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

Balance Sheet
Cash Flow
Income Statement
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10-Q 1 fult930201310q.htm 10-Q FULT 9.30.2013 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 September 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 Value – 192,450,000 shares outstanding as of October 31, 2013.


FULTON FINANCIAL CORPORATION
FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2013
INDEX
Description
Page
PART I. FINANCIAL INFORMATION
(a)
Consolidated B alance Sheets - September 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)
September 30,
2013
December 31,
2012
(unaudited)
ASSETS
Cash and due from banks
$
262,938

$
256,300

Interest-bearing deposits with other banks
221,064

173,257

Loans held for sale
39,273

67,899

Investment securities:
Held to maturity (estimated fair value of $224 in 2013 and $319 in 2012)
206

292

Available for sale
2,686,443

2,793,725

Loans, net of unearned income
12,780,899

12,146,971

Less: Allowance for loan losses
(210,486
)
(223,903
)
Net Loans
12,570,413

11,923,068

Premises and equipment
227,299

227,723

Accrued interest receivable
44,715

45,786

Goodwill
530,614

530,656

Intangible assets
3,304

4,907

Other assets
464,502

509,484

Total Assets
$
17,050,771

$
16,533,097

LIABILITIES
Deposits:
Noninterest-bearing
$
3,338,075

$
3,009,966

Interest-bearing
9,383,046

9,474,197

Total Deposits
12,721,121

12,484,163

Short-term borrowings:
Federal funds purchased
493,274

592,470

Other short-term borrowings
705,303

275,929

Total Short-Term Borrowings
1,198,577

868,399

Accrued interest payable
16,657

19,330

Other liabilities
196,330

185,296

Federal Home Loan Bank advances and long-term debt
889,122

894,253

Total Liabilities
15,021,807

14,451,441

SHAREHOLDERS’ EQUITY
Common stock, $2.50 par value, 600 million shares authorized, 217.6 million shares issued in 2013 and 216.8 million shares issued in 2012
544,052

542,093

Additional paid-in capital
1,431,015

1,426,267

Retained earnings
437,173

363,937

Accumulated other comprehensive income (loss)
(40,871
)
5,675

Treasury stock, at cost, 25.3 million shares in 2013 and 17.6 million shares in 2012
(342,405
)
(256,316
)
Total Shareholders’ Equity
2,028,964

2,081,656

Total Liabilities and Shareholders’ Equity
$
17,050,771

$
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 September 30
Nine months ended September 30
2013
2012
2013
2012
INTEREST INCOME
Loans, including fees
$
136,150

$
140,511

$
405,312

$
426,398

Investment securities:
Taxable
12,977

16,658

40,890

53,943

Tax-exempt
2,327

2,558

7,151

7,855

Dividends
958

720

2,523

2,060

Loans held for sale
382

578

1,261

1,547

Other interest income
38

35

95

133

Total Interest Income
152,832

161,060

457,232

491,936

INTEREST EXPENSE
Deposits
8,743

13,848

28,642

44,841

Short-term borrowings
691

220

1,900

912

Long-term debt
10,865

11,111

32,448

34,077

Total Interest Expense
20,299

25,179

62,990

79,830

Net Interest Income
132,533

135,881

394,242

412,106

Provision for credit losses
9,500

23,000

38,000

76,500

Net Interest Income After Provision for Credit Losses
123,033

112,881

356,242

335,606

NON-INTEREST INCOME
Service charges on deposit accounts
13,938

15,651

42,700

45,860

Investment management and trust services
10,420

9,429

31,117

28,628

Other service charges and fees
9,518

11,119

27,536

33,181

Mortgage banking income
7,123

10,594

26,293

31,787

Other
3,725

5,108

11,315

14,602

Investment securities gains, net:
Other-than-temporary impairment losses
(125
)
(43
)
(146
)
(100
)
Less: Portion of gain recognized in other comprehensive income (loss) (before taxes)
28

—

22

—

Net other-than-temporary impairment losses
(97
)
(43
)
(124
)
(100
)
Net gains on sales of investment securities
2,730

85

8,095

2,931

Investment securities gains, net
2,633

42

7,971

2,831

Total Non-Interest Income
47,357

51,943

146,932

156,889

NON-INTEREST EXPENSE
Salaries and employee benefits
63,344

62,161

188,046

182,612

Net occupancy expense
11,519

11,161

34,810

33,301

Other outside services
5,048

5,600

13,223

13,614

Data processing
4,757

3,776

13,169

11,223

Equipment expense
3,646

3,816

11,447

10,370

Professional fees
3,329

2,728

9,771

8,294

Operating risk loss
3,297

1,404

6,923

6,827

Software
3,268

2,511

9,110

6,958

FDIC insurance expense
2,918

3,029

8,766

9,052

Marketing
2,251

648

6,045

5,703

Other real estate owned and repossession expense
1,453

2,249

6,248

8,709

Intangible amortization
534

756

1,603

2,318

Other
11,241

10,143

35,510

33,757

Total Non-Interest Expense
116,605

109,982

344,671

332,738

Income Before Income Taxes
53,785

54,842

158,503

159,757

Income taxes
13,837

13,260

38,746

40,152

Net Income
$
39,948

$
41,582

$
119,757

$
119,605

PER SHARE:
Net Income (Basic)
$
0.21

$
0.21

$
0.62

$
0.60

Net Income (Diluted)
0.21

0.21

0.61

0.60

Cash Dividends
0.08

0.08

0.24

0.22

See Notes to Consolidated Financial Statements

4

FULTON FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
(in thousands)
Three months ended September 30
Nine months ended September 30
2013
2012
2013
2012
Net Income
$
39,948

$
41,582

$
119,757

$
119,605

Other Comprehensive Income (Loss), net of tax:
Unrealized gain (loss) on securities
(6,951
)
10,834

(43,784
)
4,714

Reclassification adjustment for securities gains included in net income
(1,711
)
(28
)
(5,181
)
(1,840
)
Non-credit related unrealized gain (loss) on other-than-temporarily impaired debt securities
(106
)
271

1,332

234

Unrealized gain on derivative financial instruments
34

34

102

102

Amortization of net unrecognized pension and postretirement items
329

214

985

642

Other Comprehensive Income (Loss)
(8,405
)
11,325

(46,546
)
3,852

Total Comprehensive Income
$
31,543

$
52,907

$
73,211

$
123,457

See Notes to Consolidated Financial Statements


5

FULTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 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



119,757



119,757

Other comprehensive income (loss)




(46,546
)

(46,546
)
Stock issued, including related tax benefits
1,107

1,959

562



4,838

7,359

Stock-based compensation awards


4,186




4,186

Acquisition of treasury stock
(8,000
)
(90,927
)
(90,927
)
Common stock cash dividends - $0.24 per share



(46,521
)


(46,521
)
Balance at September 30, 2013
192,332

$
544,052

$
1,431,015

$
437,173

$
(40,871
)
$
(342,405
)
$
2,028,964

Balance at December 31, 2011
200,164

$
540,386

$
1,423,727

$
264,059

$
7,955

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

Net income



119,605



119,605

Other comprehensive income (loss)




3,852


3,852

Stock issued, including related tax benefits
926

1,434

(1,889
)


5,565

5,110

Stock-based compensation awards


3,963




3,963

Acquisition of treasury stock
(2,115
)
(20,360
)
(20,360
)
Common stock cash dividends - $0.22 per share



(44,026
)


(44,026
)
Balance at September 30, 2012
198,975

$
541,820

$
1,425,801

$
339,638

$
11,807

$
(258,383
)
$
2,060,683

See Notes to Consolidated Financial Statements

6

FULTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
Nine months ended September 30
2013
2012
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income
$
119,757

$
119,605

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


Provision for credit losses
38,000

76,500

Depreciation and amortization of premises and equipment
19,165

16,735

Net amortization of investment securities premiums
8,749

8,039

Investment securities gains, net
(7,971
)
(2,831
)
Net decrease (increase) in loans held for sale
28,626

(38,468
)
Amortization of intangible assets
1,603

2,318

Stock-based compensation
4,186

3,963

Excess tax benefits from stock-based compensation
(237
)
(25
)
Decrease in accrued interest receivable
1,071

1,314

Decrease in other assets
38,485

12,956

Decrease in accrued interest payable
(2,673
)
(3,868
)
Decrease in other liabilities
(24,207
)
(2,191
)
Total adjustments
104,797

74,442

Net cash provided by operating activities
224,554

194,047

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale
283,242

225,539

Proceeds from maturities of securities held to maturity
86

228

Proceeds from maturities of securities available for sale
526,393

644,055

Purchase of securities held to maturity
—

(346
)
Purchase of securities available for sale
(723,859
)
(796,656
)
Increase in short-term investments
(47,807
)
(26,969
)
Net increase in loans
(684,529
)
(63,446
)
Net purchases of premises and equipment
(18,741
)
(30,232
)
Net cash used in investing activities
(665,215
)
(47,827
)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand and savings deposits
595,722

510,296

Net decrease in time deposits
(358,764
)
(434,952
)
Increase (decrease) in short-term borrowings
330,178

(110,062
)
Repayments of long-term debt
(5,131
)
(131,526
)
Net proceeds from issuance of common stock
7,122

5,085

Excess tax benefits from stock-based compensation
237

25

Dividends paid
(31,138
)
(40,117
)
Acquisition of treasury stock
(90,927
)
(20,360
)
Net cash provided by (used in) financing activities
447,299

(221,611
)
Net Increase (Decrease) in Cash and Due From Banks
6,638

(75,391
)
Cash and Due From Banks at Beginning of Period
256,300

292,598

Cash and Due From Banks at End of Period
$
262,938

$
217,207

Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest
$
65,663

$
83,698

Income taxes
29,964

22,671

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 nine months ended September 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.
Diluted net income per share is calculated as net income divided by the weighted average number of shares outstanding plus the incremental number of shares added as a result of converting common stock equivalents, calculated using the treasury stock method. The Corporation’s common stock equivalents consist of outstanding stock options 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 September 30
Nine months ended September 30
2013
2012
2013
2012
(in thousands)
Weighted average shares outstanding (basic)
192,251

198,956

193,926

199,371

Effect of dilutive securities
1,008

852

1,000

950

Weighted average shares outstanding (diluted)
193,259

199,808

194,926

200,321

For the three and nine months ended September 30, 2013 , 3.2 million and 3.7 million shares issuable under stock options, respectively, were excluded from the diluted net income per share computation as their effect would have been anti-dilutive. For the three and nine months ended September 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 September 30, 2013
Unrealized gain (loss) on securities
$
(10,691
)
$
3,740

$
(6,951
)
Reclassification adjustment for securities gains included in net income (1)
(2,633
)
922

(1,711
)
Non-credit related unrealized gains (losses) on other-than-temporarily impaired debt securities
(163
)
57

(106
)
Unrealized gain on derivative financial instruments
52

(18
)
34

Amortization of net unrecognized pension and postretirement items (2)
505

(176
)
329

Total Other Comprehensive Income (Loss)
$
(12,930
)
$
4,525

$
(8,405
)
Three months ended September 30, 2012
Unrealized gain (loss) on securities
$
16,667

$
(5,833
)
$
10,834

Reclassification adjustment for securities gains included in net income (1)
(42
)
14

(28
)
Non-credit related unrealized gains (losses) on other-than-temporarily impaired debt securities
417

(146
)
271

Unrealized gain on derivative financial instruments
52

(18
)
34

Amortization of net unrecognized pension and postretirement items (2)
329

(115
)
214

Total Other Comprehensive Income (Loss)
$
17,423

$
(6,098
)
$
11,325

Nine months ended September 30, 2013
Unrealized gain (loss) on securities
$
(67,357
)
$
23,573

$
(43,784
)
Reclassification adjustment for securities gains included in net income (1)
(7,971
)
2,790

(5,181
)
Non-credit related unrealized gains (losses) on other-than-temporarily impaired debt securities
2,049

(717
)
1,332

Unrealized gain on derivative financial instruments
157

(55
)
102

Amortization of net unrecognized pension and postretirement items (2)
1,515

(530
)
985

Total Other Comprehensive Income (Loss)
$
(71,607
)
$
25,061

$
(46,546
)
Nine months ended September 30, 2012
Unrealized gain (loss) on securities
$
7,252

$
(2,538
)
$
4,714

Reclassification adjustment for securities gains included in net income (1)
(2,831
)
991

(1,840
)
Non-credit related unrealized gains (losses) on other-than-temporarily impaired debt securities
360

(126
)
234

Unrealized gain on derivative financial instruments
157

(55
)
102

Amortization of net unrecognized pension and postretirement items (2)
987

(345
)
642

Total Other Comprehensive Income (Loss)
$
5,925

$
(2,073
)
$
3,852


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

$
(2,750
)
$
(17,825
)
$
(32,466
)
Other comprehensive income (loss) before reclassifications
(6,951
)
(106
)
—

—

(7,057
)
Amounts reclassified from accumulated other comprehensive income (loss)
(1,774
)
63

34

329

(1,348
)
Balance at September 30, 2013
$
(21,666
)
$
1,007

$
(2,716
)
$
(17,496
)
$
(40,871
)
Three months ended September 30, 2012




Balance at June 30, 2012
$
19,122

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

Other comprehensive income (loss) before reclassifications
10,834

271

—

—

11,105

Amounts reclassified from accumulated other comprehensive income (loss)
(40
)
12

34

214

220

Balance at September 30, 2012
$
29,916

$
(765
)
$
(2,852
)
$
(14,492
)
$
11,807

Nine months ended September 30, 2013
Balance at December 31, 2012
$
26,361

$
613

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

Other comprehensive income (loss) before reclassifications
(43,784
)
1,332

—

—

(42,452
)
Amounts reclassified from accumulated other comprehensive income (loss)
(4,243
)
(938
)
102

985

(4,094
)
Balance at September 30, 2013
$
(21,666
)
$
1,007

$
(2,716
)
$
(17,496
)
$
(40,871
)
Nine months ended September 30, 2012
Balance at December 31, 2011
$
27,054

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

Other comprehensive income (loss) before reclassifications
4,714

234

—

—

4,948

Amounts reclassified from accumulated other comprehensive income (loss)
(1,852
)
12

102

642

(1,096
)
Balance at September 30, 2012
$
29,916

$
(765
)
$
(2,852
)
$
(14,492
)
$
11,807



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 September 30, 2013
(in thousands)
Mortgage-backed securities
$
206

$
18

$
—

$
224

Available for Sale at September 30, 2013
Equity securities
$
123,111

$
8,596

$
(130
)
$
131,577

U.S. Government securities
2,250

—

—

2,250

U.S. Government sponsored agency securities
828

8

(1
)
835

State and municipal securities
288,659

7,552

(2,698
)
293,513

Corporate debt securities
108,272

5,115

(6,836
)
106,551

Collateralized mortgage obligations
1,113,753

9,373

(40,149
)
1,082,977

Mortgage-backed securities
909,292

15,209

(10,271
)
914,230

Auction rate securities
172,052

36

(17,578
)
154,510

$
2,718,217

$
45,889

$
(77,663
)
$
2,686,443

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 $1.8 billion as of September 30, 2013 and 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 ( $87.9 million at September 30, 2013 and $71.7 million at December 31, 2012 ), common stocks of financial institutions ( $36.8 million at September 30, 2013 and $44.2 million at December 31, 2012 ) and other equity investments ( $6.9 million at September 30, 2013 and $6.7 million at December 31, 2012 ).
As of September 30, 2013 , the financial institutions stock portfolio had a cost basis of $28.5 million and a fair value of $36.8 million , including an investment in a single financial institution with a cost basis of $20.0 million and a fair value of $26.2 million . The fair value of this investment accounted for 71.1% 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 September 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
$
—

$
—

$
45,346

$
45,470

Due from one year to five years
—

—

63,113

66,924

Due from five years to ten years
—

—

197,964

201,552

Due after ten years
—

—

265,638

243,713

—

—

572,061

557,659

Collateralized mortgage obligations
—

—

1,113,753

1,082,977

Mortgage-backed securities
206

224

909,292

914,230

$
206

$
224

$
2,595,106

$
2,554,866

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 September 30, 2013
(in thousands)
Equity securities
$
2,135

$
—

$
—

$
2,135

Debt securities
617

(22
)
(97
)
498

Total
$
2,752

$
(22
)
$
(97
)
$
2,633

Three months ended September 30, 2012
Equity securities
$
—

$
—

$
(24
)
$
(24
)
Debt securities
85

—

(19
)
66

Total
$
85

$
—

$
(43
)
$
42

Nine months ended September 30, 2013
Equity securities
$
4,357

$
(28
)
$
(27
)
$
4,302

Debt securities
3,788

(22
)
(97
)
3,669

Total
$
8,145

$
(50
)
$
(124
)
$
7,971

Nine months ended September 30, 2012
Equity securities
$
2,603

$
—

$
(81
)
$
2,522

Debt securities
328

—

(19
)
309

Total
$
2,931

$
—

$
(100
)
$
2,831

The other-than-temporary impairment charges for equity securities during the three and nine months ended September 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.
The credit related other-than-temporary impairment charges for debt securities during the three and nine months ended September 30, 2013 and 2012 were for investments in pooled trust preferred securities issued by financial institutions. The credit related other-than-temporary impairment charges for the pooled trust preferred securities were determined based on an expected cash flows model.

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 held by the Corporation at September 30, 2013 and 2012 :
Three Months ended September 30
Nine Months ended September 30
2013
2012
2013
2012
(in thousands)
Balance of cumulative credit losses on debt securities, beginning of period
$
(20,607
)
$
(22,692
)
$
(23,079
)
$
(22,781
)
Reductions for securities sold during the period
—

—

2,468

—

Additions for credit losses recorded which were not previously recognized as components of earnings
(97
)
(19
)
(97
)
(19
)
Reductions for increases in cash flows expected to be collected that are recognized over the remaining life of the security
—

66

4

155

Balance of cumulative credit losses on debt securities, end of period
$
(20,704
)
$
(22,645
)
$
(20,704
)
$
(22,645
)
The following table presents the gross unrealized losses and estimated fair values of investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 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
$
—

$
—

$
59

$
(1
)
$
59

$
(1
)
State and municipal securities
54,679

(2,698
)
—

—

54,679

(2,698
)
Corporate debt securities
6,889

(108
)
42,989

(6,728
)
49,878

(6,836
)
Collateralized mortgage obligations
746,630

(40,149
)
—

—

746,630

(40,149
)
Mortgage-backed securities
499,406

(10,271
)
—

—

499,406

(10,271
)
Auction rate securities
87

(3
)
153,245

(17,575
)
153,332

(17,578
)
Total debt securities
1,307,691

(53,229
)
196,293

(24,304
)
1,503,984

(77,533
)
Equity securities
17

(1
)
850

(129
)
867

(130
)
$
1,307,708

$
(53,230
)
$
197,143

$
(24,433
)
$
1,504,851

$
(77,663
)
The Corporation’s collateralized mortgage obligations and mortgage-backed securities have contractual terms that generally do not permit the issuer to settle the securities at a price less than the amortized cost of the investment. Because the decline in market value of these securities is attributable to changes in interest rates and not credit quality, and because the Corporation does not have the intent to sell and does not believe it will more likely than not be required to sell any of these securities prior to a recovery of their fair value to amortized cost, the Corporation does not consider these investments to be other-than-temporarily impaired as of September 30, 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 September 30, 2013 , approximately $147 million , or 95% , of the ARCs were rated above investment grade, with approximately $8 million , or 5% , AAA rated and $100 million , or 65% , AA rated. Approximately $8 million , or 5% , of ARCs were either not rated or rated below investment grade by at least one ratings agency. Of this amount, approximately $6 million , or 72% , of the student loans underlying these ARCs have principal payments which are guaranteed by the federal government. In total, approximately $151 million , or 98% , of the student loans underlying the ARCs have principal payments which are guaranteed by the federal government. As of September 30, 2013 , all ARCs were current and making scheduled interest payments. Based on management’s evaluations, ARCs with a fair value of $154.5 million were not subject to any other-than-temporary impairment charges as of September 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 .

13

For its investments in equity securities, particularly its investments in stocks of financial institutions, management evaluates the near-term prospects of the issuers in relation to the severity and duration of the impairment. Based on that evaluation and the Corporation’s ability and intent to hold those investments for a reasonable period of time sufficient for a recovery of fair value, the Corporation does not consider those investments with unrealized holding losses as of September 30, 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:
September 30, 2013
December 31, 2012
Amortized
cost
Estimated
fair value
Amortized
cost
Estimated
fair value
(in thousands)
Single-issuer trust preferred securities
$
54,722

$
48,368

$
56,834

$
51,656

Subordinated debt
47,375

50,493

47,286

51,747

Pooled trust preferred securities
3,676

5,191

5,530

6,927

Corporate debt securities issued by financial institutions
105,773

104,052

109,650

110,330

Other corporate debt securities
2,499

2,499

2,512

2,512

Available for sale corporate debt securities
$
108,272

$
106,551

$
112,162

$
112,842


The Corporation’s investments in single-issuer trust preferred securities had an unrealized loss of $6.4 million at September 30, 2013 . The Corporation did not record any other-than-temporary impairment charges for single-issuer trust preferred securities during the three and nine months ended September 30, 2013 or 2012 . The Corporation held six single-issuer trust preferred securities that were rated below investment grade by at least one ratings agency, with an amortized cost of $13.5 million and an estimated fair value of $11.6 million at September 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 $3.8 million at September 30, 2013 were not rated by any ratings agency.
As of September 30, 2013, the Corporation held eight pooled trust preferred securities with an amortized cost of $3.7 million and an estimated fair value of $5.2 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 $106.6 million were not subject to any additional other-than-temporary impairment charges as of September 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:
September 30, 2013
December 31, 2012
(in thousands)
Real-estate - commercial mortgage
$
5,063,373

$
4,664,426

Commercial - industrial, financial and agricultural
3,645,270

3,612,065

Real-estate - home equity
1,773,554

1,632,390

Real-estate - residential mortgage
1,327,469

1,257,432

Real-estate - construction
577,342

584,118

Consumer
296,142

309,864

Leasing and other
89,819

75,521

Overdrafts
16,706

18,393

Loans, gross of unearned income
12,789,675

12,154,209

Unearned income
(8,776
)
(7,238
)
Loans, net of unearned income
$
12,780,899

$
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:
September 30,
2013
December 31,
2012
(in thousands)
Allowance for loan losses
$
210,486

$
223,903

Reserve for unfunded lending commitments
2,352

1,536

Allowance for credit losses
$
212,838

$
225,439


15

The following table presents the activity in the allowance for credit losses:
Three months ended September 30
Nine months ended September 30
2013
2012
2013
2012
(in thousands)
Balance at beginning of period
$
217,626

$
237,316

$
225,439

$
258,177

Loans charged off
(18,108
)
(29,966
)
(61,597
)
(110,765
)
Recoveries of loans previously charged off
3,820

4,918

10,996

11,356

Net loans charged off
(14,288
)
(25,048
)
(50,601
)
(99,409
)
Provision for credit losses
9,500

23,000

38,000

76,500

Balance at end of period
$
212,838

$
235,268

$
212,838

$
235,268


The following table presents the activity in the allowance for loan losses by portfolio segment:
Real Estate -
Commercial
Mortgage
Commercial -
Industrial,
Financial and
Agricultural
Real Estate -
Home
Equity
Real Estate -
Residential
Mortgage
Real Estate -
Construction
Consumer
Leasing
and other
and
overdrafts
Unallocated
Total
(in thousands)
Three months ended September 30, 2013
Balance at June 30, 2013
$
58,696

$
57,557

$
25,736

$
32,684

$
14,471

$
2,497

$
2,925

$
21,865

$
216,431

Loans charged off
(3,724
)
(9,394
)
(2,365
)
(767
)
(598
)
(473
)
(787
)
—

(18,108
)
Recoveries of loans previously charged off
185

2,295

198

245

379

294

224

—

3,820

Net loans charged off
(3,539
)
(7,099
)
(2,167
)
(522
)
(219
)
(179
)
(563
)
—

(14,288
)
Provision for loan losses (1)
3,470

1,437

4,451

1,595

(1,221
)
610

620

(2,619
)
8,343

Balance at September 30, 2013
$
58,627

$
51,895

$
28,020

$
33,757

$
13,031

$
2,928

$
2,982

$
19,246

$
210,486

Three months ended September 30, 2012
Balance at June 30, 2012
$
69,868

$
71,931

$
14,444

$
26,711

$
25,559

$
1,816

$
3,243

$
22,164

$
235,736

Loans charged off
(7,463
)
(10,471
)
(1,688
)
(670
)
(8,364
)
(685
)
(625
)
—

(29,966
)
Recoveries of loans previously charged off
1,317

1,693

343

25

1,040

202

298

—

4,918

Net loans charged off
(6,146
)
(8,778
)
(1,345
)
(645
)
(7,324
)
(483
)
(327
)
—

(25,048
)
Provision for loan losses (1)
8,447

4,721

2,337

2,790

3,893

530

77

381

23,176

Balance at September 30, 2012
$
72,169

$
67,874

$
15,436

$
28,856

$
22,128

$
1,863

$
2,993

$
22,545

$
233,864

Nine months ended September 30, 2013
Balance at December 31, 2012
$
62,928

$
60,205

$
22,776

$
34,536

$
17,287

$
2,367

$
2,752

$
21,052

$
223,903

Loans charged off
(13,050
)
(24,856
)
(6,735
)
(8,282
)
(5,181
)
(1,456
)
(2,037
)
—

(61,597
)
Recoveries of loans previously charged off
2,754

3,430

721

442

1,794

1,206

649

—

10,996

Net loans charged off
(10,296
)
(21,426
)
(6,014
)
(7,840
)
(3,387
)
(250
)
(1,388
)
—

(50,601
)
Provision for loan losses (1)
5,995

13,116

11,258

7,061

(869
)
811

1,618

(1,806
)
37,184

Balance at September 30, 2013
$
58,627

$
51,895

$
28,020

$
33,757

$
13,031

$
2,928

$
2,982

$
19,246

$
210,486

Nine months ended September 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
(43,053
)
(29,157
)
(6,683
)
(3,009
)
(25,377
)
(1,790
)
(1,696
)
—

(110,765
)
Recoveries of loans previously charged off
3,286

3,046

641

169

2,643

833

738

—

11,356

Net loans charged off
(39,767
)
(26,111
)
(6,042
)
(2,840
)
(22,734
)
(957
)
(958
)
—

(99,409
)
Provision for loan losses (1)
26,824

19,089

8,637

8,710

14,796

737

1,554

(3,545
)
76,802

Balance at September 30, 2012
$
72,169

$
67,874

$
15,436

$
28,856

$
22,128

$
1,863

$
2,993

$
22,545

$
233,864


(1)
The provision for loan losses excluded a $ 1.2 million and $816,000 increase, respectively, in the reserve for unfunded lending commitments for the three and nine months ended September 30, 2013 and was gross of a $176,000 and $302,000 decrease, respectively, in the reserve for unfunded lending commitments for the three and nine months ended September 30, 2012 . The total provision for credit losses, comprised of allocations for both funded and unfunded loans, was $9.5 million and $38.0 million , respectively, for the three and nine months ended September 30, 2013 and $23.0 million and $76.5 million , respectively, for the three and nine months ended September 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 September 30, 2013
Measured for impairment under FASB ASC Subtopic 450-20
$
43,262

$
38,025

$
18,482

$
11,494

$
8,648

$
2,911

$
2,982

$
19,246

$
145,050

Evaluated for impairment under FASB ASC Section 310-10-35
15,365

13,870

9,538

22,263

4,383

17

—

N/A

65,436

$
58,627

$
51,895

$
28,020

$
33,757

$
13,031

$
2,928

$
2,982

$
19,246

$
210,486

Loans, net of unearned income at September 30, 2013
Measured for impairment under FASB ASC Subtopic 450-20
$
5,001,851

$
3,593,038

$
1,758,492

$
1,277,200

$
543,268

$
296,122

$
97,749

N/A

$
12,567,720

Evaluated for impairment under FASB ASC Section 310-10-35
61,522

52,232

15,062

50,269

34,074

20

—

N/A

213,179

$
5,063,373

$
3,645,270

$
1,773,554

$
1,327,469

$
577,342

$
296,142

$
97,749

N/A

$
12,780,899

Allowance for loan losses at September 30, 2012
Measured for impairment under FASB ASC Subtopic 450-20
$
46,889

$
44,169

$
10,120

$
8,306

$
14,957

$
1,858

$
2,980

$
22,545

$
151,824

Evaluated for impairment under FASB ASC Section 310-10-35
25,280

23,705

5,316

20,550

7,171

5

13

N/A

82,040

$
72,169

$
67,874

$
15,436

$
28,856

$
22,128

$
1,863

$
2,993

$
22,545

$
233,864

Loans, net of unearned income at September 30, 2012
Measured for impairment under FASB ASC Subtopic 450-20
$
4,539,370

$
3,430,724

$
1,594,553

$
1,165,504

$
554,185

$
301,710

$
78,031

N/A

$
11,664,077

Evaluated for impairment under FASB ASC Section 310-10-35
93,139

77,122

8,903

48,818

43,173

7

21

N/A

271,183

$
4,632,509

$
3,507,846

$
1,603,456

$
1,214,322

$
597,358

$
301,717

$
78,052

N/A

$
11,935,260

(1)
The unallocated allowance, which was approximately 9% and 10% of the total allowance for credit losses as of September 30, 2013 and September 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.
During the three and nine months ended September 30, 2013 , the Corporation sold $16.4 million and $41.8 million , respectively, of non-accrual commercial mortgage, commercial and construction loans to investors. During the three and nine months ended September 30, 2013 , total charge-offs associated with these transactions were $6.0 million and $18.0 million , respectively. The following table presents a summary of these transactions:
Three months ended September 30, 2013
Nine months ended September 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
$
4,840

$
11,950

$
1,490

$
18,280

$
21,760

$
23,600

$
9,930

$
55,290

Charge-offs prior to sale
—

(1,860
)
—

(1,860
)
(4,890
)
(3,890
)
(4,680
)
(13,460
)
Net recorded investment in loans sold
4,840

10,090

1,490

16,420

16,870

19,710

5,250

41,830

Proceeds from sale, net of selling expenses
3,310

6,020

1,050

10,380

10,410

10,050

3,400

23,860

Total charge-off upon sale
$
(1,530
)
$
(4,070
)
$
(440
)
$
(6,040
)
$
(6,460
)
$
(9,660
)
$
(1,850
)
$
(17,970
)
Existing allocation for credit losses on sold loans
$
(320
)
$
(450
)
$
—

$
(770
)
$
(6,620
)
$
(5,780
)
$
(1,320
)
$
(13,720
)
The $16.4 million of loans sold during the third quarter of 2013 were primarily larger balance impaired commercial loans which were secured by commercial real estate. The estimated fair value of the collateral underlying these commercial loans exceeded their unpaid principal balance and, as a result, for a number of the loans sold no specific loan loss allocations under FASB ASC

17

Section 310-10-35 were necessary prior to the date the loans were designated for sale. The $6.0 million charge-off recorded upon this sale occurred based on the third party’s purchase offer, which was based on economic return expectations relative to the perceived lending risk of the acquired loans, and the Corporation’s view of the acceptability of that purchase price in relationship to other recent loan sale transactions and the desire to eliminate these impaired loans from the portfolio.
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 nine months ended September 30, 2012 . The following table presents 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 September 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 September 30, 2013 and 2012 , approximately 79% 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 state 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:
September 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
$
29,656

$
24,117

$
—

$
44,649

$
34,189

$
—

Commercial - secured
35,102

28,665

—

40,409

30,112

—

Commercial - unsecured
—

—

—

132

131

—

Real estate - home equity
399

300

—

300

300

—

Real estate - residential mortgage
—

—

—

486

486

—

Construction - commercial residential
24,389

18,836

—

40,432

23,548

—

Construction - commercial
2,992

2,014

—

6,294

5,685

—

92,538

73,932


132,702

94,451


With a related allowance recorded:




Real estate - commercial mortgage
45,568

37,405

15,365

69,173

55,443

21,612

Commercial - secured
28,438

22,322

12,972

52,660

39,114

17,187

Commercial - unsecured
1,303

1,245

898

2,142

2,083

1,597

Real estate - home equity
20,730

14,762

9,538

12,843

12,843

8,380

Real estate - residential mortgage
62,534

50,269

22,263

53,610

53,610

24,108

Construction - commercial residential
23,490

12,351

3,941

21,336

9,831

4,787

Construction - commercial
857

374

157

2,602

2,350

1,146

Construction - other
665

499

285

576

576

326

Consumer - direct
18

18

15

29

29

25

Consumer - indirect
2

2

2

—

—

—

Leasing and other and overdrafts
—

—

—

10

10

7

183,605

139,247

65,436

214,981

175,889

79,175

Total
$
276,143

$
213,179

$
65,436

$
347,683

$
270,340

$
79,175

As of September 30, 2013 and December 31, 2012 , there were $73.9 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 September 30
Nine months ended September 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
$
27,120

$
113

$
43,197

$
172

$
29,630

$
394

$
43,422

370

Commercial - secured
33,644

49

25,992

13

32,528

131

25,526

30

Commercial - unsecured
—

—

59

—

33

—

33

—

Real estate - home equity
300

—

583

1

253

1

466

1

Real estate - residential mortgage
747

4

1,984

17

869

25

1,115

30

Construction - commercial residential
20,809

66

25,768

60

21,730

200

28,315

128

Construction - commercial
2,021

—

2,666

6

3,500

2

2,943

12

84,641

232

100,249

269

88,543

753

101,820

571

With a related allowance recorded:
Real estate - commercial mortgage
37,962

158

59,239

240

46,213

563

67,064

523

Commercial - secured
22,771

34

43,420

32

29,317

115

46,743

65

Commercial - unsecured
1,260

1

2,555

2

1,502

4

2,735

4

Real estate - home equity
14,761

17

8,045

7

14,031

49

6,810

11

Real estate - residential mortgage
51,365

290

45,022

384

52,581

924

42,555

1,144

Construction - commercial residential
12,053

39

16,232

37

11,774

121

21,647

94

Construction - commercial
525

—

2,373

5

1,641

3

2,204

11

Construction - other
501

—

997

2

517

1

1,073

4

Consumer - direct
18

—

7

—

21

—

98

—

Consumer - indirect
3

—

—

—

1

—

—

—

Leasing and other and overdrafts
—

—

158

—

14

—

101

—

141,219

539

178,048

709

157,612

1,780

191,030

1,856

Total
$
225,860

$
771

$
278,297

$
978

$
246,155

$
2,533

$
292,850

2,427

(1)
All impaired loans, excluding accruing TDRs, were non-accrual loans. Interest income recognized for the three and nine months ended September 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
September 30, 2013
December 31, 2012
September 30, 2013
December 31, 2012
September 30, 2013
December 31, 2012
September 30, 2013
December 31, 2012
(dollars in thousands)
Real estate - commercial mortgage
$
4,682,593

$
4,255,334

$
169,811

$
157,640

$
210,969

$
251,452

$
5,063,373

$
4,664,426

Commercial - secured
3,183,136

3,081,215

103,085

137,277

153,313

194,952

3,439,534

3,413,444

Commercial -unsecured
197,932

187,200

3,988

5,421

3,816

6,000

205,736

198,621

Total commercial - industrial, financial and agricultural
3,381,068

3,268,415

107,073

142,698

157,129

200,952

3,645,270

3,612,065

Construction - commercial residential
145,823

156,537

41,776

52,434

57,458

79,581

245,057

288,552

Construction - commercial
247,350

211,470

2,370

2,799

9,121

12,081

258,841

226,350

Total construction (excluding Construction - other)
393,173

368,007

44,146

55,233

66,579

91,662

503,898

514,902

$
8,456,834

$
7,891,756

$
321,030

$
355,571

$
434,677

$
544,066

$
9,212,541

$
8,791,393

% of Total
91.8
%
89.8
%
3.5
%
4.0
%
4.7
%
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 undue credit 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. Assigning risk ratings involves judgment. Risk ratings are initially assigned to loans by loan officers and are reviewed on a regular basis by credit administration staff. The Corporation's loan review officers provide a separate assessment of risk rating accuracy. Ratings may be changed based on the ongoing monitoring procedures performed by loan officers or credit administration staff, or if specific loan review activities identify a deterioration or an improvement in the loan. The risk rating process allows management to identify riskier credits in a timely manner and to allocate resources to managing troubled accounts.

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

The following table presents a summary of delinquency and non-performing status for home equity, residential mortgages, construction loans to individuals and consumer, leasing and other loans by class segment:
Performing
Delinquent (1)
Non-performing (2)
Total
September 30, 2013
December 31, 2012
September 30, 2013
December 31, 2012
September 30, 2013
December 31, 2012
September 30, 2013
December 31, 2012
(dollars in thousands)
Real estate - home equity
$
1,736,645

$
1,602,541

$
18,218

$
12,645

$
18,691

$
17,204

$
1,773,554

$
1,632,390

Real estate - residential mortgage
1,269,058

1,190,873

24,102

32,123

34,309

34,436

1,327,469

1,257,432

Construction - other
71,520

67,447

1,425

865

499

904

73,444

69,216

Consumer - direct
138,373

159,616

4,057

3,795

2,891

3,170

145,321

166,581

Consumer - indirect
147,741

140,868

2,958

2,270

122

145

150,821

143,283

Total consumer
286,114

300,484

7,015

6,065

3,013

3,315

296,142

309,864

Leasing and other and overdrafts
97,160

85,946

522

711

67

19

97,749

86,676

$
3,460,497

$
3,247,291

$
51,282

$
52,409

$
56,579

$
55,878

$
3,568,358

$
3,355,578

% of Total
97.0
%

96.7
%

1.4
%

1.6
%

1.6
%

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:
September 30,
2013
December 31,
2012
(in thousands)
Non-accrual loans
$
143,012

$
184,832

Accruing loans greater than 90 days past due
25,271

26,221

Total non-performing loans
168,283

211,053

Other real estate owned (OREO)
18,173

26,146

Total non-performing assets
$
186,456

$
237,199


21

The following table presents TDRs, by class segment:
September 30,
2013
December 31,
2012
(in thousands)
Real-estate - residential mortgage
$
27,820

$
32,993

Real-estate - commercial mortgage
22,644

34,672

Construction - commercial residential
9,841

10,564

Commercial - secured
8,060

5,624

Real estate - home equity
1,667

1,518

Commercial - unsecured
124

121

Consumer - other
11

—

Consumer - direct
—

16

Total accruing TDRs
70,167

85,508

Non-accrual TDRs (1)
30,501

31,245

Total TDRs
$
100,668

$
116,753

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

As of September 30, 2013 and December 31, 2012 , there were $12.0 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 September 30, 2013 and 2012 that were modified during the three and nine months ended September 30, 2013 and 2012 :
Three months ended September 30
Nine months ended September 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)
Construction - commercial residential
2
$
4,427

2
$
741

6
$
9,542

8
$
11,178

Real estate - commercial mortgage
4
3,774

2
1,404

13
8,428

15
18,004

Real estate - home equity
14
1,071

1
132

42
2,928

7
692

Real estate - residential mortgage
5
836

9
3,350

44
6,861

33
11,465

Construction - commercial
—
—

1
957

—
—

1
957

Commercial - secured
—
—

7
737

7
592

14
3,944

Commercial - unsecured
—
—

—
—

1
15

—
—

Construction - other
—
—

1
335

—
—

1
335

Consumer - direct
—
—

—
—

7
2

—
—

25
$
10,108

23
$
7,656

120
$
28,368

79
$
46,575



22

The following table presents TDRs, by class segment, as of September 30, 2013 and 2012 that were modified within the previous 12 months and had a payment default during the three and nine months ended September 30, 2013 and 2012 :
Three months ended September 30
Nine months ended September 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 - residential mortgage
29
$
7,224

15
$
2,977

55
$
14,808

26
$
6,763

Real estate - commercial mortgage
3
1,299

6
6,358

9
3,712

7
7,442

Real estate - home equity
7
507

3
273

20
1,609

8
653

Commercial - secured
2
217

3
1,267

5
690

4
1,294

Consumer - other
—
—

1
335

—
—

1
335

Construction - commercial
—
—

1
957

—
—

1
957

Construction - commercial residential
—
—

3
836

2
608

4
2,691

41
$
9,247

32
$
13,003

91
$
21,427

51
$
20,135


23

The following table presents past due status and non-accrual loans by portfolio segment and class segment:
September 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
$
17,060

$
2,951

$
3,745

$
38,878

$
42,623

$
62,634

$
5,000,739

$
5,063,373

Commercial - secured
9,603

1,333

1,136

42,927

44,063

54,999

3,384,535

3,439,534

Commercial - unsecured
524

308

—

1,121

1,121

1,953

203,783

205,736

Total commercial - industrial, financial and agricultural
10,127

1,641

1,136

44,048

45,184

56,952

3,588,318

3,645,270

Real estate - home equity
14,176

4,042

5,296

13,395

18,691

36,909

1,736,645

1,773,554

Real estate - residential mortgage
17,468

6,634

11,860

22,449

34,309

58,411

1,269,058

1,327,469

Construction - commercial residential
233

339

163

21,346

21,509

22,081

222,976

245,057

Construction - commercial
308

—

—

2,388

2,388

2,696

256,145

258,841

Construction - other
1,425

—

—

499

499

1,924

71,520

73,444

Total real estate - construction
1,966

339

163

24,233

24,396

26,701

550,641

577,342

Consumer - direct
2,852

1,205

2,884

7

2,891

6,948

138,373

145,321

Consumer - indirect
2,505

453

120

2

122

3,080

147,741

150,821

Total consumer
5,357

1,658

3,004

9

3,013

10,028

286,114

296,142

Leasing and other and overdrafts
294

228

67

—

67

589

97,160

97,749

$
66,448

$
17,493

$
25,271

$
143,012

$
168,283

$
252,224

$
12,528,675

$
12,780,899

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



24

NOTE F – Mortgage Servicing Rights
The following table summarizes the changes in mortgage servicing rights (MSRs), which are included in other assets on the consolidated balance sheets:
Three months ended
September 30
Nine months ended
September 30
2013
2012
2013
2012
(in thousands)
Amortized cost:
Balance at beginning of period
$
41,750

$
37,003

$
39,737

$
34,666

Originations of mortgage servicing rights
2,909

4,341

10,371

11,177

Amortization
(2,031
)
(2,711
)
(7,480
)
(7,210
)
Balance at end of period
$
42,628

$
38,633

$
42,628

$
38,633

Valuation allowance:
Balance at beginning of period
$
(1,690
)
$
(1,550
)
$
(3,680
)
$
(1,550
)
Reversals (additions)
1,690

(2,130
)
3,680

(2,130
)
Balance at end of period
$
—

$
(3,680
)
$
—

$
(3,680
)
Net MSRs at end of period
$
42,628

34,953

$
42,628

$
34,953

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.
As of September 30, 2013, the estimated fair value of MSRs was $44.9 million , resulting in the reversal of the remaining $1.7 million valuation allowance during the third quarter of 2013. An increase to the valuation allowance of $2.1 million was recorded for three and nine months ended September 30, 2012 . As a result, the fair value of MSRs as of September 30, 2012 was equal to their book value.

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 (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 September 30
Nine months ended September 30
2013
2012
2013
2012
(in thousands)
Stock-based compensation expense
$
979

$
913

$
4,186

$
3,963

Tax benefit
(272
)
(245
)
(1,183
)
(1,061
)
Stock-based compensation expense, net of tax
$
707

$
668

$
3,003

$
2,902


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

25

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. As of September 30, 2013 , the Employee Option Plan had 11.4 million shares reserved for future grants through 2023 . As of September 30, 2013 , the Directors’ Plan had 450,000 shares reserved for future grants through 2021 .

NOTE H – Employee Benefit Plans
The Corporation maintains a defined benefit pension plan (Pension Plan) for certain employees, which was curtailed effective January 1, 2008 . Contributions to the Pension Plan are actuarially determined and funded annually, if required. Pension Plan assets are invested in: money markets; fixed income securities, including corporate bonds, U.S. Treasury securities and common trust funds; and equity securities, including common stocks and common stock mutual funds.
The 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
September 30
Nine months ended
September 30
2013
2012
2013
2012
(in thousands)
Service cost (1)
$
51

$
39

$
153

$
117

Interest cost
772

806

2,316

2,418

Expected return on plan assets
(800
)
(808
)
(2,400
)
(2,424
)
Net amortization and deferral
596

420

1,788

1,260

Net periodic benefit cost
$
619

$
457

$
1,857

$
1,371

(1)
The Pension Plan service cost recorded for the three and nine months ended September 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
September 30
Nine months ended
September 30
2013
2012
2013
2012
(in thousands)
Service cost
$
57

$
53

$
171

$
159

Interest cost
81

87

243

261

Expected return on plan assets
—

(1
)
—

(3
)
Net accretion and deferral
(91
)
(91
)
(273
)
(273
)
Net periodic benefit cost
$
47

$
48

$
141

$
144



26

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.
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.

27

The following table presents a summary of the notional amounts and fair values of derivative financial instruments:
September 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
$
120,547

$
3,100

$
314,416

$
6,912

Negative fair values
5,790

(50
)
9,714

(155
)
Net interest rate locks with customers

3,050


6,757

Forward Commitments
Positive fair values
6,002

16

79,152

707

Negative fair values
130,498

(2,193
)
236,500

(915
)
Net forward commitments
(2,177
)
(208
)
Interest Rate Swaps with Customers
Positive fair values
115,409

3,460

130,841

7,090

Negative fair values
84,625

(1,640
)
—

—

Net interest rate swaps with customers
1,820

7,090

Interest Rate Swaps with Dealer Counterparties
Positive fair values
84,625

1,640

—

—

Negative fair values
115,409

(3,460
)
130,841

(7,090
)
Net Interest rate swaps with dealer counterparties
(1,820
)
(7,090
)
Foreign Exchange Contracts with Customers
Positive fair values
4,362

64

1,810

137

Negative fair values
16,770

(450
)
9,851

(348
)
Net foreign exchange contracts with customers
(386
)
(211
)
Foreign Exchange Contracts with Correspondent Banks
Positive fair values
25,418

1,013

59,368

1,064

Negative fair values
10,805

(160
)
37,865

(1,121
)
Net foreign exchange contracts with correspondent banks
853

(57
)
Net derivative fair value asset
$
1,340

$
6,281


The following table presents a summary of the fair value gains and losses on derivative financial instruments:
Three months ended
September 30
Nine months ended
September 30
2013
2012
2013
2012
(in thousands)
Interest rate locks with customers
$
4,717

$
3,933

$
(3,707
)
$
8,985

Forward commitments
(12,244
)
(3,255
)
(1,969
)
(5,068
)
Interest rate swaps with customers
1,009

1,189

(5,270
)
4,229

Interest rate swaps with dealer counterparties
(1,009
)
(1,189
)
5,270

(4,229
)
Foreign exchange contracts with customers
(344
)
1,654

(175
)
2,523

Foreign exchange contracts with correspondent banks
(50
)
(1,331
)
910

(1,717
)
Net fair value gains (losses) on derivative financial instruments
$
(7,921
)
$
1,001

$
(4,941
)
$
4,723



28

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

The following table presents the Corporation's financial instruments that are eligible for offset, and the effects of offsetting, on the consolidated balance sheets:
Gross Amounts
Gross Amounts Not Offset
Recognized
on the Consolidated
on the
Balance Sheets
Consolidated
Financial
Cash
Net
Balance Sheets
Instruments (1)
Collateral (2)
Amount
(in thousands)
September 30, 2013
Interest rate swap assets
$
5,100

$
(1,837
)
$
—

$
3,263

Interest rate swap liabilities
$
5,100

$
(1,837
)
$
(1,800
)
$
1,463

December 31, 2012
Interest rate swap assets
$
7,090

$
—

$
—

$
7,090

Interest rate swap liabilities
$
7,090

$
—

$
(7,090
)
$
—


(1)
For interest rate swap assets, amounts represent any derivative liability fair values that could be offset in the event of counterparty or customer default. For interest rate swap liabilities, amounts represent any derivative asset fair values that could be offset in the event of counterparty or customer default.
(2)
Amounts represent cash collateral posted on interest rate swap transactions with financial institution counterparties. Interest rate swaps with customers are collateralized by the underlying loans to those borrowers.
NOTE K – Commitments and Contingencies
Commitments
The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers.
Those financial instruments include commitments to extend credit and letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized on the Corporation’s consolidated balance sheets. Exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and letters of credit is represented by the outstanding amount of those instruments.
The outstanding amounts of commitments to extend credit and letters of credit were as follows:
September 30,
2013
December 31, 2012
(in thousands)
Commitments to extend credit
$
4,301,326

$
4,011,741

Standby letters of credit
393,023

425,095

Commercial letters of credit
35,036

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.

29

Residential Lending
Residential mortgages are originated and sold by the Corporation and consist primarily of conforming, prime loans sold to government sponsored agencies, such as the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). The Corporation also sells a portion of prime loans to non-government sponsored agency investors.
The Corporation provides customary representations and warranties to investors that specify, among other things, that the loans have been underwritten to the standards established by the investor. The Corporation may be required to repurchase a loan or reimburse the investor for a credit loss incurred on a loan if it is determined that the representations and warranties have not been met. This generally results from an underwriting or documentation deficiency. As of September 30, 2013 and December 31, 2012 , the reserves for losses on these loans were approximately $4.9 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 September 30, 2013 , the unpaid principal balance of loans sold under the MPF Program was approximately $186 million . As of September 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 losses methodology.
As of September 30, 2013 and December 31, 2012 , the total reserve for losses on residential mortgage loans sold was $7.8 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 September 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 will not 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 L – Fair Value Option
FASB ASC Subtopic 825-10 permits entities to measure many financial instruments and certain other items at fair value and requires certain disclosures for amounts for which the fair value option is applied. The Corporation has elected to measure mortgage loans held for sale at fair value to more accurately reflect the financial results of its mortgage banking activities in its consolidated financial statements. Derivative financial instruments related to these activities are also recorded at fair value, as noted within Note I, "Derivative Financial Instruments." The Corporation determines fair value for its mortgage loans held for sale based on the price that secondary market investors would pay for loans with similar characteristics, including interest rate and term, as of the date fair value is measured. Changes in fair values during the period are recorded as components of mortgage banking income on the consolidated statements of income. Interest income earned on mortgage loans held for sale is recorded within interest income on the consolidated statements of income.
The following table presents a summary of the Corporation’s mortgage loans held for sale:
September 30,
2013
December 31,
2012
(in thousands)
Cost
$
37,903

$
65,745

Fair value
39,273

67,899

During the three months ended September 30, 2013 , the Corporation recorded gains related to changes in fair values of mortgage loans held for sale of $2.6 million . During the nine months ended September 30, 2013 , the Corporation recorded losses related to changes in fair values of mortgage loans held for sale of $784,000 . During the three and nine months ended September 30, 2012 , the Corporation recorded gains related to changes in fair values of mortgage loans held for sale of $1.5 million and $2.5 million , respectively.


30

NOTE M – Fair Value Measurements
FASB ASC Topic 820 establishes a fair value hierarchy for 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:
September 30, 2013
Level 1
Level 2
Level 3
Total
(in thousands)
Mortgage loans held for sale
$
—

$
39,273

$
—

$
39,273

Available for sale investment securities:
Equity securities
43,728

—

—

43,728

U.S. Government securities
—

2,250

—

2,250

U.S. Government sponsored agency securities
—

835

—

835

State and municipal securities
—

293,513

—

293,513

Corporate debt securities
—

97,580

8,971

106,551

Collateralized mortgage obligations
—

1,082,977

—

1,082,977

Mortgage-backed securities
—

914,230

—

914,230

Auction rate securities
—

—

154,510

154,510

Total available for sale investments
43,728

2,391,385

163,481

2,598,594

Other assets
15,815

8,216

—

24,031

Total assets
$
59,543

$
2,438,874

$
163,481

$
2,661,898

Other liabilities
$
15,348

$
7,342

$
—

$
22,690

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


31

The valuation techniques used to measure fair value for the items in the preceding tables are as follows:
•
Mortgage loans held for sale – This category consists of mortgage loans held for sale that the Corporation has elected to measure at fair value. Fair values as of September 30, 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 pricing models that vary based on asset class and incorporate available market information, including quoted prices of investment securities with similar characteristics. Because many fixed income securities do not trade on a daily basis, pricing models use available information, as applicable, obtained 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 ( $36.8 million at September 30, 2013 and $44.2 million at December 31, 2012 ) and other equity investments ( $6.9 million at September 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 ( $87.9 million at September 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 ( $50.5 million at September 30, 2013 and $51.7 million at December 31, 2012 ), single-issuer trust preferred securities issued by financial institutions ( $48.4 million at September 30, 2013 and $51.7 million at December 31, 2012 ), pooled trust preferred securities issued by financial institutions ( $5.2 million at September 30, 2013 and $6.9 million at December 31, 2012 ) and other corporate debt issued by non-financial institutions ( $2.5 million at September 30, 2013 and December 31, 2012 ).
Level 2 investments include the Corporation’s subordinated debt, other corporate debt issued by non-financial institutions and $44.6 million and $48.3 million of single-issuer trust preferred securities held at September 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.
Level 3 investments include the Corporation’s investments in pooled trust preferred securities and certain single-issuer trust preferred securities ( $3.8 million at September 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 repaid.

32

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.
•
Other assets – Included within this category are the following:
•
Level 1 assets, consisting of mutual funds that are held in trust for employee deferred compensation plans ( $14.7 million at September 30, 2013 and $14.1 million at December 31, 2012 ) and the fair value of foreign currency exchange contracts ( $1.1 million at September 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 ( $3.1 million at September 30, 2013 and $7.6 million at December 31, 2012 ) and the fair value of interest rate swaps ( $5.1 million at September 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 ( $14.7 million at September 30, 2013 and $14.1 million at December 31, 2012 ) and the fair value of foreign currency exchange contracts ( $610,000 at September 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 ( $2.2 million at September 30, 2013 and $1.1 million at December 31, 2012 ) and the fair value of interest rate swaps ( $5.1 million at September 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.

33

The following table presents the changes in the Corporation’s available for sale investment securities measured at fair value on a recurring basis using unobservable inputs (Level 3):
Three months ended September 30, 2013
Pooled Trust
Preferred
Securities
Single-issuer
Trust Preferred
Securities
ARCs
(in thousands)
Balance at June 30, 2013
$
5,391

$
3,670

$
152,592

Sales
—

—

(25
)
Realized adjustment to fair value (1)
(97
)
—

—

Unrealized adjustment to fair value (2)
(103
)
108

1,983

Settlements - calls
—

—

(317
)
Discount accretion (3)
—

2

277

Balance at September 30, 2013
$
5,191

$
3,780

$
154,510

Three months ended September 30, 2012
Balance at June 30, 2012
$
5,018

$
4,100

$
203,282

Sales
—

(956
)
—

Realized adjustment to fair value (1)
(19
)
19

—

Unrealized adjustment to fair value (2)
298

(55
)
6,809

Settlements - calls
(202
)
—

(50,370
)
Discount accretion (3)
46

2

341

Balance at September 30, 2012
$
5,141

$
3,110

$
160,062

Nine months ended September 30, 2013
Pooled Trust
Preferred
Securities
Single-issuer
Trust Preferred
Securities
ARCs
(in thousands)
Balance at December 31, 2012
$
6,927

$
3,360

$
149,339

Sales
(4,987
)
—

(25
)
Realized adjustment to fair value (1)
1,604

—

—

Unrealized adjustment to fair value (2)
1,771

412

7,171

Settlements - calls
(124
)
—

(2,725
)
Discount accretion (3)
—

8

750

Balance at September 30, 2013
$
5,191

$
3,780

$
154,510

Nine months ended September 30, 2012
Balance at December 31, 2011
$
5,109

$
4,180

$
225,211

Sales
—

(956
)
—

Realized adjustment to fair value (1)
(19
)
19

—

Unrealized adjustment to fair value (2)
612

111

(12,677
)
Settlements - calls
(605
)
(250
)
(54,880
)
Discount accretion (3)
44

6

2,408

Balance at September 30, 2012
$
5,141

$
3,110

$
160,062

(1)
Realized adjustments to fair value represent credit related other -than-temporary impairment charges and gains on sales of investment securities, both included as components of investment securities gains on the consolidated statements of income.
(2)
Pooled trust preferred securities, single-issuer trust preferred securities and ARCs are classified as available for sale investment securities; as such, the unrealized adjustment to fair value was recorded as an unrealized holding gain (loss) and included as a component of available for sale investment securities on the consolidated balance sheets.
(3)
Included as a component of net interest income on the consolidated statements of income.

34

Certain financial assets are not measured at fair value on an ongoing basis, but are subject to fair value measurement in certain circumstances, such as upon their acquisition or when there is evidence of impairment. The following table presents the Corporation’s financial assets measured at fair value on a nonrecurring basis and reported on the Corporation’s consolidated balance sheets:
September 30, 2013
Level 1
Level 2
Level 3
Total
(in thousands)
Net loans
$
—

$
—

$
147,743

$
147,743

Other financial assets
—

—

60,801

60,801

Total assets
$
—

$
—

$
208,544

$
208,544

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 ( $18.2 million at September 30, 2013 and $26.1 million at December 31, 2012 ) and MSRs, net of the MSRs valuation reserve ( $42.6 million at September 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. Beginning in the second quarter of 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 September 30, 2013 discounted cash flows valuation was 12.1% . 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 September 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.

35

September 30, 2013
December 31, 2012
Book Value
Estimated
Fair Value
Book Value
Estimated
Fair Value
(in thousands)
FINANCIAL ASSETS
Cash and due from banks
$
262,938

$
262,938

$
256,300

$
256,300

Interest-bearing deposits with other banks
221,064

221,064

173,257

173,257

Loans held for sale (1)
39,273

39,273

67,899

67,899

Securities held to maturity
206

224

292

319

Securities available for sale (1)
2,686,443

2,686,443

2,793,725

2,793,725

Loans, net of unearned income (1)
12,780,899

12,730,181

12,146,971

12,129,971

Accrued interest receivable
44,715

44,715

45,786

45,786

Other financial assets (1)
144,367

144,367

201,069

201,069

FINANCIAL LIABILITIES
Demand and savings deposits
$
9,696,547

$
9,696,547

$
9,100,825

$
9,100,825

Time deposits
3,024,574

3,040,852

3,383,338

3,413,060

Short-term borrowings
1,198,577

1,198,577

868,399

868,399

Accrued interest payable
16,657

16,657

19,330

19,330

Other financial liabilities (1)
67,773

67,773

58,255

58,255

Federal Home Loan Bank advances and long-term debt
889,122

888,850

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 September 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.


36

NOTE N – Common Stock Repurchase Plans
On January 3, 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 4.0% 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. During the three and nine months ended September 30, 2013 , approximately 1.6 million and 8.0 million shares, respectively, were repurchased, completing this repurchase program.
On October 22, 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 4.0 million shares, or approximately 2.1% of its outstanding shares, through March 31, 2014.
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.

NOTE O – New Accounting Standard

In July 2013, the FASB issued Accounting Standards Update 2013-11, "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists." The provisions of ASC Update 2013-11 generally require an entity to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward or a similar tax loss. ASU No. 2013-11 is effective for interim and annual reporting periods beginning after December 15, 2013. For the Corporation, this standards update is effective in connection with its March 31, 2014 interim filing on Form 10-Q. The adoption of ASU No. 2013-11 is not expected to have a material impact on the consolidated financial statements.

NOTE P – Reclassifications

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

37

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.

38

The following table presents a summary of the Corporation’s earnings and selected performance ratios:
As of or for the
Three months ended
September 30
As of or for the
Nine months ended
September 30
2013
2012
2013
2012
Income before income taxes (in thousands)
$
53,785

$
54,842

$
158,503

$
159,757

Net income (in thousands)
$
39,948

$
41,582

$
119,757

$
119,605

Diluted net income per share
$
0.21

$
0.21

$
0.61

$
0.60

Return on average assets
0.93
%
1.02
%
0.95
%
0.98
%
Return on average equity
7.81
%
8.03
%
7.79
%
7.83
%
Net interest margin (1)
3.45
%
3.74
%
3.51
%
3.79
%
Non-performing assets to total assets
1.09
%
1.49
%
1.09
%
1.49
%
Annualized net charge-offs to average loans
0.45
%
0.84
%
0.54
%
1.11
%
(1)
Presented on an FTE basis, using a 35% Federal tax rate and statutory interest expense disallowances. See also the “Net Interest Income” section of Management’s Discussion.
Income before income taxes for the third quarter of 2013 decreased $1.1 million, or 1.9%, compared to the third quarter of 2012. For the nine months ended September 30, 2013, income before income taxes decreased $1.3 million, or 0.8%, compared to the same period in 2012 .
The Corporation's results for the three and nine months ended September 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, lower non-interest income, due to declines in certain types of fee income and gains on sales of loans, and higher non-interest expenses.
Asset Quality - For the three and nine months ended September 30, 2013, the Corporation's provision for credit losses decreased $13.5 million, or 58.7%, and $38.5 million, or 50.3%, respectively, in comparison to the same periods in 2012. These decreases were due to an overall improvement in asset quality.
Non-performing loans decreased $44.5 million, or 20.9%, since September 30, 2012. The total past due rate was 1.97% as of September 30, 2013, compared to 2.58% as of September 30, 2012. Annualized net charge-offs to average loans outstanding were 0.45% for the third quarter of 2013, compared to 0.84% for the third quarter of 2012. Annualized net charge-offs to average loans outstanding were 0.54% for the nine months ended September 30, 2013, compared to 1.11% for the nine months ended September 30, 2012.
Net Interest Income and Net Interest Margin - For the three and nine months ended September 30, 2013, net interest income decreased $3.3 million, or 2.5%, and $17.9 million, or 4.3%, respectively, in comparison to the same periods in 2012. Net interest income for the first nine months 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, partially offset by an increase in average interest-earning assets. The net interest margin for the third quarter of 2013 decreased 29 basis points, or 7.8%, in comparison to the third quarter of 2012. For the first nine months of 2013, the net interest margin decreased 28 basis points, or 7.4%, in comparison to the same period in 2012.
Average interest-earning assets increased $849.7 million, or 5.7%, in comparison to the third quarter of 2012, mainly due to an $805.7 million, or 6.8%, increase in average loans. For the first nine months of 2013, average interest-earning assets increased $542.5 million, or 3.6%, in comparison to the same period in 2012, including a $549.4 million, or 4.6%, increase in average loans. During the three and nine months ended September 30, 2013, loan growth was realized in commercial mortgages, commercial loans, residential mortgages and home equity loans. Approximately half of the growth in commercial loans and commercial mortgages was generated by new customer relationships.
Non-interest Income - For the three and nine months ended September 30, 2013, non-interest income, excluding investment securities gains, decreased $7.2 million, or 13.8%, and $15.1 million, or 9.8%, respectively, in comparison to the same periods in 2012. These decreases in non-interest income were primarily due to decreases in mortgage banking income as a result of lower gains on sales of residential mortgages, and, to a lessor extent, decreases in fee income, particularly overdraft fee income, other service charges on deposit accounts and foreign currency processing revenue.

39

The decreases in gains on sales of residential mortgages were a result of lower refinancing volumes due to an increase in interest rates, while the decrease in foreign currency processing income resulted from the sale of the Corporation's Global Exchange Group division (Global Exchange) in December of 2012. Global Exchange provided international payment solutions to meet the needs of companies, law firms and professionals.
Non-interest Expense - For the three and nine months ended September 30, 2013, non-interest expense increased $6.6 million, or 6.0%, and $11.9 million, or 3.6%, respectively, in comparison to the same periods in 2012. These increases were driven largely 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.
During the third quarter of 2013, the Corporation successfully completed 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. Total implementation costs specifically associated with this conversion were approximately $1.6 million and $3.1 million, respectively, during the three and nine months ended September 30, 2013, respectively. These implementation costs were approximately $181,000 and $520,000, respectively, during the three and nine months ended September 30, 2012, respectively. The Corporation expects an annual increase in expenses of approximately $3 million as a result of this conversion.

Regulatory Compliance and Risk Management Matters - As stated in Item 1A, Risk Factors, of the Corporation’s most recent Annual Report on Form 10-K, the time and expense associated with regulatory compliance and risk management efforts continues to increase. Thus, balancing the need to address regulatory changes and effectively manage growth in non-interest expense has become more challenging than in the past. In addition, virtually every aspect of the Corporation’s operations is subject to extensive regulation, and in recent years, a combination of financial reform legislation and heightened scrutiny by banking regulators have significantly increased expectations regarding what constitutes an effective risk and compliance management infrastructure. To keep pace with these expectations, over the past 18 to 24 months, the Corporation has invested considerable resources in initiatives designed to strengthen its risk management framework and regulatory compliance programs.
Despite these undertakings, deficiencies in components of the Corporation’s regulatory compliance program, including those related to compliance with requirements under the Flood Disaster Protection Act, the Bank Secrecy Act and anti-money laundering regulations, have been identified. Although the Corporation has made progress in continuing to build-out its risk and compliance management infrastructures to remedy these and other deficiencies, the pace at which it has progressed may not be consistent with current regulatory expectations. As a result, given the current regulatory environment, and the actions that the Federal banking agencies have taken with respect to other banking organizations, the Corporation believes that there is an increased risk that it, or one or more of its banking subsidiaries, may become subject to regulatory enforcement action. Any such enforcement action by the Corporation’s banking regulators would likely require that it accelerate its efforts to remedy these deficiencies and to undertake additional remedial actions, and could also involve the imposition of material restrictions on the Corporation’s activities or the assessment of fines or penalties against the Corporation.
Management has begun to accelerate its efforts to resolve the identified deficiencies and enhance the Corporation’s compliance and risk management functions, and this work will continue. Although management is not able to predict the outcome of these matters, costs associated with these efforts, including additional expenses for salaries and benefits, outside professional services, such as consulting and legal, and for enhancing or acquiring systems to strengthen and support the Corporation’s regulatory compliance and risk management infrastructures, could materially affect the Corporation’s results of operations in future periods. Management expects to implement a number of actions to reduce ongoing operating costs that could offset all or a portion of the increased expenses associated with strengthening the Corporation’s compliance and risk management functions.
Quarter Ended September 30, 2013 compared to the Quarter Ended September 30, 2012
Net Interest Income
FTE net interest income decreased $3.2 million, or 2.3%, to $136.9 million in the third quarter of 2013 from $140.1 million in the third quarter of 2012. This decrease was primarily due to a 29 basis point, or 7.8%, decrease in the net interest margin, to 3.45% for the third quarter of 2013 from 3.74% for the third quarter of 2012. The compression in the net interest margin resulted from the net effect of a 45 basis point, or 10.2%, decrease in yields on interest-earning assets and a 20 basis point, or 22.2%, decrease in funding costs.

40

The following table provides a comparative average balance sheet and net interest income analysis for the third 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 September 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)
$
12,728,162

$
139,141

4.34
%
$
11,922,417

$
143,211

4.78
%
Taxable investment securities (3)
2,446,583

12,977

2.12

2,392,043

16,658

2.78

Tax-exempt investment securities (3)
284,372

3,581

5.04

286,225

3,936

5.50

Equity securities (3)
133,200

1,056

3.16

109,884

820

2.98

Total investment securities
2,864,155

17,614

2.46

2,788,152

21,414

3.07

Loans held for sale
36,450

382

4.19

61,001

578

3.79

Other interest-earning assets
140,338

38

0.11

147,818

35

0.09

Total interest-earning assets
15,769,105

157,175

3.96
%
14,919,388

165,238

4.41
%
Noninterest-earning assets:






Cash and due from banks
210,525



221,561



Premises and equipment
224,837



222,544



Other assets
1,007,808



1,098,748



Less: Allowance for loan losses
(220,342
)


(239,931
)


Total Assets
$
16,991,933



$
16,222,310



LIABILITIES AND EQUITY
Interest-bearing liabilities:






Demand deposits
$
2,895,156

$
938

0.13
%
$
2,608,202

$
1,071

0.16
%
Savings deposits
3,359,795

1,015

0.12

3,372,278

1,431

0.17

Time deposits
3,065,210

6,790

0.88

3,657,616

11,346

1.23

Total interest-bearing deposits
9,320,161

8,743

0.37

9,638,096

13,848

0.57

Short-term borrowings
1,337,742

691

0.20

588,568

220

0.15

FHLB advances and long-term debt
889,141

10,865

4.87

908,767

11,111

4.88

Total interest-bearing liabilities
11,547,044

20,299

0.70
%
11,135,431

25,179

0.90
%
Noninterest-bearing liabilities:






Demand deposits
3,221,648



2,837,539



Other
194,163



188,065



Total Liabilities
14,962,855



14,161,035


Shareholders’ equity
2,029,078



2,061,275



Total Liabilities and Shareholders’ Equity
$
16,991,933



$
16,222,310



Net interest income/net interest margin (FTE)
136,876

3.45
%
140,059

3.74
%
Tax equivalent adjustment
(4,343
)
(4,178
)
Net interest income
$
132,533

$
135,881

(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.

41

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
$
9,492

$
(13,562
)
$
(4,070
)
Taxable investment securities
373

(4,054
)
(3,681
)
Tax-exempt investment securities
(26
)
(329
)
(355
)
Equity securities
184

52

236

Loans held for sale
(252
)
56

(196
)
Other interest-earning assets
(2
)
5

3

Total interest income
$
9,769

$
(17,832
)
$
(8,063
)
Interest expense on:
Demand deposits
$
111

$
(244
)
$
(133
)
Savings deposits
(5
)
(411
)
(416
)
Time deposits
(1,641
)
(2,915
)
(4,556
)
Short-term borrowings
364

107

471

FHLB advances and long-term debt
(213
)
(33
)
(246
)
Total interest expense
$
(1,384
)
$
(3,496
)
$
(4,880
)
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 45 basis point, or 10.2%, decrease in yields on average interest-earnings assets resulted in a $17.8 million decrease in FTE interest income, partially offset by a $9.8 million increase in FTE interest income as a result of an $849.7 million, or 5.7%, increase in average interest-earning assets.
Average investments increased $76.0 million, or 2.7%. The average yield on investments decreased 61 basis points, or 19.9%, to 2.46% in the third quarter of 2013 from 3.07% in the third 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. Net premium amortization on mortgage-backed securities and collateralized mortgage obligations for the third quarter of 2013 decreased $1.6 million, or 35.7%, in comparison to the third quarter of 2012.
Average loans, by type, are summarized in the following table:
Three months ended
September 30
Increase (decrease)
2013
2012
$
%
(dollars in thousands)
Real estate – commercial mortgage
$
4,961,871

$
4,603,388

$
358,483

7.8
%
Commercial – industrial, financial and agricultural
3,706,113

3,529,733

176,380

5.0

Real estate – home equity
1,767,095

1,597,230

169,865

10.6

Real estate – residential mortgage
1,323,972

1,201,179

122,793

10.2

Real estate – construction
576,222

605,910

(29,688
)
(4.9
)
Consumer
299,057

304,800

(5,743
)
(1.9
)
Leasing and other
93,832

80,177

13,655

17.0

Total
$
12,728,162

$
11,922,417

$
805,745

6.8
%



42

Average loans increased $805.7 million, or 6.8%, compared to the third quarter of 2012. The growth in commercial mortgages and commercial loans was driven by a combination of loans to new customers and increased borrowings from existing customers. The $169.9 million, or 10.6%, increase in home equity loans was due to promotional efforts, while the $122.8 million, or 10.2%, 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 $29.7 million, or 4.9%, decrease in construction loans was due to reductions in non-performing loans in the Maryland and Virginia markets.
The average yield on loans decreased 44 basis points, or 9.2%, to 4.34% in 2013 from 4.78% in 2012. The decrease in average yields on loans was attributable to repayments of higher-yielding loans, increased refinancing activity, the renegotiation of certain existing loans to commercial borrowers to eliminate interest rate floors and new loan production at lower rates.
Interest expense decreased $4.9 million, or 19.4%, to $20.3 million in the third quarter of 2013 from $25.2 million in the third quarter of 2012. Interest expense decreased $3.5 million due to a 20 basis point, or 22.2%, decrease in the average cost of total interest-bearing liabilities. While total interest-bearing liabilities increased $411.6 million, or 3.7%, the change in the overall funding mix resulted in an additional $1.4 million decrease in interest expense. Decreases in higher cost time deposits and long-term debt were more than offset by increases in interest-bearing demand deposits and short-term borrowings. However, the cost of these funding sources is significantly lower, resulting in the interest expense decrease.
Average deposits, by type, are summarized in the following table:
Three months ended
September 30
Increase (decrease)
2013
2012
$
%
(dollars in thousands)
Noninterest-bearing demand
$
3,221,648

$
2,837,539

$
384,109

13.5
%
Interest-bearing demand
2,895,156

2,608,202

286,954

11.0

Savings
3,359,795

3,372,278

(12,483
)
(0.4
)
Total demand and savings
9,476,599

8,818,019

658,580

7.5

Time deposits
3,065,210

3,657,616

(592,406
)
(16.2
)
Total deposits
$
12,541,809

$
12,475,635

$
66,174

0.5
%
The $658.6 million, or 7.5%, increase in total demand and savings accounts was primarily due to a $325.7 million, or 7.9%, increase in personal account balances, a $258.9 million, or 8.7%, increase in business account balances and a $74.2 million, or 4.5%, increase in municipal account balances. The $592.4 million, or 16.2%, decrease in time deposits was due to a $679.6 million, or 19.4%, decrease in consumer time deposits, partially offset by an $87.2 million, or 58.1%, increase in jumbo time deposits.
The average cost of interest-bearing deposits decreased 20 basis points, or 35.1%, to 0.37% in 2013 from 0.57% 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 third quarter of 2013, excluding early redemptions, $687.8 million of time deposits matured at a weighted average rate of 0.84%, while approximately $682.6 million of time deposits were issued at a weighted average rate of 0.44%.

43

The following table summarizes changes in average short-term borrowings and long-term debt, by type:
Three months ended
September 30
Increase (decrease)
2013
2012
$
%
(dollars in thousands)
Short-term borrowings:
Customer repurchase agreements
$
196,503

$
210,830

$
(14,327
)
(6.8
)%
Customer short-term promissory notes
91,573

127,479

(35,906
)
(28.2
)
Total short-term customer funding
288,076

338,309

(50,233
)
(14.8
)
Federal funds purchased
559,992

244,214

315,778

129.3

Short-term Federal Home Loan Bank (FHLB) advances (1)
489,674

6,045

483,629

N/M
Total short-term borrowings
1,337,742

588,568

749,174

127.3

Long-term debt:




FHLB advances
519,520

539,245

(19,725
)
(3.7
)
Other long-term debt
369,621

369,474

147

—

Total long-term debt
889,141

908,719

(19,578
)
(2.2
)
Total borrowings
$
2,226,883

$
1,497,287

$
729,596

48.7
%
(1) Represents FHLB advances with an original maturity term of less than one year.
N/M - Not meaningful.
Total short-term borrowings increased $749.2 million, or 127.3%, primarily due to increases in short-term FHLB advances and Federal funds, which were used to supplement deposits in funding loan growth. The $19.6 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 95 basis points, or 31.5%, to 2.07% in 2013 from 3.02% 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 $9.5 million for the third quarter of 2013, a decrease of $13.5 million, or 58.7%, from the third 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."


44

Non-Interest Income
The following table presents the components of non-interest income:
Three months ended September 30
Increase (decrease)
2013
2012
$
%
(dollars in thousands)
Overdraft fees
$
7,191

$
8,552

$
(1,361
)
(15.9
)%
Cash management fees
3,001

2,759

242

8.8

Other
3,746

4,340

(594
)
(13.7
)
Service charges on deposit accounts
13,938

15,651

(1,713
)
(10.9
)
Investment management and trust services
10,420

9,429

991

10.5

Merchant fees
3,397

3,128

269

8.6

Debit card income
2,394

2,145

249

11.6

Letter of credit fees
1,255

1,220

35

2.9

Foreign currency processing income
274

2,728

(2,454
)
(90.0
)
Other
2,198

1,898

300

15.8

Other service charges and fees
9,518

11,119

(1,601
)
(14.4
)
Gain on sales of mortgage loans
4,456

12,767

(8,311
)
(65.1
)
Mortgage servicing income
2,667

(2,173
)
4,840

N/M
Mortgage banking income
7,123

10,594

(3,471
)
(32.8
)
Credit card income
2,229

2,095

134

6.4

Other
1,496

3,013

(1,517
)
(50.3
)
Total, excluding investment securities gains
44,724

51,901

(7,177
)
(13.8
)
Investment securities gains
2,633

42

2,591

N/M
Total
$
47,357

$
51,943

$
(4,586
)
(8.8
)%

N/M - Not meaningful.
The $1.4 million, or 15.9%, decrease in overdraft fee income included a $696,000 decrease in fees assessed on personal accounts and a $665,000 decrease in fees assessed on commercial accounts. The overall decline in these fees resulted from a reduction in the number of overdraft items paid, largely due to changes in customer behavior.
The $991,000, or 10.5%, increase in investment management and trust services income was primarily due to a $548,000, or 13.7%, increase in brokerage revenue and a $443,000, or 8.2%, increase in trust commissions. These increases resulted from new trust business sales, improved market conditions that increased the values of existing assets under management and additional recurring revenue generated through the brokerage business due to growth in new accounts.
Mortgage banking income decreased $3.5 million, or 32.8%, from the third quarter of 2012. Gains on sales of mortgage loans decreased $8.3 million, or 65.1%, due to a $390.8 million, or 57.3%, decrease in new loan commitments and an 18.3% decrease in pricing spreads. The decrease in new loan commitments was mainly from lower refinancing volumes in 2013, which represented approximately 32% of new loan commitments during the third quarter of 2013 compared to 69% in the same period in 2012. This decrease resulted from an increase in residential mortgage loan interest rates, as evidenced by the 10-year U.S. treasury rate, which averaged 2.71% in the third quarter of 2013, as compared to 1.64% for the same period in 2012.
Mortgage servicing income increased $4.9 million from the third quarter of 2012 primarily due to a $1.7 million reversal of the valuation allowance for mortgage servicing rights (MSRs) in the third quarter of 2013 compared to a $2.1 million impairment charge recorded in the third quarter of 2012. The improvement in the fair value of MSRs resulted from a decrease in forecasted mortgage prepayments due to higher residential mortgage interest rates. Also contributing to the increase in mortgage servicing income was a $680,000 decrease in MSR amortization due to lower actual prepayments. See Note F, "Mortgage Servicing Rights," in the Notes to Consolidated Financial Statements for additional details.
Foreign currency processing revenue decreased $2.5 million, or 90.0%, due to the December 2012 sale of Global Exchange. The $1.5 million, or 50.3%, decrease in other income was largely due to gains on corporate owned life insurance realized in the third quarter of 2012.

45

Investment securities gains of $2.6 million for the third quarter of 2013 included $2.1 million of realized gains on financial institution stocks and $595,000 of net realized gains on the sales of debt securities, partially offset by $97,000 of other-than-temporary impairment charges on pooled trust preferred debt securities. The $42,000 of investment securities gains for the third quarter of 2012 included $85,000 of realized gains on the sales of debt securities, partially offset by $43,000 of other-than-temporary impairment charges for certain financial institution stocks and pooled trust preferred debt securities.
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 with its ruling to provide the Federal Reserve Board with an opportunity to replace the invalid provisions. On August 21, 2013 the Federal Reserve Board filed a notice of appeal with the U.S. Court of Appeals for the District of Columbia Circuit and on September 18, 2013 the district court granted a motion to stay the district court's July 31, 2013 ruling pending the outcome of the appeal. The final outcome of this case, or any further rulemaking 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.
Non-Interest Expense
The following table presents the components of non-interest expense:
Three months ended September 30
Increase (decrease)
2013
2012
$
%
(dollars in thousands)
Salaries and employee benefits
$
63,344

$
62,161

$
1,183

1.9
%
Net occupancy expense
11,519

11,161

358

3.2

Other outside services
5,048

5,600

(552
)
(9.9
)
Data processing
4,757

3,776

981

26.0

Equipment expense
3,646

3,816

(170
)
(4.5
)
Professional fees
3,329

2,728

601

22.0

Operating risk loss
3,297

1,404

1,893

134.8

Software
3,268

2,511

757

30.1

FDIC insurance expense
2,918

3,029

(111
)
(3.7
)
Marketing
2,251

648

1,603

247.4

Telecommunications
2,047

1,764

283

16.0

Supplies
1,504

1,188

316

26.6

Other real estate owned (OREO) and repossession expense
1,453

2,249

(796
)
(35.4
)
Postage
1,163

1,044

119

11.4

Intangible amortization
534

756

(222
)
(29.4
)
Other
6,527

6,147

380

6.2

Total
$
116,605

$
109,982

$
6,623

6.0
%
Salaries and employee benefits increased $1.2 million, or 1.9%, due to an $834,000, or 1.6%, increase in salaries and a $348,000, or 3.3%, increase in employee benefits. Increases in salaries caused by normal merit increases and an increase in staffing were partially offset by a decline in incentive compensation and bonuses. Average full-time equivalent employees were 3,640 for the three months ended September 30, 2013 as compared to 3,540 for the same period in 2012. The increase in employee benefits was primarily due to higher healthcare costs and defined benefit plan expense, partially offset by a decrease in severance expense.
Other outside services decreased $552,000, or 9.9%, primarily due to a decrease in consulting services, which were impacted by the timing of engagements. However, the Corporation anticipates continued elevated third-party consulting costs as it builds out its risk management, compliance, and technology infrastructures.

46

The $1.9 million increase in operating risk loss was primarily due to losses associated with previously sold residential mortgages. See Note K, "Commitments and Contingencies," in the Notes to Consolidated Financial Statements for additional details related to repurchases of previously sold residential mortgages.
Software expense increased $757,000, or 30.1%, largely due to the core processing system conversion. Data processing increased $981,000, or 26.0%, due to both the core processing system conversion and an increase in transaction volumes. Professional fees increased $601,000, or 22.0%, due to higher legal costs associated with regulatory compliance and risk management efforts, partially offset by lower workout costs associated with problem assets.
The $1.6 million, or 247.4%, increase in marketing expense was primarily due to the timing and number of marketing promotions and, to a lesser extent, costs related to the core processing system conversion in the third quarter of 2013. OREO and repossession expense decreased $796,000, or 35.4%, due to an $827,000 decrease in collections and repossession expense, a $488,000 decrease in property maintenance costs and a $302,000 increase in net gains on sales of properties, partially offset by a $741,000 increase in valuation provisions. While the decline in these expenses can be attributed to general improvements in asset quality, this expense category is expected to be volatile. The $222,000, or 29.4%, 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 third quarter of 2013 was $13.8 million, a $577,000, or 4.4%, increase from $13.3 million for the third quarter of 2012.
The Corporation’s effective tax rate was 25.7% in 2013, as compared to 24.2% 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 tax credits under various federal programs. The increase in the effective tax rate in comparison to the third quarter of 2012 was primarily due to non-taxable gains from investments in corporate owned life insurance realized during the third quarter of 2012 and a decrease in tax credits earned. The effect of these items was partially offset by a $260,000, net of federal tax, reduction in the valuation allowance for certain state deferred tax assets recognized through a credit to income tax expense.
Nine Months Ended September 30, 2013 compared to the Nine Months Ended September 30, 2012
Net Interest Income
FTE net interest income decreased $17.5 million, or 4.1%, to $407.2 million in the first nine months of 2013 from $424.7 million in the first nine months of 2012.
Net interest margin decreased 28 basis points, or 7.4%, to 3.51% for the first nine months of 2013 from 3.79% for the first nine months of 2012. The decrease in net interest margin was the result of a 45 basis point, or 10.0%, decrease in yields on interest-earning assets, partially offset by a 20 basis point, or 21.3%, decrease in funding costs .


47

The following table provides a comparative average balance sheet and net interest income analysis for the first nine months 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.
Nine months ended September 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)
$
12,506,393

$
414,091

4.43
%
$
11,957,025

$
434,520

4.85
%
Taxable investment securities (3)
2,426,015

40,890

2.25

2,442,237

53,943

2.95

Tax-exempt investment securities (3)
285,638

11,003

5.14

288,221

12,085

5.59

Equity securities (3)
125,193

2,848

3.04

110,807

2,307

2.78

Total investment securities
2,836,846

54,741

2.57

2,841,265

68,335

3.21

Loans held for sale
42,122

1,261

3.99

52,462

1,547

3.93

Other interest-earning assets
134,460

95

0.09

126,556

133

0.14

Total interest-earning assets
15,519,821

470,188

4.05
%
14,977,308

504,535

4.50
%
Noninterest-earning assets:
Cash and due from banks
206,403

239,050

Premises and equipment
225,733

217,351

Other assets
1,045,796

1,105,238

Less: Allowance for loan losses
(223,220
)
(255,061
)
Total Assets
$
16,774,533

$
16,283,886

LIABILITIES AND EQUITY
Interest-bearing liabilities:
Demand deposits
$
2,773,917

$
2,687

0.13
%
$
2,519,454

$
3,132

0.17
%
Savings deposits
3,348,413

3,054

0.12

3,341,512

4,751

0.19

Time deposits
3,184,281

22,901

0.96

3,799,774

36,958

1.30

Total interest-bearing deposits
9,306,611

28,642

0.41

9,660,740

44,841

0.62

Short-term borrowings
1,228,882

1,900

0.20

758,899

912

0.16

FHLB advances and long-term debt
889,826

32,448

4.87

940,348

34,077

4.84

Total interest-bearing liabilities
11,425,319

62,990

0.74
%
11,359,987

79,830

0.94
%
Noninterest-bearing liabilities:
Demand deposits
3,103,381

2,691,949

Other
190,976

190,476

Total Liabilities
14,719,676

14,242,412

Shareholders’ equity
2,054,857

2,041,474

Total Liabilities and Shareholders’ Equity
$
16,774,533

$
16,283,886

Net interest income/net interest margin (FTE)
407,198

3.51
%
424,705

3.79
%
Tax equivalent adjustment
(12,956
)
(12,599
)
Net interest income
$
394,242

$
412,106

(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.

48


The following table summarizes the changes in FTE interest income and expense for the first nine 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
$
19,207

$
(39,636
)
$
(20,429
)
Taxable investment securities
(357
)
(12,696
)
(13,053
)
Tax-exempt investment securities
(108
)
(974
)
(1,082
)
Equity securities
314

227

541

Loans held for sale
(310
)
24

(286
)
Other interest-earning assets
8

(46
)
(38
)
Total interest income
$
18,754

$
(53,101
)
$
(34,347
)
Interest expense on:
Demand deposits
$
293

$
(738
)
$
(445
)
Savings deposits
10

(1,707
)
(1,697
)
Time deposits
(5,397
)
(8,660
)
(14,057
)
Short-term borrowings
725

263

988

FHLB advances and long-term debt
(1,805
)
176

(1,629
)
Total interest expense
$
(6,174
)
$
(10,666
)
$
(16,840
)
A 45 basis point, or 10.0%, decrease in average yields on interest-earning assets resulted in a $53.1 million decrease in FTE interest income, which was partially offset by an $18.8 million increase in FTE interest income resulting from a $542.5 million, or 3.6%, increase in average interest-earning assets.
Average investments decreased $4.4 million, or 0.2%. The average yield on investment securities decreased 64 basis points, or 19.9%, to 2.57% in 2013 from 3.21% 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:
Nine months ended September 30
Increase (decrease)
2013
2012
$
%
(dollars in thousands)
Real estate – commercial mortgage
$
4,796,557

$
4,618,389

$
178,168

3.9
%
Commercial – industrial, financial and agricultural
3,694,612

3,548,332

146,280

4.1

Real estate – home equity
1,721,041

1,602,812

118,229

7.4

Real estate – residential mortgage
1,305,434

1,173,158

132,276

11.3

Real estate – construction
594,991

629,170

(34,179
)
(5.4
)
Consumer
303,127

308,215

(5,088
)
(1.7
)
Leasing and other
90,631

76,949

13,682

17.8

Total
$
12,506,393

$
11,957,025

$
549,368

4.6
%

The $324.4 million, or 4.0%, increase in commercial loans and commercial mortgages was from both new and existing customers. The $118.2 million, or 7.4%, increase in home equity loans was a result of certain promotions, while the $132.3 million, or 11.3%, 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
The average yield on loans decreased 42 basis points, or 8.7%, to 4.43% 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 renegotiation of certain existing loans to commercial borrowers to eliminate interest rate floors and new loan production at lower rates.

49

Interest expense decreased $16.8 million, or 21.1%, to $63.0 million in the first nine months of 2013 from $79.8 million in the first nine months of 2012. Interest expense decreased $10.7 million as a result of a 20 basis point, or 21.3%, decrease in the average cost of interest-bearing liabilities. While total interest-bearing liabilities increased $65.3 million, or 0.6%, the change in the overall funding mix resulted in an additional $6.2 million decrease in interest expense. Decreases in higher cost time deposits and long-term debt were more than offset by increases in interest-bearing demand deposits and short-term borrowings. However, the cost of these funding sources is significantly lower, resulting in the interest expense decrease.
Average deposits, by type, are summarized in the following table:
Nine months ended
September 30
Increase (decrease)
2013
2012
$
%
(dollars in thousands)
Noninterest-bearing demand
$
3,103,381

$
2,691,949

$
411,432

15.3
%
Interest-bearing demand
2,773,917

2,519,454

254,463

10.1

Savings
3,348,413

3,341,512

6,901

0.2

Total demand and savings
9,225,711

8,552,915

672,796

7.9

Time deposits
3,184,281

3,799,774

(615,493
)
(16.2
)
Total deposits
$
12,409,992

$
12,352,689

$
57,303

0.5
%
The $672.8 million, or 7.9%, increase in total demand and savings account balances was primarily due to a $349.1 million, or 8.6%, increase in personal account balances, a $271.8 million, or 9.6%, increase in business account balances and a $55.5 million, or 3.5%, increase in municipal account balances. The $615.5 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 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 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:
Nine months ended September 30
Increase (decrease)
2013
2012
$
%
(dollars in thousands)
Short-term borrowings:
Customer repurchase agreements
$
183,432

$
212,523

$
(29,091
)
(13.7
)%
Customer short-term promissory notes
100,532

142,896

(42,364
)
(29.6
)
Total short-term customer funding
283,964

355,419

(71,455
)
(20.1
)
Federal funds purchased
681,576

390,319

291,257

74.6

Short-term FHLB advances
263,342

13,161

250,181

N/M
Total short-term borrowings
1,228,882

758,899

469,983

61.9

Long-term debt:
FHLB advances
520,278

570,391

(50,113
)
(8.8
)
Other long-term debt
369,548

369,957

(409
)
(0.1
)
Total long-term debt
889,826

940,348

(50,522
)
(5.4
)
Total
$
2,118,708

$
1,699,247

$
419,461

24.7
%
N/M- Not meaningful.
Total short-term borrowings increased $470.0 million, or 61.9%, primarily due to increases in Federal funds purchased and short-term FHLB advances. The $50.5 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 59 basis points, or 21.5%, to 2.16% in 2013 from 2.75% in 2012, primarily due to an increase in total average borrowings, with increases primarily in lower cost short-term FHLB advances and Federal funds purchased.

50


Provision for Credit Losses
The provision for credit losses was $38.0 million for the first nine months of 2013, a decrease of $38.5 million, or 50.3%, in comparison to the first nine months of 2012, reflecting improvements in asset quality. For details related to the Corporation's allowance and provision for credit losses, see the "Financial Condition" section of Management's Discussion under the heading "Provision for Credit Losses and Allowance for Credit Losses."

Non-Interest Income
The following table presents the components of non-interest income:
Nine months ended September 30
Increase (decrease)
2013
2012
$
%
(dollars in thousands)
Overdraft fees
$
22,276

$
24,612

$
(2,336
)
(9.5
)%
Cash management fees
8,803

8,188

615

7.5

Other
11,621

13,060

(1,439
)
(11.0
)
Service charges on deposit accounts
42,700

45,860

(3,160
)
(6.9
)
Investment management and trust services
31,117

28,628

2,489

8.7

Merchant fees
10,070

9,363

707

7.6

Debit card income
6,852

6,454

398

6.2

Letter of credit fees
3,721

3,792

(71
)
(1.9
)
Foreign currency processing income
950

7,791

(6,841
)
(87.8
)
Other
5,943

5,781

162

2.8

Other service charges and fees
27,536

33,181

(5,645
)
(17.0
)
Gain on sales of mortgage loans
21,472

33,357

(11,885
)
(35.6
)
Mortgage servicing income
4,821

(1,570
)
6,391

N/M
Mortgage banking income
26,293

31,787

(5,494
)
(17.3
)
Credit card income
6,535

6,012

523

8.7

Other
4,780

8,590

(3,810
)
(44.4
)
Total, excluding investment securities gains
138,961

154,058

(15,097
)
(9.8
)
Investment securities gains
7,971

2,831

5,140

181.6

Total
$
146,932

$
156,889

$
(9,957
)
(6.3
)%
N/M- Not meaningful.
The $2.3 million, or 9.5%, decrease in overdraft fee income included a $1.3 million decrease in fees assessed on personal accounts and a $997,000 decrease in fees assessed on commercial accounts. The overall decline in these fees resulted from a reduction in the number of overdraft items paid, largely due to changes in customer behavior.
The $2.5 million, or 8.7%, increase in investment management and trust services income was primarily due to a $1.5 million, or 12.6%, increase in brokerage revenue and a $982,000, or 5.9%, 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 income decreased $6.8 million, or 87.8%, due to the sale of Global Exchange in the fourth quarter of 2012.
Mortgage banking income decreased $5.5 million, or 17.3%. Gains on sales of mortgage loans decreased $11.9 million, or 35.6%, due to a $657.6 million, or 33.6%, decrease in new loan commitments and a 2.9% decrease in pricing spreads during 2013. The decrease in new loan commitments was largely driven by lower refinancing volumes, which represented approximately 50% of new loan commitments during the first nine months of 2013 compared to 68% during the same period in 2012. The decrease in gains on sales of mortgage loans was partially offset by a $6.4 million increase in mortgage servicing income, largely as a result of a $3.7 million reversal of the valuation allowance for MSRs in 2013 compared to a $2.1 million impairment charge recorded in the prior year, and an increase in servicing income due to growth in the portfolio.
The $3.8 million, or 44.4%, decrease in other income was largely due to $2.0 million of gains on the sales of two branches and one operations facility and gains on corporate owned life insurance policies in 2012.

51

Investment securities gains of $8.0 million for the first nine months of 2013 included $4.3 million of net realized gains on financial institution stocks and $3.8 million of realized gains on the sales of debt securities, partially offset by $124,000 of other-than-temporary impairment charges for certain financial institution stocks and pooled trust preferred debt securities. Investment securities gains of $2.8 million for the first nine months of 2012 included $2.6 million of gains on the sales of equity securities and $328,000 of gains on the sales of debt securities, partially offset by $100,000 of other-than-temporary impairment charges for certain financial institution stocks and pooled trust preferred debt securities.
Non-Interest Expense
The following table presents the components of non-interest expense:
Nine months ended
September 30
Increase (decrease)
2013
2012
$
%
(dollars in thousands)
Salaries and employee benefits
$
188,046

$
182,612

$
5,434

3.0
%
Net occupancy expense
34,810

33,301

1,509

4.5

Other outside services
13,223

13,614

(391
)
(2.9
)
Data processing
13,169

11,223

1,946

17.3

Equipment expense
11,447

10,370

1,077

10.4

Professional fees
9,771

8,294

1,477

17.8

Software
9,110

6,958

2,152

30.9

FDIC insurance expense
8,766

9,052

(286
)
(3.2
)
Operating risk loss
6,923

6,827

96

1.4

OREO and repossession expense
6,248

8,709

(2,461
)
(28.3
)
Marketing
6,045

5,703

342

6.0

Telecommunications
5,586

5,143

443

8.6

Supplies
4,096

3,625

471

13.0

Postage
3,633

3,515

118

3.4

Intangible amortization
1,603

2,318

(715
)
(30.8
)
Other
22,195

21,474

721

3.4

Total
$
344,671

$
332,738

$
11,933

3.6
%
Salaries and employee benefits increased $5.4 million, or 3.0%, with salaries increasing $4.9 million, or 3.2%, and employee benefits increasing $582,000, or 1.9%. The increase in salaries was primarily due to normal merit increases and an increase in staffing levels, as well as overtime and temporary employee expense related to the core processing system conversion. These increases were partially offset by a decrease in incentive compensation and bonuses. Average full-time equivalent employees increased to 3,600 in the first nine months of 2013 from 3,500 for same period in 2012. The $582,000 increase in employee benefits was primarily due to increases in defined benefit plan expenses.
Net occupancy expense increased $1.5 million, or 4.5%, as a result of new branches opened in late 2012 and an increase in rent expense. Data processing increased $1.9 million, or 17.3%, primarily due to an increase in transaction volumes and an increase in expenses related to the core processing system conversion. Equipment expense increased $1.1 million, or 10.4%, due to an increase in depreciation expense on assets supporting the information technology infrastructure. Professional fees increased $1.5 million, or 17.8%, 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 $2.2 million, or 30.9%, due to increased maintenance costs and costs associated with the core processing system conversion. OREO and repossession expense decreased $2.5 million, or 28.3%, due to a $2.0 million decrease in collections and repossession expense, a $1.0 million decrease in property maintenance costs and a $416,000 increase in net gains on sales of properties, partially offset by a $952,000 increase in valuation provisions.
The $715,000, or 30.8%, decrease in intangible amortization was primarily due to core deposit intangible assets, which are amortized on an accelerated basis. The $721,000, or 3.4%, increase in other non-interest expenses was primarily due to a $619,000 increase in state taxes.

52

As noted previously, the Corporation successfully completed its conversion to a new core processing system during the third quarter of 2013. Total implementation costs specifically associated with this conversion were approximately $3.1 million for the nine months ended September 30, 2013, compared to $520,000 for the same period in 2012. Implementation costs for the first nine months of 2013 included $649,000 of overtime and temporary employee salaries expense, $648,000 of outside services expense, $574,000 of marketing expense and $462,000 of supplies expense.
Income Taxes
Income tax expense for the first nine months of 2013 was $38.7 million, a $1.4 million, or 3.5%, decrease from $40.2 million in 2012.
The Corporation’s effective tax rate was 24.4% 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 tax 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 nine months of 2012 was partially due to a $638,000 increase in net tax credits on such investments. In addition, a $2.1 million ($1.4 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 in 2013. 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.





53

FINANCIAL CONDITION
The table below presents condensed consolidated ending balance sheets for the Corporation.
Increase (decrease)
September 30, 2013
December 31, 2012
$
%
(dollars in thousands)
Assets
Cash and due from banks
$
262,938

$
256,300

$
6,638

2.6
%
Interest-bearing deposits with other banks
221,064

173,257

47,807

27.6

Loans held for sale
39,273

67,899

(28,626
)
(42.2
)
Investment securities
2,686,649

2,794,017

(107,368
)
(3.8
)
Loans, net of allowance
12,570,413

11,923,068

647,345

5.4

Premises and equipment
227,299

227,723

(424
)
(0.2
)
Goodwill and intangible assets
533,918

535,563

(1,645
)
(0.3
)
Other assets
509,217

555,270

(46,053
)
(8.3
)
Total Assets
$
17,050,771

$
16,533,097

$
517,674

3.1
%
Liabilities and Shareholders’ Equity
Deposits
$
12,721,121

$
12,484,163

$
236,958

1.9
%
Short-term borrowings
1,198,577

868,399

330,178

38.0

Long-term debt
889,122

894,253

(5,131
)
(0.6
)
Other liabilities
212,987

204,626

8,361

4.1

Total Liabilities
15,021,807

14,451,441

570,366

3.9

Total Shareholders’ Equity
2,028,964

2,081,656

(52,692
)
(2.5
)
Total Liabilities and Shareholders’ Equity
$
17,050,771

$
16,533,097

$
517,674

3.1
%
Investment Securities
The following table presents the carrying amount of investment securities held to maturity (HTM) and available for sale (AFS):
September 30, 2013
December 31, 2012
Increase (decrease)
HTM
AFS
Total
HTM
AFS
Total
$
%
(dollars in thousands)
U.S. Government securities
$
—

$
2,250

$
2,250

$
—

$
325

$
325

1,925

592.3
%
U.S. Government sponsored agency securities
—

835

835

—

2,397

2,397

(1,562
)
(65.2
)%
State and municipal securities
—

293,513

293,513

—

315,519

315,519

(22,006
)
(7.0
)%
Corporate debt securities
—

106,551

106,551

—

112,842

112,842

(6,291
)
(5.6
)%
Collateralized mortgage obligations
—

1,082,977

1,082,977

—

1,211,119

1,211,119

(128,142
)
(10.6
)%
Mortgage-backed securities
206

914,230

914,436

292

879,621

879,913

34,523

3.9
%
Auction rate securities
—

154,510

154,510

—

149,339

149,339

5,171

3.5
%
Total debt securities
206

2,554,866

2,555,072

292

2,671,162

2,671,454

(116,382
)
(4.4
)%
Equity securities
—

131,577

131,577

—

122,563

122,563

9,014

7.4
%
Total
$
206

$
2,686,443

$
2,686,649

$
292

$
2,793,725

$
2,794,017

$
(107,368
)
(3.8
)%
Total investment securities decreased $107.4 million, or 3.8%, to $2.7 billion as of September 30, 2013, as portfolio cash flows were not fully reinvested. Decreases in collateralized mortgage obligations and state and municipal holdings were partially offset by an increase in mortgage-backed securities. Portfolio cash flows that were reinvested during the first nine months of 2013 were

54

used to purchase collateralized mortgage obligations and mortgage-backed securities with average lives of approximately 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 $31.8 million as of September 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)
September 30,
2013
December 31,
2012
$
%
(in thousands)
Real-estate – commercial mortgage
$
5,063,373

$
4,664,426

$
398,947

8.6
%
Commercial – industrial, financial and agricultural
3,645,270

3,612,065

33,205

0.9

Real-estate – home equity
1,773,554

1,632,390

141,164

8.6

Real-estate – residential mortgage
1,327,469

1,257,432

70,037

5.6

Real-estate – construction
577,342

584,118

(6,776
)
(1.2
)
Consumer
296,142

309,864

(13,722
)
(4.4
)
Leasing and other
97,749

86,676

11,073

12.8

Loans, net of unearned income
$
12,780,899

$
12,146,971

$
633,928

5.2
%
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 as of September 30, 2013, which is below the Corporation's maximum lending limit. As of September 30, 2013, the Corporation had 56 relationships with borrowing commitments of $20.0 million or more.

Approximately $5.6 billion, or 44.1%, of the loan portfolio was in commercial mortgage and construction loans as of September 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 $398.9 million, or 8.6%, increase in commercial mortgages was throughout all markets, with increases in Maryland ($132.3 million, or 31.7%), Pennsylvania ($109.8 million, or 4.4%), Virginia ($62.7 million, or 17.4%), New Jersey ($67.4 million, or 5.5%) and Delaware ($26.8 million, or 16.1%).
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:
September 30, 2013
December 31, 2012
$
Delinquency Rate (1)
% of Total
$
Delinquency Rate (1)
% of Total
(dollars in thousands)
Commercial
$
258,841

1.0
%
44.8
%
$
226,350

3.5
%
38.8
%
Commercial - residential
245,057

9.0

42.5

288,552

8.2

49.4

Other
73,444

2.6

12.7

69,216

2.6

11.8

Total Real estate - construction
$
577,342

4.6
%
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 decreased $6.8 million, or 1.2%, in comparison to December 31, 2012. Geographically, the decrease in construction loans was in the Virginia ($23.1 million, or 19.2%), Maryland ($12.5 million, or 18.5%) and Pennsylvania ($2.7

55

million, or 0.8%) markets, partially offset by increases in the New Jersey ($18.0 million, 27.5%) and Delaware ($13.6 million, or 84.6%) markets.
The $33.2 million, or 0.9%, increase in commercial loans was in the Pennsylvania ($37.0 million, or 1.4%), New Jersey ($27.0 million, or 5.5%) and Delaware ($7.7 million, or 13.9%) markets, partially offset by decreases in the Maryland ($23.7 million, or 7.7%) and Virginia ($14.9 million, or 8.9%) markets.

The following table summarizes the industry concentrations of the Corporation's commercial loan portfolio:
September 30,
2013
December 31, 2012
Services
18.8
%
17.4
%
Manufacturing
14.3

14.7

Retail
10.8

10.1

Construction
10.3

10.3

Wholesale
9.6

10.5

Health care
8.7

8.2

Real estate (1)
7.2

7.4

Agriculture
5.4

5.7

Transportation
2.5

3.0

Arts and entertainment
2.2

2.6

Financial services
1.7

2.2

Other
8.5

7.9

100.0
%
100.0
%
(1)
Includes borrowers engaged in the business of: renting, leasing or managing real estate for others; selling and/or buying real estate for others; and appraising real estate.
Commercial loans and commercial mortgage loans also include shared national credits, which are participations in loans or loan commitments of at least $20 million that are shared by three or more banks. Below is a summary of the Corporation's outstanding purchased shared national credits:
September 30, 2013
December 31, 2012
(dollars in thousands)
Commercial - industrial, financial and agricultural
$
140,210

$
81,978

Real estate - commercial mortgage
73,324

47,637

$
213,534

$
129,615

As of September 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 $141.2 million, or 8.6%, primarily a result of an increase in 15-year fixed rate loans due to certain promotions. Geographically, the increase was in the Pennsylvania ($111.7 million, or 11.8%), New Jersey ($18.8 million, or 6.8%) and Delaware ($11.0 million, 12.9%) markets.
Residential mortgages increased $70.0 million, or 5.6%, 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, driving some of the growth since December 31, 2012. Geographically, the increase in residential mortgages was in the Pennsylvania ($33.9 million, or 5.3%), Virginia ($21.6 million, or 9.6%), Maryland ($9.2 million, or 6.2%) and Delaware ($11.0 million, or 12.9%) markets.
Consumer loans decreased $13.7 million, or 4.4%, due to a decrease in direct consumer loans, partially offset by a $7.5 million, or 5.3%, increase in indirect automobile loans.
Leasing and other loans increased $11.1 million, or 12.8%, including a $14.4 million, or 19.3%, increase in leases, due primarily to growth in equipment leases.

56

Provision for Credit Losses and Allowance for Credit Losses
The following table presents the activity in the allowance for credit losses:
Three months ended
September 30
Nine months ended
September 30
2013
2012
2013
2012
(dollars in thousands)
Daily average balance of loans, net of unearned income
$
12,728,162

$
11,922,417

$
12,506,393

$
11,957,025

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

$
237,316

$
225,439

$
258,177

Loans charged off:


Commercial – industrial, financial and agricultural
9,394

10,471

24,856

29,157

Real estate – commercial mortgage
3,724

7,463

13,050

43,053

Real estate – home equity
2,365

1,688

6,735

6,683

Real estate – residential mortgage
767

670

8,282

3,009

Real estate – construction
598

8,364

5,181

25,377

Consumer
473

685

1,456

1,790

Leasing and other
787

625

2,037

1,696

Total loans charged off
18,108

29,966

61,597

110,765

Recoveries of loans previously charged off:
Commercial – industrial, financial and agricultural
2,295

1,693

3,430

3,046

Real estate – commercial mortgage
185

1,317

2,754

3,286

Real estate – home equity
198

343

721

641

Real estate – residential mortgage
245

25

442

169

Real estate – construction
379

1,040

1,794

2,643

Consumer
294

202

1,206

833

Leasing and other
224

298

649

738

Total recoveries
3,820

4,918

10,996

11,356

Net loans charged off
14,288

25,048

50,601

99,409

Provision for credit losses
9,500

23,000

38,000

76,500

Balance of allowance for credit losses at end of period
$
212,838

$
235,268

$
212,838

$
235,268

Net charge-offs to average loans (annualized)
0.45
%
0.84
%
0.54
%
1.11
%
The following table presents the components of the allowance for credit losses:
September 30,
2013
December 31,
2012
(dollars in thousands)
Allowance for loan losses
$
210,486

$
223,903

Reserve for unfunded lending commitments
2,352

1,536

Allowance for credit losses
$
212,838

$
225,439

Allowance for credit losses to loans outstanding
1.67
%
1.98
%
For the three and nine months ended September 30, 2013, the Corporation's provision for credit losses decreased $13.5 million, or 58.7%, and $38.5 million, or 50.3%, respectively, in comparison to the same periods in 2012. The decreases in the provision for credit losses were due to improvement in credit quality metrics, including a reduction in non-performing loans and overall delinquency.
Net charge-offs decreased $10.8 million, or 43.0%, to $14.3 million for the third quarter of 2013, compared to $25.0 million for the third quarter of 2012. The decrease in net charge-offs was primarily due to a $7.1 million, or 97.0%, decrease in construction loan net charge-offs, a $2.6 million, or 42.4%, decrease in commercial mortgage net charge-offs and a $1.7 million, or 19.1%,

57

decrease in commercial loan net charge-offs. Of the $14.3 million of net charge-offs recorded in the third quarter of 2013, 71.7% were for loans originated in Pennsylvania, 20.8% in New Jersey and 4.7% in Maryland.
For the first nine months of 2013, net charge-offs decreased $48.8 million, or 49.1%, including a $29.5 million, or 74.1%, decrease in commercial mortgage net charge-offs, a $19.3 million, or 85.1%, decrease in construction loan net charge-offs and a $4.7 million, or 17.9%, decrease in commercial loan net charge-offs, partially offset by a $5.0 million, or 176.1%, increase in residential mortgage net charge-offs. Of the $50.6 million of net charge-offs recorded in the first nine months of 2013, 50.6% were for loans originated in Pennsylvania, 36.6% in New Jersey, 6.7% in Maryland and 5.3% 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 workout and collection efforts. During the three and nine months ended September 30, 2013 , the Corporation sold $16.4 million and $41.8 million , respectively, of non-accrual commercial mortgage, commercial and construction loans to investors. During the three and nine months ended September 30, 2013 , total charge-offs associated with these transactions were $6.0 million and $18.0 million , respectively. The following table presents a summary of these transactions:
Three months ended September 30, 2013
Nine months ended September 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
$
4,840

$
11,950

$
1,490

$
18,280

$
21,760

$
23,600

$
9,930

$
55,290

Charge-offs prior to sale
—

(1,860
)
—

(1,860
)
(4,890
)
(3,890
)
(4,680
)
(13,460
)
Net recorded investment in loans sold
4,840

10,090

1,490

16,420

16,870

19,710

5,250

41,830

Proceeds from sale, net of selling expenses
3,310

6,020

1,050

10,380

10,410

10,050

3,400

23,860

Total charge-off upon sale
$
(1,530
)
$
(4,070
)
$
(440
)
$
(6,040
)
$
(6,460
)
$
(9,660
)
$
(1,850
)
$
(17,970
)
Existing allocation for credit losses on sold loans
$
(320
)
$
(450
)
$
—

$
(770
)
$
(6,620
)
$
(5,780
)
$
(1,320
)
$
(13,720
)
The $16.4 million of loans sold during the third quarter of 2013 were primarily larger balance impaired commercial loans which were secured by commercial real estate. The estimated fair value of the collateral underlying these commercial loans exceeded their unpaid principal balance and, as a result, for a number of the loans sold, no specific loan loss allocations under the Financial Accounting Standards Board's Accounting Standards Codification Section 310-10-35 were necessary prior to the date the loans were designated for sale. The $6.0 million charge-off recorded upon this sale occurred based on the third party’s purchase offer, which was based on economic return expectations relative to the perceived lending risk of the acquired loans, and the Corporation’s view of the acceptability of that purchase price in relationship to other recent loan sale transactions and the desire to eliminate these impaired loans from the portfolio.
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 nine months ended September 30, 2012 .

58

The following table presents 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
)

The following table summarizes non-performing assets as of the indicated dates:
September 30, 2013
September 30, 2012
December 31,
2012
(dollars in thousands)
Non-accrual loans
$
143,012

$
185,791

$
184,832

Loans 90 days past due and accruing
25,271

27,035

26,221

Total non-performing loans
168,283

212,826

211,053

Other real estate owned (OREO)
18,173

29,217

26,146

Total non-performing assets
$
186,456

$
242,043

$
237,199

Non-accrual loans to total loans
1.12
%
1.56
%
1.52
%
Non-performing assets to total assets
1.09
%
1.49
%
1.43
%
Allowance for credit losses to non-performing loans
126.48
%
110.54
%
106.82
%

The following table presents accruing loans whose terms have been modified under troubled debt restructurings (TDRs), by type, as of the indicated dates:
September 30, 2013
September 30, 2012
December 31, 2012
(in thousands)
Real estate – residential mortgage
$
27,820

$
36,946

$
32,993

Real estate – commercial mortgage
22,644

32,198

34,672

Real estate – construction
9,841

10,525

10,564

Commercial – industrial, financial and agricultural
8,184

4,795

5,745

Real estate - home equity
1,667

755

1,518

Consumer
11

—

16

Total accruing TDRs
70,167

85,219

85,508

Non-accrual TDRs (1)
30,501

21,167

31,245

Total TDRs
$
100,668

$
106,386

$
116,753

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

Total TDRs modified during the first nine of 2013 and still outstanding as of September 30, 2013 totaled $28.4 million . During the first nine months of 2013, $21.4 million of TDRs that were modified within the previous 12 months had a payment default subsequent to modification.

59

The following table presents the changes in non-accrual loans for the three and nine months ended September 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 September 30, 2013
Balance of non-accrual loans at June 30, 2013
$
54,723

$
43,814

$
27,144

$
24,839

$
13,511

$
8

$
—

$
164,039

Additions
10,453

6,383

897

1,739

2,518

129

—

22,119

Payments
(10,846
)
(7,325
)
(3,210
)
(2,065
)
(571
)
(1
)
—

(24,018
)
Charge-offs (1)
(8,904
)
(3,705
)
(598
)
(767
)
(1,944
)
(127
)
—

(16,045
)
Transfers to accrual status
—

—

—

(467
)
—

—

—

(467
)
Transfers to OREO
(1,378
)
(289
)
—

(830
)
(119
)
—

—

(2,616
)
Balance of non-accrual loans at September 30, 2013
$
44,048

$
38,878

$
24,233

$
22,449

$
13,395

$
9

$
—

$
143,012

Nine months ended September 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
39,085

27,253

13,538

16,196

9,428

152

45

105,697

Payments
(26,916
)
(28,904
)
(12,229
)
(2,867
)
(1,847
)
(2
)
(35
)
(72,800
)
Charge-offs (1)
(24,226
)
(12,634
)
(5,423
)
(8,281
)
(4,831
)
(154
)
(20
)
(55,569
)
Transfers to accrual status
(4,694
)
(558
)
(2,738
)
(1,012
)
(135
)
—

—

(9,137
)
Transfers to OREO
(4,896
)
(1,239
)
(341
)
(2,690
)
(845
)
—

—

(10,011
)
Balance of non-accrual loans at September 30, 2013
$
44,048

$
38,878

$
24,233

$
22,449

$
13,395

$
9

$
—

$
143,012

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

Non-accrual loans decreased $42.8 million, or 23.0%, in comparison to September 30, 2012 and $41.8 million, or 22.6%, in comparison to December 31, 2012. Total non-accrual additions for the three and nine months ended September 30, 2013 were $22.1 million and $105.7 million , respectively, compared to additions for the three and nine months ended September 30, 2012 of $38.7 million and $131.1 million, respectively.
The following table summarizes non-performing loans, by type, as of the indicated dates:
September 30, 2013
September 30, 2012
December 31,
2012
(in thousands)
Commercial – industrial, financial and agricultural
$
45,184

$
73,879

$
66,954

Real estate – commercial mortgage
42,623

64,609

57,120

Real estate – residential mortgage
34,309

24,910

34,436

Real estate – construction
24,396

32,742

32,005

Real estate – home equity
18,691

12,644

17,204

Consumer
3,013

3,942

3,315

Leasing
67

100

19

Total non-performing loans
$
168,283

$
212,826

$
211,053


Non-performing commercial loans decreased $28.7 million, or 38.8%, in comparison to September 30, 2012. Geographically, the decrease occurred primarily in the Pennsylvania ($19.6 million, or 39.1%) and New Jersey ($5.3 million, or 37.6%) markets.
Non-performing commercial mortgages decreased $22.0 million, or 34.0%, in comparison to September 30, 2012. Geographically, the decrease was primarily in the Maryland ($11.0 million, 90.5%), New Jersey ($6.1 million, or 23.4%) and Virginia ($3.5 million, or 51.9%) markets.
Non-performing construction loans decreased $8.3 million, or 25.5%, in comparison to September 30, 2012. Geographically, the decrease occurred primarily in the New Jersey ($5.4 million, or 53.3%), Maryland ($3.7 million, or 39.2%) and Virginia ($2.7 million, or 81.5%) markets, partially offset by an increase in the Pennsylvania ($3.5 million, or 36.5%) market.

60

Non-performing residential mortgages increased $9.4 million, or 37.7%, in comparison to September 30, 2012. Geographically, the increase was primarily in the New Jersey ($3.8 million, or 57.1%) and Pennsylvania ($3.0 million, or 36.5%) markets.
The following table summarizes the Corporation’s OREO, by property type, as of the indicated dates:
September 30, 2013
September 30, 2012
December 31,
2012
(in thousands)
Commercial properties
$
9,514

$
16,218

$
15,482

Residential properties
5,836

7,145

6,788

Undeveloped land
2,823

5,854

3,876

Total OREO
$
18,173

$
29,217

$
26,146

The Corporation's ability to identify potential problem loans in a timely manner is important to maintaining an adequate allowance for credit losses. For commercial loans, commercial mortgages and construction loans to commercial borrowers, an internal risk rating process is used to monitor credit quality. For a description of the Corporation's risk ratings, see Note E, "Loans and Allowance for Credit Losses," in the Notes to Consolidated Financial Statements. The evaluation of credit risk for residential mortgages, home equity loans, construction loans to individuals, consumer loans and lease receivables is based on aggregate payment history, through the monitoring of delinquency levels and trends.
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
September 30, 2013
December 31, 2012
$
%
September 30, 2013
December 31, 2012
$
%
September 30, 2013
December 31, 2012
(dollars in thousands)
Real estate - commercial mortgage
$
169,811

$
157,640

$
12,171

7.7
%
$
210,969

$
251,452

$
(40,483
)
(16.1
)%
$
380,780

$
409,092

Commercial - secured
103,085

137,277

(34,192
)
(24.9
)
153,313

194,952

(41,639
)
(21.4
)
256,398

332,229

Commercial -unsecured
3,988

5,421

(1,433
)
(26.4
)
3,816

6,000

(2,184
)
(36.4
)
7,804

11,421

Total Commercial - industrial, financial and agricultural
107,073

142,698

(35,625
)
(25.0
)
157,129

200,952

(43,823
)
(21.8
)
264,202

343,650

Construction - commercial residential
41,776

52,434

(10,658
)
(20.3
)
57,458

79,581

(22,123
)
(27.8
)
99,234

132,015

Construction - commercial
2,370

2,799

(429
)
(15.3
)
9,121

12,081

(2,960
)
(24.5
)
11,491

14,880

Total real estate - construction (excluding construction - other)
44,146

55,233

(11,087
)
(20.1
)
66,579

91,662

(25,083
)
(27.4
)
110,725

146,895

Total
$
321,030

$
355,571

$
(34,541
)
(9.7
)%
$
434,677

$
544,066

$
(109,389
)
(20.1
)%
$
755,707

$
899,637

% of total loans
3.5
%
4.0
%
4.7
%
6.2
%
8.2
%
10.2
%
As of September 30, 2013, total loans with risk ratings of Substandard or lower decreased $197.6 million, or 31.3%, in comparison to September 30, 2012 and $109.4 million, or 20.1%, in comparison to December 31, 2012. Special Mention loans decreased $25.2 million, or 7.3%, in comparison to September 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 losses allocations on the above loan types, contributed to a decrease in allocations for impaired loans of $16.6 million, or 20.2%, in comparison to September 30, 2012 and $13.7 million, or 17.4%, in comparison to December 31, 2012.

61

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

September 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
0.40
%
0.84
%
1.24
%
0.46
%
1.39
%
1.85
%
0.46
%
1.22
%
1.68
%
Commercial – industrial, financial and agricultural
0.32
%
1.24
%
1.56
%
0.45
%
2.11
%
2.56
%
0.46
%
1.85
%
2.31
%
Real estate – construction
0.40
%
4.22
%
4.62
%
0.95
%
5.48
%
6.43
%
0.23
%
5.48
%
5.71
%
Real estate – residential mortgage
1.82
%
2.58
%
4.40
%
2.66
%
2.05
%
4.71
%
2.55
%
2.74
%
5.29
%
Real estate – home equity
1.03
%
1.05
%
2.08
%
0.85
%
0.78
%
1.63
%
0.77
%
1.06
%
1.83
%
Consumer, leasing and other
1.91
%
0.79
%
2.70
%
1.84
%
1.06
%
2.90
%
1.71
%
0.84
%
2.55
%
Total
0.66
%
1.31
%
1.97
%
0.80
%
1.78
%
2.58
%
0.75
%
1.74
%
2.49
%
Total dollars (in thousands)
$
83,941

$
168,283

$
252,224

$
95,417

$
212,826

$
308,243

$
90,857

$
211,053

$
301,910

(1)
Includes non-accrual loans.
The Corporation believes that the allowance for credit losses of $212.8 million as of September 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 $46.1 million, or 8.3%, 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 year. The Corporation had no such receivables outstanding as of September 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 $26.4 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)
September 30, 2013
December 31, 2012
$
%
(dollars in thousands)
Noninterest-bearing demand
$
3,338,075

$
3,009,966

$
328,109

10.9
%
Interest-bearing demand
2,986,549

2,755,603

230,946

8.4

Savings
3,371,923

3,335,256

36,667

1.1

Total demand and savings
9,696,547

9,100,825

595,722

6.5

Time deposits
3,024,574

3,383,338

(358,764
)
(10.6
)
Total deposits
$
12,721,121

$
12,484,163

$
236,958

1.9
%
Non-interest bearing demand deposits increased $328.1 million, or 10.9%, due primarily to a $295.6 million, or 13.7%, increase in business account balances, due, in part, to business maintaining higher balances to offset service fees. Non-interest bearing municipal account balances increased $50.7 million, or 77.6%, due to the seasonality of tax receipts.
Interest-bearing demand accounts increased $230.9 million, or 8.4%, due to a $190.3 million, or 19.0%, seasonal increase in municipal account balances and a $44.1 million, or 2.7%, increase in personal account balances. The $36.7 million, or 1.1%, increase in savings account balances was due to a $28.0 million, or 5.0%, seasonal increase in municipal account balances and an $11.4 million, or 0.6%, increase in personal account balances.
The $358.8 million, or 10.6%, decrease in time deposits was in accounts with balances less than $100,000 across most original maturity terms, partially offset by a $171.2 million increase in jumbo time deposits.

62

The following table summarizes the changes in ending borrowings, by type:
Increase (decrease)
September 30, 2013
December 31, 2012
$
%
(dollars in thousands)
Short-term borrowings:
Customer repurchase agreements
$
209,800

$
156,238

53,562

34.3
%
Customer short-term promissory notes
95,503

119,691

(24,188
)
(20.2
)
Total short-term customer funding
305,303

275,929

29,374

10.6

Federal funds purchased
493,274

592,470

(99,196
)
(16.7
)
Short-term FHLB advances (1)
400,000

—

400,000

N/M
Total short-term borrowings
1,198,577

868,399

330,178

38.0

Long-term debt:
FHLB advances
519,465

524,817

(5,352
)
(1.0
)
Other long-term debt
369,657

369,436

221

0.1

Total long-term debt
889,122

894,253

(5,131
)
(0.6
)
Total borrowings
$
2,087,699

$
1,762,652

325,047

18.4
%
(1) Represents FHLB advances with an original maturity term of less than one year.
N/M - Not meaningful.
The $330.2 million increase in total short-term borrowings was necessary to meet the funding gap caused by the increase in loans exceeding the increase in total deposits.
Shareholders' Equity
Total shareholders’ equity decreased $52.7 million, or 2.5%, during the first nine months of 2013. The decrease was due primarily to $90.9 million of common stock repurchases, $46.5 million of dividends on common shares outstanding and a $42.5 million net increase in unrealized holding losses on available for sale investment securities, partially offset by $119.8 million of net income.
On January 3, 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 4.0% 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. During the three and nine months ended September 30, 2013 , approximately 1.6 million and 8.0 million shares, respectively, were repurchased, completing this repurchase program.
On October 22, 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 4.0 million shares, or approximately 2.1% of its outstanding shares, through March 31, 2014.
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.
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 September 30, 2013 , the Corporation and each of its bank subsidiaries met the minimum requirements. In addition, each of the Corporation’s bank subsidiaries’ capital ratios exceeded the amounts required to be considered "well capitalized" as defined in the regulations .

63

The following table summarizes the Corporation’s capital ratios in comparison to regulatory requirements:
September 30, 2013
December 31,
2012
Regulatory
Minimum
for Capital
Adequacy
Total Capital (to Risk-Weighted Assets)
14.8
%
15.6
%
8.0
%
Tier I Capital (to Risk-Weighted Assets)
12.9
%
13.4
%
4.0
%
Tier I Capital (to Average Assets)
10.4
%
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 require the Corporation to:
•
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 an increase in the minimum Tier 1 capital ratio from 4.00% to 6.00% of risk-weighted assets;
•
Continue to require the current minimum Total capital ratio of 8.00% of risk-weighted assets and the minimum Tier 1 leverage capital ratio of 4.00% of average assets;
•
Maintain a "capital conservation buffer" of 2.50% above the minimum risk-based capital requirements, which must be maintained to avoid restrictions on capital distributions and certain discretionary bonus payments; and
•
Comply with a revised definition of capital to improve the ability of regulatory capital instruments to absorb losses.
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 September 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 demand and savings deposits, time deposits, repurchase agreements and short-term promissory notes. The Corporation can access additional liquidity from these sources, if necessary, by increasing interest rates.
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 September 30, 2013 , the Corporation had $919.5 million of short and long-term advances outstanding from the FHLB with an additional borrowing capacity of approximately $1.6 billion under these facilities. Advances from the FHLB are secured by FHLB stock, qualifying residential mortgages, investments and other assets.
As of September 30, 2013 , the Corporation had aggregate availability under Federal funds lines of $1.6 billion, with $493.3 million outstanding. A combination of commercial real estate loans, commercial loans and securities are pledged to the Federal Reserve

64

Bank of Philadelphia to provide access to Federal Reserve Bank Discount Window borrowings. As of September 30, 2013 , the Corporation had $2.0 billion of collateralized borrowing availability at the Discount Window, and no outstanding borrowings.
Liquidity must also be managed at the Fulton Financial Corporation parent company level. For safety and soundness reasons, banking regulations limit the amount of cash that can be transferred from subsidiary banks to the parent company in the form of loans and dividends. Generally, these limitations are based on the subsidiary banks’ regulatory capital levels and their net income. Management continues to monitor the liquidity and capital needs of the parent company and will implement appropriate strategies, as necessary, to remain adequately capitalized and to meet its cash needs.
The Corporation’s sources and uses of funds were discussed in general terms in the net interest income section of Management’s Discussion. The consolidated statements of cash flows provide additional information. The Corporation’s operating activities during the first nine months of 2013 generated $224.6 million of cash, mainly due to net income, as adjusted for non-cash expenses, most notably the provision for credit losses, a net decrease in other assets and a decrease in loans held for sale. Cash used in investing activities was $665.2 million, due mainly to purchases of investment securities and a net increase in loans, partially offset by maturities and sales of investment securities. Net cash provided by financing activities was $447.3 million due to a net increase in demand and savings deposits and short-term borrowings, partially offset by cash outflows from a decrease in time deposits, acquisitions of treasury stock and dividends paid on common shares.


65

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 September 30, 2013, equity investments consisted of $87.9 million of Federal Home Loan Bank (FHLB) and Federal Reserve Bank stock, $36.8 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 $28.5 million and a fair value of $36.8 million at September 30, 2013, including an investment in a single financial institution with a cost basis of $20.0 million and a fair value of $26.2 million . The fair value of this investment accounted for 71.1% 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 $8.5 million and gross unrealized losses of $120,000 as of September 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 $68.8 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 others' debt. The financial stress on the FHLB system resulting from the recent economic crisis appears to have abated, and the New York, Pittsburgh and Atlanta regional banks within the FHLB system, of 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 September 30, 2013, the Corporation had $293.5 million of securities issued by various municipalities in its investment portfolio. Ongoing uncertainty with respect to the financial strength of municipal bond insurers places much greater emphasis on the underlying strength of issuers. Continued pressure on local tax revenues of issuers due to adverse economic conditions could 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 September 30, 2013, approximately 95% of municipal securities were supported by the general obligation of corresponding municipalities. Approximately 79% of these securities were school district issuances, which are also supported by the states of the issuing municipalities.

66

Auction Rate Certificates
As of September 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 $154.5 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 September 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 September 30, 2013 , approximately $147 million , or 95% , of the ARCs were rated above investment grade, with approximately $8 million , or 5% , AAA rated and $100 million , or 65% , AA rated. Approximately $8 million , or 5% , of ARCs were either not rated or rated below investment grade by at least one ratings agency. Of this amount, approximately $6 million , or 72% , of the student loans underlying these ARCs have principal payments which are guaranteed by the federal government. In total, approximately $151 million , or 98% , of the student loans underlying the ARCs have principal payments which are guaranteed by the federal government. As of September 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:
September 30, 2013
Amortized
cost
Estimated
fair value
(in thousands)
Single-issuer trust preferred securities
$
54,722

$
48,368

Subordinated debt
47,375

50,493

Pooled trust preferred securities
3,676

5,191

Corporate debt securities issued by financial institutions
$
105,773

$
104,052


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 $6.4 million at September 30, 2013 . The Corporation did not record any other-than-temporary impairment charges for single-issuer trust preferred securities during the three months ended September 30, 2013 or 2012 . The Corporation held six single-issuer trust preferred securities that were rated below investment grade by at least one ratings agency, with an amortized cost of $13.5 million and an estimated fair value of $11.6 million as of September 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 $3.8 million at September 30, 2013 were not rated by any ratings agency.
As of September 30, 2013, the Corporation held eight pooled trust preferred securities with an amortized cost of $3.7 million and an estimated fair value of $5.2 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.

67

During the three and nine months ended September 30, 2013, the Corporation recorded $97,000 of 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.



68

The following table provides information about the Corporation’s interest rate sensitive financial instruments as of September 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)
$
1,079,479

$
533,897

$
384,520

$
284,552

$
235,307

$
672,805

$
3,190,560

$
3,188,217

Average rate
4.28
%
4.67
%
4.61
%
4.48
%
4.68
%
4.13
%
4.40
%

Floating rate loans (1) (2)
2,194,877

1,463,106

1,167,212

1,001,608

1,397,127

2,349,703

9,573,633

9,525,258

Average rate
4.20
%
4.14
%
4.14
%
4.11
%
3.92
%
4.10
%
4.11
%

Fixed rate investments (3)
394,084

306,847

251,815

236,027

195,029

979,932

2,363,734

2,346,434

Average rate
2.48
%
2.63
%
2.65
%
2.80
%
2.71
%
2.86
%
2.73
%

Floating rate investments (3)
—

59

176,994

4,938

70

49,517

231,578

208,638

Average rate
—
%
1.44
%
2.17
%
0.94
%
1.60
%
2.25
%
2.16
%

Other interest-earning assets
260,337

—

—

—

—

—

260,337

260,337

Average rate
0.60
%
—
%
—
%
—
%
—
%
—
%
0.60
%

Total
$
3,928,777

$
2,303,909

$
1,980,541

$
1,527,125

$
1,827,533

$
4,051,957

$
15,619,842

$
15,528,884

Average rate
3.81
%
4.06
%
3.86
%
3.97
%
3.89
%
3.78
%
3.87
%

Fixed rate deposits (4)
$
1,640,385

$
520,896

$
247,108

$
97,281

$
52,981

$
30,683

$
2,589,334

$
2,609,854

Average rate
0.69
%
1.37
%
1.31
%
1.43
%
1.33
%
1.84
%
0.94
%

Floating rate deposits (5)
4,831,803

695,483

449,761

365,152

312,514

138,999

6,793,712

6,789,470

Average rate
0.14
%
0.11
%
0.10
%
0.09
%
0.09
%
0.12
%
0.13
%

Fixed rate borrowings (6)
7,473

151,319

606

551,475

497

161,256

872,626

879,470

Average rate
4.71
%
4.57
%
4.51
%
4.49
%
4.69
%
6.18
%
4.82
%

Floating rate borrowings (7)
1,198,577

—

—

—

—

16,496

1,215,073

1,207,957

Average rate
0.20
%
—
%
—
%
—
%
—
%
2.59
%
0.23
%

Total
$
7,678,238

$
1,367,698

$
697,475

$
1,013,908

$
365,992

$
347,434

$
11,470,745

$
11,486,751

Average rate
0.27
%
1.08
%
0.53
%
2.61
%
0.28
%
3.20
%
0.68
%

(1)
Amounts are based on contractual payments and maturities, adjusted for expected prepayments. Excludes $16.7 million of overdraft deposit balances.
(2)
Line of credit amounts are based on historical cash flows, with an average life of approximately 5 years.
(3)
Amounts are based on contractual maturities; adjusted for expected prepayments on mortgage-backed securities and collateralized mortgage obligations and expected calls on agency and municipal securities. Excludes equity securities as such investments do not have maturity dates.
(4)
Amounts are based on contractual maturities of time deposits.
(5)
Estimated based on history of deposit flows.
(6)
Amounts are based on contractual maturities of debt instruments, adjusted for possible calls. Amounts also include junior subordinated deferrable interest debentures.
(7)
Amounts include Federal Funds purchased, short-term promissory notes and securities sold under agreements to repurchase, which mature in less than 90 days, in addition to junior subordinated deferrable interest debentures.
The preceding table and discussion addressed the liquidity implications of interest rate risk and focused on expected cash flows from financial instruments. Expected maturities, however, do not necessarily reflect the net interest impact of interest rate changes. Certain financial instruments, such as adjustable rate loans, have repricing periods that differ from expected cash flows periods.
Included within the $9.6 billion of floating rate loans above are $3.9 billion of loans, or 40.8% of the total, that float with the prime interest rate, $1.6 billion, or 16.8%, of loans that float with other interest rates, primarily the London Interbank Offered Rate (LIBOR), and $4.1 billion, or 42.4%, of adjustable rate loans. The $4.1 billion of adjustable rate loans include loans that are fixed rate instruments for a certain period of time, and then convert to floating rates.


69

The following table presents the percentage of adjustable rate loans, at September 30, 2013 , stratified by the period until their next repricing:
Percent of Total
Adjustable Rate
Loans
One year
30.5%
Two years
17.7
Three years
15.3
Four years
13.5
Five years
14.1
Greater than five years
9.0
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 September 30, 2013, the cumulative six-month ratio of RSA/RSL was 1.08.
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
+ $ 45.9 million
+8.7%
+200 bp
+ $ 26.8 million
+5.1
+100 bp
+ $ 8.8 million
+1.7
–100 bp
– $ 18.3 million
–3.5
(1)
These results include the effect of implicit and explicit floors that limit further reduction in interest rates.

Economic value of equity estimates the discounted present value of asset cash flows and liability cash flows. Discount rates are based upon market prices for like assets and liabilities. Upward and downward shocks of interest rates are used to determine the comparative effect of such interest rate movements relative to the unchanged environment. This measurement tool is used primarily to evaluate the longer-term repricing risks and options in the Corporation’s balance sheet. The Corporation's policy limits the economic value of equity that may be at risk, in a non-parallel instantaneous shock, to 10% of the base case economic value of equity for a 100 basis point shock in interest rates, 20% for a 200 basis point shock and 30% for a 300 basis point shock. As of September 30, 2013 , the Corporation was within policy limits for every 100 basis point shock.

70

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.


71



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 will not 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 third 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
July 1, 2013 to July 31, 2013
—

—
—

1,579,064

August 1, 2013 to August 31, 2013
1,579,064

$12.41
1,579,064

—

September 1, 2013 to September 30, 2013
—

—
—

—


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 September 30, 2013 , 8.0 million shares were repurchased, completing this repurchase program. 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.


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FULTON FINANCIAL CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
FULTON FINANCIAL CORPORATION
Date:
November 8, 2013
/s/ E. Philip Wenger
E. Philip Wenger
Chairman, Chief Executive Officer and President
Date:
November 8, 2013
/s/ Charles J. Nugent
Charles J. Nugent
Senior Executive Vice President and
Chief Financial Officer


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