Net cash used in investing activities
(616,930
)
(72,594
)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand and savings deposits
55,058

(10,218
)
Net decrease in time deposits
(281,412
)
(279,305
)
Increase in short-term borrowings
751,919

334,648

Repayments of long-term debt
(5,086
)
(131,340
)
Net proceeds from issuance of common stock
4,527

3,143

Excess tax benefits from stock-based compensation
148

14

Dividends paid
(15,645
)
(26,056
)
Acquisition of treasury stock
(71,337
)
—

Net cash provided by (used in) financing activities
438,172

(109,114
)
Net Decrease in Cash and Due From Banks
(36,356
)
(49,787
)
Cash and Due From Banks at Beginning of Period
256,300

292,598

Cash and Due From Banks at End of Period
$
219,944

$
242,811

Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest
$
44,313

$
56,612

Income taxes
24,336

22,646

See Notes to Consolidated Financial Statements

7

FULTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A – Basis of Presentation
The accompanying unaudited consolidated financial statements of Fulton Financial Corporation (the Corporation) have been prepared in conformity with U.S. generally accepted accounting principles (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the amounts of assets and liabilities as of the date of the financial statements as well as revenues and expenses during the period. Actual results could differ from those estimates. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013 . The Corporation evaluates subsequent events through the filing date of this Form 10-Q with the Securities and Exchange Commission (SEC).

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.
For diluted net income per share, net income is 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 and restricted stock.
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 June 30
Six months ended June 30
2013
2012
2013
2012
(in thousands)
Weighted average shares outstanding (basic)
193,273

199,671

194,777

199,581

Effect of dilutive securities
1,073

1,135

996

994

Weighted average shares outstanding (diluted)
194,346

200,806

195,773

200,575

For the three and six months ended June 30, 2013 , 4.3 million and 4.0 million shares issuable under stock options, respectively, were excluded from the diluted net income per share computation as their effect would have been anti-dilutive. For the three and six months ended June 30, 2012 , 5.2 million shares issuable under stock options were excluded from the diluted net income per share computation as their effect would have been anti-dilutive.


8

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 June 30, 2013
Unrealized loss on securities
$
(56,858
)
$
19,900

$
(36,958
)
Reclassification adjustment for securities gains included in net income (1)
(2,865
)
1,003

(1,862
)
Non-credit related unrealized gains (losses) on other-than-temporarily impaired debt securities
546

(191
)
355

Unrealized gain on derivative financial instruments
51

(17
)
34

Amortization of net unrecognized pension and postretirement items (2)
504

(176
)
328

Total Other Comprehensive Income (Loss)
$
(58,622
)
$
20,519

$
(38,103
)
Three months ended June 30, 2012
Unrealized loss on securities
$
(16,467
)
$
5,763

$
(10,704
)
Reclassification adjustment for securities gains included in net income (1)
(1,538
)
539

(999
)
Non-credit related unrealized gains (losses) on other-than-temporarily impaired debt securities
(265
)
93

(172
)
Unrealized gain on derivative financial instruments
52

(18
)
34

Amortization of net unrecognized pension and postretirement items (2)
330

(116
)
214

Total Other Comprehensive Income (Loss)
$
(17,888
)
$
6,261

$
(11,627
)
Six months ended June 30, 2013
Unrealized loss on securities
$
(56,666
)
$
19,833

$
(36,833
)
Reclassification adjustment for securities gains included in net income (1)
(5,338
)
1,868

(3,470
)
Non-credit related unrealized gains (losses) on other-than-temporarily impaired debt securities
2,212

(774
)
1,438

Unrealized gain on derivative financial instruments
105

(37
)
68

Amortization of net unrecognized pension and postretirement items (2)
1,009

(353
)
656

Total Other Comprehensive Income (Loss)
$
(58,678
)
$
20,537

$
(38,141
)
Six months ended June 30, 2012
Unrealized loss on securities
$
(9,415
)
$
3,295

$
(6,120
)
Reclassification adjustment for securities gains included in net income (1)
(2,789
)
977

(1,812
)
Non-credit related unrealized gains (losses) on other-than-temporarily impaired debt securities
(57
)
20

(37
)
Unrealized gain on derivative financial instruments
104

(36
)
68

Amortization of net unrecognized pension and postretirement items (2)
659

(231
)
428

Total Other Comprehensive Income (Loss)
$
(11,498
)
$
4,025

$
(7,473
)

(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.

9

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 June 30, 2013
Balance at March 31, 2013
$
24,878

$
1,696

$
(2,784
)
$
(18,153
)
$
5,637

Other comprehensive income (loss) before reclassifications
(36,958
)
355

—

—

(36,603
)
Amounts reclassified from accumulated other comprehensive loss
(861
)
(1,001
)
34

328

(1,500
)
Balance at June 30, 2013
$
(12,941
)
$
1,050

$
(2,750
)
$
(17,825
)
$
(32,466
)
Three months ended June 30, 2012




Balance at March 31, 2012
$
30,825

$
(876
)
$
(2,920
)
$
(14,920
)
$
12,109

Other comprehensive income (loss) before reclassifications
(10,704
)
(172
)
—

—

(10,876
)
Amounts reclassified from accumulated other comprehensive loss
(999
)
—

34

214

(751
)
Balance at June 30, 2012
$
19,122

$
(1,048
)
$
(2,886
)
$
(14,706
)
$
482

Six months ended June 30, 2013
Balance at December 31, 2012
$
26,361

$
613

$
(2,818
)
$
(18,481
)
$
5,675

Other comprehensive income (loss) before reclassifications
(36,833
)
1,438

—

—

(35,395
)
Amounts reclassified from accumulated other comprehensive loss
(2,469
)
(1,001
)
68

656

(2,746
)
Balance at June 30, 2013
$
(12,941
)
$
1,050

$
(2,750
)
$
(17,825
)
$
(32,466
)
Six months ended June 30, 2012
Balance at December 31, 2011
$
27,054

$
(1,011
)
$
(2,954
)
$
(15,134
)
$
7,955

Other comprehensive income (loss) before reclassifications
(6,120
)
—

—

—

(6,120
)
Amounts reclassified from accumulated other comprehensive loss
(1,812
)
(37
)
68

428

(1,353
)
Balance at June 30, 2012
$
19,122

$
(1,048
)
$
(2,886
)
$
(14,706
)
$
482



10

NOTE D – Investment Securities
The following table presents the amortized cost and estimated fair values of investment securities:
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
Held to Maturity at June 30, 2013
(in thousands)
Mortgage-backed securities
$
227

$
19

$
—

$
246

Available for Sale at June 30, 2013
Equity securities
$
136,364

$
6,903

$
(148
)
$
143,119

U.S. Government securities
2,251

—

—

2,251

U.S. Government sponsored agency securities
809

11

(1
)
819

State and municipal securities
290,351

8,140

(2,758
)
295,733

Corporate debt securities
108,315

5,424

(6,262
)
107,477

Collateralized mortgage obligations
1,253,484

10,186

(23,108
)
1,240,562

Mortgage-backed securities
970,273

14,519

(11,693
)
973,099

Auction rate securities
172,092

15

(19,515
)
152,592

$
2,933,939

$
45,198

$
(63,485
)
$
2,915,652

Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
Held to Maturity at December 31, 2012
(in thousands)
Mortgage-backed securities
$
292

$
27

$
—

$
319

Available for Sale at December 31, 2012
Equity securities
$
118,465

$
5,016

$
(918
)
$
122,563

U.S. Government securities
325

—

—

325

U.S. Government sponsored agency securities
2,376

21

—

2,397

State and municipal securities
301,842

13,763

(86
)
315,519

Corporate debt securities
112,162

7,858

(7,178
)
112,842

Collateralized mortgage obligations
1,195,234

16,008

(123
)
1,211,119

Mortgage-backed securities
847,790

31,831

—

879,621

Auction rate securities
174,026

—

(24,687
)
149,339

$
2,752,220

$
74,497

$
(32,992
)
$
2,793,725

Securities carried at $1.7 billion as of June 30, 2013 and $1.8 billion as of December 31, 2012 were pledged as collateral to secure public and trust deposits and customer repurchase agreements.
Available for sale equity securities include restricted investment securities issued by the Federal Home Loan Bank (FHLB) and the Federal Reserve Bank ( $95.3 million at June 30, 2013 and $71.7 million at December 31, 2012 ), common stocks of financial institutions ( $40.9 million at June 30, 2013 and $44.2 million at December 31, 2012 ) and other equity investments ( $6.9 million at June 30, 2013 and $6.7 million at December 31, 2012 ).
As of June 30, 2013 , the financial institutions stock portfolio had a cost basis of $34.3 million and a fair value of $40.9 million , including an investment in a single financial institution with a cost basis of $20.0 million and a fair value of $23.2 million . The fair value of this investment accounted for approximately 57% of the fair value of the Corporation's investments in the common stocks of publicly traded financial institutions. No other investment within the financial institutions stock portfolio exceeded 5% of the portfolio's fair value.

11

The amortized cost and estimated fair values of debt securities as of June 30, 2013 , by contractual maturity, are shown in the following table. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Held to Maturity
Available for Sale
Amortized
Cost
Estimated
Fair Value
Amortized
Cost
Estimated
Fair Value
(in thousands)
Due in one year or less
$
—

$
—

$
44,411

$
44,491

Due from one year to five years
—

—

66,739

70,642

Due from five years to ten years
—

—

190,392

194,234

Due after ten years
—

—

272,276

249,505

—

—

573,818

558,872

Collateralized mortgage obligations
—

—

1,253,484

1,240,562

Mortgage-backed securities
227

246

970,273

973,099

$
227

$
246

$
2,797,575

$
2,772,533

The following table presents information related to the gains and losses on the sales of equity and debt securities, and losses recognized for the other-than-temporary impairment of investments:
Gross
Realized
Gains
Gross
Realized
Losses
Other-than-
temporary
Impairment
Losses
Net Gains
Three months ended June 30, 2013
(in thousands)
Equity securities
$
1,083

$
(28
)
$
(27
)
$
1,028

Debt securities
1,837

—

—

1,837

Total
$
2,920

$
(28
)
$
(27
)
$
2,865

Three months ended June 30, 2012
Equity securities
$
1,517

$
—

$
(57
)
$
1,460

Debt securities
78

—

—

78

Total
$
1,595

$
—

$
(57
)
$
1,538

Six months ended June 30, 2013
Equity securities
$
2,222

$
(28
)
$
(27
)
$
2,167

Debt securities
3,171

—

—

3,171

Total
$
5,393

$
(28
)
$
(27
)
$
5,338

Six months ended June 30, 2012
Equity securities
$
2,603

$
—

$
(57
)
$
2,546

Debt securities
243

—

—

243

Total
$
2,846

$
—

$
(57
)
$
2,789

The other-than-temporary impairment charges for equity securities during the three and six months ended June 30, 2013 and 2012 were for investments in stocks of financial institutions and were due to the severity and duration of the declines in the fair values of certain bank stock stocks, in conjunction with management's assessment of the near-term prospects of each specific issuer.

12

The following table presents a summary of the cumulative credit related other-than-temporary impairment charges, recognized as components of earnings, for debt securities still held by the Corporation at June 30, 2013 and 2012 :
Three Months ended June 30
Six Months ended June 30
2013
2012
2013
2012
(in thousands)
Balance of cumulative credit losses on debt securities, beginning of period
$
(23,079
)
$
(22,692
)
$
(23,079
)
$
(22,781
)
Reductions for securities sold during the period
2,468

—

2,468

—

Reductions for increases in cash flows expected to be collected that are recognized over the remaining life of the security
4

—

4

89

Balance of cumulative credit losses on debt securities, end of period
$
(20,607
)
$
(22,692
)
$
(20,607
)
$
(22,692
)
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 June 30, 2013 :
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)
U.S. Government sponsored agency securities
$
—

$
—

$
69

$
(1
)
$
69

$
(1
)
State and municipal securities
53,135

(2,758
)
—

—

53,135

(2,758
)
Corporate debt securities
6,877

(115
)
44,348

(6,147
)
51,225

(6,262
)
Collateralized mortgage obligations
805,728

(23,108
)
—

—

805,728

(23,108
)
Mortgage-backed securities
635,582

(11,693
)
—

—

635,582

(11,693
)
Auction rate securities
87

(2
)
151,934

(19,513
)
152,021

(19,515
)
Total debt securities
1,501,409

(37,676
)
196,351

(25,661
)
1,697,760

(63,337
)
Equity securities
332

(17
)
848

(131
)
1,180

(148
)
$
1,501,741

$
(37,693
)
$
197,199

$
(25,792
)
$
1,698,940

$
(63,485
)
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 June 30, 2013 .
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. Fulton Financial Advisors (FFA) is the investment management and trust division of the Corporation’s Fulton Bank, N.A. subsidiary. FFA had previously purchased ARCs for customers as short-term investments with fair values that could be derived based on periodic auctions under normal market conditions. During 2008 and 2009, the Corporation purchased ARCs from customers due to the failure of these periodic auctions, which made these previously short-term investments illiquid.
As of June 30, 2013 , approximately $146 million , or 95% , of the ARCs were rated above investment grade, with approximately $8 million , or 5% , AAA rated and $100 million , or 66% , AA rated. Approximately $7 million , or 5% , of ARCs were either not rated or rated below investment grade by at least one ratings agency. Of this amount, approximately $5 million , or 70% , of the student loans underlying these ARCs have principal payments which are guaranteed by the federal government. In total, approximately $150 million , or 98% , of the student loans underlying the ARCs have principal payments which are guaranteed by the federal government. As of June 30, 2013 , all ARCs were current and making scheduled interest payments. Based on management’s evaluations, ARCs with a fair value of $152.6 million were not subject to any other-than-temporary impairment charges as of June 30, 2013 . 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,

13

the Corporation does not consider those investments with unrealized holding losses as of June 30, 2013 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:
June 30, 2013
December 31, 2012
Amortized
cost
Estimated
fair value
Amortized
cost
Estimated
fair value
(in thousands)
Single-issuer trust preferred securities
$
54,699

$
49,222

$
56,834

$
51,656

Subordinated debt
47,344

50,365

47,286

51,747

Pooled trust preferred securities
3,773

5,391

5,530

6,927

Corporate debt securities issued by financial institutions
105,816

104,978

109,650

110,330

Other corporate debt securities
2,499

2,499

2,512

2,512

Available for sale corporate debt securities
$
108,315

$
107,477

$
112,162

$
112,842


The Corporation’s investments in single-issuer trust preferred securities had an unrealized loss of $5.5 million at June 30, 2013 . The Corporation did not record any other-than-temporary impairment charges for single-issuer trust preferred securities during the three months ended June 30, 2013 or 2012 . The Corporation held seven single-issuer trust preferred securities that were rated below investment grade by at least one ratings agency, with an amortized cost of $20.8 million and an estimated fair value of $19.5 million at June 30, 2013 . The majority of the single-issuer trust preferred securities rated below investment grade were rated BB or Ba. Single-issuer trust preferred securities with an amortized cost of $4.7 million and an estimated fair value of $3.7 million at June 30, 2013 were not rated by any ratings agency.
As of June 30, 2013, the Corporation held eight pooled trust preferred securities with an amortized cost of $3.8 million and an estimated fair value of $5.4 million that 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 $107.5 million were not subject to any additional other-than-temporary impairment charges as of June 30, 2013 . The Corporation does not have the intent to sell and does not believe it will more likely than not be required to sell any of these securities prior to a recovery of their fair value to amortized cost, which may be at maturity.


14

NOTE E – Loans and Allowance for Credit Losses
Loans, Net of Unearned Income
Loans, net of unearned income are summarized as follows:
June 30, 2013
December 31, 2012
(in thousands)
Real-estate - commercial mortgage
$
4,856,916

$
4,664,426

Commercial - industrial, financial and agricultural
3,712,974

3,612,065

Real-estate - home equity
1,760,268

1,632,390

Real-estate - residential mortgage
1,313,345

1,257,432

Real-estate - construction
610,280

584,118

Consumer
300,233

309,864

Leasing and other
83,855

75,521

Overdrafts
15,224

18,393

Loans, gross of unearned income
12,653,095

12,154,209

Unearned income
(7,677
)
(7,238
)
Loans, net of unearned income
$
12,645,418

$
12,146,971

Allowance for Credit Losses
The allowance for credit losses consists of the allowance for loan losses and the reserve for unfunded lending commitments. The allowance for loan losses represents management’s estimate of incurred losses in the loan portfolio as of the balance sheet date and is recorded as a reduction to loans. The reserve for unfunded lending commitments represents management’s estimate of incurred losses in its unfunded loan commitments and is recorded in other liabilities on the consolidated balance sheet. The allowance for credit losses is increased by charges to expense, through the provision for credit losses, and decreased by charge-offs, net of recoveries.
The Corporation’s allowance for credit losses includes: (1) specific allowances allocated to loans evaluated for impairment under the Financial Accounting Standards Board’s (FASB) Accounting Standards Codification (ASC) 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:
June 30,
2013
December 31,
2012
(in thousands)
Allowance for loan losses
$
216,431

$
223,903

Reserve for unfunded lending commitments
1,195

1,536

Allowance for credit losses
$
217,626

$
225,439


15

The following table presents the activity in the allowance for credit losses:
Three months ended June 30
Six months ended June 30
2013
2012
2013
2012
(in thousands)
Balance at beginning of period
$
221,527

$
258,137

$
225,439

$
258,177

Loans charged off
(21,383
)
(50,540
)
(43,489
)
(80,799
)
Recoveries of loans previously charged off
3,982

4,219

7,176

6,438

Net loans charged off
(17,401
)
(46,321
)
(36,313
)
(74,361
)
Provision for credit losses
13,500

25,500

28,500

53,500

Balance at end of period
$
217,626

$
237,316

$
217,626

$
237,316


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 June 30, 2013
Balance at March 31, 2013
$
63,985

$
56,672

$
23,701

$
33,484

$
16,004

$
2,286

$
2,787

$
21,122

$
220,041

Loans charged off
(5,193
)
(5,960
)
(1,966
)
(4,465
)
(2,597
)
(433
)
(769
)
—

(21,383
)
Recoveries of loans previously charged off
1,505

756

192

116

744

406

263

—

3,982

Net loans charged off
(3,688
)
(5,204
)
(1,774
)
(4,349
)
(1,853
)
(27
)
(506
)
—

(17,401
)
Provision for loan losses (1)
(1,601
)
6,089

3,809

3,549

320

238

644

743

13,791

Balance at June 30, 2013
$
58,696

$
57,557

$
25,736

$
32,684

$
14,471

$
2,497

$
2,925

$
21,865

$
216,431

Three months ended June 30, 2012
Balance at March 31, 2012
$
81,652

$
79,756

$
13,083

$
24,851

$
31,186

$
1,643

$
3,274

$
21,051

$
256,496

Loans charged off
(23,699
)
(13,017
)
(2,789
)
(1,492
)
(8,442
)
(471
)
(630
)
—

(50,540
)
Recoveries of loans previously charged off
1,153

717

278

71

1,539

281

180

—

4,219

Net loans charged off
(22,546
)
(12,300
)
(2,511
)
(1,421
)
(6,903
)
(190
)
(450
)
—

(46,321
)
Provision for loan losses (1)
10,763

4,475

3,872

3,281

1,276

363

419

1,113

25,562

Balance at June 30, 2012
$
69,869

$
71,931

$
14,444

$
26,711

$
25,559

$
1,816

$
3,243

$
22,164

$
235,737

Six months ended June 30, 2013
Balance at December 31, 2012
$
62,928

$
60,205

$
22,776

$
34,536

$
17,287

$
2,367

$
2,752

$
21,052

$
223,903

Loans charged off
(9,326
)
(15,462
)
(4,370
)
(7,515
)
(4,583
)
(983
)
(1,250
)
—

(43,489
)
Recoveries of loans previously charged off
2,569

1,135

523

197

1,415

912

425

—

7,176

Net loans charged off
(6,757
)
(14,327
)
(3,847
)
(7,318
)
(3,168
)
(71
)
(825
)
—

(36,313
)
Provision for loan losses (1)
2,525

11,679

6,807

5,466

352

201

998

813

28,841

Balance at June 30, 2013
$
58,696

$
57,557

$
25,736

$
32,684

$
14,471

$
2,497

$
2,925

$
21,865

$
216,431

Six months ended June 30, 2012




Balance at December 31, 2011
$
85,112

$
74,896

$
12,841

$
22,986

$
30,066

$
2,083

$
2,397

$
26,090

$
256,471

Loans charged off
(35,590
)
(18,686
)
(4,995
)
(2,339
)
(17,013
)
(1,105
)
(1,071
)
—

(80,799
)
Recoveries of loans previously charged off
1,969

1,353

298

144

1,603

631

440

—

6,438

Net loans charged off
(33,621
)
(17,333
)
(4,697
)
(2,195
)
(15,410
)
(474
)
(631
)
—

(74,361
)
Provision for loan losses (1)
18,378

14,368

6,300

5,920

10,903

207

1,477

(3,926
)
53,627

Balance at June 30, 2012
$
69,869

$
71,931

$
14,444

$
26,711

$
25,559

$
1,816

$
3,243

$
22,164

$
235,737


(1)
The provision for loan losses was gross of a $ 291,000 and $341,000 decrease, respectively, in the reserve for unfunded lending commitments for the three and six months ended June 30, 2013 and was gross of a $62,000 and $127,000 decrease, respectively, for the three and six months ended June 30, 2012 . The total provision for credit losses, comprised of allocations for both funded and unfunded loans, was $13.5 million and $28.5 million , respectively, for the three and six months ended June 30, 2013 and $25.5 million and $53.5 million , respectively, for the three and six months ended June 30, 2012 .

16

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 June 30, 2013
Measured for impairment under FASB ASC Subtopic 450-20
$
43,405

$
42,354

$
16,114

$
9,841

$
9,572

$
2,479

$
2,925

$
21,865

$
148,555

Evaluated for impairment under FASB ASC Section 310-10-35
15,291

15,203

9,622

22,843

4,899

18

—

N/A

67,876

$
58,696

$
57,557

$
25,736

$
32,684

$
14,471

$
2,497

$
2,925

$
21,865

$
216,431

Loans, net of unearned income at June 30, 2013
Measured for impairment under FASB ASC Subtopic 450-20
$
4,788,274

$
3,649,857

$
1,745,208

$
1,259,558

$
572,537

$
300,212

$
91,402

N/A

$
12,407,048

Evaluated for impairment under FASB ASC Section 310-10-35
68,642

63,117

15,060

53,787

37,743

21

—

N/A

238,370

$
4,856,916

$
3,712,974

$
1,760,268

$
1,313,345

$
610,280

$
300,233

$
91,402

N/A

$
12,645,418

Allowance for loan losses at June 30, 2012
Measured for impairment under FASB ASC Subtopic 450-20
$
47,532

$
46,650

$
9,619

$
7,781

$
15,359

$
1,811

$
3,052

$
22,164

$
153,968

Evaluated for impairment under FASB ASC Section 310-10-35
22,337

25,281

4,825

18,930

10,200

5

191

N/A

81,769

$
69,869

$
71,931

$
14,444

$
26,711

$
25,559

$
1,816

$
3,243

$
22,164

$
235,737

Loans, net of unearned income at June 30, 2012
Measured for impairment under FASB ASC Subtopic 450-20
$
4,541,364

$
3,471,260

$
1,591,117

$
1,138,999

$
566,163

$
309,090

$
81,718

N/A

$
11,699,711

Evaluated for impairment under FASB ASC Section 310-10-35
111,733

66,928

8,351

45,193

52,897

7

295

N/A

285,404

$
4,653,097

$
3,538,188

$
1,599,468

$
1,184,192

$
619,060

$
309,097

$
82,013

N/A

$
11,985,115

(1)
The unallocated allowance, which was approximately 10% and 9% of the total allowance for credit losses as of June 30, 2013 and June 30, 2012 , respectively, was, in the opinion of management, reasonable and appropriate given that the estimates used in the allocation process are inherently imprecise.
N/A – Not applicable.
In March 2013 and June 2013, the Corporation sold $9.9 million and $15.5 million , respectively, of non-accrual commercial mortgage, commercial and construction loans to an investor. During the three and six months ended June 30, 2013 total charge-offs associated with these transactions totaled $6.7 million and $11.9 million , respectively. Below is a summary of these transactions:
Three months ended June 30, 2013
Six months ended June 30, 2013
Real Estate - Commercial mortgage
Commercial - industrial, financial and agricultural
Real Estate - Construction
Total
Real Estate - Commercial mortgage
Commercial - industrial, financial and agricultural
Real Estate - Construction
Total
(in thousands)
Unpaid principal balance of loans sold
$
9,230

$
6,920

$
7,700

$
23,850

$
16,920

$
11,650

$
8,440

$
37,010

Charge-offs prior to sale
(2,470
)
(1,320
)
(4,530
)
(8,320
)
(4,890
)
(2,030
)
(4,680
)
(11,600
)
Net recorded investment in loans sold
6,760

5,600

3,170

15,530

12,030

9,620

3,760

25,410

Proceeds from sale, net of selling expenses
4,330

2,300

2,210

8,840

7,100

4,030

2,350

13,480

Total charge-off upon sale
$
(2,430
)
$
(3,300
)
$
(960
)
$
(6,690
)
$
(4,930
)
$
(5,590
)
$
(1,410
)
$
(11,930
)
Existing allocation for credit losses on sold loans
$
(3,430
)
$
(3,370
)
$
(1,020
)
$
(7,820
)
$
(6,300
)
$
(5,330
)
$
(1,320
)
$
(12,950
)

17

In June 2012, the Corporation sold $44.1 million of non-accrual commercial mortgage, commercial and construction loans to an investor, resulting in a total increase to charge-offs of $21.2 million during the three and six months ended June 30, 2012 . Below is a summary of this transaction:
Real Estate - Commercial mortgage
Commercial - industrial, financial and agricultural
Real Estate - Construction
Total
(in thousands)
Unpaid principal balance of loans sold
$
38,450

$
15,270

$
6,280

$
60,000

Charge-offs prior to sale
(8,600
)
(3,750
)
(3,540
)
(15,890
)
Net recorded investment in loans sold
29,850

11,520

2,740

44,110

Proceeds from sale, net of selling expenses
15,910

5,170

1,850

22,930

Total charge-off upon sale
$
(13,940
)
$
(6,350
)
$
(890
)
$
(21,180
)
Existing allocation for credit losses on sold loans
$
(15,090
)
$
(7,510
)
$
(1,520
)
$
(24,120
)

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 with balances greater than $1.0 million are evaluated individually for impairment. Impaired loans with balances less than $1.0 million are pooled and measured for impairment collectively. All loans evaluated for impairment under FASB ASC Section 310-10-35 are measured for losses on a quarterly basis. As of June 30, 2013 and December 31, 2012 , substantially all of the Corporation’s individually evaluated impaired loans with balances greater than $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 loans. Commercial loans may also be secured by real property.
As of June 30, 2013 and 2012 , approximately 86% and 78% , respectively, of impaired loans with principal balances greater than $1.0 million , whose primary collateral is real estate, were measured at estimated fair value using certified third-party appraisals that had been updated within the preceding 12 months.
When updated certified appraisals are not obtained for loans evaluated for impairment under FASB ASC Section 310-10-35 that are secured by real estate, fair values are estimated based on the original appraisal values, as long as the original appraisal indicated a strong loan-to-value position and, in the opinion of the Corporation's internal loan evaluation staff, there has not been a significant deterioration in the collateral value since the original appraisal was performed. Original appraisals are typically used only when the estimated collateral value, as adjusted appropriately for the age of the appraisal, results in a current loan-to-value ratio that is lower than the Corporation's loan-to-value requirements for new loans, generally less than 70% .

18


The following table presents total impaired loans by class segment:
June 30, 2013
December 31, 2012
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
$
33,556

$
30,123

$
—

$
44,649

$
34,189

$
—

Commercial - secured
46,134

38,622

—

40,409

30,112

—

Commercial - unsecured
—

—

—

132

131

—

Real estate - home equity
399

300

—

300

300

—

Real estate - residential mortgage
2,582

1,493

—

486

486

—

Construction - commercial residential
28,345

22,782

—

40,432

23,548

—

Construction - commercial
2,997

2,028

—

6,294

5,685

—

114,013

95,348


132,702

94,451


With a related allowance recorded:




Real estate - commercial mortgage
48,220

38,519

15,291

69,173

55,443

21,612

Commercial - secured
30,164

23,220

14,287

52,660

39,114

17,187

Commercial - unsecured
1,332

1,275

916

2,142

2,083

1,597

Real estate - home equity
19,777

14,760

9,622

12,843

12,843

8,380

Real estate - residential mortgage
64,229

52,294

22,843

53,610

53,610

24,108

Construction - commercial residential
23,685

11,755

4,330

21,336

9,831

4,787

Construction - commercial
1,159

676

282

2,602

2,350

1,146

Construction - other
663

502

287

576

576

326

Consumer - direct
18

18

15

29

29

25

Consumer - indirect
3

3

3

—

—

—

Leasing and other and overdrafts
—

—

—

10

10

7

189,250

143,022

67,876

214,981

175,889

79,175

Total
$
303,263

$
238,370

$
67,876

$
347,683

$
270,340

$
79,175

As of June 30, 2013 and December 31, 2012 , there were $95.3 million and $94.5 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 were previously charged down to collateral values. Accordingly, no specific valuation allowance was considered to be necessary.

19

The following table presents average impaired loans by class segment:
Three months ended June 30
Six months ended June 30
2013
2012
2013
2012
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
$
30,107

$
125

$
46,502

$
127

$
31,467

$
281

$
46,591

198

Commercial - secured
35,668

50

21,798

10

33,816

82

24,012

17

Commercial - unsecured
—

—

13

—

44

—

9

—

Real estate - home equity
205

—

542

—

237

1

428

—

Real estate - residential mortgage
1,494

9

1,240

11

1,158

21

826

13

Construction - commercial residential
22,267

71

28,734

43

22,694

134

29,567

68

Construction - commercial
3,151

—

2,765

4

3,995

2

2,942

6

92,892

255

101,594

195

93,411

521

104,375

302

With a related allowance recorded:
Real estate - commercial mortgage
46,002

190

64,733

161

49,149

405

69,677

283

Commercial - secured
27,917

39

47,437

20

31,649

81

47,508

33

Commercial - unsecured
1,339

1

2,822

1

1,587

3

2,811

2

Real estate - home equity
14,260

16

6,813

4

13,787

32

6,306

4

Real estate - residential mortgage
53,222

309

41,731

370

53,351

634

41,127

760

Construction - commercial residential
12,458

40

24,210

35

11,582

82

24,684

57

Construction - commercial
1,921

—

2,854

4

2,064

3

2,252

6

Construction - other
496

—

1,047

1

523

1

1,073

2

Consumer - direct
18

—

8

—

22

—

128

—

Consumer - indirect
2

—

—

—

1

—

—

—

Leasing and other and overdrafts
23

—

164

—

18

—

128

—

157,658

595

191,819

596

163,733

1,241

195,694

1,147

Total
$
250,550

$
850

$
293,413

$
791

$
257,144

$
1,762

$
300,069

1,449

(1)
All impaired loans, excluding accruing TDRs, were non-accrual loans. Interest income recognized for the three and six months ended June 30, 2013 and 2012 represents amounts earned on accruing TDRs.

Credit Quality Indicators and Non-performing Assets

The following table presents internal credit risk ratings for commercial loans, commercial mortgages and construction loans to commercial borrowers by class segment:
Pass
Special Mention
Substandard or Lower
Total
June 30, 2013
December 31, 2012
June 30, 2013
December 31, 2012
June 30, 2013
December 31, 2012
June 30, 2013
December 31, 2012
(dollars in thousands)
Real estate - commercial mortgage
$
4,472,005

$
4,255,334

$
165,936

$
157,640

$
218,975

$
251,452

$
4,856,916

$
4,664,426

Commercial - secured
3,223,539

3,081,215

99,025

137,277

172,395

194,952

3,494,959

3,413,444

Commercial -unsecured
208,391

187,200

3,882

5,421

5,742

6,000

218,015

198,621

Total commercial - industrial, financial and agricultural
3,431,930

3,268,415

102,907

142,698

178,137

200,952

3,712,974

3,612,065

Construction - commercial residential
156,942

156,538

49,934

52,434

63,096

79,581

269,972

288,553

Construction - commercial
256,372

211,470

2,289

2,799

9,454

12,081

268,115

226,350

Total construction (excluding Construction - other)
413,314

368,008

52,223

55,233

72,550

91,662

538,087

514,903

$
8,317,249

$
7,891,757

$
321,066

$
355,571

$
469,662

$
544,066

$
9,107,977

$
8,791,394

% of Total
91.3
%
89.8
%
3.5
%
4.0
%
5.2
%
6.2
%
100.0
%
100.0
%

The following is a summary of the Corporation's internal risk rating categories:
•
Pass : These loans do not currently pose any identified risk and can range from the highest to average quality, depending on the degree of potential risk.

20

•
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. 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 an independent assessment of risk rating accuracy. Ratings change 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. While assigning risk ratings involves judgment, 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 for smaller balance, homogeneous loans, such as home equity, residential mortgage, consumer, leasing, 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 loans through the delinquency status is a significant component of the allowance for credit loss 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, residential mortgages and construction loans to individuals by class segment:
Performing
Delinquent (1)
Non-performing (2)
Total
June 30, 2013
December 31, 2012
June 30, 2013
December 31, 2012
June 30, 2013
December 31, 2012
June 30, 2013
December 31, 2012
(dollars in thousands)
Real estate - home equity
$
1,729,259

$
1,602,541

$
11,963

$
12,645

$
19,046

$
17,204

$
1,760,268

$
1,632,390

Real estate - residential mortgage
1,254,854

1,190,873

27,831

32,123

30,660

34,436

1,313,345

1,257,432

Construction - other
70,290

67,447

1,401

865

502

904

72,193

69,216

Consumer - direct
148,849

159,616

3,319

3,795

2,583

3,170

154,751

166,581

Consumer - indirect
143,235

140,868

2,050

2,270

197

145

145,482

143,283

Total consumer
292,084

300,484

5,369

6,065

2,780

3,315

300,233

309,864

Leasing and other and overdrafts
90,910

85,946

392

711

100

19

91,402

86,676

$
3,437,397

$
3,247,291

$
46,956

$
52,409

$
53,088

$
55,878

$
3,537,441

$
3,355,578

% of Total
97.2
%

96.7
%

1.3
%

1.6
%

1.5
%

1.7
%

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:
June 30,
2013
December 31,
2012
(in thousands)
Non-accrual loans
$
164,039

$
184,832

Accruing loans greater than 90 days past due
25,159

26,221

Total non-performing loans
189,198

211,053

Other real estate owned (OREO)
20,984

26,146

Total non-performing assets
$
210,182

$
237,199


21

The following table presents TDRs, by class segment:
June 30,
2013
December 31,
2012
(in thousands)
Real-estate - residential mortgage
$
28,948

$
32,993

Real-estate - commercial mortgage
24,828

34,672

Construction - commercial residential
10,599

10,564

Commercial - secured
8,264

5,624

Real estate - home equity
1,549

1,518

Commercial - unsecured
130

121

Consumer - direct
13

17

Total accruing TDRs
74,331

85,509

Non-accrual TDRs (1)
30,377

31,244

Total TDRs
$
104,708

$
116,753

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

As of June 30, 2013 and December 31, 2012 , there were $16.7 million and $7.4 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 June 30, 2013 and 2012 that were modified during the three and six months ended June 30, 2013 and 2012 :
Three months ended June 30
Six months ended June 30
2013
2012
2013
2012
Number of Loans
Recorded Investment
Number of Loans
Recorded Investment
Number of Loans
Recorded Investment
Number of Loans
Recorded Investment
(dollars in thousands)
(dollars in thousands)
Real estate - residential mortgage
11
$
2,059

11
$
3,436

39
$
6,025

24
$
8,115

Real estate - commercial mortgage
4
2,002

9
10,931

9
4,654

13
16,600

Real estate - home equity
11
677

4
389

28
1,857

6
560

Construction - commercial residential
2
4,487

3
4,072

4
5,115

6
10,437

Commercial - secured
2
135

2
167

7
592

7
3,207

Commercial - unsecured
—
—

—
—

1
15

—
—

Consumer - direct
7
2

—
—

7
2

—
—

37
$
9,362

29
$
18,995

95
$
18,260

56
$
38,919


The following table presents TDRs, by class segment, as of June 30, 2013 and 2012 that were modified within the previous 12 months and had a payment default during the three and six months ended June 30, 2013 and 2012 :
Three months ended June 30
Six months ended June 30
2013
2012
2013
2012
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
7
$
2,999

12
$
8,160

10
$
4,152

21
$
12,248

Real estate - residential mortgage
26
4,817

16
5,217

44
10,283

24
6,931

Commercial - secured
2
117

3
167

4
730

5
282

Construction - commercial residential
—
—

2
5,670

2
608

5
13,220

Real estate - home equity
8
554

4
444

15
1,055

6
683

43
$
8,487

37
$
19,658

75
$
16,828

61
$
33,364


22

The following table presents past due status and non-accrual loans by portfolio segment and class segment:
June 30, 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
$
15,541

$
7,093

$
5,615

$
43,814

$
49,429

$
72,063

$
4,784,853

$
4,856,916

Commercial - secured
10,346

3,374

2,195

53,578

55,773

69,493

3,425,464

3,494,957

Commercial - unsecured
1,349

49

301

1,145

1,446

2,844

215,173

218,017

Total commercial - industrial, financial and agricultural
11,695

3,423

2,496

54,723

57,219

72,337

3,640,637

3,712,974

Real estate - home equity
9,700

2,263

5,535

13,511

19,046

31,009

1,729,259

1,760,268

Real estate - residential mortgage
18,600

9,231

5,821

24,839

30,660

58,491

1,254,854

1,313,345

Construction - commercial residential
657

504

—

23,938

23,938

25,099

244,873

269,972

Construction - commercial
—

—

2,820

2,704

5,524

5,524

262,591

268,115

Construction - other
1,401

—

—

502

502

1,903

70,290

72,193

Total real estate - construction
2,058

504

2,820

27,144

29,964

32,526

577,754

610,280

Consumer - direct
2,451

868

2,578

5

2,583

5,902

148,849

154,751

Consumer - indirect
1,807

243

194

3

197

2,247

143,235

145,482

Total consumer
4,258

1,111

2,772

8

2,780

8,149

292,084

300,233

Leasing and other and overdrafts
297

95

100

—

100

492

90,910

91,402

$
62,149

$
23,720

$
25,159

$
164,039

$
189,198

$
275,067

$
12,370,351

$
12,645,418

December 31, 2012
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
$
12,993

$
8,473

$
2,160

$
54,960

$
57,120

$
78,586

$
4,585,840

$
4,664,426

Commercial - secured
8,013

8,030

1,060

63,602

64,662

80,705

3,332,739

3,413,444

Commercial - unsecured
461

12

199

2,093

2,292

2,765

195,856

198,621

Total commercial - industrial, financial and agricultural
8,474

8,042

1,259

65,695

66,954

83,470

3,528,595

3,612,065

Real estate - home equity
9,579

3,066

5,579

11,625

17,204

29,849

1,602,541

1,632,390

Real estate - residential mortgage
21,827

10,296

13,333

21,103

34,436

66,559

1,190,873

1,257,432

Construction - commercial residential
466

—

251

22,815

23,066

23,532

265,020

288,552

Construction - commercial
—

—

—

8,035

8,035

8,035

218,315

226,350

Construction - other
865

—

328

576

904

1,769

67,447

69,216

Total real estate - construction
1,331

—

579

31,426

32,005

33,336

550,782

584,118

Consumer - direct
2,842

953

3,157

13

3,170

6,965

159,616

166,581

Consumer - indirect
1,926

344

145

—

145

2,415

140,868

143,283

Total consumer
4,768

1,297

3,302

13

3,315

9,380

300,484

309,864

Leasing and other and overdrafts
662

49

9

10

19

730

85,946

86,676

$
59,634

$
31,223

$
26,221

$
184,832

$
211,053

$
301,910

$
11,845,061

$
12,146,971



23

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
June 30
Six months ended
June 30
2013
2012
2013
2012
(in thousands)
Amortized cost:
Balance at beginning of period
$
41,006

$
35,259

$
39,737

$
34,666

Originations of mortgage servicing rights
3,235

4,058

7,462

6,836

Amortization
(2,491
)
(2,314
)
(5,449
)
(4,499
)
Balance at end of period
$
41,750

$
37,003

$
41,750

$
37,003

Valuation allowance:
Balance at beginning of period
$
(3,680
)
$
(1,550
)
$
(3,680
)
$
(1,550
)
Reversals
1,990

—

1,990

—

Balance at end of period
$
(1,690
)
$
(1,550
)
$
(1,690
)
$
(1,550
)
Net MSRs at end of period
$
40,060

35,453

$
40,060

$
35,453

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. Based on the results of the fair value analysis completed as of June 30, 2013 , a decrease to the valuation allowance of $ 2.0 million was recorded for the three and six months ended June 30, 2013 . No adjustment to the valuation allowance was necessary for three and six months ended June 30, 2012 .

NOTE G – Stock-Based Compensation
The fair value of equity awards granted to employees is recognized as compensation expense over the period during which employees are required to provide service in exchange for such awards. The Corporation grants equity awards to employees, consisting of stock options and restricted stock, under its Amended and Restated Equity and Cash Incentive Compensation Plan (formally the 2004 Stock Option and Compensation Plan, or Employee Option Plan). In addition, employees may purchase stock under the Corporation’s Employee Stock Purchase Plan.
The Corporation also grants restricted stock to non-employee members of the board of directors under its 2011 Directors’ Equity Participation Plan (Directors’ Plan). Under the Directors’ Plan, the Corporation can grant equity awards to non-employee holding company and subsidiary bank directors in the form of stock options, restricted stock or common stock.
The following table presents compensation expense and the related tax benefits for equity awards recognized in the consolidated statements of income:
Three months ended June 30
Six months ended June 30
2013
2012
2013
2012
(in thousands)
Stock-based compensation expense
$
2,360

$
2,337

$
3,207

$
3,050

Tax benefit
(687
)
(657
)
(911
)
(816
)
Stock-based compensation expense, net of tax
$
1,673

$
1,680

$
2,296

$
2,234


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. Restricted stock fair values are equal to the average 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

24

vest. Stock options and restricted stock under the Employee Option Plan have historically been granted annually and become fully vested over or after a three year vesting period. Restricted stock awards under the Directors' Plan generally vest one year from the date of grant. Certain events, as defined in the Employee Option Plan and the Directors' Plan, result in the acceleration of the vesting of both stock options and restricted stock. During the three and six months ended June 30, 2013 , the Corporation granted approximately 618,000 stock options and 342,000 shares of restricted stock under its Employee Option Plan. As of June 30, 2013 , the Employee Option Plan h ad 11.3 million shares reserved for future grants through 2023 . During the three and six months ended June 30, 2013 , the Corporation granted approximately 18,000 shares of restricted stock under its Directors’ Plan. As of June 30, 2013 , the Directors’ Plan had 450,000 shares reser ved 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 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 . Certain full-time employees may become eligible for these discretionary benefits if they reach retirement age while working for the Corporation.
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.
The net periodic benefit cost for the Corporation’s Pension Plan, as determined by consulting actuaries, consisted of the following components:
Three months ended
June 30
Six months ended
June 30
2013
2012
2013
2012
(in thousands)
Service cost (1)
$
51

$
39

$
102

$
78

Interest cost
772

806

1,544

1,612

Expected return on plan assets
(800
)
(808
)
(1,600
)
(1,616
)
Net amortization and deferral
596

420

1,192

840

Net periodic benefit cost
$
619

$
457

$
1,238

$
914

(1)
The Pension Plan service cost recorded for the three and six months ended June 30, 2013 and 2012 , respectively, was related to administrative costs associated with the plan and was not due to the accrual of additional participant benefits.
The net periodic benefit cost for the Corporation’s Postretirement Plan, as determined by consulting actuaries, consisted of the following components:
Three months ended
June 30
Six months ended
June 30
2013
2012
2013
2012
(in thousands)
Service cost
$
57

$
53

$
114

$
106

Interest cost
81

87

162

174

Expected return on plan assets
—

(1
)
—

(2
)
Net accretion and deferral
(91
)
(91
)
(182
)
(182
)
Net periodic benefit cost
$
47

$
48

$
94

$
96


NOTE I – Derivative Financial Instruments
The Corporation manages its exposure to certain interest rate and foreign currency price risks through the use of derivatives. None of the Corporation's outstanding derivative contracts are designated as hedges and they are not entered into for speculative purposes. Derivative instruments are carried at fair value, with changes in fair values recognized directly in earnings.

25

Derivative contracts create counterparty credit risk with both the Corporation's customers and with institutional derivative counterparties. The Corporation manages credit risk through its credit approval processes, monitoring procedures and obtaining adequate collateral, when appropriate.
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 executes 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 values during the period are recorded within other 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 position, which includes all outstanding contracts and foreign account balances, to less than $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.

26

The following table presents a summary of the notional amounts and fair values of derivative financial instruments:
June 30, 2013
December 31, 2012
Notional
Amount
Asset
(Liability)
Fair Value
Notional
Amount
Asset
(Liability)
Fair Value
(in thousands)
Interest Rate Locks with Customers
Positive fair values
$
91,417

$
1,011

$
314,416

$
6,912

Negative fair values
155,894

(2,678
)
9,714

(155
)
Net interest rate locks with customers

(1,667
)

6,757

Forward Commitments
Positive fair values
260,203

10,067

79,152

707

Negative fair values
—

—

236,500

(915
)
Net forward commitments
10,067

(208
)
Interest Rate Swaps with Customers
Positive fair values
76,421

2,417

130,841

7,090

Negative fair values
86,384

(1,606
)
—

—

Net interest rate swaps with customers
811

7,090

Interest Rate Swaps with Dealer Counterparties
Positive fair values
86,384

1,606

—

—

Negative fair values
76,421

(2,417
)
130,841

(7,090
)
Net Interest rate swaps with dealer counterparties
(811
)
(7,090
)
Foreign Exchange Contracts with Customers
Positive fair values
11,826

269

1,810

137

Negative fair values
15,159

(311
)
9,851

(348
)
Net foreign exchange contracts with customers
(42
)
(211
)
Foreign Exchange Contracts with Correspondent Banks
Positive fair values
39,876

1,497

59,368

1,064

Negative fair values
19,879

(594
)
37,865

(1,121
)
Net foreign exchange contracts with correspondent banks
903

(57
)
Net derivative fair value asset
$
9,261

$
6,281


The following table presents a summary of the fair value gains and losses on derivative financial instruments:
Three months ended
June 30
Six months ended
June 30
2013
2012
2013
2012
(in thousands)
Interest rate locks with customers
$
(5,886
)
$
4,243

$
(8,424
)
$
5,052

Forward commitments
9,847

(5,159
)
10,275

(1,813
)
Interest rate swaps with customers
(5,871
)
2,516

(6,279
)
3,041

Interest rate swaps with dealer counterparties
5,871

(2,516
)
6,279

(3,041
)
Foreign exchange contracts with customers
(291
)
663

169

(387
)
Foreign exchange contracts with correspondent banks
542

(682
)
960

869

Net fair value gains (losses) on derivative financial instruments
$
4,212

$
(935
)
$
2,980

$
3,721


NOTE J – 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.

27

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:
June 30,
2013
December 31, 2012
(in thousands)
Commitments to extend credit
$
4,304,848

$
4,011,741

Standby letters of credit
403,981

425,095

Commercial letters of credit
34,637

26,191

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).
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. This generally results from an underwriting or documentation deficiency. As of June 30, 2013 and December 31, 2012 , the reserves for losses on these loans were approximately $2.5 million and $2.4 million , respectively.
From 2000 to 2011 , the Corporation sold loans to the FHLB under its Mortgage Partnership Finance Program (MPF Program). No loans were sold under this program in 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 FHLB based on a percentage of the outstanding principal balance of loans sold. As of June 30, 2013 , the unpaid principal balance of loans sold under the MPF Program was approximately $196 million . As of June 30, 2013 and December 31, 2012 , the reserve for estimated credit losses related to loans sold under the MPF Program was $2.9 million and $3.6 million , respectively. Required reserves are calculated based on delinquency status and estimated loss rates established through the Corporation's existing allowance for credit loss methodology.
As of June 30, 2013 and December 31, 2012 , the total reserve for losses on residential mortgage loans sold was $5.4 million and $6.0 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 June 30, 2013 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.
Other Contingencies
The Corporation and its subsidiaries are involved in various legal proceedings in the ordinary course of business. The Corporation evaluates the possible impact of pending litigation based on, among other factors, the advice of counsel, available insurance coverage and recorded liabilities and reserves for probable legal liabilities and costs. 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 are not expected to have a material adverse effect on the financial position, the operating results and/or the liquidity of the Corporation. However, litigation is often unpredictable, and the actual results of litigation cannot be determined with certainty.

NOTE K – Fair Value Option
FASB ASC Subtopic 825-10 permits entities to measure many financial instruments and certain other items at fair value and requires certain disclosures for amounts 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 value 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.

28

The following table presents a summary of the Corporation’s mortgage loans held for sale:
June 30,
2013
December 31,
2012
(in thousands)
Cost
$
62,171

$
65,745

Fair value
60,909

67,899

During the three and six months ended June 30, 2013 , the Corporation recorded losses related to changes in fair values of mortgage loans held for sale of $2.7 million and $3.4 million , respectively. During the three and six months ended June 30, 2012 , the Corporation recorded gains related to changes in fair values of mortgage loans held for sale of $1.1 million and $941,000 , respectively.

NOTE L – Fair Value Measurements
FASB ASC Topic 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into 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:
June 30, 2013
Level 1
Level 2
Level 3
Total
(in thousands)
Mortgage loans held for sale
$
—

$
60,909

$
—

$
60,909

Available for sale investment securities:
Equity securities
47,797

—

—

47,797

U.S. Government securities
—

2,251

—

2,251

U.S. Government sponsored agency securities
—

819

—

819

State and municipal securities
—

295,733

—

295,733

Corporate debt securities
—

98,416

9,061

107,477

Collateralized mortgage obligations
—

1,240,562

—

1,240,562

Mortgage-backed securities
—

973,099

—

973,099

Auction rate securities
—

—

152,592

152,592

Total available for sale investments
47,797

2,610,880

161,653

2,820,330

Other assets
15,980

15,100

—

31,080

Total assets
$
63,777

$
2,686,889

$
161,653

$
2,912,319

Other liabilities
$
15,113

$
6,759

$
—

$
21,872


29

December 31, 2012
Level 1
Level 2
Level 3
Total
(in thousands)
Mortgage loans held for sale
$
—

$
67,899

$
—

$
67,899

Available for sale investment securities:
Equity securities
50,873

—

—

50,873

U.S. Government securities
—

325

—

325

U.S. Government sponsored agency securities
—

2,397

—

2,397

State and municipal securities
—

315,519

—

315,519

Corporate debt securities
—

102,555

10,287

112,842

Collateralized mortgage obligations
—

1,211,119

—

1,211,119

Mortgage-backed securities
—

879,621

—

879,621

Auction rate securities
—

—

149,339

149,339

Total available for sale investments
50,873

2,511,536

159,626

2,722,035

Other assets
15,259

14,710

—

29,969

Total assets
$
66,132

$
2,594,145

$
159,626

$
2,819,903

Other liabilities
$
15,524

$
8,161

$
—

$
23,685

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 June 30, 2013 and December 31, 2012 were measured as 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 evaluated 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, evaluated 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 stocks of financial institutions ( $40.9 million at June 30, 2013 and $44.2 million at December 31, 2012 ) and other equity investments ( $6.9 million at June 30, 2013 and $6.7 million at December 31, 2012 ). These Level 1 investments are measured at fair value based on quoted prices for identical securities in active markets. Restricted equity securities issued by the FHLB and Federal Reserve Bank ( $95.3 million at June 30, 2013 and $71.7 million at December 31, 2012 ) have been excluded from the preceding tables .
•
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 ( $50.4 million at June 30, 2013 and $51.7 million at December 31, 2012 ), single-issuer trust preferred securities issued by financial institutions ( $49.2 million at June 30, 2013 and $51.7 million at December 31, 2012 ), pooled trust preferred securities issued by financial institutions ( $5.4 million at June 30, 2013 and $6.9 million at December 31, 2012 ) and other corporate debt issued by non-financial institutions ( $2.5 million at June 30, 2013 and December 31, 2012 ).

30

Classified as Level 2 investments are the Corporation’s subordinated debt, other corporate debt issued by non-financial institutions and $45.5 million and $48.3 million of single-issuer trust preferred securities held at June 30, 2013 and December 31, 2012 , respectively. The fair values for these corporate debt securities are determined by a third-party pricing service, as detailed above.
Classified as Level 3 investments are the Corporation’s investments in pooled trust preferred securities and certain single-issuer trust preferred securities ( $3.7 million at June 30, 2013 and $3.4 million at December 31, 2012 ). 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 paid down.
Management tests Level 3 valuations for ARCs by performing 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. Any inconsistencies are reconciled through discussions with the third-party valuation expert.
•
Other assets – Included within this asset category are the following:
•
Level 1 assets, consisting of mutual funds that are held in trust for employee deferred compensation plans ( $14.2 million at June 30, 2013 and $14.1 million at December 31, 2012 ) and the fair value of foreign currency exchange contracts ( $1.8 million at June 30, 2013 and $1.2 million at December 31, 2012 ).
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, representing the fair value of mortgage banking derivatives in the form of interest rate locks and forward commitments with secondary market investors ( $11.1 million at June 30, 2013 and $7.6 million at December 31, 2012 ) and the fair value of interest rate swaps ( $4.0 million at June 30, 2013 and $7.1 million at December 31, 2012 ).
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 employee deferred compensation liabilities which represent amounts due to employees under deferred compensation plans ( $14.2 million at June 30, 2013 and $14.1 million at December 31, 2012 ) and the fair value of foreign currency exchange contracts ( $905,000 at June 30, 2013 and $1.5 million at December 31, 2012 ). 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, representing the fair value of mortgage banking derivatives in the form of interest rate locks and forward commitments with secondary market investors ( $2.7 million at June 30, 2013 and $1.1 million at December 31, 2012 ) and the fair value of interest rate swaps ( $4.0 million at June 30, 2013 and $7.1 million at December 31, 2012 ). The fair values of these liabilities are determined in the same manner as the related assets, as described under the heading "Other assets" above.

31

The following table presents the changes in the Corporation’s available for sale investment securities measured at fair value on a recurring basis using unobservable inputs (Level 3):
Three months ended June 30, 2013
Pooled Trust
Preferred
Securities
Single-issuer
Trust Preferred
Securities
ARC
Investments
(in thousands)
Balance at March 31, 2013
$
8,356

$
3,370

$
154,639

Sales
(3,286
)
—

—

Unrealized adjustment to fair value (1)
445

297

(172
)
Settlements - calls
(124
)
—

(2,066
)
Discount accretion (2)
—

3

191

Balance at June 30, 2013
$
5,391

$
3,670

$
152,592

Three months ended June 30, 2012
Balance at March 31, 2012
$
5,062

$
4,360

$
223,877

Unrealized adjustment to fair value (1)
137

(262
)
(17,322
)
Settlements - calls
(180
)
—

(4,193
)
(Premium amortization) discount accretion (2)
(1
)
2

920

Balance at June 30, 2012
$
5,018

$
4,100

$
203,282

Six months ended June 30, 2013
Pooled Trust
Preferred
Securities
Single-issuer
Trust Preferred
Securities
ARC
Investments
(in thousands)
Balance at December 31, 2012
$
6,927

$
3,360

$
149,339

Sales
(3,286
)
—

—

Unrealized adjustment to fair value (1)
1,874

304

5,188

Settlements - calls
(124
)
—

(2,408
)
(Premium amortization) discount accretion (2)
—

6

473

Balance at June 30, 2013
$
5,391

$
3,670

$
152,592

Six months ended June 30, 2012
Balance at December 31, 2011
$
5,109

$
4,180

$
225,211

Unrealized adjustment to fair value (1)
314

(84
)
(19,486
)
Settlements - calls
(403
)
—

(4,510
)
(Premium amortization) discount accretion (2)
(2
)
4

2,067

Balance at June 30, 2012
$
5,018

$
4,100

$
203,282

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

32

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:
June 30, 2013
Level 1
Level 2
Level 3
Total
(in thousands)
Net loans
$
—

$
—

$
170,494

$
170,494

Other financial assets
—

—

61,044

61,044

Total assets
$
—

$
—

$
231,538

$
231,538

December 31, 2012
Level 1
Level 2
Level 3
Total
(in thousands)
Net loans
$
—

$
—

$
191,165

$
191,165

Other financial assets
—

—

62,203

62,203

Total assets
$
—

$
—

$
253,368

$
253,368

The valuation techniques used to measure fair value for the items in the tables 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 ( $21.0 million at June 30, 2013 and $26.1 million at December 31, 2012 ) and MSRs, net of the MSRs valuation reserve ( $40.1 million at June 30, 2013 and $36.1 million at December 31, 2012 ), 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. During the three and six months ended June 30, 2013, the Corporation engaged a third-party valuation expert to estimate the fair value of its MSRs. 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 rates used in the June 30, 2013 discounted cash flows valuation was 12.6% . Management tested 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 June 30, 2013 and December 31, 2012 . In addition, a general description of the methods and assumptions used to estimate such fair values is also provided.
Fair values of financial instruments are significantly affected by the assumptions used, principally the timing of future cash flows and discount rates. Because assumptions are inherently subjective in nature, the estimated fair values cannot be substantiated by comparison to independent market quotes and, in many cases, the estimated fair values could not necessarily be realized in an immediate sale or settlement of the instrument. The aggregate fair value amounts presented do not necessarily represent management’s estimate of the underlying value of the Corporation.

33

June 30, 2013
December 31, 2012
Book Value
Estimated
Fair Value
Book Value
Estimated
Fair Value
(in thousands)
FINANCIAL ASSETS
Cash and due from banks
$
219,944

$
219,944

$
256,300

$
256,300

Interest-bearing deposits with other banks
130,065

130,065

173,257

173,257

Loans held for sale (1)
60,909

60,909

67,899

67,899

Securities held to maturity
227

246

292

319

Securities available for sale (1)
2,915,652

2,915,652

2,793,725

2,793,725

Loans, net of unearned income (1)
12,645,418

12,606,477

12,146,971

12,129,971

Accrued interest receivable
45,713

45,713

45,786

45,786

Other financial assets (1)
151,485

151,485

201,069

201,069

FINANCIAL LIABILITIES
Demand and savings deposits
$
9,155,883

$
9,155,883

$
9,100,825

$
9,100,825

Time deposits
3,101,926

3,120,950

3,383,338

3,413,060

Short-term borrowings
1,620,318

1,620,318

868,399

868,399

Accrued interest payable
17,708

17,708

19,330

19,330

Other financial liabilities (1)
79,569

79,569

58,255

58,255

Federal Home Loan Bank advances and long-term debt
889,167

890,359

894,253

853,547

(1)
Description of fair value determinations for these financial instruments, or certain financial instruments within these categories, measured at fair value on the Corporation’s consolidated balance sheets, are disclosed above.
For short-term financial instruments, defined as those with remaining maturities of 90 days or less and excluding those recorded at fair value on the Corporation’s consolidated balance sheets, book value was considered to be a reasonable estimate of fair value and these financial instruments would, therefore, be categorized as Level 1 items under FASB ASC Topic 820.
The following instruments are predominantly short-term:
Assets
Liabilities
Cash and due from banks
Demand and savings deposits
Interest bearing deposits
Short-term borrowings
Accrued interest receivable
Accrued interest payable
The estimated fair values of securities held to maturity as of June 30, 2013 and December 31, 2012 were generally based on valuations performed by a third-party pricing service commonly used in the banking industry. Management tests the values provided by the pricing service by obtaining securities prices from an alternative third party source and comparing the results. These securities would be categorized as Level 2 assets under FASB Topic 820.
Estimated 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.
The fair values of commitments to extend credit and standby letters of credit are estimated to equal their carrying amounts.

NOTE M – Common Stock Repurchase Plan
On January 3, 2013, the Corporation announced that its board of directors approved a share repurchase program pursuant to which the Corporation is authorized to repurchase up to eight million shares, or approximately 4% of its outstanding shares, through June 30, 2013. On June 18, 2013, the Corporation announced that its board of directors had extended the timeframe for this stock repurchase program to September 30, 2013.

34

Repurchased shares will be added to treasury stock, at cost, and will be used for general corporate purposes. As permitted by securities laws and other legal requirements and subject to market conditions and other factors, purchases may be made from time to time in the open market at prevailing prices. The program may be discontinued at any time. During the three and six months ended June 30, 2013 , approximately 2.2 million and 6.4 million shares, respectively, were repurchased under this program. Approximately 1.6 million shares remain authorized for repurchase.

NOTE N – Reclassifications

Certain amounts in the 2012 consolidated financial statements and notes have been reclassified to conform to the 2013 presentation.

35

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;
•
the effect 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;
•
the effect of competition on rates of deposit and loan growth and net interest margin;
•
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;
•
non-interest income growth, including the impact of potential regulatory changes;
•
investment securities gains and losses, including other-than-temporary declines in the value of securities which may result in charges to earnings;
•
the level of non-interest expenses, including salaries and employee benefits expenses, operating risk losses, amortization of intangible assets and goodwill impairment;
•
the impact of increased regulatory scrutiny of the banking industry;
•
the increasing time and expense associated with regulatory compliance and risk management;
•
the uncertainty and lack of clear regulatory guidance associated with the delay in implementing many of the regulations mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act);
•
capital and liquidity strategies, including the expected impact of the capital and liquidity requirements implementing the Basel III standards for U.S. financial institutions;
•
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; and
•
acquisition and growth strategies, including the impact of a less robust merger and acquisition environment in the banking industry and increased regulatory scrutiny.


RESULTS OF OPERATIONS
Overview and Summary Financial Results
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.

36

The following table presents a summary of the Corporation’s earnings and selected performance ratios:
As of or for the
Three months ended
June 30
As of or for the
Six months ended
June 30
2013
2012
2013
2012
Income before income taxes (in thousands)
$
53,751

$
53,251

$
104,718

$
104,915

Net income (in thousands)
$
40,582

$
39,891

$
79,809

$
78,023

Diluted net income per share
$
0.21

$
0.20

$
0.41

$
0.39

Return on average assets
0.97
%
0.98
%
0.97
%
0.96
%
Return on average equity
7.89
%
7.84
%
7.78
%
7.72
%
Net interest margin (1)
3.52
%
3.78
%
3.54
%
3.81
%
Non-performing assets to total assets
1.23
%
1.63
%
1.23
%
1.63
%
Annualized net charge-offs to average loans
0.56
%
1.55
%
0.59
%
1.24
%
(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 second quarter of 2013 increased $500,000, or 0.9%, compared to the second quarter of 2012. For the first half of 2013, income before income taxes decreased $197,000, or 0.2%, compared to the same period in 2012.
The Corporation's results for the three and six months ended June 30, 2013 were most significantly impacted by improved asset quality, resulting in a decrease in the provision for credit losses, a decline in net interest income and higher non-interest expenses.
Asset Quality - For the three and six months ended June 30, 2013, the Corporation's provision for credit losses decreased $12.0 million, or 47.1%, and $25.0 million, or 46.7%, respectively, in comparison to the same periods in 2012. These decreases were due to an overall improvement in asset quality.
Non-performing loans decreased $44.8 million, or 19.1%, since June 30, 2012. The total past due rate was 2.18% as of June 30, 2013, compared to 2.81% as of June 30, 2012. Annualized net charge-offs to average loans outstanding were 0.56% for the second quarter of 2013, compared to 1.55% for the second quarter of 2012. Annualized net charge-offs to average loans outstanding were 0.59% for the six months ended June 30, 2013, compared to 1.24% for the six months ended June 30, 2012.
Net Interest Income and Net Interest Margin - For the three and six months ended June 30, 2013, net interest income decreased $5.5 million, or 4.0%, and $14.5 million, or 5.3%, respectively, in comparison to the same periods in 2012. Net interest income for the first half of 2013 was negatively impacted by net interest margin compression as yields on interest-earning assets declined more significantly than the cost of interest-bearing liabilities. The net interest margin for the second quarter of 2013 decreased 26 basis points, or 6.9%, in comparison to the second quarter of 2012. For the first half of 2013, the net interest margin decreased 27 basis points, or 7.1%, in comparison to the same period in 2012.
The decrease in net interest margin was somewhat mitigated by an increase in average interest-earning assets. Average interest-earning assets increased $452.9 million, or 3.0%, in comparison to the second quarter of 2012, due to a $560.6 million, or 4.7%, increase in average loans. For the first six months of 2013, average interest-earning assets increased $386.5 million, or 2.6%, in comparison to the same period in 2012, including a $419.2 million, or 3.5%, increase in average loans. During the three and six months ended June 30, 2013, loan growth was strong across most loan types, with significant increases in commercial loans and commercial mortgages. Approximately half of this growth was generated by new customer relationships.
Non-interest Expense - For the three and six months ended June 30, 2013, non-interest expense increased $5.0 million, or 4.5%, and $5.3 million, or 2.4%, respectively, in comparison to the same periods in 2012. These increases were driven primarily by regulatory compliance and risk management efforts and a core processing system conversion. The expense categories most notably impacted were salaries and employee benefits, other outside services, data processing, software expense and professional fees.
The Corporation has been operating under an increasingly challenging and expanding regulatory compliance and risk management environment over the past several years. This has been most evident in the passage of the Dodd-Frank Act, the resulting establishment of the Consumer Financial Protection Bureau, and the heightened scrutiny of financial institutions by bank regulators. As the regulatory environment has changed, the Corporation has made additional investments in staffing and technology to ensure that it meets regulatory expectations. Costs have also been incurred to engage third-party consulting and legal expertise to support these initiatives.

37

During the second quarter of 2013, the Corporation began its conversion to a new core processing system. The core processing system is used to maintain customer account records, reflect account transactions and activity, and support customer relationship management for substantially all deposit and loan customers. As of June 30, 2013, three subsidiary banks had been converted to the new core processing system. The remaining three subsidiary banks are expected to be converted during the third quarter of 2013. Total implementation costs specifically associated with these conversions were approximately $1.2 million and $1.5 million, respectively, during the three and six months ended June 30, 2013, respectively. These implementation costs are expected to total approximately $3.0 million in 2013, as compared to $980,000 in 2012. The Corporation also expects an annual increase in expenses of approximately $3 million upon full implementation of the new core processing system.
Quarter Ended June 30, 2013 compared to the Quarter Ended June 30, 2012
Net Interest Income
FTE net interest income decreased $5.3 million, or 3.7%, from $141.7 million in the second quarter of 2012 to $136.4 million in the second quarter of 2013. This decrease was primarily due to a 26 basis point, or 6.9%, decrease in the net interest margin, to 3.52% for the second quarter of 2013 from 3.78% for the second quarter of 2012. The compression in the net interest margin resulted from the net effect of a 41 basis point, or 9.2%, decrease in yields on interest-earning assets and a 19 basis point, or 20.4%, decrease in funding costs.

38

The following table provides a comparative average balance sheet and net interest income analysis for the second quarter of 2013 as compared to the same period in 2012 . 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 June 30
2013
2012
ASSETS
Average
Balance
Interest (1)
Yield/
Rate
Average
Balance
Interest (1)
Yield/
Rate
Interest-earning assets:
Loans, net of unearned income (2)
$
12,528,562

$
138,002

4.42
%
$
11,967,939

$
144,263

4.85
%
Taxable investment securities (3)
2,410,004

14,516

2.41

2,533,060

18,624

2.94

Tax-exempt investment securities (3)
280,508

3,608

5.15

283,736

3,992

5.63

Equity securities (3)
123,848

875

2.83

106,954

707

2.65

Total investment securities
2,814,360

18,999

2.70

2,923,750

23,323

3.19

Loans held for sale
42,158

384

3.64

55,813

538

3.85

Other interest-earning assets
144,945

35

0.10

129,659

45

0.14

Total interest-earning assets
15,530,025

157,420

4.07
%
15,077,161

168,169

4.48
%
Noninterest-earning assets:






Cash and due from banks
206,090



233,041



Premises and equipment
225,915



216,881



Other assets
1,060,095



1,104,615



Less: Allowance for loan losses
(221,541
)


(259,327
)


Total Assets
$
16,800,584



$
16,372,371



LIABILITIES AND EQUITY
Interest-bearing liabilities:






Demand deposits
$
2,718,679

$
872

0.13
%
$
2,484,730

$
1,025

0.17
%
Savings deposits
3,350,856

1,016

0.12

3,302,418

1,510

0.18

Time deposits
3,169,141

7,610

0.96

3,791,362

12,208

1.30

Total interest-bearing deposits
9,238,676

9,498

0.41

9,578,510

14,743

0.62

Short-term borrowings
1,313,424

700

0.21

961,900

411

0.17

FHLB advances and long-term debt
889,186

10,815

4.87

929,318

11,301

4.88

Total interest-bearing liabilities
11,441,286

21,013

0.74
%
11,469,728

26,455

0.93
%
Noninterest-bearing liabilities:






Demand deposits
3,116,940



2,670,397



Other
179,875



185,929



Total Liabilities
14,738,101



14,326,054


Shareholders’ equity
2,062,483



2,046,317



Total Liabilities and Shareholders’ Equity
$
16,800,584



$
16,372,371



Net interest income/net interest margin (FTE)
136,407

3.52
%
141,714

3.78
%
Tax equivalent adjustment
(4,342
)
(4,184
)
Net interest income
$
132,065

$
137,530

(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.

39

The following table summarizes the changes in FTE interest income and interest expense due to changes in average balances (volume) and changes in rates:
2013 vs. 2012
Increase (decrease) due
to change in
Volume
Rate
Net
(in thousands)
Interest income on:
Loans, net of unearned income
$
6,705

$
(12,966
)
$
(6,261
)
Taxable investment securities
(870
)
(3,238
)
(4,108
)
Tax-exempt investment securities
(45
)
(339
)
(384
)
Equity securities
118

50

168

Loans held for sale
(127
)
(27
)
(154
)
Other interest-earning assets
5

(15
)
(10
)
Total interest income
$
5,786

$
(16,535
)
$
(10,749
)
Interest expense on:
Demand deposits
$
91

$
(244
)
$
(153
)
Savings deposits
22

(516
)
(494
)
Time deposits
(1,795
)
(2,803
)
(4,598
)
Short-term borrowings
173

116

289

FHLB advances and long-term debt
(459
)
(27
)
(486
)
Total interest expense
$
(1,968
)
$
(3,474
)
$
(5,442
)
Note: Changes which are 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 41 basis point, or 9.2%, decrease in yields on average interest-earnings assets resulted in a $16.5 million decrease in FTE interest income, partially offset by a $5.8 million increase in FTE interest income as a result of a $452.9 million, or 3.0%, increase in average interest-earning assets.
Average investments decreased $109.4 million, or 3.7%, as portfolio cash flows were not fully reinvested. The average yield on investments decreased 49 basis points, or 15.4%, to 2.70% in the second quarter of 2013 from 3.19% in the second quarter of 2012 as the reinvestment of cash flows and purchases of mortgage-backed securities and collateralized mortgage obligations were at yields that were lower than the overall portfolio yield. The decrease in investment yields was partially offset by $1.9 million of interest recoveries and calls on debt securities during the second quarter of 2013, compared to $134,000 during the same period in 2012.
Average loans, by type, are summarized in the following table:
Three months ended
June 30
Increase (decrease)
2013
2012
$
%
(dollars in thousands)
Real estate – commercial mortgage
$
4,758,060

$
4,634,436

$
123,624

2.7
%
Commercial – industrial, financial and agricultural
3,714,683

3,529,947

184,736

5.2

Real estate – home equity
1,732,704

1,599,702

133,002

8.3

Real estate – residential mortgage
1,308,713

1,180,024

128,689

10.9

Real estate – construction
617,577

640,282

(22,705
)
(3.5
)
Consumer
304,918

307,651

(2,733
)
(0.9
)
Leasing and other
91,907

75,897

16,010

21.1

Total
$
12,528,562

$
11,967,939

$
560,623

4.7
%



40

Average loans increased $560.6 million, or 4.7%, compared to the second quarter of 2012. The growth in commercial mortgages and commercial loans was driven by a combination of loans to new customers and greater credit demand from existing customers. The $133.0 million, or 8.3%, increase in home equity loans was due to promotional efforts, while the $128.7 million, or 10.9%, increase in residential mortgages was primarily due to the Corporation electing to retain certain 15-year fixed rate residential mortgages in portfolio during the second half of 2012 instead of selling them to third-party investors.
The average yield on loans decreased 43 basis points, or 8.9%, to 4.42% in 2013 from 4.85% in 2012. The decrease in average yields on loans was attributable to repayments of higher-yielding loans, increased refinancing activity, the elimination of interest rate floors on certain loans and new loan production at lower rates.
Interest expense decreased $5.4 million, or 20.6%, to $21.0 million in the second quarter of 2013 from $26.5 million in the second quarter of 2012. Interest expense decreased $3.5 million due to a 19 basis point, or 20.4%, decrease in the average cost of total interest-bearing liabilities. Interest expense decreased an additional $2.0 million as a result of a $28.4 million, or 0.2%, decline in average interest-bearing liabilities.
Average deposits, by type, are summarized in the following table:
Three months ended
June 30
Increase (decrease)
2013
2012
$
%
(dollars in thousands)
Noninterest-bearing demand
$
3,116,940

$
2,670,397

$
446,543

16.7
%
Interest-bearing demand
2,718,679

2,484,730

233,949

9.4

Savings
3,350,856

3,302,418

48,438

1.5

Total demand and savings
9,186,475

8,457,545

728,930

8.6

Time deposits
3,169,141

3,791,362

(622,221
)
(16.4
)
Total deposits
$
12,355,616

$
12,248,907

$
106,709

0.9
%
The $728.9 million, or 8.6%, increase in total demand and savings accounts was primarily due to a $368.7 million, or 9.0%, increase in personal account balances and a $303.0 million, or 10.9%, increase in business account balances. The $622.2 million, or 16.4%, decrease in time deposits was primarily in accounts with original maturity terms of less than three years.
The average cost of interest-bearing deposits decreased 21 basis points, or 33.9%, to 0.41% in 2013 from 0.62% in 2012, primarily due to a decrease in higher cost time deposits and an increase in average interest-bearing savings and demand balances. Also contributing to the decrease in the average cost of interest-bearing deposits was the repricing of time deposits to lower rates. During the second quarter of 2013, excluding early redemptions, $704.8 million of time deposits matured at a weighted average rate of 0.89%, while approximately $586.3 million of time deposits were issued at a weighted average rate of 0.35%.
The following table summarizes changes in average short-term borrowings and long-term debt, by type:
Three months ended
June 30
Increase (decrease)
2013
2012
$
%
(dollars in thousands)
Short-term borrowings:
Customer repurchase agreements
$
188,339

$
226,216

$
(37,877
)
(16.7
)%
Customer short-term promissory notes
98,207

146,307

(48,100
)
(32.9
)
Total short-term customer funding
286,546

372,523

(85,977
)
(23.1
)
Federal funds purchased
776,603

564,377

212,226

37.6

Short-term Federal Home Loan Bank (FHLB) advances (1)
250,275

25,000

225,275

901.1

Total short-term borrowings
1,313,424

961,900

351,524

36.5

Long-term debt:




FHLB advances
519,638

559,780

(40,142
)
(7.2
)
Other long-term debt
369,548

369,538

10

—

Total long-term debt
889,186

929,318

(40,132
)
(4.3
)
Total borrowings
$
2,202,610

$
1,891,218

$
311,392

16.5
%
(1) Represents FHLB advances with an original maturity term of less than one year.

41

Total short-term borrowings increased $351.5 million, or 36.5%, primarily due to increases in short-term FHLB advances and Federal funds, which were used to supplement deposits in funding loan growth. The $40.1 million decrease in long-term debt was due to the repayment of FHLB advances, which were not replaced with new long-term borrowings.
The average cost of total borrowings decreased 39 basis points, or 15.7%, to 2.09% in 2013 from 2.48% in 2012, primarily due to an increase in total average borrowings, with the increase primarily in lower cost short-term FHLB advances and Federal funds purchased.

Provision for Credit Losses
The provision for credit losses was $13.5 million for the second quarter of 2013, a decrease of $12.0 million, or 47.1%, in comparison to the second quarter of 2012 due to improvements in asset quality, as shown by a reduction in non-performing loans and overall delinquency rates.
The provision for credit losses is recognized as an expense in the consolidated statements of income and is the amount necessary to adjust the allowance for credit losses to its appropriate balance. The Corporation determines the appropriate level of the allowance for credit losses based on its allowance methodology, which considers various 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. 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:
Three months ended June 30
Increase (decrease)
2013
2012
$
%
(dollars in thousands)
Overdraft fees
$
7,624

$
8,095

$
(471
)
(5.8
)%
Cash management fees
2,970

2,816

154

5.5

Other
4,057

4,456

(399
)
(9.0
)
Service charges on deposit accounts
14,651

15,367

(716
)
(4.7
)
Mortgage banking income
10,997

11,143

(146
)
(1.3
)
Investment management and trust services
10,601

9,822

779

7.9

Merchant fees
3,600

3,376

224

6.6

Debit card income
2,374

2,209

165

7.5

Letter of credit fees
1,232

1,255

(23
)
(1.8
)
Foreign currency processing income
316

2,672

(2,356
)
(88.2
)
Other
1,986

1,995

(9
)
(0.5
)
Other service charges and fees
9,508

11,507

(1,999
)
(17.4
)
Credit card income
2,134

2,018

116

5.7

Other
1,560

1,913

(353
)
(18.5
)
Total, excluding investment securities gains
49,451

51,770

(2,319
)
(4.5
)
Investment securities gains
2,865

1,538

1,327

86.3

Total
$
52,316

$
53,308

$
(992
)
(1.9
)%
The $471,000, or 5.8%, decrease in overdraft fee income included a $321,000 decrease on personal accounts and a $150,000 decrease on commercial accounts. The overall decline in these fees resulted from a reduction in the number of overdraft items paid, largely due to changes in customer behavior.
Mortgage banking income decreased $146,000, or 1.3%, from the second quarter of 2012. Gains on sales of mortgage loans decreased $2.2 million, or 20.1%, due to a $164.6 million, or 25.1%, decrease in new loan commitments, partially offset by a 6.7% increase in pricing spreads. The decrease in new loan commitments was mainly from lower refinancing volumes in 2013. Mortgage servicing income increased $2.0 million from the second quarter of 2012 due to a reversal of the valuation allowance for mortgage servicing rights (MSRs) in the second quarter of 2013. The improvement in the fair value of MSRs was mainly due to a decrease

42

in forecasted mortgage prepayments as residential mortgage rates increased near the end of the quarter. See Note F, "Mortgage Servicing Rights," in the Notes to Consolidated Financial Statements for additional details.
The $779,000, or 7.9%, increase in investment management and trust services income was primarily due to a $436,000, or 10.3%, increase in brokerage revenue and a $427,000, or 7.9%, increase in trust commissions. These increases resulted from new trust business sales, improved market conditions that increased the values of existing assets under management and additional recurring revenue generated through the brokerage business due to growth in new accounts.
Foreign currency processing revenue decreased $2.4 million, or 88.2%. In December 2012, the Corporation's Fulton Bank, N.A. subsidiary sold its Global Exchange Group division (Global Exchange), which provided international payment solutions to meet the needs of companies, law firms and professionals.
The $353,000, or 18.4%, decrease in other income was largely due to $313,000 of gains on the sales of branch properties in the second quarter of 2012.
Investment securities gains of $2.9 million for the second quarter of 2013 included $1.1 million of net realized gains on financial institution stocks and $1.8 million of realized gains on the sales of debt securities, partially offset by $27,000 of other-than-temporary impairment charges for certain financial institution stocks. The $1.5 million of investment securities gains for the second quarter of 2012 included $1.5 million of realized gains on the sales of stocks of financial institutions and $78,000 of realized gains on the sales of debt securities, partially offset by $57,000 of other-than-temporary impairment charges for certain financial institution stocks.
On July 31, 2013, the U.S. District Court for the District of Columbia issued a ruling granting summary judgment to the plaintiffs in a case challenging certain provisions of the Federal Reserve Board's rule concerning electronic debit card transaction fees and network exclusivity arrangements (the Current Rule) that were adopted to implement the so-called "Durbin Amendment" of the Dodd-Frank Act. The district court held that, in adopting the Current Rule, the Federal Reserve Board violated the Durbin Amendment's provisions concerning which costs are allowed to be taken into account for purposes of setting fees that are "reasonable and proportional to the costs of the issuer" and therefore the Current Rule's maximum permissible debit card interchange fees were too high. In addition, the district court held that the Current Rule's network non-exclusivity provisions concerning unaffiliated payment networks for debit cards also violated the Durbin Amendment. The district court vacated the Current Rule, but stayed its ruling to provide the Federal Reserve Board an opportunity to replace the invalid provisions. The district court has not yet decided upon the length of the stay or whether the Current Rule will remain in effect during the stay. The Corporation will continue to monitor developments in the district court and any response to the district court's ruling by the Federal Reserve Board. The final outcome of this case, or any response to the district court's ruling by the Federal Reserve Board, may result in a reduction in the Current Rule's maximum permissible debit card interchange fees, thereby potentially reducing the Corporation's debit card income in future periods.



43

Non-Interest Expense
The following table presents the components of non-interest expense:
Three months ended June 30
Increase (decrease)
2013
2012
$
%
(dollars in thousands)
Salaries and employee benefits
$
63,490

$
60,091

$
3,399

5.7
%
Net occupancy expense
11,447

11,205

242

2.2

Other outside services
5,315

5,101

214

4.2

Data processing
4,509

3,759

750

20.0

Equipment expense
3,893

3,185

708

22.2

Professional fees
3,395

2,984

411

13.8

FDIC insurance expense
3,001

3,002

(1
)
—

Software
3,094

2,272

822

36.2

Other real estate owned (OREO) and repossession expense
1,941

3,165

(1,224
)
(38.7
)
Marketing
1,922

2,583

(661
)
(25.6
)
Operating risk loss
1,860

2,055

(195
)
(9.5
)
Telecommunications
1,736

1,478

258

17.5

Supplies
1,396

1,213

183

15.1

Postage
1,206

1,186

20

1.7

Intangible amortization
535

761

(226
)
(29.7
)
Other
8,390

8,047

343

4.3

Total
$
117,130

$
112,087

$
5,043

4.5
%
Salaries and employee benefits increased $3.4 million, or 5.7%. Salaries grew $2.9 million, or 5.7%, and employee benefits grew $545,000, or 5.3%. The increase in salaries was due to normal merit increases and an increase in average full-time equivalent employees to 3,595 for the three months ended June 30, 2013 from 3,500 for the same period in 2012. The increase in employee benefits was primarily due to higher healthcare costs and defined benefit plan expense.
Data processing increased $750,000, or 20.0%, primarily due to an increase in transaction volumes and costs related to the core processing system conversion. Equipment expense increased $708,000, or 22.2%, due to an increase in depreciation expense on assets supporting the information technology infrastructure. Professional fees increased $411,000, or 13.8%, due to higher legal costs associated with regulatory compliance and risk management efforts, partially offset by lower workout costs associated with problem assets. Software expense increased $822,000, or 36.2%, largely due to the core processing system conversion.
OREO and repossession expense decreased $1.2 million, or 38.7%, due to a $666,000 decrease in collections and repossession expense, a $244,000 decrease in property maintenance costs and a $346,000 decrease in valuation provisions and net losses on sales of properties. While the decline in these expenses can be attributed to general improvements in asset quality, this expense category is expected to be volatile. The $661,000, or 25.6%, decrease in marketing expense was primarily due to the timing and number of marketing promotions, partially offset by $244,000 of costs related to the core processing system conversion in the second quarter of 2013.
The $195,000 decrease in operating risk loss was due to a $966,000 decrease in reserves for losses associated with previously sold residential mortgages, partially offset by a $251,000 increase in charges related to debit card fraud losses. See Note J, "Commitments and Contingencies," in the Notes to Consolidated Financial Statements for additional details related to repurchases of previously sold residential mortgages. The $226,000, or 29.7%, 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 second quarter of 2013 was $13.2 million, a $191,000, or 1.4%, decrease from $13.4 million for the second quarter of 2012.
The Corporation’s effective tax rate was 24.5% in 2013, as compared to 25.1% in 2012. 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 such credits under various federal programs. The decrease in the effective tax rate in comparison to the

44

second quarter of 2012 was partially due to a $647,000 increase in net credits from such investments. In addition, the valuation allowance for certain state deferred tax assets was reduced by $488,000, net of federal tax, through a credit to income tax expense. This reduction resulted from an improvement in forecasts for state taxable income that will allow a larger portion of this deferred tax asset to be realized. In 2012, a $775,000 credit to state tax expense, net of federal tax, was recorded as a result of settling certain tax positions with taxing authorities.
Six Months Ended June 30, 2013 compared to the Six Months Ended June 30, 2012
Net Interest Income
FTE net interest income decreased $14.3 million, or 5.0%, to $270.3 million in the first half of 2013 from $284.6 million in the first half of 2012.
Net interest margin decreased 27 basis points, or 7.1%, to 3.54% for the first half of 2013 from 3.81% for the first half of 2012. The decrease in net interest margin was the result of a 45 basis point, or 9.9%, decrease in yields on interest-earning assets, partially offset by a 20 basis point, or 20.8%, decrease in funding costs.


45

The following table provides a comparative average balance sheet and net interest income analysis for the first half of 2013 as compared to the same period in 2012. Interest income and yields are presented on an FTE basis, using a 35% Federal tax rate and statutory interest expense disallowances. The discussion following this table is based on these FTE amounts. All dollar amounts are in thousands.
Six months ended June 30
2013
2012
ASSETS
Average
Balance
Interest  (1)
Yield/
Rate
Average
Balance
Interest  (1)
Yield/
Rate
Interest-earning assets:
Loans, net of unearned income (2)
$
12,393,670

$
274,950

4.47
%
$
11,974,519

$
291,309

4.89
%
Taxable investment securities (3)
2,415,562

27,913

2.31

2,467,609

37,285

3.02

Tax-exempt investment securities (3)
286,281

7,422

5.19

289,230

8,149

5.63

Equity securities (3)
121,123

1,792

2.97

111,274

1,487

2.68

Total investment securities
2,822,966

37,127

2.63

2,868,113

46,921

3.27

Loans held for sale
45,005

879

3.91

48,145

969

4.02

Other interest-earning assets
131,472

57

0.01

115,808

98

0.17

Total interest-earning assets
15,393,113

313,013

4.10
%
15,006,585

339,297

4.55
%
Noninterest-earning assets:
Cash and due from banks
204,308

247,891

Premises and equipment
226,189

214,725

Other assets
1,065,104

1,108,520

Less: Allowance for loan losses
(224,682
)
(262,709
)
Total Assets
$
16,664,032

$
16,315,012

LIABILITIES AND EQUITY
Interest-bearing liabilities:
Demand deposits
$
2,712,292

$
1,749

0.13
%
$
2,474,591

$
2,061

0.17
%
Savings deposits
3,342,626

2,039

0.12

3,325,959

3,320

0.20

Time deposits
3,244,805

16,111

1.00

3,871,636

25,612

1.33

Total interest-bearing deposits
9,299,723

19,899

0.43

9,672,186

30,993

0.64

Short-term borrowings
1,173,550

1,209

0.21

845,001

692

0.16

FHLB advances and long-term debt
890,174

21,583

4.87

956,310

22,966

4.82

Total interest-bearing liabilities
11,363,447

42,691

0.76
%
11,473,497

54,651

0.96
%
Noninterest-bearing liabilities:
Demand deposits
3,043,268

2,618,355

Other
189,357

191,696

Total Liabilities
14,596,072

14,283,548

Shareholders’ equity
2,067,960

2,031,464

Total Liabilities and Shareholders’ Equity
$
16,664,032

$
16,315,012

Net interest income/net interest margin (FTE)
270,322

3.54
%
284,646

3.81
%
Tax equivalent adjustment
(8,613
)
(8,421
)
Net interest income
$
261,709

$
276,225

(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.

46


The following table summarizes the changes in FTE interest income and expense for the first six months of 2013 as compared to the same period in 2012 due to changes in average balances (volume) and changes in rates:
2013 vs. 2012
Increase (decrease) due
to change in
Volume
Rate
Net
(in thousands)
Interest income on:
Loans, net of unearned income
$
9,682

$
(26,041
)
$
(16,359
)
Taxable investment securities
(773
)
(8,599
)
(9,372
)
Tax-exempt investment securities
(84
)
(643
)
(727
)
Equity securities
136

169

305

Loans held for sale
(64
)
(26
)
(90
)
Other interest-earning assets
12

(53
)
(41
)
Total interest income
$
8,909

$
(35,193
)
$
(26,284
)
Interest expense on:
Demand deposits
$
182

$
(494
)
$
(312
)
Savings deposits
17

(1,298
)
(1,281
)
Time deposits
(3,758
)
(5,743
)
(9,501
)
Short-term borrowings
309

208

517

FHLB advances and long-term debt
(1,615
)
232

(1,383
)
Total interest expense
$
(4,865
)
$
(7,095
)
$
(11,960
)
A 45 basis point, or 9.9%, decrease in average yields on interest-earning assets resulted in a $35.2 million decrease in FTE interest income, which was partially offset by an $8.9 million increase in FTE interest income resulting from a $386.5 million, or 2.6%, increase in average interest-earning assets.
Average investments decreased $45.1 million, or 1.6%. The average yield on investment securities decreased 64 basis points, or 19.6%, to 2.63% in 2013 from 3.27% in 2012, as the reinvestment of cash flows and purchases of mortgage-backed securities and collateralized mortgage obligations were at yields that were lower than the overall portfolio yield.
Average loans, by type, are summarized in the following table:
Six months ended June 30
Increase (decrease)
2013
2012
$
%
(dollars in thousands)
Real estate – commercial mortgage
$
4,712,530

$
4,625,969

$
86,561

1.9
%
Commercial – industrial, financial and agricultural
3,688,767

3,557,731

131,036

3.7

Real estate – home equity
1,697,634

1,605,633

92,001

5.7

Real estate – residential mortgage
1,296,012

1,158,994

137,018

11.8

Real estate – construction
604,531

640,928

(36,397
)
(5.7
)
Consumer
305,199

309,942

(4,743
)
(1.5
)
Leasing and other
88,997

75,322

13,675

18.2

Total
$
12,393,670

$
11,974,519

$
419,151

3.5
%

The $217.6 million, or 2.7%, increase in commercial loans and commercial mortgages was from both new and existing customers. The $137.0 million, or 11.8%, increase in residential mortgages was due to the Corporation retaining certain 15-year fixed rate residential mortgages in portfolio in the second half of 2012, while the $92.0 million, or 5.7%, increase in home equity loans was a result of certain promotions.
The average yield on loans decreased 42 basis points, or 8.6%, to 4.47% in 2013 from 4.89% in 2012. The decrease in average yields on loans was attributable to repayments of higher-yielding loans, increased refinancing activity, the elimination of interest rate floors on certain loans and new loan production at lower rates.

47

Interest expense decreased $12.0 million, or 21.9%, to $42.7 million in the first half of 2013 from $54.7 million in the first half of 2012. Interest expense decreased $7.1 million as a result of a 20 basis point, or 20.8%, decrease in the average cost of interest-bearing liabilities. Interest expense decreased an additional $4.9 million as a result of a $110.1 million, or 1.0%, decline in average interest-bearing liabilities.
Average deposits, by type are summarized in the following table:
Six months ended
June 30
Increase (decrease)
2013
2012
$
%
(dollars in thousands)
Noninterest-bearing demand
$
3,043,268

$
2,618,355

$
424,913

16.2
%
Interest-bearing demand
2,712,292

2,474,591

237,701

9.6

Savings
3,342,626

3,325,959

16,667

0.5

Total demand and savings
9,098,186

8,418,905

679,281

8.1

Time deposits
3,244,805

3,871,636

(626,831
)
(16.2
)
Total deposits
$
12,342,991

$
12,290,541

$
52,450

0.4
%
The $679.3 million, or 8.1%, increase in total demand and savings account balances was primarily due to a $360.8 million, or 8.9%, increase in personal account balances, a $277.9 million, or 10.1%, increase in business account balances and a $45.7 million, or 3.0%, increase in municipal account balances. The $626.8 million, or 16.2%, decrease in time deposits was primarily in accounts with original maturity terms of less than three years.
The average cost of interest-bearing deposits decreased 21 basis points, or 32.8%, to 0.43% in 2013 from 0.64% in 2012, primarily due to a decrease in higher cost time deposits and an increase in average interest-bearing savings and demand balances. Also contributing to the decrease in the average cost of interest-bearing deposits was the repricing of time deposits to lower rates.
The following table summarizes changes in average short-term borrowings and long-term debt, by type:
Six months ended June 30
Increase (decrease)
2013
2012
$
%
(dollars in thousands)
Short-term borrowings:
Customer repurchase agreements
$
176,788

$
213,379

$
(36,591
)
(17.1
)%
Customer short-term promissory notes
105,086

150,689

(45,603
)
(30.3
)
Total short-term customer funding
281,874

364,068

(82,194
)
(22.6
)
Federal funds purchased
743,376

464,175

279,201

60.1

Short-term FHLB advances
148,300

16,758

131,542

785.0

Total short-term borrowings
$
1,173,550

$
845,001

$
328,549

38.9

Long-term debt:
FHLB advances
520,663

586,115

(65,452
)
(11.2
)
Other long-term debt
369,511

370,195

(684
)
(0.2
)
Total long-term debt
890,174

956,310

(66,136
)
(6.9
)
Total
$
2,063,724

$
1,801,311

$
262,413

14.6
%
Total short-term borrowings increased $328.5 million, or 38.9%, primarily due to increases in Federal funds purchased and short-term FHLB advances. The $66.1 million decrease in long-term debt was due to the repayment of FHLB advances, which were not replaced with new long-term borrowings.
The average cost of total borrowings decreased 41 basis points, or 15.6%, to 2.22% in 2013 from 2.63% in 2012, primarily due to an increase in total average borrowings, with the increase primarily in lower cost short-term FHLB advances and Federal funds purchased.


48

Provision for Credit Losses
The provision for credit losses was $28.5 million for the first half of 2013, a decrease of $25.0 million, or 46.7%, in comparison to the first half of 2012 due to 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:
Six months ended June 30
Increase (decrease)
2013
2012
$
%
(dollars in thousands)
Overdraft fees
$
15,085

$
16,060

$
(975
)
(6.1
)%
Cash management fees
5,802

5,429

373

6.9

Other
7,875

8,720

(845
)
(9.7
)
Service charges on deposit accounts
28,762

30,209

(1,447
)
(4.8
)
Investment management and trust services
20,697

19,199

1,498

7.8

Mortgage banking income
19,170

21,193

(2,023
)
(9.5
)
Merchant fees
6,673

6,235

438

7.0

Debit card income
4,458

4,310

148

3.4

Letter of credit fees
2,466

2,572

(106
)
(4.1
)
Foreign currency processing income
676

5,064

(4,388
)
(86.7
)
Other
3,745

3,881

(136
)
(3.5
)
Other service charges and fees
18,018

22,062

(4,044
)
(18.3
)
Credit card income
4,306

3,916

390

10.0

Other
3,284

5,579

(2,295
)
(41.1
)
Total, excluding investment securities gains
94,237

102,158

(7,921
)
(7.8
)
Investment securities gains
5,338

2,789

2,549

91.4

Total
$
99,575

$
104,947

$
(5,372
)
(5.1
)%
The $975,000, or 6.1%, decrease in overdraft fee income included a $643,000 decrease on personal accounts and a $332,000 decrease on commercial accounts. The overall decline in these fees resulted from a reduction in the number of overdraft items paid, largely due to changes in customer behavior.
The $1.5 million, or 7.8%, increase in investment management and trust services income was primarily due to a $960,000, or 12.1%, increase in brokerage revenue and a $737,000, or 6.8%, 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.
Mortgage banking income decreased $2.0 million, or 9.5%. Gains on sales of mortgage loans decreased $3.6 million, or 17.4%, due to a $266.8 million, or 21.0%, decrease in new loan commitments, partially offset by a 4.3% increase in pricing spreads during 2013. The decrease in new loan commitments was largely driven by lower refinancing volumes. The decrease in gains on sales of mortgage loans was partially offset by a $1.6 million increase in mortgage servicing income, largely a result of a $2.0 million reversal of the valuation allowance for MSRs in the second quarter of 2013.
Foreign currency processing income decreased $4.4 million, or 86.7%, due to the sale of Global Exchange in the fourth quarter of 2012. The $390,000, or 10.0%, increase in credit card income was due to an increase in sales volumes and customer balances over the prior year. The $2.3 million, or 41.1%, decrease in other income was largely due to $2.0 million of gains on the sales of two branches and one operations facility in 2012.
Investment securities gains of $5.3 million for the first half 2013 included $2.1 million of net realized gains on financial institution stocks and $3.2 million of realized gains on the sales of debt securities, partially offset by $27,000 of other-than-temporary impairment charges for certain financial institution stocks. Investment securities gains of $2.8 million for the first half of 2012 included $2.6 million of gains on the sales of equity securities and $243,000 of gains on the sales of debt securities, partially offset by $57,000 of other-than-temporary impairment charges for certain financial institution stocks.

49

Non-Interest Expense
The following table presents the components of non-interest expense:
Six months ended
June 30
Increase (decrease)
2013
2012
$
%
(dollars in thousands)
Salaries and employee benefits
$
124,702

$
120,451

$
4,251

3.5
%
Net occupancy expense
23,291

22,140

1,151

5.2

Data processing
8,412

7,447

965

13.0

Other outside services
8,175

8,014

161

2.0

Equipment expense
7,801

6,554

1,247

19.0

Professional fees
6,442

5,566

876

15.7

FDIC insurance expense
5,848

6,023

(175
)
(2.9
)
Software
5,842

4,447

1,395

31.4

OREO and repossession expense
4,795

6,460

(1,665
)
(25.8
)
Marketing
3,794

5,055

(1,261
)
(24.9
)
Operating risk loss
3,626

5,423

(1,797
)
(33.1
)
Telecommunications
3,539

3,379

160

4.7

Postage
2,470

2,471

(1
)
—

Supplies
2,592

2,437

155

6.4

Intangible amortization
1,069

1,562

(493
)
(31.6
)
Other
15,668

15,327

341

2.2

Total
$
228,066

$
222,756

$
5,310

2.4
%
Salaries and employee benefits increased $4.3 million, or 3.5%, with salaries increasing $4.1 million, or 4.0%, and employee benefits increasing $234,000, or 1.1%. The increase in salaries was primarily due to normal merit increases and an increase in staffing levels, in addition to an $863,000 increase in incentive compensation expense. Average full-time equivalent employees increased to 3,580 in the first six months of 2013 from 3,500 for same period in 2012. The $234,000 increase in employee benefits was primarily due to increases in defined benefit and defined contribution plan expenses, partially offset by a decrease in healthcare costs as a result of elevated claims in the first quarter of 2012.
Net occupancy expense increased $1.2 million, or 5.2%, as a result of new branches opened in late 2012 and an increase in rent expense. Data processing increased $965,000, or 13.0%, primarily due to an increase in transaction volumes and an increase in expenses as a result of the core processing systems conversion. Equipment expense increased $1.2 million, or 19.0%, due to an increase in depreciation expense on assets supporting the information technology infrastructure. Professional fees increased $876,000, or 15.7%, due to an increase in legal costs associated with regulatory compliance and risk management efforts, partially offset by lower workout costs associated with problem assets.
Software expense increased $1.4 million, or 31.4%, due to increased maintenance costs and costs associated with the core processing system conversion. OREO and repossession expense decreased $1.7 million, or 25.8%, mainly due to a $1.2 million decrease in collections and repossession expense and a $553,000 decrease in property maintenance costs.
Marketing expense decreased $1.3 million, or 24.9%, due to the number and timing of promotional campaigns, partially offset by $244,000 of expenses related to the core processing system conversion. The $1.8 million, or 33.1%, decrease in operating risk loss was largely due to a $3.3 million decrease in reserves for losses associated with previously sold residential mortgages, partially offset by a $728,000 increase in debit card fraud losses. The $493,000, or 31.6%, decrease in intangible amortization was primarily due to core deposit intangible assets, which are amortized on an accelerated basis.

50

Income Taxes
Income tax expense for the first half of 2013 was $24.9 million, a $2.0 million, or 7.4%, decrease from $26.9 million in 2012. The decrease was primarily due to a decline in the effective tax rate.
The Corporation’s effective tax rate was 23.8% in 2013, as compared to 25.6% in 2012. 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 such credits under various federal programs. The decrease in the effective tax rate in comparison to the first half of 2012 was partially due to a $1.2 million increase in net credits on such investments. In addition, a $1.7 million ($1.1 million, net of federal tax) decrease in the valuation allowance for certain state deferred tax assets was recorded as a credit to income tax expense. This decrease resulted from an improvement in forecasts for state taxable income that will allow a larger portion of this deferred tax asset to be realized.





51

FINANCIAL CONDITION
The table below presents condensed consolidated ending balance sheets for the Corporation.
Increase (decrease)
June 30, 2013
December 31, 2012
$
%
(dollars in thousands)
Assets
Cash and due from banks
$
219,944

$
256,300

$
(36,356
)
(14.2
)%
Interest-bearing deposits with other banks
130,065

173,257

(43,192
)
(24.9
)
Loans held for sale
60,909

67,899

(6,990
)
(10.3
)
Investment securities
2,915,879

2,794,017

121,862

4.4

Loans, net of allowance
12,428,987

11,923,068

505,919

4.2

Premises and equipment
224,418

227,723

(3,305
)
(1.5
)
Goodwill and intangible assets
534,452

535,563

(1,111
)
(0.2
)
Other assets
507,756

555,270

(47,514
)
(8.6
)
Total Assets
$
17,022,410

$
16,533,097

$
489,313

3.0
%
Liabilities and Shareholders’ Equity
Deposits
$
12,257,809

$
12,484,163

$
(226,354
)
(1.8
)%
Short-term borrowings
1,620,318

868,399

751,919

86.6

Long-term debt
889,167

894,253

(5,086
)
(0.6
)
Other liabilities
226,384

204,626

21,758

10.6

Total Liabilities
14,993,678

14,451,441

542,237

3.8

Total Shareholders’ Equity
2,028,732

2,081,656

(52,924
)
(2.5
)
Total Liabilities and Shareholders’ Equity
$
17,022,410

$
16,533,097

$
489,313

3.0
%
Investment Securities
The following table presents the carrying amount of investment securities held to maturity (HTM) and available for sale (AFS):
June 30, 2013
December 31, 2012
Increase (decrease)
HTM
AFS
Total
HTM
AFS
Total
$
%
(dollars in thousands)
U.S. Government securities
$
—

$
819

$
819

$
—

$
325

$
325

494

152.0
%
U.S. Government sponsored agency securities
—

2,251

2,251

—

2,397

2,397

(146
)
(6.1
)%
State and municipal securities
—

295,733

295,733

—

315,519

315,519

(19,786
)
(6.3
)%
Corporate debt securities
—

107,477

107,477

—

112,842

112,842

(5,365
)
(4.8
)%
Collateralized mortgage obligations
—

1,240,562

1,240,562

—

1,211,119

1,211,119

29,443

2.4
%
Mortgage-backed securities
227

973,099

973,326

292

879,621

879,913

93,413

10.6
%
Auction rate securities
—

152,592

152,592

—

149,339

149,339

3,253

2.2
%
Total debt securities
227

2,772,533

2,772,760

292

2,671,162

2,671,454

101,306

3.8
%
Equity securities
—

143,119

143,119

—

122,563

122,563

20,556

16.8
%
Total
$
227

$
2,915,652

$
2,915,879

$
292

$
2,793,725

$
2,794,017

$
121,862

4.4
%
Total investment securities increased $121.9 million, or 4.4%, to $2.9 billion at June 30, 2013, due mainly to an increase in mortgage-backed securities and collateralized mortgage obligations, partially offset by a decrease in state and municipal holdings. Portfolio cash flows and short-term borrowings during the first half of 2013 were used to purchase collateralized mortgage

52

obligations and mortgage-backed securities with an average life of four years to provide for more structured cash flows, thereby limiting price and extension risk in the current low interest rate environment.
The net unrealized loss on available for sale investment securities was $18.3 million as of June 30, 2013 compared to a net unrealized gain of $41.5 million as of December 31, 2012. The change was due to an increase in interest rates, which caused the fair values of collateralized mortgage obligations and mortgage-backed securities to decrease below amortized cost. 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)
June 30,
2013
December 31,
2012
$
%
(in thousands)
Real-estate – commercial mortgage
$
4,856,916

$
4,664,426

$
192,490

4.1
%
Commercial – industrial, financial and agricultural
3,712,974

3,612,065

100,909

2.8

Real-estate – home equity
1,760,268

1,632,390

127,878

7.8

Real-estate – residential mortgage
1,313,345

1,257,432

55,913

4.4

Real-estate – construction
610,280

584,118

26,162

4.5

Consumer
300,233

309,864

(9,631
)
(3.1
)
Leasing and other
91,402

86,676

4,726

5.5

Loans, net of unearned income
$
12,645,418

$
12,146,971

$
498,447

4.1
%
The Corporation does not have a concentration of credit risk with any single borrower, industry or geographical location. The maximum total lending commitment to an individual borrower was $39.0 million at June 30, 2013, which is below the Corporation's maximum lending limit. As of June 30, 2013, the Corporation had 61 relationships with borrowing commitments of $20.0 million or more.

Approximately $5.5 billion, or 43.2%, of the loan portfolio was in commercial mortgage and construction loans as of June 30, 2013. The performance of these loans can be adversely impacted by fluctuations in real estate values. The Corporation limits its maximum non-owner occupied commercial real estate exposure to $28.0 million to any one borrower, and limits its exposure to any one development project to $15.0 million.
Geographically, the $192.5 million, or 4.1%, increase in commercial mortgages was due to increases in the Pennsylvania ($75.6 million, or 3.0%), Maryland ($51.6 million, or 12.4%), Virginia ($29.5 million, or 8.2%), New Jersey ($23.9 million, or 2.0%) and Delaware ($11.9 million, or 7.1%) markets.
Construction loans include loans to commercial borrowers secured by residential real estate, loans to commercial borrowers secured by commercial real estate and other construction loans, which represent loans to individuals secured by residential real estate. The following table presents outstanding construction loans and their delinquency rates by these class segments:
June 30, 2013
December 31, 2012
$
Delinquency Rate (1)
% of Total
$
Delinquency Rate (1)
% of Total
Commercial - residential
$
269,972

9.3
%
44.3
%
$
288,552

8.2
%
49.4
%
Commercial
268,115

2.1

43.9

226,350

3.5

38.8

Other
72,193

2.6

11.8

69,216

2.6

11.8

Total Real estate - construction
$
610,280

5.3
%
100.0
%
$
584,118

5.7
%
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 $26.2 million, or 4.5%, in comparison to December 31, 2012. During 2012, the Corporation reduced its exposure to non-performing construction loans, particularly within its Maryland and Virginia markets. Recent improvements in economic conditions and increased demand have resulted in moderate growth in this portfolio. Geographically, the increase in

53

construction loans was realized in the Pennsylvania ($16.8 million, or 5.3%), New Jersey ($14.1 million, 21.6%) and Delaware ($4.2 million, or 26.4%) markets, partially offset by a decrease in the Maryland ($8.1 million, or 12.0%) market.
The $100.9 million, or 2.8%, increase in commercial loans was in the Pennsylvania ($79.5 million, or 3.1%), Virginia ($28.7 million, or 17.1%), New Jersey ($8.1 million, 1.6%) and Delaware ($4.6 million, or 8.3%) markets, offset by a decline in the Maryland ($20.0 million, or 6.4%) market.

The following table summarizes the industry concentrations of the Corporation's commercial loan portfolio:
June 30,
2013
December 31, 2012
Services
17.1
%
17.4
%
Manufacturing
15.1

14.7

Retail
11.0

10.1

Wholesale
10.4

10.5

Construction
10.1

10.3

Health care
8.4

8.2

Real estate (1)
7.2

7.4

Agriculture
5.3

5.7

Transportation
2.4

3.0

Arts and entertainment
2.3

2.6

Financial services
2.1

2.2

Other
8.6

7.9

100.0
%
100.0
%
(1)
Includes borrowers engaged in the business of: renting, leasing or managing real estate for others; selling, renting 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:
June 30, 2013
December 31, 2012
(dollars in thousands)
Commercial - industrial, financial and agricultural
$
148,955

$
81,978

Real estate - commercial mortgage
50,605

47,637

$
199,560

$
129,615

As of June 30, 2013, none of the shared national credits were past due, as compared to one past due shared national credit, or 2.7% of the total balance, as of December 31, 2012.
Home equity loans increased $127.9 million, or 7.8%, primarily a result of an increase in 15-year fixed rate loans due to certain promotions. Geographically, the increase was in the Pennsylvania ($98.5 million, or 10.4%), New Jersey ($16.4 million, or 6.0%) and Delaware ($12.1 million, 14.3%) markets. As of June 30, 2013, approximately 7% of home equity loans were fixed maturity lines of credit, or lines that will convert to amortizing lines at a future date.
Residential mortgages increased $55.9 million, or 4.4%, due primarily to an increase in fixed rate mortgages. During the second half of 2012, the Corporation elected to retain certain 15-year fixed rate mortgages in portfolio instead of selling them to third-party investors. A portion of these loans closed during the first quarter of 2013, resulting in the growth since December 31, 2012. Geographically, the increase in residential mortgages was throughout all markets, with increases in Pennsylvania ($27.6 million, or 4.3%), Virginia ($17.3 million, or 7.7%), Maryland ($4.3 million, or 2.9%), Delaware ($3.6 million, or 4.8%) and New Jersey ($3.1 million, or 1.8%).

54

Provision for Credit Losses and Allowance for Credit Losses
The following table presents the activity in the allowance for credit losses:
Three months ended
June 30
Six months ended
June 30
2013
2012
2013
2012
(dollars in thousands)
Daily average balance of loans, net of unearned income
$
12,528,562

$
11,967,939

$
12,393,670

$
11,974,519

Balance of allowance for credit losses at beginning of period
$
221,527

$
258,137

$
225,439

$
258,177

Loans charged off:


Commercial – industrial, financial and agricultural
5,960

13,017

15,462

18,686

Real estate – commercial mortgage
5,193

23,699

9,326

35,590

Real estate – residential mortgage
4,465

1,492

7,515

2,339

Real estate – construction
2,597

8,442

4,583

17,013

Real estate – home equity
1,966

2,789

4,370

4,995

Consumer
433

471

983

1,105

Leasing and other
769

630

1,250

1,071

Total loans charged off
21,383

50,540

43,489

80,799

Recoveries of loans previously charged off:
Commercial – industrial, financial and agricultural
756

717

1,135

1,353

Real estate – commercial mortgage
1,505

1,153

2,569

1,969

Real estate – residential mortgage
116

71

197

144

Real estate – construction
744

1,539

1,415

1,603

Real estate – home equity
192

278

523

298

Consumer
406

281

912

631

Leasing and other
263

180

425

440

Total recoveries
3,982

4,219

7,176

6,438

Net loans charged off
17,401

46,321

36,313

74,361

Provision for credit losses
13,500

25,500

28,500

53,500

Balance of allowance for credit losses at end of period
$
217,626

$
237,316

$
217,626

$
237,316

Net charge-offs to average loans (annualized)
0.56
%
1.55
%
0.59
%
1.24
%
The following table presents the components of the allowance for credit losses:
June 30,
2013
December 31,
2012
(dollars in thousands)
Allowance for loan losses
$
216,431

$
223,903

Reserve for unfunded lending commitments
1,195

1,536

Allowance for credit losses
$
217,626

$
225,439

Allowance for credit losses to loans outstanding
1.72
%
1.98
%
For the three and six months ended June 30, 2013, the Corporation's provision for credit losses decreased $12.0 million, or 47.1%, and $25.0 million, or 46.7%, respectively, in comparison to the same periods in 2012. The decreases in the provision for credit losses were due to improvement in the Corporation’s credit quality metrics, including a reduction in the level of non-performing loans and overall delinquency.
Net charge-offs decreased $28.9 million, or 62.4%, to $17.4 million for the second quarter of 2013 compared to $46.3 million for the second quarter of 2012. The decrease in net charge-offs was primarily due to an $18.9 million, or 83.6%, decrease in commercial mortgage net charge-offs, a $7.1 million, or 57.7%, decrease in commercial loan net charge-offs and a $5.1 million, or 73.2%,

55

decrease in construction loan net-charge-offs. Of the $17.4 million of net charge-offs recorded in the second quarter of 2013, 45.1% were for loans originated in New Jersey, 34.3% in Pennsylvania, 11.7% in Virginia and 7.2% in Maryland.
For the first half of 2013, net charge-offs decreased $38.0 million, or 51.2%, including a $26.9 million, or 79.9%, decrease in commercial mortgage net charge-offs and a $12.2 million, or 79.4%, decrease in construction loan net charge-offs, partially offset by a $5.1 million, or 233.4%, increase in residential mortgage net charge-offs. Of the $36.3 million of net charge-offs recorded in the first half of 2013, 42.8% were for loans originated in New Jersey, 42.3% in Pennsylvania, 7.5% in Maryland and 6.7% in Virginia.
The Corporation occasionally sells pools of non-accrual loans to third-party investors. When an appropriate price can be obtained, these sales can be advantageous as they reduce the cost of resolving problem credits and enable the Corporation to redeploy resources to other work-out and collection efforts. In March 2013 and June 2013, the Corporation sold $9.9 million and $15.5 million , respectively, of non-accrual commercial mortgage, commercial and construction loans to an investor. During the three and six months ended June 30, 2013 total charge-offs associated with these transactions totaled $6.7 million and $11.9 million , respectively. Below is a summary of these transactions:
Three months ended June 30, 2013
Six months ended June 30, 2013
Real Estate - Commercial mortgage
Commercial - industrial, financial and agricultural
Real Estate - Construction
Total
Real Estate - Commercial mortgage
Commercial - industrial, financial and agricultural
Real Estate - Construction
Total
(in thousands)
Unpaid principal balance of loans sold
$
9,230

$
6,920

$
7,700

$
23,850

$
16,920

$
11,650

$
8,440

$
37,010

Charge-offs prior to sale
(2,470
)
(1,320
)
(4,530
)
(8,320
)
(4,890
)
(2,030
)
(4,680
)
(11,600
)
Net recorded investment in loans sold
6,760

5,600

3,170

15,530

12,030

9,620

3,760

25,410

Proceeds from sale, net of selling expenses
4,330

2,300

2,210

8,840

7,100

4,030

2,350

13,480

Total charge-off upon sale
$
(2,430
)
$
(3,300
)
$
(960
)
$
(6,690
)
$
(4,930
)
$
(5,590
)
$
(1,410
)
$
(11,930
)
Existing allocation for credit losses on sold loans
$
(3,430
)
$
(3,370
)
$
(1,020
)
$
(7,820
)
$
(6,300
)
$
(5,330
)
$
(1,320
)
$
(12,950
)
In June 2012, the Corporation sold $44.1 million of non-accrual commercial mortgage, commercial and construction loans to an investor, resulting in a total increase to charge-offs of $21.2 million during the three and six months ended June 30, 2012 . Below is a summary of this transaction:
Real Estate - Commercial mortgage
Commercial - industrial, financial and agricultural
Real Estate - Construction
Total
(in thousands)
Unpaid principal balance of loans sold
$
38,450

$
15,270

$
6,280

$
60,000

Charge-offs prior to sale
(8,600
)
(3,750
)
(3,540
)
(15,890
)
Net recorded investment in loans sold
29,850

11,520

2,740

44,110

Proceeds from sale, net of selling expenses
15,910

5,170

1,850

22,930

Total charge-off upon sale
$
(13,940
)
$
(6,350
)
$
(890
)
$
(21,180
)
Existing allocation for credit losses on sold loans
$
(15,090
)
$
(7,510
)
$
(1,520
)
$
(24,120
)


56

The following table summarizes non-performing assets as of the indicated dates:
June 30, 2013
June 30, 2012
December 31,
2012
(dollars in thousands)
Non-accrual loans
$
164,039

$
203,539

$
184,832

Loans 90 days past due and accruing
25,159

30,434

26,221

Total non-performing loans
189,198

233,973

211,053

Other real estate owned (OREO)
20,984

32,338

26,146

Total non-performing assets
$
210,182

$
266,311

$
237,199

Non-accrual loans to total loans
1.30
%
1.70
%
1.52
%
Non-performing assets to total assets
1.23
%
1.63
%
1.43
%
Allowance for credit losses to non-performing loans
115.0
%
101.4
%
106.8
%

The following table presents accruing loans whose terms have been modified under troubled debt restructurings (TDRs), by type, as of the indicated dates:
June 30, 2013
June 30, 2012
December 31, 2012
(in thousands)
Real estate – residential mortgage
$
28,948

$
33,516

$
32,993

Real estate – commercial mortgage
24,828

32,481

34,672

Real estate – construction
10,599

10,030

10,564

Commercial – industrial, financial and agricultural
8,394

4,806

5,745

Real estate - home equity
1,549

620

1,518

Consumer
13

—

17

Total accruing TDRs
74,331

81,453

85,509

Non-accrual TDRs (1)
30,377

27,576

31,244

Total TDRs
$
104,708

$
109,029

$
116,753

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

Total TDRs modified during the first half of 2013 and still outstanding as of June 30, 2013 totaled $18.3 million. During the first half of 2013, $16.8 million of TDRs that were modified within the previous 12 months had a payment default subsequent to modification.

57

The following table presents the changes in non-accrual loans for the three and six months ended June 30, 2013:
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 June 30, 2013
Balance of non-accrual loans at March 31, 2013
$
57,699

$
55,154

$
31,715

$
22,383

$
12,332

$
6

$
45

$
179,334

Additions
11,706

6,640

7,562

8,690

3,707

7

—

38,312

Payments
(6,429
)
(12,662
)
(6,215
)
(476
)
(540
)
—

(25
)
(26,347
)
Charge-offs (1)
(5,947
)
(4,761
)
(2,839
)
(4,464
)
(1,392
)
(5
)
(20
)
(19,428
)
Transfers to accrual status
—

(557
)
(2,738
)
—

(35
)
—

—

(3,330
)
Transfers to OREO
(2,306
)
—

(341
)
(1,294
)
(561
)
—

—

(4,502
)
Balance of non-accrual loans at June 30, 2013
$
54,723

$
43,814

$
27,144

$
24,839

$
13,511

$
8

$
—

$
164,039

Six months ended June 30, 2013
Balance of non-accrual loans at January 1, 2013
$
65,695

$
54,960

$
31,426

$
21,103

$
11,625

$
13

$
10

$
184,832

Additions
28,632

20,870

12,641

14,457

6,910

23

45

83,578

Payments
(16,070
)
(21,579
)
(9,019
)
(802
)
(1,276
)
(1
)
(35
)
(48,782
)
Charge-offs (1)
(15,322
)
(8,929
)
(4,825
)
(7,514
)
(2,887
)
(27
)
(20
)
(39,524
)
Transfers to OREO
(3,518
)
(950
)
(341
)
(1,860
)
(726
)
—

—

(7,395
)
Transfers to accrual status
(4,694
)
(558
)
(2,738
)
(545
)
(135
)
—

—

(8,670
)
Balance of non-accrual loans at June 30, 2013
$
54,723

$
43,814

$
27,144

$
24,839

$
13,511

$
8

$
—

$
164,039

(1) Excludes charge-offs of loans on accrual status.

Non-accrual loans decreased $39.5 million, or 19.4%, in comparison to June 30, 2012 and $20.8 million, or 11.2%, in comparison to December 31, 2012. Total non-accrual additions for the three and six months ended June 30, 2013 were $38.3 million and $83.6 million, respectively, compared to additions for the three and six months ended June 30, 2012 of $55.6 million and $92.4 million, respectively.
The following table summarizes non-performing loans, by type, as of the indicated dates:
June 30, 2013
June 30, 2012
December 31,
2012
(in thousands)
Commercial – industrial, financial and agricultural
$
57,219

$
67,969

$
66,954

Real estate – commercial mortgage
49,429

82,179

57,120

Real estate – residential mortgage
30,660

25,373

34,436

Real estate – construction
29,964

43,124

32,005

Real estate – home equity
19,046

12,260

17,204

Consumer
2,780

2,672

3,315

Leasing
100

396

19

Total non-performing loans
$
189,198

$
233,973

$
211,053


Non-performing commercial loans decreased $10.8 million, or 15.8%, in comparison to June 30, 2012. Geographically, the decrease occurred primarily in the New Jersey ($5.1 million, or 35.0%), Pennsylvania ($2.8 million, or 6.3%) and Maryland ($2.6 million, or 46.9%) markets.
Non-performing commercial mortgages decreased $32.8 million, or 39.9%, in comparison to June 30, 2012. Geographically, the decrease was primarily in the Maryland ($14.6 million, 92.8%), New Jersey ($12.8 million, or 40.6%) and Pennsylvania ($8.3 million, or 30.3%) markets.
Non-performing construction loans decreased $13.2 million, or 30.5%, in comparison to June 30, 2012. Geographically, the decrease occurred primarily in the New Jersey ($7.8 million, or 62.2%) and Virginia ($7.2 million, or 77.2%) markets.

58

Non-performing residential mortgages increased $5.3 million, or 20.8%, in comparison to June 30, 2012. Geographically, the increase was primarily in the Pennsylvania ($5.9 million, or 93.8%) and New Jersey ($2.0 million, or 34.6%) markets, partially offset by a $2.1 million, or 24.5%, decrease in the Virginia market. In the fourth quarter of 2012, the Corporation began classifying loans where borrowers have been discharged via Chapter 7 bankruptcy, and have not reaffirmed their loan obligation, as non-accrual TDRs based on new interpretative regulatory guidance.
The following table summarizes the Corporation’s OREO, by property type, as of the indicated dates:
June 30, 2013
June 30, 2012
December 31,
2012
(in thousands)
Commercial properties
$
10,501

$
16,730

$
15,482

Residential properties
5,800

9,680

6,788

Undeveloped land
4,683

5,928

3,876

Total OREO
$
20,984

$
32,338

$
26,146

The Corporation's ability to identify potential problem loans in a timely manner is key 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 complete description of the Corporation's risk ratings, see Note E, "Loans and Allowance for Credit Losses," in the Notes to Consolidated Financial Statements. The evaluation of credit risk for residential mortgages, home equity loans, construction loans to individuals, consumer loans and lease receivables is based on aggregate payment history, through the monitoring of delinquency levels and trends.
The following table presents commercial loans, commercial mortgages and construction loans to commercial borrowers with internal risk ratings of Special Mention or Substandard or lower, by class segment:
Special Mention
Increase (decrease)
Substandard or lower
Decrease
Total Criticized Loans
June 30, 2013
December 31, 2012
$
%
June 30, 2013
December 31, 2012
$
%
June 30, 2013
December 31, 2012
(dollars in thousands)
Real estate - commercial mortgage
$
165,936

$
157,640

$
8,296

5.3
%
$
218,975

$
251,452

$
(32,477
)
(12.9
)%
$
384,911

$
409,092

Commercial - secured
99,025

137,277

(38,252
)
(27.9
)
172,395

194,952

(22,557
)
(11.6
)
271,420

332,229

Commercial -unsecured
3,882

5,421

(1,539
)
(28.4
)
5,742

6,000

(258
)
(4.3
)
9,624

11,421

Total Commercial - industrial, financial and agricultural
102,907

142,698

(39,791
)
(27.9
)
178,137

200,952

(22,815
)
(11.4
)
281,044

343,650

Construction - commercial residential
49,934

52,434

(2,500
)
(4.8
)
63,096

79,581

(16,485
)
(20.7
)
113,030

132,015

Construction - commercial
2,289

2,799

(510
)
(18.2
)
9,454

12,081

(2,627
)
(21.7
)
11,743

14,880

Total real estate - construction (excluding construction - other)
52,223

55,233

(3,010
)
(5.4
)
72,550

91,662

(19,112
)
(20.9
)
124,773

146,895

Total
$
321,066

$
355,571

$
(34,505
)
(9.7
)%
$
469,662

$
544,066

$
(74,404
)
(13.7
)%
$
790,728

$
899,637

% of total loans
3.5
%
4.0
%
5.1
%
6.2
%
8.6
%
10.2
%
As of June 30, 2013, total loans with risk ratings of Substandard or lower decreased $185.0 million, or 28.3%, in comparison to June 30, 2012 and $74.4 million, or 13.7%, in comparison to December 31, 2012. Special Mention loans decreased $51.7 million, or 13.9%, in comparison to June 30, 2012 and $34.5 million, or 9.7%, in comparison to December 31, 2012.
Overall reductions in criticized loans, while not the sole factor for measuring allowance for credit loss allocations on the above loan types, contributed to a decrease in allocations for impaired loans of $13.9 million, or 17.0%, from June 30, 2012 to June 30, 2013.

59

The following table summarizes loan delinquency rates, by type, as of the dates indicated:
June 30, 2013

June 30, 2012
December 31, 2012
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
0.47
%
1.01
%
1.48
%
0.41
%
1.78
%
2.19
%
0.46
%
1.22
%
1.68
%
Commercial – industrial, financial and agricultural
0.41
%
1.54
%
1.95
%
0.66
%
1.91
%
2.57
%
0.46
%
1.85
%
2.31
%
Real estate – construction
0.42
%
4.91
%
5.33
%
0.95
%
6.96
%
7.91
%
0.23
%
5.48
%
5.71
%
Real estate – residential mortgage
2.12
%
2.33
%
4.45
%
2.94
%
2.15
%
5.09
%
2.55
%
2.74
%
5.29
%
Real estate – home equity
0.68
%
1.08
%
1.76
%
0.83
%
0.76
%
1.59
%
0.77
%
1.06
%
1.83
%
Consumer, leasing and other
1.47
%
0.74
%
2.21
%
1.61
%
0.79
%
2.40
%
1.71
%
0.84
%
2.55
%
Total
0.68
%
1.50
%
2.18
%
0.86
%
1.95
%
2.81
%
0.75
%
1.74
%
2.49
%
Total dollars (in thousands)
$
85,869

$
189,198

$
275,067

$
102,688

$
233,973

$
336,661

$
90,857

$
211,053

$
301,910

(1)
Includes non-accrual loans.
The Corporation believes that the allowance for credit losses of $217.6 million as of June 30, 2013 is sufficient to cover incurred losses in both the loan portfolio and the unfunded lending commitments as of that date and is appropriate based on applicable accounting standards.
Other Assets
Other assets decreased $47.5 million, or 8.6%, in comparison to December 31, 2012. As of December 31, 2012, the Corporation had $53.2 million of receivables outstanding related to investment security sales that had not settled at the end of the quarter. The Corporation had no such receivables outstanding as of June 30, 2013. In addition, prepaid FDIC insurance assessments decreased $23.6 million, as the FDIC refunded $21.0 million in prepaid assessments in the second quarter of 2013. These decreases were partially offset by a $26.7 million increase in net deferred tax assets, mainly due to an increase in unrealized losses on available for sale investment securities.
Deposits and Borrowings
The following table presents ending deposits, by type:
Increase (decrease)
June 30, 2013
December 31, 2012
$
%
(dollars in thousands)
Noninterest-bearing demand
$
3,168,781

$
3,009,966

$
158,815

5.3
%
Interest-bearing demand
2,714,545

2,755,603

(41,058
)
(1.5
)
Savings
3,272,557

3,335,256

(62,699
)
(1.9
)
Total demand and savings
9,155,883

9,100,825

55,058

0.6

Time deposits
3,101,926

3,383,338

(281,412
)
(8.3
)
Total deposits
$
12,257,809

$
12,484,163

$
(226,354
)
(1.8
)%
Non-interest bearing demand deposits increased $158.8 million, or 5.3%, due primarily to a $140.3 million, or 6.5%, increase in business account balances, due, in part, to business maintaining higher balances to offset service fees.
Interest-bearing demand accounts decreased $41.1 million, or 1.5%, due to a $130.1 million, or 13.0%, decrease in municipal account balances, partially offset by a $52.3 million, or 3.2%, increase in personal account balances and a $36.7 million, or 30.1%, increase in business account balances.
The $62.7 million, or 1.9%, decrease in savings account balances was due to a $78.2 million, or 14.1%, decrease in municipal account balances and a $23.2 million, or 3.1%, decrease in business account balances, partially offset by a $38.7 million, or 1.9%, increase in personal account balances.
The decreases in interest-bearing municipal demand and savings account balances was primarily due to normal seasonality.

60

The $281.4 million, or 8.3%, decrease in time deposits was in accounts with balances less than $100,000, with original maturity terms of less than three years ($305.9 million, or 13.2%) and individual retirement account certificates of deposit ($25.4 million, or 5.7%), partially offset by an increase in jumbo certificates of deposit ($50.2 million, or 34.9%). The decrease in shorter-term time deposits was due primarily to customers' reluctance to reinvest maturing funds in certificates of deposit in the current low interest rate environment.
The following table summarizes the changes in ending borrowings, by type:
Increase (decrease)
June 30, 2013
December 31, 2012
$
%
(dollars in thousands)
Short-term borrowings:
Customer repurchase agreements
$
196,188

$
156,238

39,950

25.6
%
Customer short-term promissory notes
93,671

119,691

(26,020
)
(21.7
)
Total short-term customer funding
289,859

275,929

13,930

5.0

Federal funds purchased
780,459

592,470

187,989

31.7

Short-term FHLB advances (1)
550,000

—

550,000

N/M
Total short-term borrowings
1,620,318

868,399

751,919

86.6

Long-term debt:
FHLB advances
519,584

524,817

(5,233
)
(1.0
)
Other long-term debt
369,583

369,436

147

—

Total long-term debt
889,167

894,253

(5,086
)
(0.6
)
Total borrowings
$
2,509,485

$
1,762,652

746,833

42.4
%
(1) Represents FHLB advances with an original maturity term of less than one year.
N/M - Not meaningful.
The $188.0 million, or 31.7%, increase in Federal funds purchased and the $550.0 million increase in short-term FHLB advances were due to the change in the Corporation's net funding position, as short-term borrowings were used to meet the funding needs caused by the increase in loans and the decrease in total deposits.
Other Liabilities
Other liabilities increased $21.8 million, or 10.6%, in comparison to December 31, 2012. The increase was due to a $15.5 million increase in dividends payable to shareholders and a $13.0 million increase in payables related to investment security purchases executed prior to June 30, 2013, but not settled until after June 30, 2013.
Shareholders' Equity
Total shareholders’ equity decreased $52.9, or 2.5%, during the first half of 2013. The decrease was due primarily to $71.3 million of common stock repurchases, a $38.9 million net increase in unrealized holding losses on available for sale investment securities and $31.1 million of dividends on common shares outstanding, partially offset by $79.8 million of net income.
In January 2013, the Corporation announced that its board of directors approved a share repurchase program pursuant to which the Corporation was authorized to repurchase up to eight million shares, or approximately 4% of its outstanding shares, through June 30, 2013. On June 18, 2013, the Corporation announced that its board of directors had extended the timeframe for this stock repurchase program to September 30, 2013.
Repurchased shares will be added to treasury stock, at cost, and will be used for general corporate purposes. As permitted by securities laws and other legal requirements and subject to market conditions and other factors, purchases may be made from time to time in the open market at prevailing prices. The program may be discontinued at any time. During the three and six months ended June 30, 2013 , approximately 2.2 million and 6.4 million shares, respectively, were repurchased under this program. Approximately 1.6 million shares remain authorized for repurchase.
The Corporation and its subsidiary banks are subject to various regulatory capital requirements administered by banking regulators. Failure to meet minimum capital requirements can lead to certain actions by regulators that could have a material effect on the Corporation’s consolidated 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 June 30, 2013 , the Corporation and each of its bank subsidiaries met the minimum requirements. In addition, each

61

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:
June 30, 2013

December 31,
2012
Regulatory
Minimum
for Capital
Adequacy
Total Capital (to Risk-Weighted Assets)
14.9
%
15.6
%
8.0
%
Tier I Capital (to Risk-Weighted Assets)
13.0
%
13.4
%
4.0
%
Tier I Capital (to Average Assets)
10.6
%
11.0
%
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 in 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:
•
Increase the quantity and quality of capital required in order to meet a new minimum Common Equity Tier 1 capital ratio of 4.50% of risk-weighted assets and a higher minimum Tier 1 capital ratio from 4.00% to 6.00% of risk-weighted assets;
•
Continue to meet the current minimum Total capital ratio of 8.00% of risk-weighted assets and the minimum Tier 1 leverage capital ratio at 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
•
Revise the definition of capital to improve the ability of regulatory capital instruments to absorb losses.
The U.S. Basel III Capital Rules prescribe a standardized approach for risk weightings that expand the risk-weightings for assets and off balance sheet exposures from the current 0%, 20%, 50% and 100% categories to a much larger and more risk-sensitive number of categories, depending on the nature of the assets and resulting in higher risk weights for a variety of asset categories.
As of June 30, 2013 , the Corporation believes its current capital levels would meet the fully-phased in minimum capital requirements, including 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 "core" demand and savings deposits, time deposits in various denominations, including jumbo time deposits, repurchase agreements and short-term promissory notes. The Corporation can access additional liquidity from these sources, if necessary, by increasing interest rates.
Borrowing availability with the FHLB and 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 June 30, 2013 , the Corporation had $1.1 billion of short and long-term advances outstanding from the FHLB with an additional borrowing capacity of approximately $1.5 billion under these facilities. Advances from the FHLB are secured by FHLB stock, qualifying residential mortgages, investments and other assets.

62

As of June 30, 2013 , the Corporation had aggregate availability under Federal funds lines of $1.6 billion, with $780.5 million 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 June 30, 2013 , the Corporation had $1.9 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 half of 2013 generated $142.4 million of cash, mainly due to net income, as adjusted for non-cash expenses, most notably the provision for credit losses. Cash used in investing activities was $616.9 million, due mainly to purchases of investment securities and a net increase in loans, partially offset by maturities of investment securities. Net cash provided by financing activities was $438.2 million due to a net increase in short-term borrowings and net demand and savings deposits, partially offset by cash outflows from a decrease in time deposits, acquisitions of treasury stock and dividends paid on common shares.


63

Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the exposure to economic loss that arises from changes in the values of certain financial instruments. The types of market risk exposures generally faced by financial institutions include interest rate risk, equity market price risk, debt security market price risk, foreign currency risk and commodity price risk. Due to the nature of its operations, only equity market price risk, debt security market price risk and interest rate risk are materially significant to the Corporation.
Equity Market Price Risk
Equity market price risk is the risk that changes in the values of equity investments could have a material impact on the financial position or results of operations of the Corporation. As of June 30, 2013, equity investments consisted of $95.3 million of Federal Home Loan Bank (FHLB) and Federal Reserve Bank stock, $40.9 million of common stocks of publicly traded financial institutions, and $6.9 million of other equity investments.
The equity investments most susceptible to equity market price risk are the financial institutions stocks, which had a cost basis of approximately $34.3 million and a fair value of $40.9 million at June 30, 2013, including an investment in a single financial institution with a cost basis of $20.0 million and a fair value of $23.2 million . The fair value of this investment accounted for approximately 57% 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 $6.8 million and gross unrealized losses of $136,000 as of June 30, 2013.
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.
Another source of equity market price risk is the Corporation's $76.3 million investment in FHLB stock, which the Corporation is required to own in order to borrow funds from the FHLB. FHLBs obtain funding primarily through the issuance of consolidated obligations of the FHLB system. The U.S. government does not guarantee these obligations, and each of the FHLB banks is, generally, jointly and severally liable for repayment of each other’s debt. The financial stress on the FHLB system appears to have abated and the New York, Pittsburgh and Atlanta regional banks within the FHLB system, to which the Corporation is a member, have resumed redemptions of capital stock. The Corporation's FHLB stock and its ability to obtain FHLB funds could be adversely impacted if the financial health of the FHLB system worsens.
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 mortgage-backed securities and collateralized mortgage obligations, state and municipal securities, U.S. government sponsored agency securities, U.S. government debt securities, auction rate certificates 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 June 30, 2013, the Corporation had $295.7 million of securities issued by various municipalities in its investment portfolio. Ongoing uncertainty with respect to the financial viability 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 also 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, meaning they can be repaid by any means available to the issuing municipality. As of June 30, 2013, approximately 95% of municipal securities were supported by the general obligation of corresponding municipalities. Approximately 78% of these securities were school district issuances, which are also supported by the states of the issuing municipalities.

64

Auction Rate Certificates
As of June 30, 2013, the Corporation’s investments in student loan auction rate certificates (ARCs), had a cost basis of $172.1 million and a fair value of $152.6 million.
ARCs are long-term securities structured to allow their sale in periodic auctions, resulting in both the treatment of ARCs as short-term instruments in normal market conditions and fair values that could be derived based on periodic auction prices. However, beginning in 2008, market auctions for these securities began to fail due to an insufficient number of buyers, resulting in an illiquid market. This illiquidity has resulted in recent market prices that represent forced liquidations or distressed sales and do not provide an accurate basis for fair value. Therefore, as of June 30, 2013, the fair values of the ARCs were derived using significant unobservable inputs based on an expected cash flows model which produced fair values which were materially different from those that would be expected from settlement of these investments in the illiquid market that presently exists. The expected cash flows model, prepared by a third-party valuation expert, produced fair values which assumed a return to market liquidity sometime within the next five years. The Corporation believes that the trusts underlying the ARCs will self-liquidate as student loans are repaid.
The credit quality of the underlying debt associated with ARCs is also a factor in the determination of their estimated fair value. As of June 30, 2013 , approximately $146 million , or 95% , of the ARCs were rated above investment grade, with approximately $8 million , or 5% , AAA rated and $100 million , or 66% , AA rated. Approximately $7 million , or 5% , of ARCs were either not rated or rated below investment grade by at least one ratings agency. Of this amount, approximately $5 million , or 70% , of the student loans underlying these ARCs have principal payments which are guaranteed by the federal government. In total, approximately $150 million , or 98% , of the student loans underlying the ARCs have principal payments which are guaranteed by the federal government. As of June 30, 2013 , 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:
June 30, 2013
Amortized
cost
Estimated
fair value
(in thousands)
Single-issuer trust preferred securities
$
54,699

$
49,222

Subordinated debt
47,344

50,365

Pooled trust preferred securities
3,773

5,391

Corporate debt securities issued by financial institutions
$
105,816

$
104,978


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

The Corporation’s investments in single-issuer trust preferred securities had an unrealized loss of $5.5 million at June 30, 2013 . The Corporation did not record any other-than-temporary impairment charges for single-issuer trust preferred securities during the three months ended June 30, 2013 or 2012 . The Corporation held seven single-issuer trust preferred securities that were rated below investment grade by at least one ratings agency, with an amortized cost of $20.8 million and an estimated fair value of $19.5 million as of June 30, 2013 . The majority of the single-issuer trust preferred securities rated below investment grade were rated BB or Ba. Single-issuer trust preferred securities with an amortized cost of $4.7 million and an estimated fair value of $3.7 million at June 30, 2013 were not rated by any ratings agency.
As of June 30, 2013, the Corporation held eight pooled trust preferred securities with an amortized cost of $3.8 million and an estimated fair value of $5.4 million that 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 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.

65

During the three months ended June 30, 2013, the Corporation did not record any other-than-temporary impairment losses for pooled trust preferred securities. Additional impairment charges for debt securities issued by financial institutions may be necessary in the future depending upon the performance of the individual investments held by the Corporation.
See Note D, "Investment Securities," in the Notes to Consolidated Financial Statements for further discussion related to other-than-temporary impairment evaluations for debt securities and Note L, "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 net interest income and changes in the economic value of 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 position of the Corporation, approving asset and liability management policies, and overseeing the formulation and implementation of strategies regarding balance sheet positions and earnings.
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.



66

The following table provides information about the Corporation’s interest rate sensitive financial instruments as of June 30, 2013 . 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)
$
1,076,019

$
549,643

$
432,546

$
333,645

$
270,250

$
506,265

$
3,168,368

$
3,208,747

Average rate
4.01
%
4.81
%
4.70
%
4.59
%
4.80
%
4.40
%
4.43
%

Floating rate loans (1) (2)
2,328,636

1,457,074

1,160,443

996,655

1,179,813

2,339,205

9,461,826

9,382,506

Average rate
4.13
%
4.15
%
4.16
%
4.11
%
3.95
%
4.24
%
4.14
%

Fixed rate investments (3)
476,701

367,443

287,261

258,115

205,568

970,898

2,565,986

2,565,145

Average rate
2.52
%
2.65
%
2.74
%
2.83
%
2.75
%
2.92
%
2.76
%

Floating rate investments (3)
—

70

177,028

4,928

74

49,716

231,816

207,615

Average rate
—
%
1.48
%
1.47
%
0.95
%
1.72
%
2.26
%
1.63
%

Other interest-earning assets
190,974

—

—

—

—

—

190,974

190,974

Average rate
1.33
%
—
%
—
%
—
%
—
%
—
%
1.33
%

Total
$
4,072,330

$
2,374,230

$
2,057,278

$
1,593,343

$
1,655,705

$
3,866,084

$
15,618,970

$
15,554,987

Average rate
3.78
%
4.07
%
3.84
%
3.99
%
3.94
%
3.90
%
3.90
%

Fixed rate deposits (4)
$
1,703,168

$
485,996

$
269,371

$
95,451

$
60,602

$
31,976

$
2,646,564

$
2,669,647

Average rate
0.84
%
1.27
%
1.59
%
1.56
%
1.34
%
1.86
%
1.05
%

Floating rate deposits (5)
4,520,492

652,131

428,531

368,928

317,472

154,910

6,442,464

6,438,405

Average rate
0.19
%
0.14
%
0.13
%
0.12
%
0.11
%
0.15
%
0.17
%

Fixed rate borrowings (6)
7,435

151,349

626

551,493

478

161,290

872,671

880,731

Average rate
4.71
%
4.57
%
4.46
%
4.49
%
4.69
%
6.19
%
4.82
%

Floating rate borrowings (7)
1,620,319

—

—

—

—

16,495

1,636,814

1,629,946

Average rate
0.18
%
—
%
—
%
—
%
—
%
2.59
%
0.20
%

Total
$
7,851,414

$
1,289,476

$
698,528

$
1,015,872

$
378,552

$
364,671

$
11,598,513

$
11,618,729

Average rate
0.33
%
1.09
%
0.70
%
2.62
%
0.32
%
3.08
%
0.73
%

(1)
Amounts are based on contractual payments and maturities, adjusted for expected prepayments. Excludes $15.2 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 $9.5 billion of floating rate loans above are $3.9 billion of loans, or 41.1% of the total, that float with the prime interest rate, $1.7 billion, or 17.8%, of loans that float with other interest rates, primarily the London Interbank Offered Rate (LIBOR), and $3.9 billion, or 41.1%, of adjustable rate loans. The $3.9 billion of adjustable rate loans include loans that are fixed rate instruments for a certain period of time, and then convert to floating rates.


67

The following table presents the percentage of adjustable rate loans, at June 30, 2013 , stratified by the period until their next repricing:
Percent of Total
Adjustable Rate
Loans
One year
29.7%
Two years
19.2
Three years
15.1
Four years
13.3
Five years
14.4
Greater than five years
8.3
The Corporation uses three complementary methods to measure and manage interest rate risk. They are static gap analysis, simulation of earnings and estimates of economic value of equity. Using these measurements in tandem provides a reasonably comprehensive summary of the magnitude of the Corporation's interest rate risk, level of risk as time evolves, and exposure to changes in interest rates.
Static gap provides a measurement of repricing risk in the Corporation’s balance sheet as of a point in time. This measurement is accomplished through stratification of assets and liabilities into repricing periods. The sums of assets and liabilities in each of these periods are compared for mismatches within that maturity segment. Core deposits having no contractual maturities are placed into repricing periods based upon historical balance performance. Repricing for mortgage loans, mortgage-backed securities and collateralized mortgage obligations is based upon industry projections for prepayment speeds. The Corporation’s policy limits the cumulative six-month ratio of rate sensitive assets to rate sensitive liabilities (RSA/RSL) to a range of 0.85 to 1.15. As of June 30, 2013, the cumulative six-month ratio of RSA/RSL was 1.02.
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 earnings 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
+ $ 34.9 million
+6.5%
+200 bp
+ $ 20.4 million
+3.8
+100 bp
+ $ 4.4 million
+0.8
–100 bp
– $18.2 million
–3.4
(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 June 30, 2013 , the Corporation was within policy limits for every 100 basis point shock.

68

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 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.


69



PART II – OTHER INFORMATION

Item 1. Legal Proceedings
The Corporation and its subsidiaries are involved in various legal proceedings in the ordinary course of the 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. 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 are not expected to have a material adverse effect on the financial position, the operating results and/or the liquidity of the Corporation. However, litigation is often unpredictable, and the actual results of litigation cannot be determined with certainty.

Item 1A. Risk Factors
There have been no material changes to the risk factors as previously disclosed in Part I, Item 1A of the Corporation’s Form 10-K for the year ended December 31, 2012 .

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

The following table presents the Corporation's monthly repurchases of its common stock during the first quarter of 2013:
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
April 1, 2013 to April 30, 2013
562,700

$10.87
562,700

3,191,268

May 1, 2013 to May 31, 2013
1,365,990

$11.23
1,365,990

1,825,278

June 1, 2013 to June 30, 2013
246,214

$11.49
246,214

1,579,064


On January 3, 2013, the Corporation announced that its board of directors approved a stock repurchase plan for the repurchase of up to 8.0 million shares through June 30, 2013. On June 18, 2013, the Corporation announced that its board of directors had extended the timeframe for its current stock repurchase program to September 30, 2013. As of June 30, 2013 , 6.4 million shares were repurchased under this plan and approximately 1.6 million shares remain authorized for repurchase. No stock repurchases were made outside the plan 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.


70



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:
August 8, 2013
/s/ E. Philip Wenger
E. Philip Wenger
Chairman, Chief Executive Officer and President
Date:
August 8, 2013
/s/ Charles J. Nugent
Charles J. Nugent
Senior Executive Vice President and
Chief Financial Officer


71

EXHIBIT INDEX
Exhibits Required Pursuant
to Item 601 of Regulation S-K
3.1
Articles of Incorporation, as amended and restated, of Fulton Financial Corporation– Incorporated by reference to Exhibit 3.1 of the Fulton Financial Corporation Current Report on Form 8-K dated June 24, 2011.
3.2
Bylaws of Fulton Financial Corporation as amended – Incorporated by reference to Exhibit 3.1 of the Fulton Financial Corporation Current Report on Form 8-K dated September 18, 2008.
31.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101
Financial statements from the Quarterly Report on Form 10-Q of Fulton Financial Corporation for the quarter ended June 30, 2013, filed on August 8, 2013, 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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TABLE OF CONTENTS