Fulton Financial
Annual Report 2013

Plain-text annual report

2013 AnnuAl RepoRt Fulton Financial Corporation Banking SuBSidiarieS: Fulton Bank, N.A. Fulton Bank of New Jersey Swineford National Bank Lafayette Ambassador Bank FNB Bank, N.A. The Columbia Bank Residential mortgage lending offered through: Fulton Mortgage Company Investment management and planning services offered through: Fulton Financial Advisors & Clermont Wealth Strategies 263922_FFC_Cover_r1.indd 1 3/18/14 5:26 AM The Columbia Bank (cid:127) FNB Bank, N.A. (cid:127) Fulton Bank, N.A. Fulton Bank of New Jersey (cid:127) Lafayette Ambassador Bank (cid:127) Swineford National Bank The Columbia Bank (cid:127) FNB Bank, N.A. (cid:127) Fulton Bank, N.A. Fulton Bank of New Jersey (cid:127) Lafayette Ambassador Bank (cid:127) Swineford National Bank The Columbia Bank (cid:127) FNB Bank, N.A. (cid:127) Fulton Bank, N.A. Fulton Bank of New Jersey (cid:127) Lafayette Ambassador Bank (cid:127) Swineford National Bank OUR MISSION: By caring, listening, understanding and delivering a consistently superior customer experience, we will increase shareholder value and enrich the communities we serve while creating opportunities for financial success for our customers and for career success for our employees. We will conduct all of our business with honesty and integrity, effectively manage risk and be in full compliance with all legal and regulatory requirements. OUR VISION: We will be a high-performing, Mid-Atlantic regional financial services company whose team members deliver compliant products and services through relationship-based banking more effectively than our competitors, enabling us to sustain a long-term competitive advantage. OUR VALUES: • Integrity • Respect for the individual • Focus on employee and customer relationships • Passion for creating value through successful execution • Inclusion • Corporate citizenship • Teamwork/collaboration • Caring and compassionate • Open communication • Dedication to career success • Individual and team accountability with a competitive spirit STRATEGIC SERVICE DIFFERENTIATION: Fulfilling our Customer Promise to: Care, Listen, Understand and Deliver we will care, listen, understand and deliver. 3 1 0 2 t r o p e R l a u n n A n o i t a r o p r o C l a i c n a n i F n o t l u F F u l t o n F i n a n c i a l C o r p o r a t i o n A n n u a l R e p o r t 2 0 1 3 the ColumBia Bank DiviSional BoarDS hagerStown truSt DiviSion Paul N. Crampton, Jr. Louis J. Giustini Donald R. Harsh, Jr. Doris E. Lehman Paul C. Mellott, Jr. John A. Scaldara, Jr. Gregory Snook Michael S. Zampelli PeoPleS Bank oF elkton DiviSion Harry C. Brown Donald S. Hicks John A. Scaldara, Jr. Nancy R. Simpers David K. Williams, Jr. State College DiviSion weSt Fulton Bank oF new JerSey Dennis N. DeSimone Lawrence M. DiVietro, Jr. James R. Johnson, Jr. Warner A. Knobe Joel A. Kobert Stephen R. Miller Antoinette Pergolin Anthony J. Santye, Jr. Leslie E. Smith, Jr. Angela M. Snyder Mark F. Strauss, Esq. Norman Worth Fulton Bank oF new JerSey DiviSional BoarD Central region James R. Johnson, Jr. Timothy J. Losch Priscilla Luppke Leonard Smith Allen Weiss the ColumBia Bank Joe N. Ballard, LTG, US Army (Ret.) John M. Bond, Jr. Robert R. Bowie, Jr. Garnett Y. Clark, Jr. Donald R. Harsh James R. Moxley III Mark A. Mullican John A. Scaldara, Jr. Gregory Snook David K. Williams, Jr. Elizabeth M. Wright John A. Rodgers, Chairman Elizabeth A. Dupuis Thomas J. Kearney Jeffrey M. Krauss Thomas F. Songer Fulton Bank, n.a. aDviSory BoarDS Central Ronald L. Miller, C.P.A. Wilbur G. Rohrer Paul W. Stauffer eaSt Galen Eby R. Douglas Good, Esq. Richard M. Hurst Aldus R. King John D. Yoder lanCaSter City Clarence (Ted) E. Darcus Ron Ford Jessica H. May north Dean A. Hoover Louis G. Hurst Kent M. Martin northweSt P. Larry Groff, Sr. Peter J. Hondru Kenneth L. Kreider Robert W. Obetz, Jr. David W. Sweigart III J. David Young, Jr., Esq. Dennis M. Zubler South Frank M. Abel, V.M.D. John E. Chase James W. Hostetter, Sr., C.P.A. Dwight E. Wagner Tony Legenstein Lynette Trout agriCultural aDviSory BoarD Harry H. Bachman Robert Barley Phoebe R. Bitler Dennis L. Grumbine William Hostetter Amos M. Hursh Aldus R. King Jay H. Kopp Rodney L. Metzler William D. Robinson Scott I. Sechler Kyle Wagner SwineForD national Bank Arthur F. Bowen Thomas C. Clark, Esq. Michael N. O’Keefe William D. Robinson Gene D. Zartman laFayette amBaSSaDor Bank Gary A. Clewell John Crampsie Craig A. Dally Thomas Daub Rocco A. Del Vecchio Robert E. Gadomski Sara (Sally) Jane Gammon Dolores Laputka Jamie P. Musselman Gerald A. Nau John J. Simon FnB Bank, n.a. Robert O. Booth Kenneth A. Holdren Bryan L. Holmes James D. Hawkins Gerald A. Nau Wendy S. Tripoli 263922_FFC_Cover_r1.indd 2 3/18/14 5:26 AM F u l t o n F i n a n c i a l C o r p o r a t i o n A n n u a l R e p o r t 2 0 1 3 FULTON FINANCIAL CORPORATION’S SENIOR MANAGEMENT TEAM: Front row, l. to r.: Craig Hill, Meg Mueller, Pat Barrett, and Phil Wenger Back row, l. to r.: Jim Shreiner, Curt Myers, Phil Rohrbaugh, Angie Sargent and Craig Roda The Columbia Bank (cid:127) FNB Bank, N.A. (cid:127) Fulton Bank, N.A. Fulton Bank of New Jersey (cid:127) Lafayette Ambassador Bank (cid:127) Swineford National Bank 263922_FFC_Nar.indd 1 3/11/14 6:33 PM The Columbia Bank (cid:127) FNB Bank, N.A. (cid:127) Fulton Bank, N.A. Fulton Bank of New Jersey (cid:127) Lafayette Ambassador Bank (cid:127) Swineford National Bank The Columbia Bank (cid:127) FNB Bank, N.A. (cid:127) Fulton Bank, N.A. Fulton Bank of New Jersey (cid:127) Lafayette Ambassador Bank (cid:127) Swineford National Bank Dear Shareholder, In 2013, we improved the performance of Fulton Financial Corporation and took important steps to better position your company to meet the challenges of the rapidly changing financial services environment. We made progress on many of our corporate priorities, but there is much unfinished business that we look forward to tackling in 2014 as we strive to grow and develop your organization. Average loans grew $610.0 million in 2013, a 5.1% increase over 2012. In the fourth quarter of 2013, we were pleased to see our fifth consecutive quarter of average loan growth, despite the highly competitive environment. To help stimulate additional loan growth in 2014, we are launching several new marketing initiatives to actively promote our loan products to retail and commercial customers. Corporate Priorities Senior management and the Corporation’s Board of Directors are focused on the following priorities: • Enhancing our compliance/risk management infrastructure • Providing an appropriate return to shareholders • Growing quality loans • Improving asset quality • Growing core deposits/households • Managing our Net Interest Margin • Increasing the Return on Average Assets • Increasing the Return on Average Equity • Managing expenses • Providing a positive, challenging and rewarding work experience for our 3,800+ employees A steady focus on these priorities enabled us to improve our performance in 2013, and I am pleased to report that our net income was $161.8 million, or 83 cents per diluted share, for the year ended December 31, 2013, a 3.8% increase when compared to the 80 cents per diluted share earned for the same period in 2012. Please note that as I discuss our financial performance throughout this letter, all of my comparisons are as of or for the year ended December 31, 2013 in comparison to the same period in 2012. Asset Quality and Loan Growth There were a number of positive developments in the credit area that contributed to our success. We saw reductions in non-performing loans and overall loan delinquency as well as a decrease in the provision for credit losses. As a result, we began 2014 with the strongest overall asset quality we have seen since late 2007. In 2013, non-performing loans decreased $56.8 million, or 26.9%, compared to 2012. The provision for credit losses decreased $53.5 million, or 56.9%, compared to 2012. Income and Expenses In 2013, we carefully managed the net interest margin in this protracted low-interest rate environment. The net interest margin was 3.50% for 2013, compared to 3.76% for 2012. Although we saw loan growth in 2013, yields on those earning assets were lower due to the current rate environment, and our net interest income decreased $17.1 million, or 3.1% from 2012. Non-interest income, excluding investment securities gains, decreased $33.7 million, or 15.8%, over the same time period, mainly due to declines in mortgage sale gains. Non-interest expense increased $12.1 million, or 2.7% in 2013. Much of the increase in expenses was due to two main activities. First, we expanded our risk management and compliance infrastructure, an effort that is both critically important to us as a company as well as necessary to address heightened regulatory expectations that are prevalent in the banking industry. Second, we have made, and are planning to make, a number of significant investments in technology that will help us improve our operations and compliance infrastructure while also enabling us to serve our customers more effectively and efficiently. Using Our Capital Wisely Fulton Financial Corporation’s subsidiary banks continue to exceed all regulatory definitions of “well capitalized” for tier 1 risk-based, total risk-based, and leverage capital ratios. In addition, the Corporation’s capital ratios compare favorably to those of our peers. We have continued to prudently deploy capital by re-investing it in profitable business lines; paying a quarterly cash dividend, which is currently yielding approximately 2.5%; and repurchasing shares of our stock. On October 22, 2013, we announced our intention to repurchase up to four million, or 2.1%, of our outstanding shares through March 31, 2014. I am pleased to report that we completed this program in February 2014, repurchasing all four million shares. Since 2012, through a variety of stock repurchase programs authorized by the Corporation’s Board of Directors, we have repurchased 14.1 million shares. 3 1 0 2 t r o p e R l a u n n A n o i t a r o p r o C l a i c n a n i F n o t l u F 263922_FFC_Nar.indd 2 3/11/14 6:33 PM Cost Savings Initiatives At our strategic planning sessions in the third quarter of 2013, we developed a number of initiatives designed to help reduce our expenses. These initiatives were announced in January 2014 and, in total, are expected to result in approximately $8 million of cost savings annually. We made the decision to consolidate 14 of our banking branches into other nearby branches. One of these consolidations occurred in December of 2013; the others are expected to take place by the end of the second quarter of 2014. Of these 14 branches, six are in Pennsylvania, three are in New Jersey, and five are in Maryland. Customers’ accounts at these branches will be relocated to our next most convenient existing branch location, and we have implemented extensive communication programs for customers impacted by these changes. To enhance our operating efficiency, we also announced changes to our regional leadership structure to create larger roles for fewer people. While we have not changed our overall organizational structure, we have decreased the number of regional presidents by six positions and increased the scope of responsibility for the ten regional presidents who remain. We evaluate our benefits programs regularly and, as a result of our most recent evaluation, we decided to reduce or eliminate certain employee benefits that had been “grandfathered” over the years and that affect a relatively small number of employees. Prudently managing our employee benefits programs will enable us to retain those benefits that are most highly valued by the greatest number of employees while managing our expenses in this area. Over the past five years, we nearly doubled our workforce in our Fulton Mortgage Company to enable us to keep up with the increasing volume of refinance business that resulted from the low interest rate environment. As we grew, we chose to add a large number of temporary workers to our team rather than dramatically increase the number of permanent employees, knowing that the mortgage volume was unlikely to continue once interest rates began to rise and that at some point, we would need to reduce the size of the team. As we anticipated, our mortgage volume has declined from the all-time highs we experienced over the past few years as interest rates have continued to rise. We have adjusted our staffing levels accordingly, and this will help us achieve additional savings beyond the $8 million referenced above. Average loans grew $610.0 million in 2013, a 5.1% increase over 2012. In the fourth quarter of 2013, we were pleased to see our fifth consecutive quarter of average loan growth, despite the highly competitive environment. To help stimulate additional loan growth in 2014, we are launching several new marketing initiatives to actively promote our loan products to retail and commercial customers. Income and Expenses In 2013, we carefully managed the net interest margin in this protracted low-interest rate environment. The net interest margin was 3.50% for 2013, compared to 3.76% for 2012. Although we saw loan growth in 2013, yields on those earning assets were lower due to the current rate environment, and our net interest income decreased $17.1 million, or 3.1% from 2012. Non-interest income, excluding investment securities gains, decreased $33.7 million, or 15.8%, over the same time period, mainly due to declines in mortgage sale gains. Non-interest expense increased $12.1 million, or 2.7% in 2013. Much of the increase in expenses was due to two main activities. First, we expanded our risk management and compliance infrastructure, an effort that is both critically important to us as a company as well as necessary to address heightened regulatory expectations that are prevalent in the banking industry. Second, we have made, and are planning to make, a number of significant investments in technology that will help us improve our operations and compliance infrastructure while also enabling us to serve our customers more effectively and efficiently. Using Our Capital Wisely Fulton Financial Corporation’s subsidiary banks continue to exceed all regulatory definitions of “well capitalized” for tier 1 risk-based, total risk-based, and leverage capital ratios. In addition, the Corporation’s capital ratios compare favorably to those of our peers. We have continued to prudently deploy capital by re-investing it in profitable business lines; paying a quarterly cash dividend, which is currently yielding approximately 2.5%; and repurchasing shares of our stock. On October 22, 2013, we announced our intention to repurchase up to four million, or 2.1%, of our outstanding shares through March 31, 2014. I am pleased to report that we completed this program in February 2014, repurchasing all four million shares. Since 2012, through a variety of stock repurchase programs authorized by the Corporation’s Board of Directors, we have repurchased 14.1 million shares. F u l t o n F i n a n c i a l C o r p o r a t i o n A n n u a l R e p o r t 2 0 1 3 Cost Savings Initiatives At our strategic planning sessions in the third quarter of 2013, we developed a number of initiatives designed to help reduce our expenses. These initiatives were announced in January 2014 and, in total, are expected to result in approximately $8 million of cost savings annually. We made the decision to consolidate 14 of our banking branches into other nearby branches. One of these consolidations occurred in December of 2013; the others are expected to take place by the end of the second quarter of 2014. Of these 14 branches, six are in Pennsylvania, three are in New Jersey, and five are in Maryland. Customers’ accounts at these branches will be relocated to our next most convenient existing branch location, and we have implemented extensive communication programs for customers impacted by these changes. To enhance our operating efficiency, we also announced changes to our regional leadership structure to create larger roles for fewer people. While we have not changed our overall organizational structure, we have decreased the number of regional presidents by six positions and increased the scope of responsibility for the ten regional presidents who remain. We evaluate our benefits programs regularly and, as a result of our most recent evaluation, we decided to reduce or eliminate certain employee benefits that had been “grandfathered” over the years and that affect a relatively small number of employees. Prudently managing our employee benefits programs will enable us to retain those benefits that are most highly valued by the greatest number of employees while managing our expenses in this area. Over the past five years, we nearly doubled our workforce in our Fulton Mortgage Company to enable us to keep up with the increasing volume of refinance business that resulted from the low interest rate environment. As we grew, we chose to add a large number of temporary workers to our team rather than dramatically increase the number of permanent employees, knowing that the mortgage volume was unlikely to continue once interest rates began to rise and that at some point, we would need to reduce the size of the team. As we anticipated, our mortgage volume has declined from the all-time highs we experienced over the past few years as interest rates have continued to rise. We have adjusted our staffing levels accordingly, and this will help us achieve additional savings beyond the $8 million referenced above. Risk Management and Compliance A portion of the cost savings we will realize from the initiatives outlined above is being redeployed in our ongoing efforts to enhance our regulatory and compliance infrastructure. We view this as a critical expenditure as the regulations governing the banking industry continue to increase and as banks, including our organization, face heightened expectations from regulators. While the regulatory environment is the impetus for many of these and other changes, I want to emphasize, however, that it has also forced us to look more critically at ourselves – a good thing, in my view – and in doing so, we are self-identifying many areas where we believe enhancements are in order. These activities reinforce a continuous improvement process that I have been leading in conjunction with our senior management team. As I noted earlier in this letter, the Corporation has made good progress in enhancing its earnings performance, and also in strengthening our risk management and compliance management infrastructures. In doing so, we will continue to incur additional expenses for salaries and benefits for compliance, internal audit and legal staff and also for the contracting of outside professional services and expertise to help us acquire and develop systems to strengthen and support our internal risk management and compliance capabilities. Investments in Technology In 2013, the Corporation successfully completed the conversion to our new core processing system. This project was very important as it helped us strengthen our technology infrastructure, increasing our capacity to integrate the new core system with various business-specific applications throughout our company. In today’s world, data is key – for everything from serving our customers to meeting our regulatory obligations. The upgrade of our core processor provides us with an enhanced foundation upon which we will build stronger data integration of various business systems, enabling more robust applications, greater automated controls and more efficient processes. As part of this conversion, we also enhanced our digital online and mobile banking capabilities to support the growing number of customers who choose to conduct their banking business from their smartphone or tablet. By delivering personalized, responsive, high quality service through a variety of delivery channels, we can more effectively meet our customers’ individual banking needs in a way that is most convenient for them. 263922_FFC_Nar.indd 3 3/11/14 6:34 PM In 2013, we made significant strides in enhancing our technology infrastructure. Over the next several years, we will focus on using existing and new technology to further automate and enable our processes and service delivery across the Corporation. We view this as critically important as we continue to work to improve the efficiency and cost effectiveness of our operations, enable regulatory compliance, and meet changing customer needs. On December 31, 2013, Charlie Nugent, our chief financial officer, retired after 21 years of service to our company. During Charlie’s tenure at Fulton, he provided sound advice, guidance and support to the Board of Directors and senior management on countless financial and business matters. His extensive financial knowledge and understanding of the banking industry have been invaluable during the economic peaks and valleys of the last decade. We wish Charlie well in his retirement. Deepening the Expertise of our Senior Management Team We have also been conducting robust management succession planning activities which help us identify talented individuals and ensure that we are providing them with training and experience to enable them to increase their contributions to our company. As a result of these efforts, in 2013 we expanded our senior management team to incorporate additional expertise and perspective into the Corporation’s senior leadership. On July 1, three employees were promoted to the position of senior executive vice president: Meg R. Mueller, chief credit officer; Curtis J. Myers, president and chief operating officer of Fulton Bank, N.A.; and Angela M. Sargent, chief information officer. Each retained his/her existing areas of responsibility while assuming a new role as a member of senior management. On January 1, 2014, Patrick S. Barrett succeeded Charlie as senior executive vice president and chief financial officer. Pat joined our senior management team in November of 2013. He came to us from SunTrust Banks, Inc., where he served most recently as the chief financial officer of that company’s Wholesale Bank. Prior to joining SunTrust, Pat worked with JPMorgan Chase & Co. as deputy head/managing director of Investor Relations in New York. Before JPMorgan, he spent ten years at Deloitte & Touche as a financial services audit and advisory specialist. Corporate Governance I hope you will join us for our 2014 Annual Shareholders’ Meeting at the Lancaster Marriott at Penn Square in Lancaster, Pennsylvania on Thursday, May 8th at 10:00 a.m. At that meeting, Lt. General Joe Ballard, US Army (Ret.) will retire from our board of directors. General Ballard joined the Fulton Financial Corporation board in 2010. He has also served on the board of our subsidiary bank, The Columbia Bank, since 2006. General Ballard, who is a decorated war veteran, has brought vast expertise in management and business practices to our company and we thank him for his leadership and dedication. A New Way of Reaching Shareholders Some of our shareholders are receiving their proxy materials in a different format this year. Taking our cue from a number of other companies our size, we have begun to implement “Notice & Access,” a program approved by the Securities and Exchange Commission several years ago to reduce companies’ costs to mail annual meeting materials to their shareholders. Instead of receiving a full packet in the mail, shareholders will receive a printed notice, which directs them to a website where they can view their materials and vote their shares. If the shareholder would still like to receive a full printed packet of materials through the mail, a toll-free phone number is provided on the notice to call to request the documents. We have begun the program this year with a portion of our shareholders and we hope to expand the program in future years to help manage the very significant costs and negative environmental impact associated with traditional paper mailings. 3 1 0 2 t r o p e R l a u n n A n o i t a r o p r o C l a i c n a n i F n o t l u F • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • % 4 5 . 0 1 % 3 7 . 0 1 % 6 7 . 0 1 25 20 15 10 5 0 0.75 0.50 0.25 0 2 . 0 $ 0.00 0 3 . 0 $ 2 3 . 0 $ 1.5 1.0 0.5 0.0 0 8 . 0 $ 3 8 . 0 $ 3 7 . 0 $ 2011 2012 2013 Return on Average Common Equity (tangible)* 2011 2012 2013 2011 2012 2013 Cash Dividends Per Common Share Net Income Per Common Share (diluted) * Net income available to common shareholders, adjusted for intangible amortization (net of tax), divided by average common shareholders' equity, net of goodwill and intangible assets. FINANCIAL HIGHLIGHTS AS OF OR FOR THE YEAR ENDED DECEMBER 31 (Dollars in thousands, except per-share data) Percent Change BALANCE SHEET DATA 2013 2012 2011 2013/2012 2012/2011 Total assets Loans, net of unearned income Deposits Shareholders' equity $16,935,000 $16,533,000 $16,375,000 12,782,000 12,491,000 2,063,000 12,147,000 12,484,000 2,082,000 11,971,000 12,535,000 1,993,000 PER COMMON SHARE DATA Net income (diluted) Common stock cash dividends Shareholders' equity (tangible)* $0.83 0.32 7.94 $0.80 0.30 7.76 $0.73 0.20 7.24 *Common shareholders' equity, net of goodwill and intangible assets, divided by common shares outstanding. 2.4% 5.2% 0.1% (0.9%) 3.7% 6.7% 2.3% 1.0% 1.5% (0.4%) 4.5% 9.6% 50.0% 7.2% 263922_FFC_Nar.indd 4 3/11/14 6:34 PM On December 31, 2013, Charlie Nugent, our chief financial officer, retired after 21 years of service to our company. During Charlie’s tenure at Fulton, he provided sound advice, guidance and support to the Board of Directors and senior management on countless financial and business matters. His extensive financial knowledge and understanding of the banking industry have been invaluable during the economic peaks and valleys of the last decade. We wish Charlie well in his retirement. On January 1, 2014, Patrick S. Barrett succeeded Charlie as senior executive vice president and chief financial officer. Pat joined our senior management team in November of 2013. He came to us from SunTrust Banks, Inc., where he served most recently as the chief financial officer of that company’s Wholesale Bank. Prior to joining SunTrust, Pat worked with JPMorgan Chase & Co. as deputy head/managing director of Investor Relations in New York. Before JPMorgan, he spent ten years at Deloitte & Touche as a financial services audit and advisory specialist. Corporate Governance I hope you will join us for our 2014 Annual Shareholders’ Meeting at the Lancaster Marriott at Penn Square in Lancaster, Pennsylvania on Thursday, May 8th at 10:00 a.m. At that meeting, Lt. General Joe Ballard, US Army (Ret.) will retire from our board of directors. General Ballard joined the Fulton Financial Corporation board in 2010. He has also served on the board of our subsidiary bank, The Columbia Bank, since 2006. General Ballard, who is a decorated war veteran, has brought vast expertise in management and business practices to our company and we thank him for his leadership and dedication. A New Way of Reaching Shareholders Some of our shareholders are receiving their proxy materials in a different format this year. Taking our cue from a number of other companies our size, we have begun to implement “Notice & Access,” a program approved by the Securities and Exchange Commission several years ago to reduce companies’ costs to mail annual meeting materials to their shareholders. Instead of receiving a full packet in the mail, shareholders will receive a printed notice, which directs them to a website where they can view their materials and vote their shares. If the shareholder would still like to receive a full printed packet of materials through the mail, a toll-free phone number is provided on the notice to call to request the documents. We have begun the program this year with a portion of our shareholders and we hope to expand the program in future years to help manage the very significant costs and negative environmental impact associated with traditional paper mailings. F u l t o n F i n a n c i a l C o r p o r a t i o n A n n u a l R e p o r t 2 0 1 3 In closing, I want to recognize the many accomplishments of our outstanding team of employees. The past few years have been challenging times in the banking industry. A still sluggish economy makes it more difficult to increase business, and the dramatic changes and increased regulation present in the financial services industry have affected virtually all of our staff members. They have worked hard to remain focused, increase their skills, learn new ways of doing things, and balance the importance of complying with the many regulations that govern our industry with the need to bring creativity and energy to how we deliver on our customer promise to Care, Listen, Understand and Deliver. Our employees are the ones who work to meet the highest of standards and expectations with the goal of providing you, our shareholder, with an appropriate return on your investment. Thank you for your continued support of Fulton Financial Corporation! Sincerely, E. Philip Wenger Chairman, President and Chief Executive Officer • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • * Net income available to common shareholders, adjusted for intangible amortization (net of tax), divided by average common shareholders' equity, net of goodwill and intangible assets. 3 8 . 0 $ 1.5 1.0 0.5 0.0 2011 2012 2013 Net Income Per Common Share (diluted) FINANCIAL HIGHLIGHTS AS OF OR FOR THE YEAR ENDED DECEMBER 31 (Dollars in thousands, except per-share data) Percent Change BALANCE SHEET DATA 2013 2012 2011 2013/2012 2012/2011 Total assets Loans, net of unearned income Deposits Shareholders' equity $16,935,000 $16,533,000 $16,375,000 12,782,000 12,491,000 2,063,000 12,147,000 12,484,000 2,082,000 11,971,000 12,535,000 1,993,000 PER COMMON SHARE DATA Net income (diluted) Common stock cash dividends Shareholders' equity (tangible)* $0.83 0.32 7.94 $0.80 0.30 7.76 $0.73 0.20 7.24 *Common shareholders' equity, net of goodwill and intangible assets, divided by common shares outstanding. 2.4% 5.2% 0.1% (0.9%) 3.7% 6.7% 2.3% 1.0% 1.5% (0.4%) 4.5% 9.6% 50.0% 7.2% 263922_FFC_Nar.indd 5 3/11/14 6:34 PM 10 YEARS IN REVIEW (2004-2013) 20 18 16 14 12 10 8 6 4 2 0 6 . 6 1 3 . 6 1 4 . 6 1 5 . 6 1 9 . 6 1 2 . 6 1 9 . 5 1 9 . 4 1 4 . 2 2 1 . 1 1 04 05 06 07 08 09 10 11 12 13 Net Income (loss) (in millions of dollars) 5 . 3 0 1 6 . 4 0 1 9 . 0 0 1 100 80 3 . 7 7 5 . 8 8 0 . 0 6 9 . 1 6 0 . 0 4 2 . 3 2 1 . 1 2 04 05 06 07 08 09 10 11 12 13 2 8 0 2 , 3 6 0 2 , 3 9 9 , 1 0 8 8 , 1 5 7 5 , 1 1 9 4 , 1 6 1 5 , 1 6 6 5 , 1 3 8 2 , 1 4 4 2 , 1 60 40 20 0 2,200 2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 0 Deposits (in billions of dollars) Loans (in billions of dollars) 200 180 160 140 120 100 80 60 40 20 0 -20 15 12 9 6 3 0 13 12 11 10 9 8 7 6 5 4 3 2 1 0 Total Assets (in billions of dollars) Common Stock Cash Dividends (in millions of dollars) 3 1 0 2 t r o p e R l a u n n A n o i t a r o p r o C l a i c n a n i F n o t l u F Common Shareholders’ Equity (in millions of dollars) 5 . 5 8 1 7 . 2 5 1 1 . 6 6 1 6 . 9 4 1 8 . 1 6 1 8 . 9 5 1 6 . 5 4 1 3 . 8 2 1 9 . 3 7 6 . 5 - 04 05 06 07 08 09 10 11 12 13 1 . 2 1 4 . 2 1 5 . 2 1 5 . 2 1 5 . 2 1 2 . 0 1 6 . 0 1 1 . 0 1 8 . 9 8 . 7 04 05 06 07 08 09 10 11 12 13 0 . 2 1 1 . 2 1 9 . 1 1 0 . 2 1 8 . 2 1 1 . 2 1 2 . 1 1 4 . 0 1 4 . 8 5 . 7 04 05 06 07 08 09 10 11 12 13 04 05 06 07 08 09 10 11 12 13 263922_FFC_Nar.indd 6 3/11/14 6:34 PM JOB TITLE Fulton Financial Combo REVISION 10 JOB NUMBER 263922 TYPE SERIAL PAGE NO. i DATE Thursday, March 20, 2014 OPERATOR RaMelP P.O. Box 4887 One Penn Square Lancaster, Pennsylvania 17604 NOTICE OF ANNUAL MEETING OF SHAREHOLDERS TO BE HELD THURSDAY, MAY 8, 2014 AT 10:00 A.M. TO THE SHAREHOLDERS OF FULTON FINANCIAL CORPORATION: NOTICE IS HEREBY GIVEN that, pursuant to the call of its directors, the Annual Meeting of the shareholders of FULTON FINANCIAL CORPORATION (“Fulton”) will be held on Thursday, May 8, 2014, at 10:00 a.m., at the Lancaster Marriott at Penn Square, 25 South Queen Street, Lancaster, Pennsylvania, for the purpose of considering and voting upon the following matters: 1. ELECTION OF DIRECTORS. The election of ten (10) director nominees to serve for one-year terms; 2. EXECUTIVE COMPENSATION PROPOSAL. A non-binding say on pay (“Say-on-Pay”) resolution to approve the compensation of the named executive officers; 3. APPROVAL OF THE AMENDED AND RESTATED EMPLOYEE STOCK PURCHASE PLAN. A proposal to approve Fulton’s Amended and Restated Employee Stock Purchase Plan; 4. RATIFICATION OF INDEPENDENT AUDITOR. The ratification of the appointment of KPMG LLP as Fulton’s independent auditor for the fiscal year ending December 31, 2014; and 5. OTHER BUSINESS. Such other business as may properly be brought before the meeting and any adjournments thereof. Only those shareholders of record at the close of business on February 28, 2014, shall be entitled to be given notice of, to attend and to vote at, the meeting. Please take a moment now to cast your vote over the Internet or by telephone in accordance with the instructions set forth on the enclosed proxy card, or, alternatively, to complete, sign and date the enclosed proxy card and return it in the postage-paid envelope provided. Shareholders attending the Annual Meeting in person may vote in person, even if they have previously voted by proxy. Voting via the Internet or by telephone is fast and convenient, and your vote is immediately tabulated and confirmed. Your Proxy is revocable and may be withdrawn at any time before it is voted at the meeting. You are cordially invited to attend the meeting. If you plan on attending, please RSVP that you will attend using the enclosed postcard. A copy of Fulton’s Annual Report on Form 10-K is also enclosed. Sincerely, Daniel R. Stolzer Corporate Secretary Enclosures March 26, 2014 <12345678> JOB TITLE Fulton Financial Combo REVISION 10 JOB NUMBER 263922 TYPE SERIAL PAGE NO. ii DATE Thursday, March 20, 2014 OPERATOR RaMelP [This Page Intentionally Left Blank]<12345678>JOB TITLE Fulton Financial Combo REVISION 10 JOB NUMBER 263922 TYPE SERIAL PAGE NO. iii DATE Thursday, March 20, 2014 OPERATOR RaMelP PROXY STATEMENT Dated and To Be Mailed on or about: March 26, 2014 P.O. Box 4887, One Penn Square Lancaster, Pennsylvania 17604 (717) 291-2411 ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON MAY 8, 2014 AT 10:00 A.M. ANNUAL MEETING SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PAGE 1 TABLE OF CONTENTS 1 GENERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 RSVP, Date, Time and Place of Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Shareholders Entitled to Vote and Attend Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Purpose of Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Solicitation of Proxies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Revocability and Voting of Proxies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Voting Your Shares Held in Street Name . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 3 Voting of Shares and Principal Holders Thereof . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Recommendation of the Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Shareholder Proposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Contacting the Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Code of Conduct . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Corporate Governance Guidelines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SELECTION OF DIRECTORS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . General Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Majority Vote Standard . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Procedure for Shareholder Nominations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Director Qualifications and Board Diversity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 5 6 6 6 7 ELECTION OF DIRECTORS – Proposal One . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 General Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Vote Required . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Recommendation of the Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Information about Nominees, Directors and Independence Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Security Ownership of Directors, Nominees, Management and Certain Beneficial Owners . . . . . . . . . . . . . . 12 INFORMATION CONCERNING DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Meetings and Committees of the Board of Directors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Human Resources Committee Interlocks and Insider Participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Other Board Committees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Board’s Role in Risk Oversight. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Lead Director and Fulton’s Leadership Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Executive Sessions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Annual Meeting Attendance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Director Education and Board Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 <12345678>JOB TITLE Fulton Financial Combo REVISION 10 JOB NUMBER 263922 TYPE SERIAL PAGE NO. iv DATE Thursday, March 20, 2014 OPERATOR RaMelP Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Related Person Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Section 16(a) Beneficial Ownership Reporting Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Board and Committee Evaluations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Compensation of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Director Compensation Table . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 INFORMATION CONCERNING COMPENSATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Compensation Discussion and Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Human Resources Committee Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Summary Compensation Table . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Grants of Plan-Based Awards Table . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 Outstanding Equity Awards at Fiscal Year-End Table . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 Option Exercises and Stock Vested Table. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 Pension Benefits Table . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 Nonqualified Deferred Compensation Table . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 Potential Payments Upon Termination and Golden Parachute Table . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 NON-BINDING SAY-ON-PAY RESOLUTION TO APPROVE THE COMPENSATION OF THE NAMED EXECUTIVE OFFICERS – Proposal Two . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 Recommendation of the Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 APPROVAL OF THE AMENDED AND RESTATED EMPLOYEE STOCK PURCHASE PLAN - Proposal Three . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 General Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Summary of the Plan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Vote Required . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 Recommendation of the Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 RELATIONSHIP WITH INDEPENDENT PUBLIC ACCOUNTANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 RATIFICATION OF INDEPENDENT AUDITOR – Proposal Four . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 Recommendation of the Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 ADDITIONAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 OTHER MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 EXHIBITS Amended and Restated Fulton Financial Corporation Employee Stock Purchase Plan . . . . . . . . . . . . .Exhibit A Report of Audit Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Exhibit B iv <12345678>JOB TITLE Fulton Financial Combo REVISION 10 JOB NUMBER 263922 TYPE SERIAL PAGE NO. 1 DATE Thursday, March 20, 2014 OPERATOR RaMelP ANNUAL MEETING SUMMARY The annual meeting of the shareholders of Fulton (the “Annual Meeting”) for 2014 will be held on Thursday, May 8, 2014, at 10:00 a.m., at the Lancaster Marriott at Penn Square, 25 South Queen Street, Lancaster, Pennsylvania. There are four items on the agenda this year as described in more detail herein, and shareholders are encouraged to complete their ballots to vote online at www.proxyvote.com or by telephone in accordance with the instructions set forth on the enclosed proxy card in advance of the Annual Meeting. If you would like to reduce the costs incurred by Fulton in mailing proxy material, you can consent to receiving all future proxy statements, proxy cards and annual reports electronically via e-mail or the Internet. To sign up for electronic delivery, please go to www.proxyvote.com and have your proxy card in hand when you access the website, then follow the instructions at www.proxyvote.com to obtain your records and to create an electronic voting instruction form. Follow the instructions for voting by Internet and, when prompted, indicate that you agree to receive or access shareholder communications electronically in future years. The Board of Directors recommends that shareholders vote FOR the election of the ten (10) director nominees identified in this proxy statement, FOR the approval of the non-binding Say-on-Pay resolution to approve the compensation of the named executive officers, FOR the approval of the Amended and Restated Employee Stock Purchase Plan, and FOR the ratification of the appointment of KPMG LLP as Fulton’s independent auditor for the fiscal year ending December 31, 2014. Fulton encourages you to vote your shares in advance of the Annual Meeting either by voting via the Internet, voting by telephone or returning your proxy by mail so that your shares will be represented and voted at the Annual Meeting if you cannot attend in person and are eligible to vote in person at the Annual Meeting on May 8, 2014. Voting via the Internet or by telephone is fast and convenient, and your vote is immediately tabulated and confirmed. Please see the Internet and telephone voting instructions on the proxy card for more details. Introduction GENERAL Fulton Financial Corporation, a Pennsylvania business corporation and registered financial holding company, was organized pursuant to a plan of reorganization adopted by Fulton Bank and implemented on June 30, 1982. On that date, Fulton Bank became a wholly owned subsidiary of Fulton, and the shareholders of Fulton Bank became shareholders of Fulton. Since that time, Fulton has acquired other banks, Fulton Bank adopted a national charter, and today Fulton owns the following community banks: FNB Bank, N.A., Fulton Bank, N.A., Fulton Bank of New Jersey, Lafayette Ambassador Bank, Swineford National Bank and The Columbia Bank. In addition, Fulton has several other direct subsidiaries, including: Fulton Insurance Services Group, Inc. (which operates an insurance agency selling life insurance and related insurance products); Fulton Financial Realty Company (which owns or leases certain properties on which branch and operational facilities are located); Fulton Reinsurance Company, Ltd. (which reinsures credit life, health and accident insurance that is directly related to extensions of credit by subsidiary banks of Fulton); Central Pennsylvania Financial Corp. (which owns, directly or indirectly, certain limited partnership interests, principally in low- to moderate-income and elderly housing projects); and FFC Management, Inc. (which holds certain investment securities and corporate-owned life insurance policies). RSVP, Date, Time and Place of Meeting The Annual Meeting will be held on Thursday, May 8, 2014, at 10:00 a.m., at the Lancaster Marriott at Penn Square, 25 South Queen Street, Lancaster, Pennsylvania. You are cordially invited to attend the Annual Meeting. In order for Fulton to plan and prepare for the proper number of shareholders, if you plan on attending, please RSVP and confirm that you will attend by completing and returning the postcard enclosed. Light refreshments will be available starting at 9:00 a.m., and the business meeting will start promptly at 10:00 a.m. Shareholders are encouraged to arrive early. Public parking is available in downtown Lancaster. For a list of parking locations, please consult the Lancaster Parking Authority web site at www.lancasterparkingauthority.com, or consult the information in the Annual Meeting Invitation and Reservation Form. Each shareholder may be asked to present valid picture identification, such as a driver’s license, and proof of share ownership, such as a copy of a brokerage statement or copy of your ballot. Large bags, cameras, cell phones, recording 1 <12345678>JOB TITLE Fulton Financial Combo REVISION 10 JOB NUMBER 263922 TYPE SERIAL PAGE NO. 2 DATE Thursday, March 20, 2014 OPERATOR RaMelP devices and other electronic devices will not be permitted at the Annual Meeting, and individuals not complying with this request are subject to dismissal from the Annual Meeting. In the event of an adjournment, postponement or emergency that may change the Annual Meeting’s time, date or location, Fulton will make an announcement, issue a press release or post information at www.fult.com to notify shareholders as appropriate. This proxy statement relates to the Annual Meeting of shareholders to be held on May 8, 2014. Attendance at the Annual Meeting will be limited to shareholders of record at the close of business on February 28, 2014 (the “Record Date”), their authorized representatives and guests of Fulton. Shareholders Entitled to Vote and Attend Meeting Only those shareholders of record as of the Record Date shall be entitled to receive notice of, attend, and vote at, the Annual Meeting. Purpose of Meeting Fulton shareholders will be asked to consider and vote upon the following matters at the Annual Meeting: (i) the election of ten (10) director nominees to serve for one-year terms; (ii) the non-binding Say-on-Pay resolution to approve the compensation of the named executive officers; (iii) the approval of the Amended and Restated Employee Stock Purchase Plan; (iv) the ratification of the appointment of KPMG LLP as Fulton’s independent auditor for the fiscal year ending December 31, 2014; and (v) such other business as may be properly brought before the Annual Meeting and any adjournments thereof. Solicitation of Proxies This proxy statement is furnished in connection with the solicitation of proxies, in the accompanying form, by the Board of Directors of Fulton for use at the Annual Meeting to be held at 10:00 a.m. on Thursday, May 8, 2014, and any adjournments or postponements thereof. Fulton is making this solicitation and will pay the entire cost of preparing, assembling, printing, mailing and distributing the notices and these proxy materials and soliciting votes. In addition to the mailing of the notices and these proxy materials, the solicitation of proxies or votes may be made in person, by mail, telephone or by electronic communication by Fulton’s directors, officers and employees, who will not receive any additional compensation for such solicitation activities. Fulton has engaged AST Phoenix Advisors, a division of American Stock Transfer & Trust Company, LLC, to aid in the solicitation of proxies in order to assure a sufficient return of votes on the proposals to be presented at the Annual Meeting. The fee for such services is estimated at $7,000, plus reimbursement for reasonable research, distribution and mailing costs. Arrangements will be made with brokerage houses and other custodians, nominees and fiduciaries for the forwarding of solicitation material to the beneficial owners of stock held of record by such persons, and Fulton will reimburse them for reasonable out-of-pocket expenses incurred by them in connection therewith. Revocability and Voting of Proxies The execution and return of the enclosed proxy card, or voting by another method, will not affect a shareholder’s right to attend the Annual Meeting and to vote in person. A shareholder may revoke any proxy given pursuant to this solicitation by delivering written notice of revocation to the Corporate Secretary or Assistant Corporate Secretary of Fulton, sending a new proxy card at any time before the proxy is voted at the Annual Meeting or by voting by another method at any time before the applicable deadline for voting set forth on the proxy card. Unless revoked, any proxy given pursuant to this solicitation will be voted at the Annual Meeting, including any adjournment or postponement thereof, in accordance with the written instructions of the shareholder giving the proxy. In the absence of instructions, all proxies will be voted FOR the election of the ten (10) director nominees identified in this proxy statement, FOR the approval of the non-binding Say-on-Pay resolution to approve the compensation of the named executive officers, FOR the approval of the Amended and Restated Employee Stock Purchase Plan and FOR the ratification of the appointment of KPMG LLP as Fulton’s independent auditor for the fiscal year ending December 31, 2014. Although the Board of Directors knows of no other business to be presented, in the event that any other matters are properly brought before the Annual Meeting, any proxy given pursuant to this solicitation will be voted in accordance with the recommendations of the Board of Directors of Fulton as permitted by Rule 14a-4(c) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). 2 <12345678>JOB TITLE Fulton Financial Combo REVISION 10 JOB NUMBER 263922 TYPE SERIAL PAGE NO. 3 DATE Thursday, March 20, 2014 OPERATOR RaMelP Shares held for the account of shareholders who participate in the Dividend Reinvestment and Stock Purchase Plan and for the account of employees who participate in the Employee Stock Purchase Plan (the “ESPP”) will be voted in accordance with the instructions of each shareholder as set forth in his or her proxy. If a shareholder who participates in these plans does not return a proxy, the shares held for the shareholder’s account will not be voted. Shares held for the account of employees of Fulton and its subsidiaries who participate in the Fulton Financial Common Stock Fund of the Fulton Financial Corporation 401(k) Retirement Plan (the “401(k) Plan”), will be voted by Fulton Financial Advisors, a division of Fulton Bank, N.A., as plan trustee (“Plan Trustee”) in accordance with the instructions of each participant as set forth in the separate voting instruction card sent to the participant with respect to such shares. To allow sufficient time for the Plan Trustee to vote, participants’ voting instructions must be received by May 6, 2014. Voting Your Shares Held in Street Name If you hold your shares in street name with a bank or broker, it is important that you instruct your bank or broker how to vote your shares if you want your shares to be voted on the election of directors (Proposal 1 of this proxy statement), on the non-binding Say-on-Pay resolution to approve the compensation of the named executive officers (Proposal 2 of this proxy statement) and on the approval of the Amended and Restated Employee Stock Purchase Plan (Proposal 3 of this proxy statement). If you hold your shares in street name and you do not instruct your bank or broker how to vote your shares in the election of directors or any non-routine matters, such as Proposals 2 and 3 of this proxy statement, no votes will be cast on your behalf for the election of directors or Proposals 2 and 3. Your bank or broker will, however, continue to have discretion to vote any uninstructed shares on the ratification of the appointment of Fulton’s independent auditor (Proposal 4 of this proxy statement) and other matters that your bank or broker considers routine. If you are a registered shareholder of record who holds stock in certificates or book entry with Fulton’s transfer agent and you do not cast your vote, no votes will be cast on your behalf on any of the items of business at the Annual Meeting. Voting of Shares and Principal Holders Thereof At the close of business on the Record Date, Fulton had 188,818,566 shares of common stock outstanding and entitled to vote. There is no other class of capital stock outstanding. As of the Record Date, 2,835,253 shares of Fulton common stock were held by Fulton Financial Advisors, a division of Fulton Bank, N.A., as the Plan Trustee, or in a fiduciary capacity for fiduciary accounts. The shares held in this manner, in the aggregate, represent approximately 1.50 percent of the total shares outstanding. Shares that are held in the 401(k) Plan will be voted by the Participants. Shares for which Fulton Financial Advisors serves as a co-fiduciary will be voted by the co-fiduciary, unless the co- fiduciary declines to accept voting responsibility, in which case, Fulton Financial Advisors will vote to abstain on all proposals. Shares for which Fulton Financial Advisors serves as sole trustee of a revocable trust, shares for which Fulton Financial Advisors acts as agent for an investment management account and shares for which Fulton Financial Advisors acts as custodian for a custodial account will be voted by the settlor of the revocable trust and the principal of the agency or custodial account, unless the governing document provides for Fulton Financial Advisors to vote the shares, in which case Fulton Financial Advisors will vote to abstain on all proposals. Shares for which Fulton Financial Advisors is acting as sole trustee of an irrevocable trust or as guardian of the estate of a minor or an incompetent will be voted by Fulton Financial Advisors and in such cases, Fulton Financial Advisors will vote to abstain on all proposals. A majority of the outstanding common stock present in person or by proxy at the Annual Meeting constitutes a quorum for the conduct of business. The judge of election will treat shares of Fulton common stock represented by a properly signed and returned proxy as present at the Annual Meeting for purposes of determining a quorum, without regard to whether the proxy is marked as casting a vote or abstaining. Likewise, the judge of election will treat shares of common stock represented by broker non-votes 1 as present for purposes of determining a quorum. Each share is entitled to one vote on all matters submitted to a vote of the shareholders. A majority of the votes cast at a meeting at which a quorum is present is required in order to approve any matter submitted to a vote of the shareholders, except for the election of directors, or in cases where the vote of a greater number of shares is required by law or under Fulton’s Articles of Incorporation or Bylaws. 1 Broker non-votes are shares of common stock held in record name by brokers or nominees as to which (i) instructions have not been received from the beneficial owners or persons entitled to vote; and (ii) the broker or nominee does not have discretionary voting power to vote such shares on a particular proposal. 3 <12345678>JOB TITLE Fulton Financial Combo REVISION 10 JOB NUMBER 263922 TYPE SERIAL PAGE NO. 4 DATE Thursday, March 20, 2014 OPERATOR RaMelP In the case of the election of directors, the ten (10) candidates receiving the highest number of votes cast at the Annual Meeting shall be elected to the Board of Directors for terms of one year. The affirmative vote of a majority of the common shares present or represented by proxy and voting at the Annual Meeting is required for approval of the non- binding Say-on-Pay resolution to approve the compensation of the named executive officers, the Amended and Restated Employee Stock Purchase Plan and the ratification of Fulton’s independent auditor. Abstentions and broker non-votes will be counted as shares that are present at the Annual Meeting for determining the presence of a quorum, but will not be counted as votes cast on the election of directors, the non-binding Say-on-Pay resolution to approve the compensation of the named executive officers, the Amended and Restated Employee Stock Purchase Plan, or the ratification of Fulton’s independent auditor. Abstentions and broker non-votes will have no effect on the director election, the non-binding Say-on-Pay resolution concerning executive compensation, the Amended and Restated Employee Stock Purchase Plan, or the ratification of Fulton’s independent auditor, since only votes cast will be counted. To the knowledge of Fulton, on the Record Date, no person or entity owned of record, or beneficially, more than five percent of the outstanding common stock of Fulton, except those listed on page 12 under “Security Ownership of Directors, Nominees, Management and Certain Beneficial Owners.” Recommendation of the Board of Directors The Board of Directors recommends that the shareholders vote FOR the election of the ten (10) director nominees identified in this proxy statement, FOR the approval of the non-binding Say-on-Pay resolution to approve the compensation of the named executive officers, FOR the approval of the Amended and Restated Employee Stock Purchase Plan and FOR the ratification of the appointment of KPMG LLP as Fulton’s independent auditor for the fiscal year ending December 31, 2014. Shareholder Proposals Shareholder proposals intended to be considered for inclusion in Fulton’s proxy statement and proxy for the 2015 Annual Meeting must be received at the principal executive offices of Fulton at One Penn Square, Lancaster, Pennsylvania no later than November 26, 2014. Any shareholder proposal not received at Fulton’s principal executive offices by February 9, 2015, which is 45 calendar days before the one year anniversary of the date Fulton released the previous year’s annual meeting proxy statement to shareholders, will be considered untimely and, if presented at the 2015 Annual Meeting, the proxy holders will be able to exercise discretionary authority regarding whether to vote on any such proposal to the extent authorized by Rule 14a-4(c) under the Exchange Act. All shareholder proposals must comply with Rule 14a-8 under the Exchange Act, as well as Fulton’s Bylaws. Generally, under Fulton’s Bylaws, a shareholder may not submit more than one proposal, and the proposal, including any accompanying supporting statement, may not exceed 500 words in accordance with applicable Securities and Exchange Commission (the “SEC”) rules. In order to be eligible to submit a proposal, a shareholder must have continuously held at least $2,000 in market value of Fulton common stock for at least one year before the date the proposal is submitted. Any shareholder submitting a shareholder proposal to Fulton must also provide Fulton with a written statement verifying ownership of stock and confirming the shareholder’s intention to continue to hold the stock through the date of the 2015 Annual Meeting. The shareholder, or a qualified representative, must attend the 2015 Annual Meeting in person to present the proposal. The shareholder must also continue to hold the applicable amount of Fulton common stock through the date of the 2015 Annual Meeting. Contacting the Board of Directors Any shareholder of Fulton who desires to contact the Board of Directors may do so by writing to: Board of Directors, Fulton Financial Corporation, P.O. Box 4887, One Penn Square, Lancaster, PA 17604. These written communications will be provided to the Chair of the Executive Committee of the Board of Directors who will determine further distribution based on the nature of the information in the communication. For example, communications concerning accounting, internal accounting controls or auditing matters will be shared with the Chair of the Audit Committee of the Board of Directors. 4 <12345678>JOB TITLE Fulton Financial Combo REVISION 10 JOB NUMBER 263922 TYPE SERIAL PAGE NO. 5 DATE Thursday, March 20, 2014 OPERATOR RaMelP Code of Conduct Fulton’s code of conduct (the “Code of Conduct”) governs the conduct of its directors, officers and employees. Fulton provides the Code of Conduct to each director, officer and employee when starting their position, and they are required to annually acknowledge their review of the Code of Conduct. In 2013, minor updates were made to the Code of Conduct that included adding a section on antitrust laws and fair dealing with others. In addition, a section outlining the prohibition on providing others with unauthorized advice was included, and directors were added to the social media requirements listed. A current copy of the Code of Conduct can be obtained, without cost, by writing to the Corporate Secretary at: Fulton Financial Corporation, P.O. Box 4887, One Penn Square, Lancaster, PA 17604. The current Code of Conduct is also posted and available on Fulton’s website at www.fult.com. Corporate Governance Guidelines Fulton has adopted Corporate Governance Guidelines (the “Governance Guidelines”) that include guidelines and Fulton’s policy regarding the following topics: (1) board size; (2) director qualifications; (3) majority vote standard; (4) service on other boards and director change in status; (5) meeting attendance and review of meeting materials; (6) director access to management and independent advisors; (7) designation of a lead director; (8) executive sessions; (9) Chief Executive Officer (“CEO”) evaluation and succession planning; (10) board and committee evaluations; (11) stock ownership guidelines; (12) communications by interested parties; (13) board and committee minutes; (14) codes of conduct; and (15) disclosure and update of the Governance Guidelines. The Governance Guidelines were last updated on January 21, 2014, principally to add a majority vote standard for an uncontested election of directors. In 2013, the Governance Guidelines were also amended to update Fulton’s stock ownership requirements, which included increasing the director stock ownership requirement from $100,000 to $175,000 in fair market value of Fulton common stock. A copy of the Governance Guidelines can be obtained, without cost, by writing to the Corporate Secretary at: Fulton Financial Corporation, P.O. Box 4887, One Penn Square, Lancaster, PA 17604. The Governance Guidelines are also posted and available on Fulton’s website at www.fult.com. General Information SELECTION OF DIRECTORS The Bylaws of Fulton provide that the Board of Directors shall consist of not less than five (5) nor more than thirty-five (35) persons, and that the Board of Directors shall determine the number of directors. Pursuant to Fulton’s Bylaws, as amended, all nominees elected to the Board of Directors are elected for one-year terms. A majority of the Board of Directors may increase or decrease the number of directors between meetings of the shareholders. Any vacancy occurring in the Board of Directors, whether due to an increase in the number of directors, resignation, retirement, death or any other reason, may be filled by appointment by the remaining directors. Any director who is appointed to fill a vacancy shall hold office until the next Annual Meeting of the shareholders and until a successor is elected and shall have qualified. Fulton’s Bylaws limit the age of director nominees, and no person may be nominated for election as a director who will attain the age of seventy-two (72) years on or before the date of the Annual Meeting at which he or she is to be elected. In addition, Fulton has adopted a Voluntary Resignation Policy for Directors that generally requires a director to tender his or her resignation when the director’s effectiveness as a member of the Board of Directors may be substantially impaired. Circumstances that trigger this provision include, but are not limited to: a director failing to attend at least 62.5% of meetings without a valid reason and, unless such an event is promptly cured to the satisfaction of Fulton, any extension of credit by any of Fulton’s affiliate banks for which the director or a related interest of the director is an obligor or guarantor is: a) classified by Fulton as nonaccrual, sixty or more days past due, or restructured; b) assigned a risk rating of substandard or less; or c) not in material compliance with Board of Governors of the Federal Reserve System’s Regulation O (12 C.F.R. Part 215) (“Regulation O”). In addition, in January 2014, Fulton added a majority vote standard to the Voluntary Resignation Policy for Directors that requires a director to tender his or her resignation if a director does not receive a majority of the votes cast in an uncontested election for the Board of Directors. While the policy sets forth events which might cause a director to tender his or her resignation, it also directs Fulton’s Board of Directors to consider carefully, on a case-by-case basis, whether or not Fulton should accept such a resignation. 5 <12345678>JOB TITLE Fulton Financial Combo REVISION 10 JOB NUMBER 263922 TYPE SERIAL PAGE NO. 6 DATE Thursday, March 20, 2014 OPERATOR RaMelP Majority Vote Standard In January 2014, Fulton’s Nominating and Corporate Governance Committee recommended, and the Board of Directors adopted, a majority vote standard for uncontested director elections by revising its Governance Guidelines and Voluntary Resignation Policy for Directors. In an uncontested election at a Fulton annual meeting of shareholders occurring after January 2014, any nominee for director who does not receive a majority of the votes cast in an uncontested election for the Board of Directors is required to promptly tender his or her resignation following certification of the shareholder vote. As further described in the Governance Guidelines, the Nominating and Corporate Governance Committee shall consider the resignation tendered and recommend to the Board of Directors whether to accept it. Procedure for Shareholder Nominations Section 3 of Article II of Fulton’s Bylaws requires shareholder nominations of director candidates to be made in writing and delivered or mailed to the Chairman of the Board or the Corporate Secretary not less than the earlier of (a) one hundred twenty (120) days prior to any meeting of shareholders called for the election of directors or (b) the deadline for submitting shareholder proposals for inclusion in a proxy statement and form of proxy as calculated under Rule 14a-8(e) promulgated by the SEC under the Exchange Act. For the 2015 Annual Meeting this deadline date is November 26, 2014. Further, the notice to the Chairman of the Board or the Corporate Secretary of a shareholder nomination shall set forth: (i) the name and address of the shareholder who intends to make the nomination and a representation that the shareholder is a holder of record of stock of Fulton entitled to vote at such meeting and intends to be present in person or by proxy at such meeting to nominate the person or persons to be nominated; (ii) the name, age, business address and residence address of each nominee proposed in such notice; (iii) the principal occupation or employment of each such nominee; (iv) the number of shares of capital stock of Fulton that are beneficially owned by each such nominee; (v) a statement of qualifications of the proposed nominee and a letter from the nominee affirming that he or she will agree to serve as a director of Fulton if elected by the shareholders; (vi) a description of all arrangements or understandings between the shareholder submitting the notice and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the shareholder; and (vii) such other information regarding each nominee proposed by the shareholder as would have been required to be included in the proxy statement filed pursuant to the proxy rules of the SEC had each nominee been nominated by or at the direction of the Board of Directors. The chairman of the meeting shall determine whether nominations have been made in accordance with the requirements of the Bylaws and, if the chairman determines that a nomination is defective, the nomination and any votes cast for the nominee shall be disregarded. Shareholder nominees are subject to the same standard of review as nominees of Fulton’s Board of Directors or its Nominating and Corporate Governance Committee. Director Qualifications and Board Diversity In considering any individual nominated for board membership, including those nominated by a shareholder, Fulton considers a variety of factors, including whether the candidate is recommended by executive management, the individual’s professional and personal qualifications, including business experience, education, community and charitable activities, and the individual’s familiarity with a market or markets in which Fulton is located or is seeking to locate, or with a market that is similar to those in which Fulton is located or is seeking to locate. Fulton does not have a separate written policy regarding how diversity is to be considered in the director nominating process. Generally, however, Fulton takes into account diversity in business experience, community service, skills, professional background and other qualifications, as well as diversity in race, national origin and gender, in considering individual candidates. Fulton’s Governance Guidelines provide that Fulton’s Board of Directors should be sufficient in size to achieve diversity in business experience, community service and other qualifications among non-employee directors while still facilitating substantive discussions in which each director can participate meaningfully. In 2004, the Board of Directors formed the Nominating and Corporate Governance Committee of the Board, whose members are independent in accordance with the NASDAQ listing standards. The charter for the Nominating and Corporate Governance Committee is posted and available on Fulton’s website at www.fult.com. The Nominating and Corporate Governance Committee is responsible for recommending director nominees to the Board of Directors and for the Governance Guidelines. Information on the experience, qualifications, attributes or skills of Fulton’s directors and nominees is described under “Director and Nominee Biographical Information” below. 6 <12345678>JOB TITLE Fulton Financial Combo REVISION 10 JOB NUMBER 263922 TYPE SERIAL PAGE NO. 7 DATE Thursday, March 20, 2014 OPERATOR RaMelP General Information ELECTION OF DIRECTORS – PROPOSAL ONE For the 2014 Annual Meeting, the Board of Directors has fixed the number of directors at ten (10). Pursuant to Fulton’s Bylaws, as amended, nominees to the Board of Directors are elected for one-year terms. The Board of Directors has nominated the following ten (10) people for election to the Board of Directors for a term of one year: John M. Bond, Jr. Patrick J. Freer R. Scott Smith, Jr. E. Philip Wenger 2014 Director Nominees Craig A. Dally George W. Hodges Gary A. Stewart Denise L. Devine Albert Morrison III Ernest J. Waters Each of the above nominees is presently a director of Fulton. Following the recommendation of the Nominating and Corporate Governance Committee, the Board of Directors approved the nomination of the above individuals. However, in the event that any of the foregoing 2014 director nominees are unable to accept nomination or election, any proxy given pursuant to this solicitation will be voted in favor of such other persons as the Board of Directors may recommend. The Board of Directors has no reason to believe that any of its director nominees will be unable to accept nomination or to serve as a director, if elected by a majority of the shares voted at the Annual Meeting. Vote Required The ten (10) candidates receiving the highest number of votes cast at the Annual Meeting shall be elected to the Board of Directors. Abstentions and broker non-votes will be counted as shares that are present at the Annual Meeting, but will not be counted as votes cast in the election of directors. Recommendation of the Board of Directors The Board of Directors recommends that shareholders vote FOR the election of the ten (10) director nominees identified in this proxy statement to serve for one-year terms. Information about Nominees, Directors and Independence Standards Information concerning the experience, qualifications, attributes or skills of the ten (10) persons nominated by Fulton for election to the Board of Directors of Fulton at the 2014 Annual Meeting is set forth below, including whether they were determined by the Board of Directors to be independent for purposes of the NASDAQ listing standards. Fulton is a NASDAQ listed company and follows the NASDAQ listing standards for board of directors and committee independence. At a meeting in December 2013, the Board of Directors determined that eight (8) of Fulton’s ten (10) director nominees are independent, and nine (9) of Fulton’s current eleven (11) directors are independent, as defined in the applicable NASDAQ listing standards. Specifically, the Board of Directors found that Directors Bond, Dally, Devine, Freer, Hodges, Morrison, Stewart and Waters met the definition of independent director in the NASDAQ listing standards and that each of these directors is free of any relationships that would interfere with his or her individual exercise of independent judgment. Director Ballard, who is also an independent director, will be retiring at the 2014 Annual Meeting. In addition, members of the Audit Committee and the Human Resources Committee (the “HR Committee”) of the Board of Directors meet the more stringent requirements for independence under the NASDAQ listing standards, and the rules and regulations of the SEC for service on the Audit Committee, or the HR Committee, as applicable. In reviewing director independence, the Board of Directors considered the relationships and other arrangements, if any, of each director. The other types of relationships and transactions that were reviewed and considered are more fully described in “Related Person Transactions” on page 18. 7 <12345678>JOB TITLE Fulton Financial Combo REVISION 10 JOB NUMBER 263922 TYPE SERIAL PAGE NO. 8 DATE Thursday, March 20, 2014 OPERATOR RaMelP Director and Nominee Biographical Information The following information regarding each director nominee’s background, experience, qualifications, attributes or skills represents the information that led Fulton to conclude that these persons should serve as a director of Fulton. JOHN M. BOND, JR. (Independent Director), age 70. Director of Fulton since 2006 and The Columbia Bank since 1988. Mr. Bond serves as a Director of the Federal Home Loan Bank of Atlanta, 2005 to present. He was a Director of Columbia Bancorp from 1987 to 2006 when Columbia Bancorp merged with Fulton and retired as CEO of The Columbia Bank in 2006. He was the former Chairman of the Maryland Bankers Association, 2001 to 2002, and serves as a Trustee of Goucher College, 1997 to present, and was Chairman of the Board, 2004 to 2009. Mr. Bond was admitted to practice law in New York. Mr. Bond offers Fulton’s Board of Directors years of bank executive management and financial expertise, strong knowledge of the financial services industry and knowledge of the suburban markets near Baltimore and Washington DC as well as northern Virginia. Mr. Bond also brings a focused historical perspective to the Fulton Board with his prior corporate governance experience and having held leadership positions at an entity acquired by Fulton. Mr. Bond serves as Chair of Fulton’s Audit Committee and as a “financial expert,” as defined by SEC regulations. He is also a member of Fulton’s Executive Committee and Risk Committee. CRAIG A. DALLY (Independent Director), age 57. Director of Fulton since 2000 and Lafayette Ambassador Bank since 1990. Mr. Dally is a Judge for the Third Judicial District of Pennsylvania, 2010 to present. He is admitted and licensed to practice law in Pennsylvania and a former partner of Pierce & Dally, LLP (law firm). He previously served as a member of the Pennsylvania House of Representatives, District 138, from 1996 to 2010 and is a former Director of the Pennsylvania Higher Education Assistance Agency, 2007 to 2010. He serves as a Director of Nazareth Area YMCA, 1993 to present; Courtney Anne Diacont Memorial Foundation, 2010 to present; and Two Rivers Health and Wellness Foundation, 2003 to present. Mr. Dally brings unique knowledge and expertise to Fulton’s Board of Directors that he gained as a director of Lafayette Ambassador Bank, a member of the Pennsylvania House of Representatives, a Director of the Pennsylvania Higher Education Assistance Agency, a judge, a law firm partner and his leadership role in various philanthropic endeavors in the Lehigh Valley. Mr. Dally serves as Chair of Fulton’s Human Resources Committee and is a member of Fulton’s Executive Committee and Vice Chair of Fulton’s Nominating and Corporate Governance Committee. 8 <12345678>JOB TITLE Fulton Financial Combo REVISION 10 JOB NUMBER 263922 TYPE SERIAL PAGE NO. 9 DATE Thursday, March 20, 2014 OPERATOR RaMelP DENISE L. DEVINE (Independent Director), age 58. Director of Fulton since 2012. Ms. Devine is the founder and has been the Chief Executive Officer of Nutripharm, Inc. since 1997, a company that has generated a portfolio of composition and process patents to create innovative natural food, beverage, pharmaceutical and nutraceutical products that facilitate nutrition and lifelong health. She has also been dedicated to developing and marketing convenient and natural beverage and snack solutions for the healthy growth and development of children. Ms. Devine, a certified public accountant, also previously served as Chief Financial Officer for Energy Solutions International and in financial management positions for Campbell Soup Company. Ms. Devine has served as Chair of the Pennsylvania State Board of Accountancy and on the Board of the American Institute of CPAs. Since 2006, Ms. Devine has served on the Board of Trustees of Villanova University and is currently the Chair of the Villanova University Audit and Risk Committees. She has also served as a member of the Board of Lourdes Health System since 2010. Ms. Devine has substantial management, business and finance experience which adds valuable outside experience to Fulton’s Board of Directors and its committees. Ms. Devine serves as Vice Chair of Fulton’s Audit Committee and is a member of Fulton’s Human Resources Committee. PATRICK J. FREER (Independent Director), age 64. Director of Fulton since 1996. Mr. Freer was a Director of Lebanon Valley Farmers Bank, formerly known as Farmers Trust Bank, from 1980 until it was combined with Fulton Bank in 2007. He is the President of Strickler Insurance Agency, Inc. (insurance broker) and a Certified Insurance Counselor. Mr. Freer brings to the Fulton Board of Directors an extensive knowledge of insurance, investments, finance and risk management as well as valuable knowledge of Fulton through his tenure of more than fifteen (15) years on its Board of Directors and as a bank director from 1980 to 2007. Mr. Freer has long been an active member in his community, helping with numerous capital campaigns and community projects. Mr. Freer has been a board member of the American Cancer Society, Lebanon County Economic Development Authority, Center of Lebanon Association and the Lebanon County Mental Health Association and has served as past president of the Lebanon Valley Sertoma Club and Lebanon County Christian Ministries. Mr. Freer serves as Vice Chair of Fulton’s Human Resources Committee and is a member of Fulton’s Nominating and Corporate Governance Committee. GEORGE W. HODGES (Independent Director), age 63. Director of Fulton since 2001 and currently serves as Lead Director of Fulton. Mr. Hodges was a Director of Drovers & Mechanics Bank, until it was merged into Fulton Bank in 2001, and has served on the Board of Directors of Fulton Bank since 2012. He has been a Director of York Water Company from 2000 to present (NASDAQ:YORW), Director of The Wolf Organization, Inc. from 2008 to present (regional distributor and sourcing company of kitchen and bath products and specialty building products), a Director of Burnham Holdings, Inc. from 2006 to present, the parent company of fourteen subsidiaries that are leading domestic manufacturers of boilers and related HVAC products and accessories (including furnaces, radiators and air conditioning systems), for residential, commercial and industrial applications, and has served on the boards of various for profit, non-profit and community organizations. Mr. Hodges served as non-executive Chairman of the Board of The Wolf Organization from 2008 to 2009. Prior to being Chairman, Mr. Hodges was a member of the Office of the President of The Wolf Organization from 1986 to 2008. Mr. Hodges brings considerable financial expertise and business knowledge to the Fulton Board of Directors, both through his business experience and his service on other boards. His extensive business experience, financial expertise, and background are also invaluable for Fulton’s Audit Committee where he serves as a member and as a “financial expert,” as defined by SEC regulations. Mr. Hodges also serves as Chair of Fulton’s Executive Committee and is a member of Fulton’s Human Resources Committee. 9 <12345678>JOB TITLE Fulton Financial Combo REVISION 10 SERIAL DATE Thursday, March 20, 2014 JOB NUMBER 263922 TYPE PAGE NO. 10 OPERATOR RaMelP ALBERT MORRISON III (Independent Director), age 67. Director of Fulton since 2012. Mr. Morrison is the Chairman of the Board of Burnham Holdings, Inc., the parent company of fourteen subsidiaries that are leading domestic manufacturers of boilers and related HVAC products and accessories (including furnaces, radiators and air conditioning systems), for residential, commercial and industrial applications. Mr. Morrison was elected as a director of Burnham in 1986, became President and Chief Executive Officer of Burnham in 1988 and has served as Chairman since 2002. Mr. Morrison retired as Chief Executive Officer, effective in April 2012, after thirty-eight years of service with Burnham Holdings, Inc. As a long-time CEO and director of a manufacturing company, Mr. Morrison brings extensive business, financial, acquisition and human resources skills to Fulton’s Board of Directors and its Audit Committee, where he serves as a member. Mr. Morrison also serves as Chair of Fulton’s Risk Committee and is a member of Fulton’s Executive Committee. R. SCOTT SMITH, JR., age 67. Director of Fulton since 2001. Mr. Smith is the retired Chairman of the Board and CEO of Fulton. He served as Chairman of the Board and CEO from January 2006 to December 2012 and also served as a Director of Fulton Bank from 1993 to 2002. He was a Director of The Federal Reserve Bank of Philadelphia from 2010 to 2013 and a member of the Federal Advisory Council to the Federal Reserve Board, Washington, DC from 2008 to 2010. Mr. Smith was a Director of the American Bankers Association from 2006 to 2009, was employed by Fulton from 1978 to 2012 in various positions and worked in financial services since 1969. In 2014, Mr. Smith became a director of Herr Foods, Inc. (snack food manufacturer) and continues to be active in the Lancaster community. Mr. Smith’s various management roles during his over thirty years of service in banking give him a broad understanding of the financial services industry, Fulton’s operations, corporate governance matters and the leadership experience qualifying him to serve on the Fulton Board of Directors. Mr. Smith serves as a member of Fulton’s Risk Committee. GARY A. STEWART (Independent Director), age 66. Director of Fulton since 2001. Mr. Stewart is a Director of The Stewart Companies (manufacturing holding company), Vice President of Apple Automotive Group, Inc., a Partner of Stewart Properties (real estate developer), President of Aspen Equity Group LLC (real estate) and has served on the boards of various for profit, non-profit and community organizations. He was a Director of York Bank & Trust Company from 1981 to 1998, and was a Director of Drovers & Mechanics Bank until it was merged into Fulton Bank in 2001. Mr. Stewart has relevant business experience and bank board service qualifying him for service as a member of the Board of Directors that includes extensive experience in real estate acquisition, development, finance and management. Mr. Stewart serves as Vice Chair of Fulton’s Executive Committee and Chair of Fulton’s Nominating and Corporate Governance Committee, and is a member of Fulton’s Risk Committee. 10 <12345678>JOB TITLE Fulton Financial Combo REVISION 10 SERIAL DATE Thursday, March 20, 2014 JOB NUMBER 263922 TYPE PAGE NO. 11 OPERATOR RaMelP ERNEST J. WATERS (Independent Director), age 64. Director of Fulton since 2012 and Director of Fulton Bank, N.A. since 2011. Mr. Waters retired from Metropolitan Edison, a FirstEnergy company, in 2009, where he served as the Area Vice President and Area Manager. Mr. Waters joined the FirstEnergy companies (an investor-owned utility) in 1976 and held various positions in Auditing and Marketing during his tenure. He also served as an expert accounting witness in setting rates before the Pennsylvania Public Utility Commission. Prior to joining the FirstEnergy companies, Mr. Waters was a public accountant and business consultant in Philadelphia. He is a former certified public accountant and holds an MBA from the University of Pittsburgh. Since 2007, Mr. Waters has served on the Board of Directors of the York Water Company (NASDAQ: YORW) where he chairs their Compensation Committee and is a member of the Audit Committee. In addition, Mr. Waters has served at leadership and committee levels with numerous community and non- profit organizations. He is the past Chairman of the Board of York Hospital and is currently a member of the Board, a member of the Executive Committee and chairs the Audit Committee for Wellspan Health, York Hospital’s parent company. Mr. Waters has business, regulatory, leadership, board service and accounting expertise that brings valuable perspectives to Fulton’s Board of Directors, and Fulton’s Audit Committee and Fulton’s Risk Committee where he serves as a member. E. PHILIP WENGER, age 56. Director of Fulton since 2009. Mr. Wenger became Chairman of the Board, President and Chief Executive Officer of Fulton effective on January 1, 2013. He previously served as President and Chief Operating Officer of Fulton from 2008 to 2012, a Director of Fulton Bank from 2003 to 2009, Chairman of Fulton Bank from 2006 to 2009 and has been employed by Fulton in a number of positions since 1979. Mr. Wenger possesses an extensive knowledge of the many aspects of banking operations through more than thirty years of experience in the financial services industry. He has gained valuable insight through his experience in different banking areas, including retail banking, commercial banking, bank operations and systems. Mr. Wenger serves as a member of Fulton’s Executive Committee. 11 <12345678>JOB TITLE Fulton Financial Combo REVISION 10 SERIAL DATE Thursday, March 20, 2014 JOB NUMBER 263922 TYPE PAGE NO. 12 OPERATOR RaMelP Security Ownership of Directors, Nominees, Management and Certain Beneficial Owners The following table sets forth the number of shares of common stock beneficially owned 1 as of the Record Date by each director and nominee, and the named executive officers discussed in this proxy statement, Messrs. Wenger, Nugent, Shreiner, Roda and Rohrbaugh (the “Named Executive Officers” or “Executives” and individually an “Executive”). Except as to the beneficial owners and other principal holders listed below, to the knowledge of Fulton, no person or entity owned of record or beneficially on the Record Date more than five percent of the outstanding common stock of Fulton. Unless otherwise indicated in a footnote, shares shown as beneficially owned by each nominee and director or the Executives are held individually by the person. The directors, nominees and the Executives of Fulton, as a group, owned of record and beneficially 2,949,206 shares of Fulton common stock, representing 1.55 percent of such shares then outstanding. Shares representing less than one percent of the outstanding shares are shown with a “*” below. Name of Beneficial Owner John M. Bond, Jr. Joe N. Ballard Craig A. Dally Denise L. Devine Patrick J. Freer George W. Hodges Albert Morrison III Charles J. Nugent 12 Craig A. Roda Philmer H. Rohrbaugh James E. Shreiner R. Scott Smith, Jr. Gary A. Stewart Ernest J. Waters E. Philip Wenger Total Ownership Title Director and Nominee Director Director and Nominee Director and Nominee Director and Nominee Director and Nominee Director and Nominee Senior Executive Vice President and Chief Financial Officer Senior Executive Vice President Senior Executive Vice President and Chief Risk Officer Senior Executive Vice President Director and Nominee Director and Nominee Director and Nominee Director, Nominee, Chairman of the Board, President and Chief Executive Officer Number of Common Shares Beneficially Owned 2 3 4 Percent of Class 452,333 5 19,315 6 158,344 7 4,103 8 96,683 9 36,969 10 23,048 11 434,549 13 194,243 14 20,708 15 351,964 16 592,526 17 191,738 18 3,220 19 369,464 20 * * * * * * * * * * * * * * * Directors, Nominees and Executives as a Group (15 Persons) 2,949,206 1.55% Other Principal Holders BlackRock, Inc. 40 East 52nd Street New York, NY 10022 State Street Corporation One Lincoln Street Boston, MA 02111 The Vanguard Group 100 Vanguard Blvd. Malvern, PA 19355 Janus Capital Management LLC 151 Detroit Street Denver, Colorado 80206 N/A N/A N/A N/A 12 13,021,171 21 6.80% 12,320,269 22 6.40% 10,871,134 23 5.64% 10,723,375 24 5.60% <12345678>JOB TITLE Fulton Financial Combo REVISION 10 SERIAL DATE Thursday, March 20, 2014 JOB NUMBER 263922 TYPE PAGE NO. 13 OPERATOR RaMelP 1 Beneficial ownership is determined in accordance with SEC Rule 13d-3, which provides that a person is deemed to own any stock for which that person has or shares: (i) voting power, which includes the power to vote or to direct the voting of the stock; or (ii) investment power, which includes the power to dispose or direct the disposition of the stock; or (iii) the right to acquire beneficial ownership within 60 days after the Record Date. 2 Includes 907,709 shares issuable upon the exercise of vested stock options and 243,733 shares of unvested restricted stock, which have been treated as outstanding shares for purposes of calculating the percentage of outstanding shares owned by directors and Executives as a group. 3 As of the Record Date, none of the listed individuals had pledged Fulton stock except for Mr. Stewart, who has pledged 74,755 shares in connection with a collateral account with his broker related to a line of credit with the same broker. 4 Fulton has established stock ownership guidelines for Fulton directors and certain officers. Achievement of the levels of ownership required by the stock ownership guidelines is reviewed and determined annually based on the closing price of Fulton stock on December 31. In 2013, the targeted ownership for directors was increased to $175,000 in fair market value of Fulton common stock and directors that did not own shares at this level were given were given five years to achieve this amount. For Executive Officers, the targeted stock ownership differs by position. The Chief Executive Officer is required to acquire shares with a fair market value of 2 times his annual base salary, the President and the Chief Financial Officer are required to acquire shares with a fair market value of 1.5 times their respective annual base salary, and certain other officers are required to acquire shares with a fair market value of 1 times their annual base salary. In the case of newly-appointed or elected directors and officers, the required level of stock ownership may be achieved over a period of five (5) years and compliance is determined at the calendar year end of the year in which the five year anniversary of appointment or election occurs. As of December 31, 2013, all of Fulton’s directors and Executives had satisfied the stock ownership guidelines, except Directors Devine and Waters and Mr. Rohrbaugh. Under the revised ownership guidelines, each of the Directors Devine and Waters and Mr. Rohrbaugh are required to achieve the targeted stock ownership level by December 31, 2018. 5 Mr. Bond’s ownership includes 1,865 shares of unvested restricted stock, 59,198 shares which may be acquired pursuant to the exercise of vested stock options and 136,723 shares held solely by his spouse. 6 Mr. Ballard’s ownership includes 1,865 shares of unvested restricted stock and 3,442 shares held jointly with his spouse. Also includes 10,825 shares held solely by his spouse. 7 Mr. Dally’s ownership includes 1,865 shares of unvested restricted stock, 12,243 shares held in an IRA, 2,065 shares held jointly with his spouse and 9,632 shares held solely by his daughter. 8 Ms. Devine’s ownership includes 1,865 shares of unvested restricted stock and 1,000 shares are held jointly with her spouse. 9 Mr. Freer’s ownership includes 1,865 shares of unvested restricted stock, 90,375 shares held jointly with his spouse and 318 shares held solely by his spouse. 10 Mr. Hodges’ ownership includes 1,865 shares of unvested restricted stock and 15,800 shares held in a 401(k) Plan. 11 Mr. Morrison’s ownership includes 1,865 shares of unvested restricted stock. 12 Mr. Nugent retired as Fulton’s Senior Executive Vice President and Chief Financial Officer on December 31, 2013. As of January 1, 2014, Patrick S. Barrett became Fulton’s Chief Financial Officer. 13 Mr. Nugent’s ownership includes 31,911 shares held in Fulton’s 401(k) Plan, 11,394 shares held in an IRA and 206,882 shares which may be acquired pursuant to the exercise of vested stock options. Mr. Nugent’s ownership includes 54,028 shares held solely by his spouse. 14 Mr. Roda’s ownership includes 45,898 shares of unvested restricted stock, 102,237 shares which may be acquired pursuant to the exercise of vested stock options, 17,366 shares in Fulton’s ESPP and 9,191 shares held jointly with his spouse. 15 Mr. Rohrbaugh’s ownership includes 20,708 shares of unvested restricted stock. 16 Mr. Shreiner’s ownership includes 94,986 shares in Fulton’s ESPP and held jointly with his spouse, 78,432 shares of unvested restricted stock and 144,922 shares which may be acquired pursuant to the exercise of vested stock options. 13 <12345678>JOB TITLE Fulton Financial Combo REVISION 10 SERIAL DATE Thursday, March 20, 2014 JOB NUMBER 263922 TYPE PAGE NO. 14 OPERATOR RaMelP 17 Mr. Smith’s ownership includes 1,865 shares of unvested restricted stock and 323,344 shares held jointly with spouse, 16,539 shares held in an IRA, and 249,548 shares which may be acquired pursuant to the exercise of vested stock options. 18 Mr. Stewart’s ownership includes 1,865 shares of unvested restricted stock, 89,635 shares held in a grantor retained annuity trust and 89,283 shares held by The Stewart Foundation. Mr. Stewart disclaims beneficial ownership of any of The Stewart Foundation shares beyond his pro rata interest. 19 Mr. Water’s ownership includes 1,865 shares of unvested restricted stock. 20 Mr. Wenger’s ownership includes 37,625 shares held jointly with his spouse, 80,046 shares of unvested restricted stock, 63,557 shares held in Fulton’s 401(k) Plan and 144,922 shares which may be acquired pursuant to the exercise of vested stock options. Also includes 2,742 shares held in Fulton’s 401(k) Plan by his spouse and 512 shares held by Mr. Wenger as custodian for his children. 21 This information is based solely on a Schedule 13G filed with the SEC on January 29, 2014 by BlackRock, Inc., which reported sole voting power and sole dispositive power as to 12,213,263 shares, as of December 31, 2013. 22 This information is based solely on a Schedule 13G filed with the SEC on February 3, 2014 by State Street Corporation, which reported shared voting power and shared dispositive power as to 12,320,269 shares, as of December 31, 2013. 23 This information is based solely on a Schedule 13G filed with the SEC on February 11, 2014 by The Vanguard Group, which reported sole voting power and sole dispositive power as to 10,762,246 shares, and shared voting power and shared dispositive power as to 108,888 shares, as of December 31, 2013. 24 This information is based solely on a Schedule 13G filed with the SEC on February 14, 2014 by Janus Capital Management LLC, which reported shared voting power and shared dispositive power as to 10,723,375 shares, as of December 31, 2013. The Schedule 13G filed with the SEC also noted that Janus Capital has a direct 96.74% ownership stake in INTECH Investment Management (“INTECH”) and a direct 99.61% ownership stake in Perkins Investment Management LLC (“Perkins”). Due to the above ownership structure, holdings for Janus Capital, Perkins and INTECH were aggregated for purposes of this filing. 14 <12345678>JOB TITLE Fulton Financial Combo REVISION 10 SERIAL DATE Thursday, March 20, 2014 JOB NUMBER 263922 TYPE PAGE NO. 15 OPERATOR RaMelP Meetings and Committees of the Board of Directors INFORMATION CONCERNING DIRECTORS There were ten (10) regular and special meetings of the Board of Directors of Fulton and forty-eight (48) meetings of the standing committees of the Board of Directors of Fulton during 2013. No director attended fewer than 75% of all meetings of the Board of Directors, all of the meetings of the board committees on which a director served, or the aggregate number of meetings of the Board of Directors and of the board committees on which he or she served in 2013. The Board of Directors of Fulton has the following regular standing committees: Audit, Executive, Human Resources, Nominating and Corporate Governance and Risk. The following table represents the membership on each Fulton committee as of the date of this proxy statement: Joe N. Ballard 1 John M. Bond, Jr. 1 2 Craig A. Dally 1 Denise L. Devine 1 Patrick J. Freer 1 George W. Hodges 1 2 3 Albert Morrison III 1 R. Scott Smith, Jr. Gary A. Stewart 1 Ernest J. Waters 1 E. Philip Wenger Human Resources Member Chair Member Vice Chair Member Audit Executive Chair Vice Chair Member Member Member Member Chair Member Member Vice Chair Member Nominating and Corporate Governance Member Risk Member Vice Chair Member Chair Chair Member Member Vice Chair Ex-officio Member 4 1-Independent Director 2-Audit Committee Financial Expert 3-Lead Director 4-Ex-officio member per bylaws Human Resources Committee Interlocks and Insider Participation Fulton maintains an HR Committee, and its membership consists only of independent directors. All members of the HR Committee meet the independence requirements of the NASDAQ listing standards. More information regarding the HR Committee can be found in the “Compensation Discussion and Analysis” on page 23. There are no interlocking relationships, as defined in applicable SEC regulations, involving members of the HR Committee. Certain directors may have indirect relationships described in “Related Person Transactions” on page 18. The HR Committee is responsible for, among other things, recommending the compensation and equity awards for the Executives to the Board of Directors, administration of Fulton’s ESPP and the 401(k) Plan, approving employment agreements for non-executive officers of Fulton and fulfilling other broad-based human resources duties. The HR Committee met a total of twelve (12) times in 2013. The HR Committee is governed by a formal charter, which was last amended in September 2013, and which is available on Fulton’s website at www.fult.com. Other Board Committees All members of the Audit Committee meet the independence requirements of the NASDAQ listing standards, and the rules and regulations of the SEC. Each of Directors Bond and Hodges have been determined to qualify, been designated by the Board of Directors, and agreed to serve, as an Audit Committee “financial expert” as defined by the SEC regulations. Director Hodges has served as a “financial expert” of Fulton since 2008, and Director Bond was designated as an additional “financial expert” by Fulton’s Board of Directors in 2013. The Audit Committee met thirteen (13) times during 2013. The Audit Committee is governed by a formal charter, which was last amended in June 2013, and which is available on Fulton’s website at www.fult.com. The Audit Committee’s pre-approval policy and procedure for audit and non-audit services is set forth in its charter. The functions of the Audit Committee include, among other things: sole authority to appoint, evaluate, retain, or terminate the independent auditor; direct responsibility for the compensation and oversight of the work of the independent auditor; oversight of the overall relationship with the independent auditor; meeting with the independent auditor to review the scope of audit services; reviewing and discussing with management 15 <12345678>JOB TITLE Fulton Financial Combo REVISION 10 SERIAL DATE Thursday, March 20, 2014 JOB NUMBER 263922 TYPE PAGE NO. 16 OPERATOR RaMelP and the independent auditor annual and quarterly financial statements and related disclosures; overseeing the internal audit function, including hiring and replacing the chief audit executive; reviewing periodic reports from the loan review function; reviewing and approving related person transactions; establishing procedures and handling complaints concerning accounting, internal accounting controls, or auditing matters, and certain risk management matters as outlined in the Audit Committee Charter. In addition, with respect to any bank subsidiary of Fulton that has not established its own independent audit committee, it is intended that Fulton’s Audit Committee, in carrying out its responsibilities, will also satisfy the obligations imposed on such bank subsidiary of Fulton relating to the establishment and duties of an independent audit committee as set forth in Section 36 of the Federal Deposit Insurance Act and its implementing regulations. All the members of the Nominating and Corporate Governance Committee meet the independence requirements of the NASDAQ listing standards. The Nominating and Corporate Governance Committee met eight (8) times during 2013. The Nominating and Corporate Governance Committee is responsible for, among other things, recommending to the Board of Directors the nominees for election to the Board of Directors and assisting the Board of Directors with corporate governance matters including, but not limited to, the review and approval of all additions, deletions or changes to the Code of Conduct, Governance Guidelines and the responsibility for guidelines and procedures to be used by directors in completing board evaluations used in monitoring and evaluating the performance of the Board of Directors and committees. The Nominating and Corporate Governance Committee also has the primary responsibility for determining annually the compliance of Fulton’s directors and Executives with Fulton’s stock ownership guidelines. The Nominating and Corporate Governance Committee operates pursuant to its charter, which was last amended in July 2013, and is available on Fulton’s website at www.fult.com. The Executive Committee met one (1) time during 2013. Except for the powers expressly excluded in Section 5 of Article III of the Bylaws, the Executive Committee exercises the powers of the Board of Directors between board meetings. The Risk Committee, which was previously known as the Risk Management Committee, met eight (8) times during 2013. The Risk Committee is responsible for providing oversight of the risk management function of Fulton, including assisting the Board of Directors with its oversight of Fulton’s policies, procedures and practices relating to assessment and management of Fulton’s enterprise-wide risks, including those risks identified in Fulton’s Enterprise Risk Management Policy, currently, credit risk, market risk, liquidity risk, operational risk, legal risk, compliance and regulatory risk, reputation risk and strategic risk. The Risk Committee operates pursuant to its charter, which was last amended in March 2014, and is available on Fulton’s website at www.fult.com. Board’s Role in Risk Oversight Although Fulton’s Risk Committee is primarily responsible for overseeing the management of Fulton’s risks, the Board of Directors continues to regularly review information regarding Fulton’s exposure to credit risk, market risk, liquidity risk, operational risk, compliance and regulatory risk, legal risk, reputation risk, and strategic risk, as well as Fulton’s strategies and tactics to monitor, control and mitigate its exposure to these risks. In addition, the HR Committee is responsible for overseeing the management of risks relating to all of Fulton’s compensation plans. The Audit Committee shares with the Risk Committee a general oversight role in Fulton’s risk management process in the context of the Audit Committee’s responsibility for financial reporting and its evaluation and assessment of the adequacy of Fulton’s internal control structure. The Nominating and Corporate Governance Committee manages risks associated with the independence of the Board of Directors, potential conflicts of interest and governance matters. While each of Fulton’s committees are responsible for evaluating certain risks, Fulton’s Risk Committee is primarily responsible for overseeing the management of such risks for Fulton, and the entire Board of Directors is regularly informed through committee reports and review of committee meeting minutes about such risks. The Board of Directors also utilizes Fulton’s Chief Risk Officer and other members of Fulton’s Enterprise Risk Management Committee, which is Fulton’s officer-level risk management committee, to oversee and manage existing and emerging risks and report to the Board of Directors and the Risk Committee on those risks. This officer-level risk management committee provides additional oversight for Fulton’s risk management and compliance programs. In addition, in December 2013, Fulton’s Board of Directors adopted revised formal Risk Vision and Risk Appetite Statements which set forth both the qualitative and quantitative parameters within which Fulton will pursue its growth strategies. These documents also outline the general framework within which Fulton manages risk in the context of Fulton’s core values and its management philosophy, which seeks to balance the interests of Fulton’s shareholders, customers, employees and 16 <12345678>JOB TITLE Fulton Financial Combo REVISION 10 SERIAL DATE Thursday, March 20, 2014 JOB NUMBER 263922 TYPE PAGE NO. 17 OPERATOR RaMelP the communities that it serves. These core values are embedded in Fulton’s corporate strategic plan and its management philosophy and guide the actions of the Board of Directors and Fulton’s management and employees. Fulton’s framework for risk management consists of three pillars: 1) Business units, bank operations, shared services and corporate staff office functions have primary responsibility for risk management and compliance, and they each drive deployment, process management, controls, policies and procedures, training and communication; 2) Corporate Risk Management (consisting of compliance, loan review, contract and vendor management, and other risk management activities) has oversight responsibility for risk management and compliance, and Corporate Risk Management educates, advises and monitors business unit risk and compliance activities; and 3) Fulton’s Internal Audit periodically independently validates the effectiveness of risk management activities and operational controls, and reports results to management and the Board of Directors. Fulton’s risk appetite is centered on Fulton’s objective to maintain a strong financial condition throughout all economic cycles. Fulton’s Board of Directors and the committees that monitor risk continue to assess and manage risk, including the establishment, tracking and reporting of key risk indicators within the primary risk categories of credit, market, liquidity, operational, legal, compliance and regulatory, reputation and strategic risk, and report to management and the Board of Directors. Fulton’s key risk indicator targets reflect Fulton’s commitment to strong asset quality and liquidity with ready access to external funding at competitive rates. Finally, Fulton engages in ongoing risk assessment, capital management and stress testing to ensure that Fulton has adequate capital to absorb potential losses under various stress scenarios. Lead Director and Fulton’s Leadership Structure Director Hodges currently serves as Fulton’s Lead Director and is the independent chair of the Executive Committee. The Board of Directors has made a determination that a structure that includes a Lead Director and a combined Chairman/CEO is appropriate for Fulton. Pursuant to the Governance Guidelines, the Board of Directors designates for a term of at least a year, and publicly discloses in the Fulton proxy statement, the independent non- employee director who will lead the non-employee directors’ executive sessions and preside at all meetings of the Board of Directors at which the Chairman is not present. The Governance Guidelines also require that the Lead Director shall, as appropriate: serve as a liaison between the Chairman and the independent directors; approve information sent to the Board of Directors; approve meeting schedules to assure that there is sufficient time for discussion of all agenda items; and have the authority to call meetings of the independent directors. Similar to many public companies, the leadership structure of Fulton combines the positions of Chairman and CEO. This structure permits the CEO to manage Fulton’s daily operations and provides a single voice for Fulton when needed. Fulton believes that separation of these roles is not necessary because the Lead Director acts to counterbalance the combined Chairman and CEO positions. In addition, as of the date of this proxy statement, approximately 82% of Fulton’s directors (9 out of 11) are independent under applicable NASDAQ standards, and approximately 80% of the Nominees for election at the 2014 Annual Meeting (8 out of 10), are independent under applicable NASDAQ standards, which provides an appropriate level of independent oversight at Board of Directors meetings and executive sessions. Finally, Fulton’s HR Committee, Nominating and Corporate Governance Committee and Audit Committee are all currently, and will continue to be, comprised solely of independent directors. Executive Sessions The independent directors of the Fulton Board of Directors met five (5) times in executive session at which only independent directors were present in 2013. The Chair of the Executive Committee, George W. Hodges, who also served as the Lead Director, conducted these executive sessions of the independent directors of the board. Annual Meeting Attendance Pursuant to Fulton’s Governance Guidelines, attendance by directors in person is expected at the Annual Meeting unless a member of the Board of Directors is excused. All members of the Board of Directors, except for one (1) member whose absence was excused by the Chairman, attended the 2013 Annual Meeting. 17 <12345678>JOB TITLE Fulton Financial Combo REVISION 10 SERIAL DATE Thursday, March 20, 2014 JOB NUMBER 263922 TYPE PAGE NO. 18 OPERATOR RaMelP Director Education and Board Development Fulton encourages the directors to attend director education programs as part of its corporate governance and general board education process. These director education programs are in addition to the education and development opportunities that are provided during Fulton Board of Directors meetings and seminars. For example, third parties are periodically asked to provide the Board of Directors with presentations on governance, the economy and other topics of interest. In addition, Directors Dally and Hodges completed the requirements for the NACD Board Leadership Fellow Program in 2013. In order to become NACD Fellows, individuals must demonstrate their knowledge of the leading trends and practices that define exemplary corporate governance, and commit to developing professional insights through a sophisticated course of ongoing study. Legal Proceedings There are no material legal proceedings to which any director, officer, nominee, affiliate or principal shareholder, or any associate thereof, is a party adverse to Fulton or in which any such person has a material interest adverse to Fulton. Related Person Transactions Financial Products and Services Some of the current directors and Executives of Fulton, their family members and the companies with which they are associated were customers of, and/or had banking transactions with, Fulton’s subsidiaries during 2013. These transactions included deposit accounts, trust relationships, loans and other financial products and services provided in the ordinary course of business by different Fulton subsidiaries. All loans and commitments to lend made to such persons and to the companies with which they are associated were made in the ordinary course of business, on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans with persons not related to the lender, and did not involve more than a normal risk of collectability or present other unfavorable features. It is anticipated that similar transactions will be entered into in the future. By using Fulton’s products and services, directors and officers have the opportunity to become familiar with the wide array of products and services offered by Fulton’s subsidiaries to customers. Other Transactions Applicable SEC regulations require Fulton to disclose transactions with certain related persons where the amount involved exceeds $120,000. However, a person who has a position or relationship with a firm, corporation, or other entity that engages in a transaction with Fulton is not deemed to have a material interest in a transaction where the interest arises only from such person’s position as a director of the other entity and/or arises only from the ownership by such person in the other entity if that ownership is under ten percent, excluding partnerships. Amounts paid to entities in which a related person does not have a material interest or were obtained by a low bid pursuant to a formal request for proposal to provide services are not required to be disclosed. During 2013, Fulton had one director who was associated with a law firm which provided various legal services to Fulton or its affiliate bank subsidiaries. The Albertson Law Office, West Deptford, New Jersey, has provided legal services to subsidiaries of Fulton for a number of years, and Fulton expects that this firm may continue to provide services to Fulton or its subsidiaries in the future. Director Albertson, who retired from Fulton’s Board of Directors in 2013, is a partner with more than a ten percent interest in the law firm. During 2013, Fulton paid the Albertson Law Office a total of $162,410 in legal fees and expenses related to loan transactions and other matters. Some of these fees and expenses were paid by parties other than Fulton in certain transactions. Fulton considered the above related person transactions with Director Albertson and other related person transactions of other members of the Board of Directors and senior officers that do not require specific disclosure, when it made the determinations that eight (8) of Fulton’s ten (10) director nominees, or approximately 80% of its directors who are standing for election at the 2014 Annual Meeting, are independent in accordance with the NASDAQ listing standards. See “Information about Nominees, Directors and Independence Standards” on page 7 for more information. Family Relationships SEC regulations generally require disclosure of any employment relationship or transaction with a related person where the amount involved exceeds $120,000. In fiscal year 2013, there were no family relationships among any of the members of the Board of Directors and senior management of Fulton, except for Messrs. Wenger and Roda, who are related by marriage and are brothers-in-law. Further, Mr. Brad Roda, the brother-in-law of Mr. Wenger and 18 <12345678>JOB TITLE Fulton Financial Combo REVISION 10 SERIAL DATE Thursday, March 20, 2014 JOB NUMBER 263922 TYPE PAGE NO. 19 OPERATOR RaMelP brother of Mr. Roda, was also employed by Fulton. In 2013, Mr. Brad Roda received annual compensation consisting of base salary, equity awards and cash bonus totaling approximately $123,650, plus other benefits on the same basis as other similarly situated employees. Mr. Brad Roda became SVP/Division Sales Manager-Merchant Services of Fulton Bank in 2010, and has been employed by Fulton in various positions since 1981. In addition, as of December 31, 2013, other family relationships existed among senior management and some of the approximately 3,620 full-time equivalent employees of Fulton and its subsidiaries. These Fulton employees participate in compensation, benefit and incentive plans on the same basis as other similarly situated employees. Related Person Transaction Policy and Procedures Fulton does not have a separate policy specific to related person transactions. Under the Code of Conduct, however, employees and directors are expected to recognize and avoid those situations where personal or financial interests or relationships might influence, or appear to influence, the judgment of the employee or director on matters affecting Fulton. The Code of Conduct also requires thoughtful attention to the problem of conflicts and the exercise of the highest degree of good judgment. Under the Code of Conduct, directors must provide reasonable notice to Fulton of all new or changed business activities, related person relationships and board directorships. In addition, Fulton and its affiliate banks are subject to Regulation O, which governs loans by federally regulated banks to certain insiders, including an executive officer, director or 10% controlling shareholder of the applicable bank or bank holding company, or an entity controlled by such executive officer, director or controlling shareholder (an “Insider”). Each Fulton affiliate bank is required to follow a Regulation O policy that prohibits the affiliate bank from making loans to an Insider unless the loan (i) is made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans with persons not related to the lender; and (ii) does not involve more than the normal risk of repayment or present other unfavorable features. Fulton and its affiliate banks are examined periodically by bank regulators and Fulton’s Internal Audit Department for compliance with Regulation O to ensure that internal controls exist within Fulton and its affiliate banks to monitor Fulton’s compliance with Regulation O. In accordance with Fulton’s Audit Committee Charter and NASDAQ listing standards, the Audit Committee is charged with the responsibility to review the terms of, and approve, related person transactions. This responsibility includes reviewing an annual report regarding the related person transactions, if any, with each member of Fulton’s Board of Directors and senior management during the prior year. At a meeting in February 2014, the Audit Committee reviewed all existing related person transactions involving Fulton’s directors and Executives. The Audit Committee concluded that the loans and other banking services provided to the directors and Executives of Fulton and their related interests were provided in the ordinary course of business and on substantially the same terms as those prevailing at the time for comparable transactions with others. The Audit Committee also reviewed all other related person transactions for any potential conflict of interest situations with the directors of Fulton and the Executives, and concluded that there were no conflicts present, and ratified and approved all the transactions reviewed. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Exchange Act, requires Fulton’s Executives, the principal accounting officer, directors, and any persons owning 10% or more of Fulton’s common stock, to file with the SEC, in their personal capacities, initial statements of beneficial ownership on Form 3, statements of changes in beneficial ownership on Form 4 and annual statements of beneficial ownership on Form 5. Persons filing such beneficial ownership statements are required by SEC regulation to furnish Fulton with copies of all such statements filed with the SEC. The rules of the SEC regarding the filing of such statements require that “late filings” of such statements be disclosed in Fulton’s proxy statement. Based solely on Fulton’s review of Forms 3 and 4 and amendments thereto furnished to Fulton during the 2013 fiscal year, including Forms 5 and amendments thereto furnished to Fulton, and on written representations from Fulton’s directors, Executives and other officers, Fulton believes that all such statements were timely filed in 2013, except for a Form 4 for Patrick S. Barrett filed late on December 6, 2013 to report a restricted stock award of 30,000 shares granted December 2, 2013 due to an administrative oversight, and a Form 5A filed by Craig A. Roda on February 12, 2014 to report approximately 201 shares received in 2012 as dividends and not included on Mr. Roda’s Form 5 filed in 2013. 19 <12345678>JOB TITLE Fulton Financial Combo REVISION 10 SERIAL DATE Thursday, March 20, 2014 JOB NUMBER 263922 TYPE PAGE NO. 20 OPERATOR RaMelP Board and Committee Evaluations Pursuant to its charter, the Nominating and Corporate Governance Committee is to review and recommend to the Board of Directors guidelines and procedures to be used by directors in monitoring and evaluating the performance of the Board of Directors and committees. The Board of Directors and committees, except the Executive Committee, conduct an annual self-evaluation of the performance of the Board of Directors and committees. Anonymous board and committee evaluation questionnaires were last completed in the fourth quarter of 2013. The results were compiled by Fulton’s Legal Department and presented to the Nominating and Corporate Governance Committee in December 2013, and the members of each committee also received a summary report of the results of their committee’s questionnaire. The Nominating and Corporate Governance Committee reported the results to the Board of Directors at its December 2013 regular meeting. Compensation of Directors In 2013, the Board of Directors reviewed the overall cash and equity compensation paid to the Fulton Board of Directors. A survey of peer compensation was also prepared by Fulton’s compensation consultant. Each member of the Board of Directors of Fulton is paid a retainer fee and meeting fees for his or her services as a director, except that no fee is paid to any director who is also a salaried officer of Fulton. Thus, Mr. Wenger did not receive any director fees or additional compensation in 2013 for serving as a member of the Board of Directors. Non-employee directors receive a quarterly retainer of $8,750 in cash. Non-employee directors are also paid a cash fee of $2,000 for each Board of Directors meeting attended and $1,000 in cash for each committee meeting attended on a non-board meeting day, except the $1,000 meeting fee is not paid where the committee meeting for a standing committee is held on the day before or the day of a monthly Board of Directors meeting attended by the director. The Board of Directors has also approved, in certain circumstances, the payment of a $500 per meeting cash fee for attending certain committee meetings. Directors are paid a cash fee of $2,000 for any special Board of Directors meeting attended. Prior to the third quarter of 2013, the chairperson of the Audit Committee was paid a quarterly cash fee of $2,500, and the chairpersons of all other committees of the Board of Directors, and the Lead Director, were each paid a quarterly cash fee of $1,875. Effective with the third quarter of 2013, the Board of Directors increased the quarterly fees paid to the Lead Director to $7,500 and each committee chairperson receives $3,125. In addition, Directors are also paid $1,000 in cash for attendance at Fulton sponsored educational seminars and other meetings attended, but these seminars and meetings are not included for purposes of calculating director attendance rates since they are a voluntary activity. Pursuant to the 2011 Directors’ Equity Participation Plan (the “2011 Director Plan”), each non-employee director received $20,000 in shares of restricted stock, rounded up to the next whole share, as a retainer in 2013. This director equity award was granted on May 1, 2013, and the restricted stock will vest one year from the grant date in accordance with the terms of the 2011 Director Plan. In addition, Fulton’s Board of Directors regularly reviews the annual retainer amounts paid in cash and equity from time to time. During a review in 2013, the Board of Directors also approved a stock award, without restriction or vesting requirements, with a market value, at the time of grant on November 1, 2013, equal to $15,000, rounded up to the next whole share. A stock award is expected to be made shortly after Fulton’s 2014 Annual Meeting to all non-employee directors that are elected at the Annual Meeting and an additional award is anticipated to be made on November 1, 2014. 20 <12345678>JOB TITLE Fulton Financial Combo REVISION 10 SERIAL DATE Thursday, March 20, 2014 JOB NUMBER 263922 TYPE PAGE NO. 21 OPERATOR RaMelP Fulton also reimburses directors for certain business and other director-related expenses incurred in the performance of their service as directors of Fulton and provides non-employee directors with a $50,000 term life insurance policy while they are directors. Certain directors have elected to participate in the Fulton Deferred Compensation Plan, under which a director may elect not to receive his or her cash director’s fees when earned, but instead, to receive them, together with interest, in a lump sum or in installments over a period of up to twenty (20) years following retirement. The only current non-employee Fulton directors who have previously established accounts to defer fees or had balances from prior years are Directors Bond, Devine and Smith. Certain Fulton directors also serve on the boards of various Fulton subsidiary banks, and these directors are compensated with a retainer, meeting fees or both for their service on each of those individual boards. The following table summarizes all of the compensation paid to and received by each Fulton non-employee director who served during 2013. DIRECTOR COMPENSATION TABLE Name 1 Stock Awards 2 Option Awards Fees Earned or Paid in Cash Non-Equity Incentive Plan Compensation Jeffrey G. Albertson Joe N. Ballard John M. Bond, Jr. Craig A. Dally Denise L. Devine Patrick J. Freer Rufus A. Fulton, Jr. George W. Hodges Donald W. Lesher, Jr. Albert Morison III R. Scott Smith, Jr. Gary A. Stewart Ernest J. Waters ($) ($) 19,667 58,000 69,750 68,000 63,000 57,000 19,667 90,425 22,667 68,500 53,000 63,000 57,500 0 35,000 35,000 35,000 35,000 35,000 0 35,000 0 35,000 35,000 35,000 35,000 ($) 0 0 0 5 0 0 0 0 0 0 0 0 6 0 0 ($) 0 0 0 0 0 0 0 0 0 0 0 0 0 Change in Pension Value and Nonqualified Deferred Compensation Earnings ($) 0 0 0 0 0 0 0 0 0 0 0 0 0 All Other Compensation 3 4 Total ($) 0 0 0 0 0 0 0 0 0 0 16,558 7 0 0 ($) 19,667 93,000 104,750 103,000 98,000 92,000 19,667 125,425 22,667 103,500 104,558 98,000 92,500 1 Directors listed represent all the non-employee directors of Fulton during 2013. Director Ballard is retiring from Fulton effective with the 2014 Annual Meeting. Directors Albertson, Fulton and Lesher retired from Fulton effective with the 2013 Annual Meeting. 2 Fulton’s non-employee directors were granted stock and restricted stock as part of their 2013 compensation pursuant to the 2011 Director Plan. A $20,000.00 equity award in 1,819 shares of restricted stock with a one year vesting period was granted on May 1, 2013. A $15,000.00 equity award in 1,230 shares of stock without any vesting restrictions was granted on November 1, 2013. The awards were rounded up to the next whole share of Fulton stock, and the amount shown does not reflect the value of any dividends accrued in vested or unvested restricted stock. Directors Albertson, Fulton and Lesher retired from Fulton and were not eligible to receive the equity awards in 2013. 3 Unless otherwise noted, the amount excludes perquisites and other personal benefits with an aggregate value of less than $10,000. Fulton’s methodology to calculate the aggregate incremental cost of perquisites and other personal benefits was to use the amount disbursed for the item. Where a benefit involved assets owned by Fulton, an estimate of the incremental cost was used. 21 <12345678>JOB TITLE Fulton Financial Combo REVISION 10 SERIAL DATE Thursday, March 20, 2014 JOB NUMBER 263922 TYPE PAGE NO. 22 OPERATOR RaMelP 4 In addition to the fees listed in the table, Fulton also paid $48 per year for an individual $50,000 term life insurance policy for each of the directors during 2013. Some of Fulton’s directors also serve on boards of Fulton’s affiliate banks and received director fees for bank board service. During 2013, Director Albertson received $4,450 in fees from Fulton Bank of New Jersey, Director Ballard received $16,500 in fees from The Columbia Bank, Director Bond received $15,850 in fees from The Columbia Bank, Director Dally received $17,800 in fees from Lafayette Ambassador Bank, Director Hodges received $27,750 in fees from Fulton Bank, N.A., and Director Waters received $27,750 in fees from Fulton Bank, N.A. 5 Fulton directors did not receive options as part of their 2013 compensation; however, as of December 31, 2013, Mr. Bond held 78,728 exercisable options that previously were awarded to him by Columbia Bancorp, which was acquired by Fulton in February 2006. 6 Fulton directors did not receive options as part of their 2013 compensation; however, as of December 31, 2013, Mr. Smith held 249,548 exercisable options that previously were awarded to him by Fulton. 7 Includes $13,348 for club fees and other perquisites received by Director Smith during 2013. 22 <12345678>JOB TITLE Fulton Financial Combo REVISION 10 SERIAL DATE Thursday, March 20, 2014 JOB NUMBER 263922 TYPE PAGE NO. 23 OPERATOR RaMelP INFORMATION CONCERNING COMPENSATION Compensation Discussion and Analysis Executive Summary As discussed in detail below, Fulton believes that the compensation of its Executives should reflect Fulton’s overall performance and the contribution of its Executives to that performance. Cash awards under Fulton’s Variable Compensation Plan (“Variable Plan” or the “VCP”) and the Amended and Restated Equity and Cash Incentive Compensation Plan (the “2013 Plan”) are determined based on performance goals and the HR Committee’s subjective assessment of Fulton’s and the Executives’ performance in the preceding year. In 2014, the Executives each received cash incentive awards for their performance in 2013. Those cash incentive awards were based on an assessment of 2013 scorecard performance, which fell below the target level for each Executive, and other factors. 2012 performance qualified the Executives for equity awards in 2013 and the grant date value of actual awards the Executives received on April 1, 2013 ranged from $252,952 to $371,586. As outlined in Fulton’s January 2014 earnings release, for the year ended December 31, 2013, filed as an exhibit to Fulton’s Current Report on Form 8-K filed with the SEC on January 21, 2014, Fulton reported net income of $161.8 million, or 83 cents per diluted share, a 3.8 percent increase in comparison to the 80 cents per diluted share earned for the same period in 2012. This was the first year with Mr. Wenger serving as Fulton’s CEO, and 2013 was a year of good progress and positioning Fulton for the future. Fulton increased its loan portfolio, accomplishing one of Fulton’s key strategic priorities, and overall asset quality improved significantly, as seen in Fulton’s lower provision for credit losses and lower non-performing loan levels year over year. Fulton also continued to deploy capital prudently to support organic growth and through share repurchases and cash dividends. 2013 Compensation Program Changes Fulton believes that it needs to offer competitive compensation in order to recruit, motivate and retain qualified Executives. To that end, the HR Committee undertook the following compensation program initiatives in 2013: Shareholder Approval of 2013 Plan • In 2013, the HR Committee designed amendments to the 2004 Stock Option and Compensation Plan (the “2004 Stock Plan”) with its compensation consultant and submitted the amendments to shareholders as the 2013 Plan at the 2013 Annual Meeting. Shareholders approved the 2013 Plan at the 2013 Annual meeting. The 2013 Plan added performance features and other updated equity plan design features to seek to ensure that future awards continue to effectively link pay with performance and qualify as fully deductible compensation expense to Fulton for federal income tax purposes. The 2013 Plan also provides authority to the HR Committee to make cash-based performance compensation awards to eligible participants, including the Executives. In addition to incentivizing Executives with a new pay for performance methodology, the HR Committee intends to make awards that qualify as “performance-based” compensation for purposes of Section 162(m) of the Tax Code under the 2013 Plan, allowing Fulton to treat such awards as deductible expense for income tax purposes. Changes to CEO Cash Bonus Award Level Determination • The HR Committee increased the target for the CEO’s cash bonus for 2013. After a review with its compensation consultant, the HR Committee increased the target from 75% to 85% of salary. Changes to Equity Award Level Determination for CEO • For 2013, the long term incentive (“LTI”) award target performance level recommended by the HR Committee’s compensation consultant was 125% of salary for CEO and 75% of salary for the other Executives. In 2012, these targets were 75% and 50%, respectively. For grants made in 2013, Fulton increased its formal target award levels from 100% 23 <12345678>JOB TITLE Fulton Financial Combo REVISION 10 SERIAL DATE Thursday, March 20, 2014 JOB NUMBER 263922 TYPE PAGE NO. 24 OPERATOR RaMelP of salary for the CEO to 125% of salary, in order to increase the proportion of pay contingent on long-term company performance and to position total compensation for the CEO near the 50th percentile of the market at the target level of performance. In 2013, other Executives had a formal LTI target award level of 75% of salary, the same level as 2012. The change in the long-term incentive target percentage for the CEO was supported by a review of peer compensation practices and consultation with the compensation consultant. • Similar to 2012, the equity awards granted in 2013 by Fulton used the same annual award date of April 1 so that the LTI award could be considered by the HR Committee at the same time as the cash incentive awards based on each Executive’s performance in the preceding year. 2013 Executive Compensation Decisions During 2013, the HR Committee made the following awards and decisions impacting compensation for the Executives: Peer Group The peer group Fulton used for 2013 was updated at the recommendation of Fulton’s compensation consultant. After a review, to better align the median of the peer group metrics with those of Fulton, Fulton deleted three peers and added six new peers. Salaries In 2013, the Executives received the following salary adjustments: Executive 2012 Base Salary 2013 Base Salary Wenger Nugent Shreiner Roda Rohrbaugh $625,000 $530,000 $400,000 $370,000 $450,000 $900,000 $544,575 $411,000 $380,175 $456,188 Mr. Wenger received a base salary increase in connection with his promotion to CEO effective January 1, 2013. As a result, his new salary was within 2% of the market median of Fulton’s peer group as determined by the compensation consultant. Messrs. Nugent, Shreiner, Roda and Rohrbaugh each received base salary increases ranging from 1.375% to 2.75%, based on an assessment of performance and to bring such Executives more in line with salaries of comparable executives employed by institutions within Fulton’s peer group. These non-CEO 2013 salary increases were effective April 1, 2013. Cash Bonus Awards As in previous years, actual payout levels and cash awards to the CEO and the other Executives were determined based on HR Committee discretion, plus a scorecard which evaluated performance in four categories: Corporate Financial Objectives compared to Peers; Risk/Control/Liquidity; Superior Customer Experience; and Employee Engagement Objectives. Mr. Wenger’s 2013 cash bonus award was approved subject to terms of the 2013 Plan. % of Target - Determined under 2013 Cash Incentive scorecard Wenger Other Executives 94% 94%-95% 2013 Cash Incentive Award $503,370 $124,048 to $177,861 Equity Awards Under the terms of the 2004 Stock Plan, Fulton’s five-year total shareholder return (“TSR”) through December 31, 2012, as measured relative to its peer group, ranked Fulton in the second quartile among its peer group, permitting the HR Committee to grant equity awards in 2013 to the CEO and Executives. Actual awards in 2013 were determined at the discretion of the HR Committee and were approved in a range of 57.73% to 70.11% of base salary, on the grant date of April 1, 2013. On the date of grant, these awards were valued from $252,952 to $371,586. 24 <12345678>JOB TITLE Fulton Financial Combo REVISION 10 SERIAL DATE Thursday, March 20, 2014 JOB NUMBER 263922 TYPE PAGE NO. 25 OPERATOR RaMelP Compensation Philosophy Objectives Fulton’s executive compensation philosophy and programs are intended to achieve three objectives: • Align interests of the Executives with shareholder interests - Fulton believes that the interests of the Executives should be closely aligned with those of its shareholders. Fulton attempts to align these interests by evaluating the Executives’ performance in relation to key financial measures 1 which it believes correlate to consistent long-term shareholder value and increasing profitability, without compromising Fulton’s culture and overall risk profile. • Link pay to performance - Fulton believes in a close link between pay to the Executives and the overall performance of Fulton on both a short-term and long-term basis. It seeks to reward the Executives for their contributions to Fulton’s financial and non-financial achievements and to differentiate rewards to Executives based on their individual contributions. • Attract, motivate and retain talent - Fulton believes its long-term success is closely tied to the attraction, motivation and retention of highly talented employees and a strong management team. While a competitive compensation package is essential in competing for and retaining talented employees in a competitive market, Fulton also believes that non-monetary factors, such as a desirable work environment and successful working relationships between employees and managers, are critical to providing a rewarding employee experience. To achieve these three objectives, Fulton provides the following elements of Executive compensation: • Base Salary - Fulton generally sets Executive base salaries near the market median at comparable peer companies and to reflect individual job responsibilities, experience and tenure. • Annual Performance Awards - Annual cash incentives are designed to focus the attention of the Executives on the achievement of annual business goals. Under Fulton’s annual cash incentive plans, awards at the target level of performance are designed to position total cash compensation near the market median. Fulton’s cash incentive plans provide the Executives with the opportunity to earn cash compensation above the median for superior performance. • Equity Awards - Fulton believes in providing LTI awards in the form of equity in order to focus the Executives on delivering long-term performance and shareholder value. The LTI program is also designed to provide the Executives with a long-term wealth-building opportunity that balances short-term incentives, ensures a focus on the long-term stability of the organization and incorporates vesting terms that encourage executive retention. Fulton believes in equity award levels that are fair and market competitive, both in isolation and in the context of total compensation. • Benefits - Fulton believes in providing benefits that are competitive in the marketplace and that encourage the Executives to remain with Fulton. Retirement benefits are designed to provide reasonable long-term financial security. • Perquisites - Fulton believes in providing the Executives and other officers with basic perquisites that are necessary for conducting Fulton’s business. HR Committee Membership and Role The HR Committee is currently comprised of five independent directors, all of whom are appointed annually by Fulton’s Board of Directors. Each member of the HR Committee qualifies as an independent director under the NASDAQ listing standards and meets NASDAQ additional independence requirements specific to compensation committee members, and no member of the HR Committee is a party to a related person transaction in excess of $120,000 as more fully described in “Related Person Transactions” on page 18. There are no interlocking relationships, as defined in the regulations of the SEC, involving members of the HR Committee. For a further discussion on director independence, see the “Information about Nominees, Directors and Independence Standards” section on page 7 of this proxy statement. 1 See discussion of scorecards in the Variable Plan section beginning on page 29. 25 <12345678>JOB TITLE Fulton Financial Combo REVISION 10 SERIAL DATE Thursday, March 20, 2014 JOB NUMBER 263922 TYPE PAGE NO. 26 OPERATOR RaMelP Pursuant to its charter, which is available on Fulton’s website at www.fult.com, and consistent with NASDAQ rules, the role of the HR Committee is to assist the Board of Directors in evaluating and setting salaries, bonuses and other compensation of the Executives, to administer Fulton’s equity and other compensation plans and to take such other actions, within the scope of its charter, as the HR Committee deems necessary or appropriate. The HR Committee relies upon such performance data, statistical information and other data regarding executive compensation programs, including information provided by Fulton’s Human Resources Department, Fulton’s officers and outside advisors, as it deems appropriate. The HR Committee has unrestricted access to individual members of management and employees and may ask them to attend any HR Committee meeting or to meet with any member of the HR Committee. The HR Committee also has the power and discretion to retain, at Fulton’s expense, such independent counsel and other advisors or experts as it deems necessary or appropriate to carry out its duties. Fulton’s executive compensation process consists of establishing targeted overall compensation for each Executive and then allocating that targeted total compensation among base salary, incentive compensation and equity awards. Fulton does not have a policy or an exact formula with regard to the allocation of compensation between cash and non-cash elements, except that the HR Committee has established a methodology and an award matrix for cash bonus payments under the Variable Plan and 2013 Plan and LTI non-cash elements, as described in more detail below. Consistent with Fulton’s compensation philosophy, however, the HR Committee determines the amount of each type of compensation for the Executives by: reviewing publicly available executive compensation information of twenty peer group companies (as defined and listed below); consulting with outside advisors and experts; considering the complexity, scope and responsibilities of the individual’s position; consulting with the CEO with respect to the other Executives; assessing possible demand for the Executives by competitors and other companies; and evaluating the compensation appropriate to attract executives to Fulton’s headquarters in Lancaster, Pennsylvania. Role of Management Management assists the HR Committee in recommending agenda items for its meetings and by gathering and producing information for these meetings. As requested by the HR Committee, the CEO and other Executives participate in HR Committee meetings to provide background information, compensation recommendations for other officers, performance evaluations and other items requested by the HR Committee. As part of the performance evaluation process, all the Executives are asked to complete an annual self-assessment of their overall performance. The HR Committee, without management present, reviews the CEO’s self-assessment. The CEO reviews the self-assessment forms prepared by the other Executives and shares his comments and recommendations with respect to the performance of the other Executives. The Executives are not present for the HR Committee’s discussions, deliberations and decisions with respect to their individual compensation. The HR Committee Charter, last amended in 2013, provides that the CEO may not be present during HR Committee voting or HR Committee deliberations regarding the CEO’s compensation. The Board of Directors, in executive session, with only the independent directors present, makes all final determinations regarding the compensation of the Executives, after considering recommendations made by the HR Committee. Compensation Plan Risk Review The HR Committee, at its February 25, 2014 meeting, conducted its annual compensation plan risk review of all compensation plans in effect as of December 31, 2013. At this meeting, Fulton’s Chief Risk Officer discussed his review of Fulton’s compensation plans with a focus on three compensation risk management components: 1) governance and policies; 2) inherent risk in plan design and mitigating factors; and 3) internal controls and monitoring. The HR Committee has reviewed and considered all of such plans and practices and does not believe that Fulton’s compensation policies and practices create risks that are reasonably likely to have a material adverse effect on Fulton. The HR Committee considered various factors that have the effect of mitigating risk and, with the assistance of Fulton’s Chief Risk Officer, and Legal and Human Resources staff members, reviewed Fulton’s compensation policies and practices for all employees, including the elements of Fulton’s executive compensation programs, to determine whether 26 <12345678>JOB TITLE Fulton Financial Combo REVISION 10 SERIAL DATE Thursday, March 20, 2014 JOB NUMBER 263922 TYPE PAGE NO. 27 OPERATOR RaMelP any portion of such compensation encourages excessive risk taking. The HR Committee concluded that risks associated with Fulton’s compensation plans are mitigated by a variety of factors, including: 1) the multiple elements of Fulton’s compensation packages, including base salary, annual cash incentive programs and equity awards; the fact that equity awards vest over a number of years and that equity awards are generally intended to motivate employees to take a long-term view of Fulton’s business; and the use of clawbacks, caps and balanced metrics in certain plans; 2) the structure of Fulton’s annual cash incentive program, which is based on (a) a number of different performance measures and scorecards to avoid employees placing undue emphasis on any particular performance metric at the expense of other aspects of Fulton’s business, and (b) performance targets that do not require undue risk-taking to achieve a stated metric or performance factor; 3) effective management processes for developing strategic and annual operating plans, and strong internal financial controls; 4) the review by Fulton’s Internal Audit Department of the controls related to incentive compensation and certain metrics used to determine executive compensation, such as the Executive scorecards; and 5) proper governance and oversight of Fulton’s programs by the Board of Directors, the HR Committee, Fulton’s Enterprise Risk Management Committee, Fulton’s Chief Risk Officer and Fulton’s Human Resources staff. Shareholder Say-on-Pay Proposal and Frequency of Future Proposals As required by SEC rules, Fulton submitted a non-binding Say-on-Pay proposal to its shareholders at Fulton’s 2013 Annual Meeting, and the shareholders approved Fulton’s recommendation in favor of Fulton’s 2013 Say-on-Pay proposal. This year’s non-binding 2014 Say-on-Pay proposal is described on page 52. Fulton viewed the results of the 2013 Say-on-Pay proposal as supporting its compensation policies and decisions for the Executives, and the Board will consider this year’s non-binding proposal as a barometer of shareholder support for the current compensation programs for the Executives. Not counting broker non-votes, approximately 91% of the shareholders who returned a ballot in 2013 voted in favor of, and approved, Fulton’s 2013 Say-on-Pay proposal. In particular, the HR Committee viewed the number of votes cast in favor of Fulton’s 2013 Say-on-Pay proposal to be a positive endorsement of the current pay programs and practices. Fulton will continue to monitor the level of support for each annual Say-on-Pay proposal. However, the outcome of any annual non-binding shareholder Say-on-Pay vote will not be the only factor that the HR Committee and Board of Directors will consider in making future decisions related to executive compensation. In 2011, Fulton submitted to shareholders a non-binding proposal, asking shareholders whether Fulton should submit its Say-on-Pay proposal to shareholders every one, two or three years. This proposal is commonly known as a “Say-When-on-Pay” proposal. The shareholders approved Fulton’s recommendation that the Say-on-Pay proposal should be submitted to shareholders on an annual basis. Although Fulton believes that having an annual Say-on-Pay vote is appropriate for 2014, Fulton’s HR Committee and Board of Directors will continue to evaluate the frequency of the non- binding Say-on-Pay proposal and might recommend that shareholders approve a different frequency in the future. Under current SEC rules, publicly traded companies are required, no less frequently than once every six years, to provide for a separate shareholder Say-When-on-Pay advisory vote in proxy statements for annual meetings to determine whether the Say-on-Pay vote will occur every one, two or three years. Fulton anticipates submitting a new “Say-When-on-Pay” proposal to shareholders on or before Fulton’s annual meeting of shareholders in 2017. Use of Consultants The HR Committee retained McLagan, an Aon Hewitt company, as its sole independent compensation consultant for 2013. McLagan has served as the sole independent compensation consultant for the HR Committee since June 2010. McLagan previously was retained in 2009 for a compensation plan risk review project. McLagan has performed a variety 27 <12345678>JOB TITLE Fulton Financial Combo REVISION 10 SERIAL DATE Thursday, March 20, 2014 JOB NUMBER 263922 TYPE PAGE NO. 28 OPERATOR RaMelP of engagements during 2013, including conducting a compensation market analysis related to Fulton’s Executives, a scorecard review and an overall compensation policy review, extensive work related to updating Fulton’s 2004 Stock Plan in the form of the 2013 Plan and providing general compensation advice regarding Fulton’s Executives. At its February 25, 2014 meeting, the HR Committee considered the independence of McLagan in light of the SEC rules and NASDAQ listing standards related to compensation committee consultants. The HR Committee requested and received a report from McLagan addressing the independence of McLagan and its consultants, including the following factors: (1) other services provided to Fulton by McLagan; (2) fees paid by Fulton as a percentage of Aon’s total revenue; (3) policies or procedures maintained by McLagan that are designed to prevent a conflict of interest; (4) any business or personal relationships between the consultants and a member of the HR Committee; (5) any company stock owned by the consultants; and (6) any business or personal relationships between Fulton’s executive officers and the consultants. The HR Committee discussed these considerations and concluded that the work performed by McLagan and its consultants involved in the engagements did not raise any conflict of interest, and further concluded that McLagan continues to be an independent HR Committee consultant. During 2013, McLagan was instructed by the HR Committee to compare Fulton’s current compensation practices and executive compensation payments with those of its peers, evolving industry best practices and regulatory guidance. Based on that comparison, McLagan was asked to recommend changes in Fulton’s executive compensation practices that were consistent with Fulton’s executive compensation philosophy and objectives as described above. McLagan completed a number of assignments at the direction of the HR Committee during 2013, including a benchmarking analysis of total compensation, base salary, short-term incentive payments and LTI awards against Fulton’s twenty (20) member peer group listed below. In doing its review, McLagan used the peer data as a point of reference for measurement of different compensation elements, but this was not the only determinative factor in its final recommendations to the HR Committee. The HR Committee considered the benchmarking data of Fulton’s peer companies along with other information from the compensation consultant, in making its determinations in 2013. McLagan also undertook other projects during 2013, including assisting Fulton with updates to the 2013 Plan and developing a new performance-based cash and equity award methodology for new performance awards in 2014. The specific instructions given to the consultant and fees to be paid were generally outlined in engagement letters that described the scope and performance of duties under each project. Fulton does not have a policy that limits the other services that an executive compensation consultant can perform. McLagan and its affiliates did not provide additional services in 2013 with associated fees in excess of the $120,000 SEC disclosure threshold for a compensation consultant. Use of Peer Groups The HR Committee last reviewed and updated Fulton’s peer group in 2012. At that time, the HR Committee asked McLagan to review Fulton’s then current peer group members, consider new peers and recommend a new peer group to be used by Fulton starting in 2013. To establish an appropriate peer group, McLagan initially defined a broad list of all financial institutions with $10 to $40 billion in assets nationwide and, from these companies, made recommendations based on a variety of factors, including geographic focus, business model, asset size, loan portfolio, and revenue composition to determine the most relevant comparators. Six new peers were added to the peer group and three existing peers were deleted, primarily due to differences in revenue mix and asset size. The deleted peer members were: First Horizon National Corporation, First Niagara Financial Group, Inc. and Synovus Financial Corp. The peers added for 2013 were: F.N.B. Corporation, Hancock Holding Company, IBERIABANK Corporation, Prosperity Bancshares, Inc., Umpqua Holdings Corporation and Wintrust Financial Corporation. During 2013, this peer group was utilized for both compensation decisions and to gauge Fulton’s overall financial performance. When a peer group member announces that it is being acquired, Fulton has historically deleted the company from the peer group. The HR Committee will continue to evaluate the peer group to confirm that continues to be appropriate for Fulton. 28 <12345678>JOB TITLE Fulton Financial Combo REVISION 10 SERIAL DATE Thursday, March 20, 2014 JOB NUMBER 263922 TYPE PAGE NO. 29 OPERATOR RaMelP The peer group is also used by Fulton for financial performance purposes (the “Performance Peer Group”). During 2013, this Performance Peer Group was used to determine the annual equity award grants, and for certain scorecard performance factors under the VCP and 2013 Plan, as discussed below. As of December 31, 2013, the twenty (20) members of the Performance Peer Group used for 2013, and their stock trading symbols were: Associated Banc-Corp (ASBC) BOK Financial Corporation (BOKF) Commerce Bancshares, Inc. (CBSH) F.N.B. Corporation (FNB) Hancock Holding Company (HBHC) International Bancshares Corporation (IBOC) Prosperity Bancshares, Inc. (PB) TCF Financial Corporation (TCB) Umpqua Holdings Corporation (UMPQ) Webster Financial Corporation (WBS) BancorpSouth, Inc. (BXS) City National Corporation (CYN) Cullen/Frost Bankers, Inc. (CFR) FirstMerit Corporation (FMER) IBERIABANK Corporation (IBKC) People’s United Financial, Inc. (PBCT) Susquehanna Bancshares, Inc. (SUSQ) UMB Financial Corporation (UMBF) Valley National Bancorp (VLY) Wintrust Financial Corporation (WTFC) Elements of Executive Compensation Fulton’s executive compensation program currently provides a mix of base salary, cash incentive and equity- based plans, as well as retirement benefits, health plans and other benefits as follows: Base Salary Base salary is an important element of executive compensation because it provides the Executives with a consistent level of monthly income. Consistent with its compensation philosophy, Fulton generally seeks to set base salary for the Executives in line with the market median overall. Fulton sets salaries on an individual-by-individual basis and seeks to provide base salary appropriate for the person’s position, experience, responsibilities and performance. In making recommendations to the Board of Directors regarding the appropriate base salaries for 2013, the HR Committee received a recommendation from McLagan, its compensation consultant, which considered base salaries paid by members of the Performance Peer Group to peer officers who held similar roles and who were positioned similarly to the Executives in their respective organizations. With regard to the compensation paid to Mr. Wenger, the HR Committee also considered his performance based on a scorecard that included the attainment of certain performance goals, results of his management decisions, the earnings of Fulton during the previous year and other factors, such as the HR Committee’s perspective of his overall performance. With regard to the compensation paid to the other Executives, the HR Committee also considered information provided by Mr. Wenger for Messrs. Nugent, Shreiner, Roda and Rohrbaugh, which included an assessment of each Executive’s level of individual performance, attainment of performance goals set forth in individual scorecards, overall contributions to the organization and salary history. The HR Committee also considered its own perceptions of the performance of each Executive. On March 19, 2013, after a review of the Executives’ competitive positioning to market using Performance Peer Group data and internal equity comparisons presented by McLagan, the HR Committee recommended, and the Board of Directors approved, base salary adjustments effective April 1, 2013, and Fulton set the annual base salaries for Messrs. Wenger, Nugent, Shreiner, Roda and Rohrbaugh at that time. The 2014 base salary for each Executive is listed in footnote 2 of the “Summary Compensation Table” on page 41. Variable Plan The HR Committee believes that annual performance-based incentive bonuses are valuable in recognizing and rewarding individual achievement and, by focusing more on performance pay opportunities for the Executives, it can more closely align Fulton’s compensation program with shareholder interests. Fulton’s Variable Plan and 2013 Plan are designed so that no incentive bonus is paid unless Fulton achieves a predetermined performance threshold metric. Prior to 2011, the HR Committee used an earnings per share (“EPS”) threshold performance target. However, starting with performance in 2011, based on a recommendation by McLagan, the HR Committee changed the threshold performance target to one based on return on equity (“ROE”). McLagan indicated that there were two reasons for its recommendation. First, using relative EPS growth could lead to abnormal results in certain circumstances, such as when earnings in a prior year are negative. Second, because Fulton’s Executive scorecards already rely heavily on 29 <12345678>JOB TITLE Fulton Financial Combo REVISION 10 SERIAL DATE Thursday, March 20, 2014 JOB NUMBER 263922 TYPE PAGE NO. 30 OPERATOR RaMelP relative performance to peers in several categories, an absolute performance hurdle, such as a predetermined ROE target, would better balance the overall approach to determining incentives. When it set the new ROE target, the HR Committee viewed this performance target as a reachable goal, but not a target which guarantees payment of an incentive bonus, to insure that the Executives are paid for performance. Although Fulton used a ROE performance hurdle as a plan threshold for the 2011, 2012 and 2013 Variable Plan awards the 2013 awards under the 2013 Plan, and has decided to do so again in 2014, a different threshold performance target other than ROE may be used in future years. The HR Committee, at its January 2014 meeting, determined that the 2013 ROE target set for 2013 performance of 6.06% was met by Fulton, and for 2013 was in excess of 80% of Fulton’s budgeted ROE of 7.57%. Therefore, because the threshold performance target was achieved for the 2013 Variable Plan, each Executive was eligible to receive a VCP award, or in the case of the CEO, a 2013 Plan award, equal to a percentage of base salary paid to the individual Executive during the year the award was earned. Actual awards may be greater than or less than targets set by the HR Committee, up to a predetermined maximum, with the variability attributable to individual and company performance. These award payouts are substantially based on scorecard results with the HR Committee exercising negative discretion in its sole judgment, as appropriate. Generally, performance factors that are more directly aligned with the interests of shareholders, such as financial performance, are given greater weight. Based upon the recommendation and the market review conducted by Fulton’s compensation consultant at the time the Variable Plan was approved originally, the HR Committee determined that the award amounts payable to each Executive should be a percentage of the Executive’s base salary. For his cash incentive 2013 Plan award, Mr. Wenger, as CEO, had threshold, target and maximum award percentages that were different from the other Executives. His 2013 annual cash performance-based incentive bonus award was made pursuant to the terms and provisions of the 2013 Plan, and the HR Committee approved it as a Performance Compensation Award under Article 10 of the 2013 Plan. For 2013, all Executives utilized a similar scorecard, except category rating and individual cash award payouts were determined under the annual cash incentive award matrix below and approved by the HR Committee. Scorecard 1.00 1.25 1.50 1.75 2.00 2.25 2.50 2.75 3.00 3.25 3.50 3.75 4.00 2013 Annual Cash Incentive Award Matrix % of Target CEO Payout % SEVP Payout % 0.0% 0.0% 0.0% 0.0% 25.0% 37.5% 50.0% 58.3% 66.7% 75.0% 83.3% 91.7% 100.0% 0.0% 0.0% 0.0% 0.0% 42.50% 63.75% 85.00% 99.17% 113.33% 127.50% 141.67% 155.83% 170.00% 0.0% 0.0% 0.0% 0.0% 50.0% 75.0% 100.0% 116.7% 133.3% 150.0% 166.7% 183.3% 200.0% 2013 Award Level Threshold Target Maximum For 2013, McLagan recommended, and the HR Committee approved, increasing the CEO target to 85%, up from 75%, and maintaining the target for other officers at 50%. This change for the CEO was recommended by Fulton’s compensation consultant because the increase in opportunity levels better aligned the annual cash incentives paid to the CEO with the Performance Peer Group median. In early 2013, the HR Committee reviewed and approved the scorecards to be used in 2013 and determined that the Executives should all be reviewed based on a uniform scorecard with similar category weightings, except for Mr. Rohrbaugh who, due to his position as Chief Risk Officer, should have a scorecard with a greater focus on risk- related categories as a result of his job responsibilities. As a result, all the non-CEO Executives, except Mr. Rohrbaugh, had category ratings of 50%, 30%, 10% and 10% for Corporate Financial Objectives, Risk/Control/Liquidity, Superior Customer Experience and Employee Engagement Objectives, respectively. For Mr. Rohrbaugh, each of these categories 30 <12345678>JOB TITLE Fulton Financial Combo REVISION 10 SERIAL DATE Thursday, March 20, 2014 JOB NUMBER 263922 TYPE PAGE NO. 31 OPERATOR RaMelP was weighted differently at 40%, 40%, 10% and 10% for Corporate Financial Objectives, Risk/Control/Liquidity, Superior Customer Experience and Employee Engagement Objectives, respectively. Mr. Wenger, as the CEO, had category ratings of 62.5 and 37.5% for the performance-based categories of Corporate Financial Objectives and Risk/ Control/Liquidity, while the HR Committee reserved negative discretion related to Superior Customer Experience and Employee Engagement Objectives to lower Mr. Wenger’s score. For 2013, the four scorecard performance factors and the sub-categories under each factor were: 2013 Performance Factors Sub-categories ● Corporate Financial Objectives ● Risk/Control/Liquidity Earnings Per Share Growth; Return on Assets; Return on Equity; Average Core Deposit Growth; Average Loan Growth; Non-Interest Income Growth; and Efficiency Ratio measured relative to the Performance Peer Group. Capital Rating; Non-Performing Assets/Total Assets relative to the Performance Peer Group; Liquidity and Funding; and Regulatory Compliance. ● Superior Customer Experience Customer Satisfaction Index and Household Growth. ● Employee Engagement Objectives Management Succession; Corporate Diversity; Corporate Employee Retention; Employee Engagement Survey Results; and Salaries and Benefits Efficiency Ratio. For each of the Executives, performance measurement criteria were established for each critical performance factor sub-category. While, for the most part, specific, objective, measureable criteria were used, some scorecard sub-categories require a subjective determination to be made by the HR Committee. For certain objectively measured performance categories, scorecard results depended upon Fulton’s quartile ranking among the Performance Peer Group, and all factors were rated with a numerical scale of 4 to 1. The top of the scale range was a 4 for 1st quartile performance, or excellent results, down to a score of 1 for 4th quartile performance, or results below expectations. The following is a tabular summary of the critical performance factors with the weights and the total score for each Executive on their 2013 scorecards. 2013 Scorecard Critical Performance Factors ● Corporate Financial Objectives Score ● Risk/Control/Liquidity Score ● Superior Customer Experience Score ● Employee Engagement Objectives Score ● Total Score for each Executive Wenger Nugent Shreiner Roda Rohrbaugh 62.5% 37.5% NA 1 NA 1 2.44 50% 30% 10% 10% 2.44 50% 30% 10% 10% 2.44 50% 30% 10% 10% 2.44 40% 40% 10% 10% 2.45 The HR Committee reviewed the overall 2013 performance and scorecard results for each Executive, and determined that each of the Executives achieved a level of performance in 2013 that qualified the Executive for an annual cash incentive award slightly below each Executive’s target payout established under the Variable Plan, or in the case of the CEO, under the 2013 Plan. In addition to the scorecard results and information provided on individual critical performance factors for each Executive, in determining the annual cash incentive award percentages for each Executive, the HR Committee also considered the efforts and contributions to Fulton’s financial performance of each of the Executives. The HR Committee also considered the overall progress Fulton has made in continuing to enhance its risk and regulatory compliance infrastructures and strengthen its regulatory compliance and risk management functions to address identified deficiencies in these areas, the heightened level of regulatory expectations and substantially increased new requirements. 1 The HR Committee for the CEO cash award has discretion to reduce or eliminate the amount of the annual cash incentive award under the 2013 Plan as the HR Committee may determine. 31 <12345678>JOB TITLE Fulton Financial Combo REVISION 10 SERIAL DATE Thursday, March 20, 2014 JOB NUMBER 263922 TYPE PAGE NO. 32 OPERATOR RaMelP In particular, the HR Committee weighed the pace of progress in building-out Fulton’s risk and regulatory compliance infrastructures relative to current regulatory expectations in that regard. In weighing these factors, the HR Committee determined to exercise its discretion under the Variable Plan and the 2013 Plan to recommend that the Board of Directors reduce by 30% the amount of the annual cash incentive award paid to each of the Executives for performance during 2013, determined based on the scorecard performance factors and formulas described above. The HR Committee took this action to emphasize the need to continue to strengthen Fulton’s risk management framework and regulatory compliance programs and to encourage the Executives to accelerate their efforts in these areas. In addition, the reduction was intended to provide tangible evidence of the importance the Board of Directors attaches to the need to strengthen Fulton’s risk and regulatory compliance management infrastructures and to reinforce the “tone from the top” regarding the critical importance of accelerating completion of that work to build stronger and sustainable regulatory compliance and risk management processes that will support Fulton as it continues to grow. In addition, and for these same reasons, the Board of Directors reduced the cash incentive awards paid to Fulton’s other officers by 15%. Options and Restricted Shares The Executives, except Mr. Rohrbaugh, received restricted stock awards in 2013 under the terms of the 2004 Stock Plan prior to the approval of the 2013 Plan by shareholders in April 2013. The HR Committee did not award any restricted stock to Mr. Rohrbaugh in 2013 because he received an award in November 2012 in connection with the acceptance of his employment with Fulton. The 2004 Stock Plan defines the total number of shares available for awards each year based on Fulton’s five-year TSR performance relative to its peer group. Fulton believes equity-based compensation aligns the interests of the Executives and other eligible officers with those of Fulton’s shareholders, and encourages them to “think like owners.” Therefore, Fulton believes that equity awards are an appropriate means of motivating, rewarding and compensating the Executives and other key officers based on the future performance of Fulton. Historically, “pay for performance” included the discretionary award of options and restricted shares to the Executives. Pursuant to the 2004 Stock Plan approved by shareholders at the 2004 Annual Meeting, Fulton was authorized to award incentive stock options, non-qualified stock options and restricted stock for a period of ten years to key employees of Fulton, its affiliate banks and its other subsidiaries. Stock options were previously awarded to the Executives, but more recently, restricted stock, has been the traditional award type for Fulton to the Executives, pursuant to a formula applied by the HR Committee. Under the 2013 Plan, the HR Committee will determine the number of shares granted in any calendar year. However, for awards made in 2013 and before, the 2004 Stock Plan provided that the total number of shares available for grant to all participants, including the Executives, in any calendar year in the form of stock options or restricted stock was to be determined based on the performance of Fulton, measured in terms of TSR for the immediately preceding five-year period relative to the Performance Peer Group. This process for determining the number of shares available for grant in a particular year was stated in Section 5.04 of the 2004 Stock Plan, as follows: The number of Shares available for Awards in any calendar year shall be determined depending upon the performance of Fulton measured in terms of TSR relative to a Peer Group, determined at the sole discretion of the HR Committee, for the five-year period immediately preceding the grant of the Award. The number of Shares available for Awards shall be determined in accordance with the following schedule: Fulton’s TSR Ranking among the Peer Group for Prior Five-Year Period Top Quartile Second Quartile Third Quartile Fourth Quartile Percent of Total Outstanding Shares Available for Awards for Plan Year 1.00% 0.75% 0.50% At the Discretion of the HR Committee but limited to no more than 0.50% Under the 2004 Stock Plan, an option recipient who retired at age fifty-five or older with five or more years of consecutive employment as defined in the 2004 Stock Plan, may exercise his or her currently exercisable stock options for up to two years from the retirement date (but not beyond the date when the option would otherwise expire). For option or restricted stock recipients who retire at age sixty or older with ten or more years of consecutive employment as defined in the 2004 Stock Plan, unvested stock options become exercisable and unvested restricted stock grants become vested 32 <12345678> JOB TITLE Fulton Financial Combo REVISION 10 SERIAL DATE Thursday, March 20, 2014 JOB NUMBER 263922 TYPE PAGE NO. 33 OPERATOR RaMelP on the retirement date. Upon a change in control, as defined in the 2004 Stock Plan, 1 options not previously exercisable become exercisable, and unvested restricted stock vests. Generally under the 2004 Stock Plan, unvested stock options become exercisable and unvested restricted stock vests upon the death or disability of the Executive, and his or her authorized representative shall have a period of one year following such termination of employment to exercise any vested option granted, but such period of time shall not exceed the option’s original expiration date. 2013 Long-term Incentive Awards During 2012 and 2013, the HR Committee worked in conjunction with McLagan to develop a new performance-based long-term incentive award methodology for 2014 that incorporates performance-vested equity earned based on Fulton’s future performance. The HR Committee expects to grant these performance-based awards to the Executives in first quarter of 2014 with a variety of performance features pursuant to the 2013 Plan. For 2013, individual awards of restricted shares were made to the Executives on April 1, 2013, for performance in 2012. Awards to other eligible participants were granted on April 1, 2013. Awards were in the form of restricted stock, stock options, or a combination of stock options and restricted stock, and were determined by the Board of Directors based on recommendations of the HR Committee and management. Prior to 2011, the HR Committee did not establish specific equity award target levels for individual performance or overall corporate profitability. The number of options and restricted shares awarded to each Executive was primarily at the discretion of the HR Committee. In 2011, as a guide in making individual awards to the Executives, the HR Committee established a long-term incentive award matrix based on Fulton’s five-year TSR ranking among its Performance Peer Group for the prior year. Equity awards in 2013 were made to each Executive as a percent of the Executive’s base salary in accordance with the following matrix, with the actual award being subject to the discretion of HR Committee, but generally not to exceed the maximum of the equity award guidelines below: 2013 LTI Award Matrix CEO 2013 LTI Award SEVP 2013 LTI Award TSR Performance Percent of Target Payout Percent of Salary Percent of Salary Top Quartile Second Quartile Third Quartile Bottom Quartile 125%-150% 100%-125% 75%-100% 50%-75% 156.3%-187.5% 125.0%-156.3% 93.8%-125.0% 62.5%-93.8% 93.8%-112.5% 75.0%-93.8% 56.3%-75.0% 37.5%-56.3% For 2013 the LTI target award levels recommended by McLagan was 125% for the CEO and 75% for other Executives. In the prior year, the LTI target award levels were 75% and 50% for the CEO and other Executives, respectively. As a result of Fulton’s 2012 TSR performance being in the second quartile, the 2013 award to the Executives, including Mr. Wenger who, for these 2013 LTI awards, the HR Committee decided should be awarded at the same level as the other 1 “Change in Control” of Fulton shall mean: (a) a change in the Board during any twenty-four (24) month period ending on or after the effective date of the Plan, if the individuals who were directors of Fulton at the beginning of the period cease during such period to constitute at least a majority of the Board; (b) the acceptance and completion of a tender offer or exchange offer by any entity, person or group (including any affiliates of such entity, person or group, other than an Affiliate of Fulton) for twenty-five percent (25%) or more of the outstanding voting power of all capital stock of Fulton; (c) the acquisition by any entity, person or group (including any affiliates of such entity, person or group) of beneficial ownership, as that term is defined in Rule 13d-3 under the Exchange Act, of Fulton’s capital stock entitled to twenty-five percent (25%) or more of the outstanding voting power of all capital stock of Fulton; (d) a merger, consolidation, division, share exchange, or any other transaction or a series of transactions outside the ordinary course of business involving Fulton (a “Business Combination”), as a result of which the holders of the outstanding voting capital stock of Fulton immediately prior to such Business Combination, excluding any shareholder who is a party to the Business Combination (other than Fulton) or is such party’s affiliate as defined in the Exchange Act, hold less than seventy-five percent (75%) of the voting capital stock of the surviving or resulting corporation; or (e) the transfer of substantially all of the assets of Fulton other than to a wholly owned subsidiary of Fulton. 33 <12345678>JOB TITLE Fulton Financial Combo REVISION 10 SERIAL DATE Thursday, March 20, 2014 JOB NUMBER 263922 TYPE PAGE NO. 34 OPERATOR RaMelP Executives because the TSR period occurred prior to him becoming CEO, was in the range of approximately 58% to 70%. While the LTI awards made in 2013 were approximately 30% higher than 2012 LTI awards, Fulton’s second quartile TSR performance would have permitted higher awards to be made in the second quartile range, up to 93.8% of salary for the Executives as provided in the table above. The reduction was in part based on management’s recommendation to temper the amount of awards for budget and other considerations such as the current economic and regulatory environment. Other factors that the HR Committee considered in determining the number of restricted shares to be awarded to each Executive included the recommendation of the compensation consultant, the CEO’s recommendations for the other Executives, previous stock option and restricted stock awards to each Executive, Fulton’s performance and each Executive’s achievement of scorecard goals. In 2013, Fulton granted a total of 617,869 stock options and 378,206 restricted shares to all participants in the 2004 Stock Plan, with no stock options and 107,748 restricted shares granted to the Executives and the remaining 617,869 stock options and 270,458 restricted shares granted to other Fulton employees.1 In accordance with the terms of the 2004 Stock Plan, restricted shares accrue dividends, which are reinvested in similarly restricted shares. During 2013, Fulton made equity awards to the Executives for 2012 performance in the form of restricted stock which vests after three years as follows: Executive 2 Wenger Nugent Shreiner Roda Number of Restricted Shares 31,161 32,089 22,654 21,844 Grant Date 4/1/2013 4/1/2013 4/1/2013 4/1/2013 Grant-date Fair Value @ $11.58 per Share $360,834 $371,586 $262,332 $252,952 Employee Stock Purchase Plan The ESPP was designed to advance the interests of Fulton and its shareholders by encouraging Fulton’s employees and the employees of its affiliate banks and other subsidiaries to acquire a stake in the future of Fulton by purchasing shares of the common stock of Fulton. Currently, Fulton limits payroll deduction and annual employee participation in the ESPP to $7,500. During 2013, Mr. Roda participated in ESPP payroll deduction and has shares in the ESPP. Mr. Shreiner has shares in the ESPP, but is not currently purchasing shares by payroll deduction. Mr. Rohrbaugh is a new participant enrolled in the ESPP, but has not yet purchased any shares by payroll deduction. No other Executives participate in the ESPP. Defined Contribution Plan – 401(k) Plan Fulton provides a qualified defined contribution plan, in the form of a 401(k) Plan, to the Executives and other employees and provides for employer matching contributions that satisfy a non-discrimination “safe-harbor” available to 401(k) retirement plans. This safe-harbor employer matching contribution is equal to 100% of each dollar a participant elects to contribute to the 401(k) Plan, but the amount of contributions that are matched by Fulton is limited to 5% of eligible compensation. In addition, the Executives, except for Mr. Rohrbaugh, and certain employees are eligible for an additional employer profit sharing contribution under the 401(k) Plan, which for 2013 was equal to 5% of a participant’s eligible compensation. Deferred Compensation Agreements Fulton’s nonqualified deferred compensation plans include (1) the Fulton Deferred Compensation Plan, under which officers, directors and advisory board members can elect to defer receipt of fees and certain management employees can elect to defer receipt of cash compensation, and (2) a series of essentially identical Supplemental Executive Retirement Plan Agreements entered into with a certain group of senior managers, including the Executives, for the purpose of crediting them with full contributions each year equal to the contributions they would have otherwise been eligible to receive under the 401(k) Plan, if not for the limits imposed by the Internal Revenue Code, as amended (the “Tax Code”) on the amount of compensation that can be taken into account under a tax- qualified retirement plan. Fulton’s deferred compensation contributions for the Executives in 2013 are stated in footnote 8 of the “Summary Compensation Table” on page 41. The deferred compensation plan accounts of each participant are 1 Restricted shares listed are as of December 31, 2013 and exclude any accrued reinvested dividends. 2 Mr. Rohrbaugh did not receive a restricted share award in 2013 because he received a restricted share award when he was hired in 2012. 34 <12345678>JOB TITLE Fulton Financial Combo REVISION 10 SERIAL DATE Thursday, March 20, 2014 JOB NUMBER 263922 TYPE PAGE NO. 35 OPERATOR RaMelP held and invested under the Fulton Nonqualified Deferred Compensation Benefits Trust, with Fulton Financial Advisors, a division of Fulton Bank, N.A., serving as trustee. The participants are permitted to individually direct the investment of the deferred amounts into various investment options under the Nonqualified Deferred Compensation Benefits Trust. Defined Benefit Pension Plans Fulton has not had an historical practice of using defined benefit pension plans to provide employees or the Executives with retirement benefits, but some defined benefit plans have been acquired in different merger transactions over time, and any such acquired plans were continued only for the then current plan participants. However, none of the Executives participate in such pension plans. Survivors’ Benefit Life Insurance and Other Death Benefits Employees of Fulton and certain of its bank subsidiaries, who had been employed by Fulton for at least five years as of April 1, 1992, were eligible to participate in a survivors’ benefit program, which was discontinued on February 1, 2014. This program provided the employee’s spouse, in the event of the employee’s death prior to retirement, with an annual income equal to the lesser of $25,000 or twenty- five percent of the employee’s final annual salary. This benefit is paid from the date of death until the employee’s sixty- fifth birthday, subject to a minimum of ten annual payments having been made. During 2013, Messrs. Wenger, Shreiner and Roda participated in this program because each was hired before April 1, 1992. Messrs. Nugent and Rohrbaugh were hired after April 1, 1992 and were not eligible for this benefit. The estates of each of the Executives are also eligible for a payment equal to two times base salary (plus an amount equal to applicable individual income taxes due on such amounts) from Fulton pursuant to individual Death Benefit Agreements between Fulton and each Executive, should the Executive die while actively employed by Fulton. Upon the Executive’s retirement, the post retirement benefit payable upon the individual’s death is reduced to $5,000. Health, Dental and Vision Benefits Fulton offers a comprehensive benefits package for health, dental and vision insurance coverage to all full-time employees, including the Executives, and their eligible spouses and children. Fulton pays a portion of the premiums for the coverage selected, and the amount paid varies with each health, dental and vision plan. All of the Executives have elected one of the standard employee coverage plans available. Retiree Benefit Payments Generally, employees who were hired or joined Fulton as a result of a merger prior to January 1, 1998, and who retired prior to February 1, 2014 having attained age sixty-five with at least ten years of full-time service, were eligible for post-retirement benefits. Post-retirement benefits included health coverage plus death benefits. The level of coverage and the cost to the retiree depends on the retiree’s date of retirement and completed years of full-time service after attainment of age forty. As a result of their length of service with Fulton, the Executives, except Mr. Rohrbaugh, were eligible to receive these post-retirement benefits at an annual cost to the Executive similar to other employees with similar years of service. Since Mr. Nugent retired on December 31, 2013, he is eligible to receive these post-retirement benefits. Fulton does not provide post-retirement medical, dental and vision benefits to any current full- time employees of Fulton and its affiliates. Other Executive Benefits Fulton provides the Executives with a variety of perquisites and other personal benefits that the HR Committee believes are necessary to facilitate the conduct of Fulton’s business by the Executives and are reasonable and consistent with the overall compensation program for the CEO and the other Executives. In addition, these benefits enable Fulton to attract and retain talented senior officers for key positions, as well as provide the Executives and other senior officers with opportunities to be involved in their communities and directly interact with current and prospective customers of Fulton. The 2013 amounts are included in the “All Other Income” column of the “Summary Compensation Table” on page 41 of this proxy statement. The Executives are provided with company-owned automobiles, club memberships and other executive benefits consistent with their positions. Fulton does not have a direct or indirect interest in any corporate aircraft. Generally, the Executives travel on commercial aircraft, by train or in vehicles provided by Fulton. In addition, if spouses accompany an Executive when traveling on business or attending a corporate event, Fulton pays the travel and other expenses associated with certain spousal travel for the Executive. Fulton also includes spousal travel and personal vehicle use as part of the Executive’s reported W-2 income. 35 <12345678>JOB TITLE Fulton Financial Combo REVISION 10 SERIAL DATE Thursday, March 20, 2014 JOB NUMBER 263922 TYPE PAGE NO. 36 OPERATOR RaMelP Pay for Performance Fulton operates in a highly complex business environment and competes with many well-established financial services businesses. The annual cash incentive component of Fulton’s Executive compensation program involves awards that are payable if pre-established corporate and individual performance objectives are achieved. Fulton’s prior equity compensation plan, the 2004 Stock Plan, also had an award trigger based on Fulton’s performance relative to its peers that is discussed in the “Options and Restricted Shares” section above. The HR Committee believes that the Variable Plan, the 2013 Plan and the 2004 Stock Plan further Fulton’s business plan and seeks to ensure that the interests of the Executives, both short-term and long-term, are aligned with the interests of Fulton’s shareholders. The Variable Plan and the 2013 Plan align these interests by offering each Executive the opportunity to earn an annual cash incentive award upon achieving both an established corporate performance goal and certain specific individual performance goals, and the 2004 Stock Plan aligned these interests by offering the Executive the opportunity to earn longer-term compensation through stock options and restricted stock. Fulton seeks to continue its pay for performance philosophy with the 2013 Plan, which replaces the Variable Plan, with future performance based awards that are designed to better align Executive pay and Fulton’s performance. The core of Fulton’s compensation philosophy is to link pay to performance on both a short-term and long-term basis. Annual cash incentive awards are “at-risk” performance-based awards because if the ROE threshold target is not met, or scorecard performance factors are not achieved, then the amount of the annual cash incentive award bonuses may be reduced, or the Executive may not receive the award. The 2004 Stock Plan awards are “at-risk” because, in addition to the total annual awards being linked to Fulton’s TSR performance relative to the Performance Peer Group, restricted shares are subject to vesting and possible forfeiture, maintaining alignment with shareholders regardless of stock price movement, and options only increase in value if Fulton’s share price increases over the term of the option awards. With these compensation elements, Fulton seeks to reward the Executives for their contributions to Fulton’s financial and non-financial achievements. Comparing (i) salary paid in 2013, to (ii) the annual cash incentive awards paid for 2013 performance and LTI awarded in 2013, as outlined below, 49% of the Mr. Wenger’s total compensation was “at-risk”, as described herein. The 2013 percent of compensation “at-risk” for Messrs. Nugent, Shreiner, Roda and Rohrbaugh was 50%, 49%, 50% and 43%, respectively. The following table and pie charts show the mix of salary and annual cash incentive and LTI awards the Executives received in 2013, as reported in the Summary Compensation Table on page 41. Executive Salary Paid in 2013 Annual Cash Incentive Paid for 2013 LTI Awarded in 2013 1 Wenger Nugent Shreiner Roda Rohrbaugh $900,000 $540,091 $407,616 $377,044 $454,287 $503,370 $177,861 $134,235 $124,048 $151,124 $360,844 $371,591 $262,333 $252,954 $196,100 2013 Compensation Mix Chart Salary, Annual Cash Incentive and LTI Award Amounts as a Percentage of Total Wenger Nugent Shreiner Roda Rohrbaugh 20% 29% 51% 34% 16% 50% 32% 51% 34% 50% 17% 16% 24% 19% 57% Cash Incentive LTI Salary 1 Mr. Rohrbaugh’s LTI award is the restricted stock award he received in late 2012 when he commenced employment with Fulton. 36 <12345678>JOB TITLE Fulton Financial Combo REVISION 10 SERIAL DATE Thursday, March 20, 2014 JOB NUMBER 263922 TYPE PAGE NO. 37 OPERATOR RaMelP Employment Agreements Fulton believes that a company should provide reasonable severance benefits to employees. For most employees, Fulton has a policy that, in general, provides for severance benefits to be paid upon a reduction in force or position elimination. These severance arrangements are intended to provide the employees with a sense of security in making the commitment to dedicate their professional careers to the success of Fulton. With respect to the Executives and certain other employees, the severance benefits provided reflect the fact that it may be difficult for them to find comparable employment within a reasonable period of time. The levels of these benefits for the Executives in the event of change in control are discussed in footnote 6 in the “Potential Payments Upon Termination and Golden Parachute Table” on page 48 under “Termination Without Cause or for Good Reason - Upon or After a Change in Control.” On May 30, 2006, Fulton’s Board of Directors approved, with the recommendation of Fulton’s compensation committee and the compensation consultant at the time, a form of employment agreement to be used for Fulton’s senior executive officers, including its CEO, Chief Financial Officer and Senior Executive Vice Presidents (the “Employment Agreements”). The Employment Agreements for Messrs. Wenger, Nugent and Shreiner were amended as of November 12, 2008, and each continues until terminated. Messrs. Roda’s and Rohrbaugh’s Employment Agreements became effective as of August 1, 2011 and November 1, 2012, respectively, and each continues until terminated. The Employment Agreements all provide that the Executive is to receive a base salary, which is set annually, and is entitled to participate in Fulton’s incentive bonus programs as in effect from time to time. The Executive also is entitled to participate in Fulton’s retirement plans, welfare benefit plans and other benefit programs. In Mr. Nugent’s Employment Agreement, he agreed to restrictions on the sharing of confidential information as well as non-competition and non-solicitation covenants for two years following termination of employment. The Employment Agreements with Messrs. Wenger, Shreiner, Roda and Rohrbaugh contain restrictions on the sharing of confidential information as well as non-competition and non-solicitation covenants for one year following termination of employment. The non-competition and non-solicitation covenants will not apply if the Executive leaves for good reason or if the Executive’s employment is terminated without cause, as defined in the Employment Agreements. 1 These provisions of the Employment Agreements are further outlined in the “Potential Payments Upon Termination and Golden Parachute Table” section on page 48. Messrs. Roda’s and Rohrbaugh’s Employment Agreements are similar to the Employment Agreements Fulton executed with the other Executives effective as of November 12, 2008, except that the prior Employment Agreements provide for an excise tax gross-up for taxes applicable to termination payments as a result of the Executive’s termination. The Employment Agreements executed after 2011 provide that, in the event a payment to Mr. Roda, Mr. Rohrbaugh, or another newly hired Executive, in connection with their termination of employment, would result in the imposition of an excise tax under Section 4999 of the Tax Code, such payment would be retroactively reduced, if necessary, to the extent required to avoid such excise tax imposition and, if any portion of the amount payable the Executive is determined to be non-deductible pursuant to the regulations promulgated under Section 280G of the Tax Code, Fulton would be required to pay to the Executive only the amount determined to be deductible under Section 280G. 1 “Cause” shall mean the following: (a) Executive shall have committed an act of dishonesty constituting a felony and resulting or intending to result directly or indirectly in gain or personal enrichment at the expense of Fulton; (b) Executive’s use of alcohol or other drugs which interferes with the performance by the Executive of Executive’s duties; (c) Executive shall have deliberately and intentionally refused or otherwise failed (for reasons other than incapacity due to accident or physical or mental illness) to perform Executive’s duties to Fulton, with such refusal or failure continuing for a period of at least 30 consecutive days following the receipt by Executive of written notice from Fulton setting forth in detail the facts upon which Fulton relies in concluding that Executive has deliberately and intentionally refused or failed to perform such duties; or (d) Executive’s conduct that brings public discredit on or injures the reputation of Fulton, in Fulton’s reasonable opinion. 37 <12345678>JOB TITLE Fulton Financial Combo REVISION 10 SERIAL DATE Thursday, March 20, 2014 JOB NUMBER 263922 TYPE PAGE NO. 38 OPERATOR RaMelP Other Compensation Elements 162(m) and Tax Consequences Although Fulton takes into account deductibility of compensation, tax deductibility is not a primary objective of its compensation programs. Section 162(m) of the Tax Code disallows the deductibility by Fulton of any compensation over $1 million per year paid to certain employees and the Executives unless certain criteria are satisfied. 409A Changes Section 409A of the Tax Code, effective January 1, 2005, defines what constitutes a “nonqualified deferred compensation plan,” conditions income tax deferrals under such plans on their compliance with certain distribution, acceleration, election and funding restrictions, and also imposes excise tax and interest penalties for noncompliance. In order to preserve intended tax deferrals and to avoid the imposition of excise taxes and interest penalties, Fulton has identified all such nonqualified deferred compensation plans it maintains and to the extent necessary, timely amended each, to meet the Section 409A requirements, and to alter the administration of each, where necessary, to comply with Section 409A. With respect to the Executives, in particular, the deferred compensation agreements and the Employment Agreements and other agreements summarized above have been amended and restated as of November 12, 2008 for Section 409A compliance, except in the case of Messrs. Roda and Rohrbaugh who have Employment Agreements originally prepared to comply with Section 409A. Discussion of Option and Restricted Stock Grant Timing Fulton does not have a formal written policy as to when options and restricted shares are granted during the year, but in March 2013, Fulton awarded options and restricted stock to eligible participants in the 2004 Stock Plan with a grant date of April 1, 2013, so that the LTI award could be considered by the HR Committee at the same time as the VCP awards. In years prior to 2012, the HR Committee and Board of Directors historically met in June of each year to consider the award of options and restricted stock to the Executives and other officers with a July 1 grant date. Fulton does not back date options or grant options retroactively, and does not coordinate option grants with the release of positive or negative corporate news. The 2004 Stock Plan, and the 2013 Plan which replaces the 2004 Stock Plan, do not permit the award of discounted options, the reload of stock options or the re- pricing of stock options. Pursuant to the terms of the 2004 Stock Plan, option prices are determined based on the average of the high and low trading price on the grant date. Under the 2013 Plan, an option exercise price shall not be less than 100% of the fair market value of Fulton’s stock on the date of grant. The 2013 Plan defines fair market value to be the closing price on the date of grant, or if no sales of shares were reported on any stock exchange or quoted on any interdealer quotation system on that day, the price on the next preceding trading day on which such price was quoted. Stock Hedging Policy and Stock Trading Procedures Fulton has adopted an Insider Trading Policy and Compliance Procedures to facilitate securities law compliance in a number of areas. Pursuant to this policy, Fulton requires that all directors, officers, and employees of Fulton and its affiliates adhere to certain procedures when trading in Fulton common stock or any other security issued by Fulton or its subsidiaries. Among other requirements, directors, officers and employees of Fulton and its subsidiaries that know of material, non-public information about Fulton may not (i) buy or sell Fulton stock while the information remains non-public or (ii) disclose the information to relatives, friends or any other person. In addition, the Executives and directors of Fulton, and senior officers of Fulton’s banking subsidiaries, are prohibited from engaging in speculative transactions involving Fulton’s securities. This prohibition encompasses “short sales” and “puts” along with other trading that anticipates a decline in price. These instruments can involve “a bet against Fulton,” raise issues about the insider knowledge of the person involved or create a conflict of interest and are therefore prohibited by Fulton’s policy. Stock Ownership Guidelines Fulton believes that broad-based stock ownership by directors, officers and employees is an effective method to align the interests of its directors, officers and employees with the interests of its shareholders. In 2009, Fulton first adopted Governance Guidelines that included a formal share ownership guideline for directors and the Executives. The director ownership guidelines were updated in September 2013, and each director is presently encouraged to own at least $175,000 of Fulton common stock, which is five times the annual director cash retainer, within the later of five full calendar years of first becoming a director, or five full calendar years after the guideline was changed. A similar guideline exists for the Executives. The guideline for Executives was last updated and approved in 2013, with a recommended amount of share ownership calculated as a multiple of the Executive’s base salary, depending upon position. Currently the CEO, President, Chief Financial Officer and the other two Executives are encouraged to own Fulton stock with a value of at least 2.0, 1.5, 1.5 and 1.0, times their base salary, respectively. Compliance with the stock ownership guidelines is determined annually based on stock ownership and the closing stock 38 <12345678>JOB TITLE Fulton Financial Combo REVISION 10 SERIAL DATE Thursday, March 20, 2014 JOB NUMBER 263922 TYPE PAGE NO. 39 OPERATOR RaMelP price as of December 31 of the prior year. Ownership excludes stock options and unvested restricted stock, but includes all other shares beneficially owned and reported on an individual’s Form 3, Form 4 or Form 5 filed with the SEC, including shares held in retirement accounts, indirect ownership and jointly held shares. Once an Executive or director has achieved the ownership guideline, he or she remains in compliance with the ownership guideline regardless of changes in base salary or stock price, as long as he or she retains the same number of shares or a higher amount. However, if an Executive is promoted to CEO, President or CFO with a base salary increase, he or she would be allowed a period of five full calendar years during which the Executive could satisfy the new stock ownership requirement for the new position and base salary. As described in more detail in footnote 4 on page 13, except for Mr. Rohrbaugh, all of the Executives have satisfied the stock ownership guidelines for 2013. Mr. Rohrbaugh has until December 31, 2018, to satisfy the stock ownership guidelines for his position. Management Succession The topic of management succession is discussed and reviewed at least annually at Fulton. At the December 2013 meeting of the Executive Committee, senior officers in Fulton’s Human Resources Department discussed and reviewed the succession planning processes used by management to identify successors for each Executive at Fulton. Clawback Policies Compensation recovery policies, or “clawbacks,” began to be used with the enactment of the Sarbanes-Oxley Act in 2002, which required that, in the event of any restatement based on executive misconduct, public companies must recoup incentives paid to the company’s CEO and CFO within 12 months preceding the restatement. Fulton’s CEO and CFO are currently subject to the Sarbanes-Oxley clawback provision which is set forth in Section 304 of the Sarbanes-Oxley Act, and provides that, if an issuer “is required to prepare an accounting restatement due to material noncompliance of the issuer, as a result of misconduct, with any financial reporting requirement under the securities laws,” the CEO and CFO shall reimburse the issuer for any bonus or other incentive-based or equity-based compensation received, and any profits realized from the sale of the securities of the issuer, during the year following issuance of the original financial report. In addition, the HR Committee has discussed and is in the process of implementing clawback policies and procedures in various compensation plans and agreements. This included inserting a clawback provision in Mr. Rohrbaugh’s Employment Agreement and new senior officer employment agreements. In December 2012, the HR Committee approved a Compensation Recovery Clawback Provision and a Severance and Golden Parachute Policy for officers, including the Executives. The HR Committee also has approved a broad general clawback provision in the 2013 Plan approved by shareholders at the 2013 Annual Meeting. Under the 2013 Plan, all cash and equity awards under the 2013 Plan are subject to such deductions and clawback as may be required to be made pursuant to any law, government regulation or stock exchange listing requirement, or any policy adopted by Fulton whether or not pursuant to any such law, government regulation or stock exchange listing requirement. Finally, the Dodd-Frank Wall Street Reform and Consumer Protection Act mandates that the SEC adopt rules that require publicly traded companies to adopt a formal clawback policy. Pending final clawback rules from the SEC, the HR Committee will continue to monitor and consider the use of clawbacks in any new or amended compensation agreements and plans with the Executives. 39 <12345678>JOB TITLE Fulton Financial Combo REVISION 10 SERIAL DATE Thursday, March 20, 2014 JOB NUMBER 263922 TYPE PAGE NO. 40 OPERATOR RaMelP Human Resources Committee Report The HR Committee reviewed and discussed the foregoing Compensation Discussion and Analysis with management at their February 25, 2014 and March 17, 2014 meetings and, based on the review and discussions, the HR Committee recommended to the Board of Directors that the Compensation Discussion and Analysis above be incorporated in Fulton’s Annual Report on Form 10-K for the year ended December 31, 2013, and the 2014 annual proxy statement, as applicable. As described above in the Compensation Discussion and Analysis section, in performing its compensation risk evaluation, the HR Committee met with the Chief Risk Officer regarding the material risks facing Fulton, and consulted with human resources personnel about Fulton’s various compensation plans. Based on the foregoing review, the HR Committee concluded that Fulton’s compensation policies and practices in 2013 did not create risks that are reasonably likely to have a material adverse effect on Fulton. Human Resources Committee Craig A. Dally, Chair Patrick J. Freer, Vice Chair Joe N. Ballard Denise L. Devine George W. Hodges 40 <12345678>JOB TITLE Fulton Financial Combo REVISION 10 SERIAL DATE Thursday, March 20, 2014 JOB NUMBER 263922 TYPE PAGE NO. 41 OPERATOR RaMelP SUMMARY COMPENSATION TABLE Name and Principal Position 1 Year Salary 2 Bonus 3 Stock Awards 4 5 Option Awards 6 Non-Equity Incentive Plan Compensation ($) ($) ($) ($) ($) E. Philip Wenger 9 2013 900,000 Chairman and Chief Executive Officer of Fulton 2012 598,077 2011 501,282 Charles J. Nugent 10 2013 540,091 Senior Executive Vice President and Chief Financial Officer of Fulton 2012 527,308 2011 516,214 James E. Shreiner 2013 407,616 Senior Executive Vice President of Fulton 2012 393,269 2011 364,431 Craig A. Roda 2013 377,044 Senior Executive Vice President of Fulton 2012 368,116 2011 351,395 0 0 0 0 0 0 0 0 0 0 0 0 360,844 250,646 230,003 371,591 258,114 423,007 262,333 182,223 398,005 252,954 175,708 0 0 0 0 0 0 0 0 0 0 0 503,370 360,640 322,324 177,861 317,967 331,926 134,235 232,029 228,498 124,048 221,974 57,882 33,512 225,947 Philmer H. Rohrbaugh 11 2013 454,286 150,000 0 Chief Risk Officer and Senior Executive Vice President of Fulton 2012 64,040 2011 - 0 - 196,100 - 0 0 - 151,124 0 - Change in Pension Value and Non- qualified Deferred Compensation Earnings 7 ($) 0 0 0 0 0 0 0 0 0 0 0 0 0 0 - All Other Compensation 8 Total ($) ($) 147,198 1,911,412 118,380 1,327,743 94,456 1,148,065 128,060 1,217,603 106,403 1,209,792 88,280 1,359,427 77,938 882,122 78,483 886,004 63,722 1,054,656 76,856 830,902 77,782 843,580 67,550 736,286 47,303 802,713 2,790 262,930 - - 1 Titles and positions listed are as of Fulton’s fiscal year-end of 12/31/2013. 2 Represents the 2011, 2012 and 2013 base salary amounts paid to and earned by each of the Executives named in this table. On March 17, 2014, upon the recommendation of the HR Committee, the Board approved 2014 annual base salaries for Messrs. Wenger, Shreiner, Roda and Rohrbaugh of $924,750, $422,303, $390,630, and $468,733, respectively. These changes to annual base salary are effective April 1, 2014. 3 The HR Committee did not award any bonus payments in 2011, 2012 or 2013 to the Executives, except for the bonus paid to Mr. Rohrbaugh paid in January 2013 in connection with his acceptance of employment with Fulton. 4 Amounts represent the grant date fair values of restricted stock awards. There were no forfeitures of restricted stock during 2011, 2012 and 2013 by any of the Executives. The per-share fair values of restricted stock awards are equal to the average of the high and low trading prices of Fulton stock on the date the shares are awarded. The per-share fair values of shares awarded on July 1, 2011, was $10.88. The per-share fair value of shares awarded on August 8, 2011, March 30, 2012, since April 1, 2012 was not a trading day, and April 1, 2013, were $8.92, $10.475 and $11.58, respectively. The number of restricted stock shares awarded to Messrs. Wenger, Nugent, Shreiner and Roda on July 1, 2011 was 21,140, 18,383, 16,085, and 5,320, respectively. On August 8, 2011, 25,000 restricted stock shares were awarded to each of Mr. Nugent and to Mr. Shreiner. The number of restricted stock shares awarded to Messrs. Wenger, Nugent, Shreiner and Roda on April 1, 2012 was 23,928, 24,641, 17,396 and 16,774, respectively. The number of restricted stock shares awarded to Messrs. Wenger, Nugent, Shreiner and Roda on April 1, 2013 was 31,161, 32,089, 22,654 and 21,844, respectively. 41 <12345678>JOB TITLE Fulton Financial Combo REVISION 10 SERIAL DATE Thursday, March 20, 2014 JOB NUMBER 263922 TYPE PAGE NO. 42 OPERATOR RaMelP 5 The HR Committee did not award Mr. Rohrbaugh an equity award in 2013 because he received a restricted stock award of 20,000 restricted shares and the per-share fair values of shares awarded on November 1, 2012, was $9.805 per share. 6 Amounts represent the grant date fair values of the options. Except for Mr. Roda, Fulton did not award options in 2011, 2012 and 2013 to the Executives and there were no forfeitures of options during 2011, 2012 or 2013 by any of the Executives. The 2001 grant expired in 2011, including the following number of options by Executive: Wenger – 0; Nugent – 35,815; Shreiner – 20,260; and Roda – 14,109. The 2002 grant expired in 2012, including the following number of options by Executive: Wenger – 19,898; Nugent – 35,742; Shreiner – 21,706; and Roda – 14,471. The 2003 grant expired in 2013, including the following number of options by Executive: Wenger – 20,673; Nugent – 35,832; Shreiner – 20,673; and Roda – 16,538. The per-option fair value of options granted in 2011 was $2.10. Discussion of the significant assumptions used to determine these fair values can be found in Note M “Shareholders’ Equity and Stock-Based Compensation Plans,” which starts on page 95 in the Notes to Consolidated Financial Statements, located in the Fulton Financial Corporation Annual Report on Form 10-K for the year ended December 31, 2011. In 2011, Mr. Roda was the only Executive to receive options, and the number of shares under the 2011 options granted to Mr. Roda was 15,958. 7 Fulton has determined that the Executives did not receive above-market earnings on their nonqualified deferred compensation accounts, and therefore, such earnings are not required to be reported in this table column for 2011, 2012 or 2013. All participants in the nonqualified deferred compensation plan, which also includes senior managers other than the Executives, are permitted to select various investment options listed in footnote 2 of the “Nonqualified Deferred Compensation Table” on page 47. The rate of return for an individual participant’s account is based on the performance of the various investment options selected by each participant. 42 <12345678>JOB TITLE Fulton Financial Combo REVISION 10 SERIAL DATE Thursday, March 20, 2014 JOB NUMBER 263922 TYPE PAGE NO. 43 OPERATOR RaMelP 8 All Other Compensation includes Fulton’s payments for qualified profit sharing plan contributions, qualified employer matching contributions, nonqualified profit sharing plan contributions, nonqualified employer matching contributions, club membership fees, use of company provided automobiles, certain travel expenses where spouses traveled with the Executives and attended Fulton events, plus other personal benefits received by the Executive. The methodology used to calculate the aggregate incremental cost of perquisites and other personal benefits was to use the amount disbursed for the items. Where a benefit involved assets owned by Fulton, an estimate of the incremental cost was used. For 2011, amounts for vehicles include the cost of related items attributed to the company provided vehicle including depreciation, gasoline, and other expenses. For 2012 and 2013, the amounts are the personal use or other financial benefit the Executive received for an automobile as reported on their W-2. The “Other Perquisites” column includes personal travel, employee service awards paid to all employees for achieving certain years of service and other small benefits that individually are less than ten percent of all perquisites received by the Executive. The breakdown and total of all other compensation for each Executive for 2011, 2012 and 2013 is shown in the following table: Name Year Qualified Retirement Plan Company Contribution Nonqualified Retirement Plan Company Contribution Club Memberships Automobile Perquisites Other Perquisites Total All Other Compensation E. Philip Wenger Charles J. Nugent James E. Shreiner Craig A. Roda Philmer H. Rohrbaugh ($) 25,500 25,000 24,500 25,500 25,000 24,500 25,500 25,000 24,500 25,500 25,000 24,500 0 0 - 2013 2012 2011 2013 2012 2011 2013 2012 2011 2013 2012 2011 2013 2012 2011 ($) 100,564 67,040 33,908 60,358 60,923 36,733 38,504 37,177 17,787 34,438 34,406 15,125 0 0 - ($) 16,978 16,759 16,001 12,061 12,588 12,993 12,894 12,498 11,959 12,958 14,259 14,201 45,055 0 - ($) 2,921 2,945 17,730 28,502 3,456 12,858 1,038 2,836 8,021 3,113 3,357 7,246 0 0 - ($) 1,235 6,636 2,317 1,639 4,436 1,196 2.033 972 1,455 847 760 6,478 2,248 2,790 - ($) 147,198 118,380 94,456 128,060 106,403 88,280 77,938 78,483 63,722 76,856 77,782 67,550 47,303 2,790 - 9 Effective January 1, 2013, Mr. Wenger was promoted and became Fulton’s Chairman, President and Chief Executive Officer following the retirement of R. Scott Smith, Jr. 10 Effective December 31, 2013, Mr. Nugent retired as Fulton’s Chief Financial Officer. Effective January 1, 2014, Patrick S. Barrett became Fulton’s Chief Financial Officer following Mr. Nugent’s retirement. 11 Mr. Rohrbaugh first became an Executive officer effective November 1, 2012, and pursuant to SEC rules, compensation for 2011 is not included. 43 <12345678> JOB TITLE Fulton Financial Combo REVISION 10 SERIAL DATE Thursday, March 20, 2014 JOB NUMBER 263922 TYPE PAGE NO. 44 OPERATOR RaMelP GRANTS OF PLAN-BASED AWARDS TABLE Name Grant Date Approval Date 1 Estimated Future or Possible Payouts Under Non-Equity Incentive Plan Awards 2 Estimated Future or Possible Payouts Under Equity Incentive Plan Awards Threshold Target Maximum Threshold Target Maximum All Other Stock Awards: Number of Shares of Stock or Units 3 All Other Option Awards: Number of Securities Underlying Options Exercise or Base Price of Option Awards Closing Price on Grant Date 4 Grant Date Fair Value of Stock and Option Awards 5 ($) ($) ($) (#) (#) (#) (#) (#) ($/Sh) ($/Sh) ($) E. Philip Wenger 4/1/2013 3/18/2013 - - - E. Philip Wenger - 3/18/2013 382,500 765,000 1,530,000 Charles J. Nugent 4/1/2013 3/18/2013 - - - Charles J. Nugent - 3/18/2013 135,153 270,306 540,611 James E. Shreiner 4/1/2013 3/18/2013 - - - James E. Shreiner - 3/18/2013 102,002 204,004 408,008 Craig A. Roda 4/1/2013 3/18/2013 - - - Craig A. Roda - 3/18/2013 94,261 188,522 377,044 Philmer H. Rohrbaugh 6 4/1/2013 3/18/2013 - - - Philmer H. Rohrbaugh - 3/18/2013 113,627 227,254 454,507 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 11.56 360,844 - - 11.56 371,591 - - 11.56 262,333 - - 11.56 252,954 - 11.56 - - 0 - 1 Fulton approved the restricted stock awards at the March 2013 HR Committee and Board meetings, with a grant date of April 1, 2013. The low trading, high trading, closing, and average of high/low trading prices of Fulton stock on April 1, 2013, were $11.46, $11.70, $11.56 and $11.58, respectively. Fulton also approved a non-equity incentive plan award under the Variable Plan on March 18, 2013. 2 The Executives were eligible to receive an annual cash incentive award for 2013 pursuant to the Variable Plan, or in the case of the CEO, the 2013 Plan, that is discussed on page 29. 3 The restricted shares awarded pursuant to the 2004 Stock Plan on April 1, 2013 will cliff vest (100%) three years after the date of the grant. 4 The grant date closing price of $11.56 is the closing price on April 1, 2013. Closing price of Fulton stock was $11.59 on the March 18, 2013 Board of Director approval date of all the 2013 equity awards. 5 Grant date fair value of restricted shares awarded on April 1, 2013 was $11.58 per share, which is the average high and low trading price on April 1, 2013. 6 The HR Committee did not award Mr. Rohrbaugh restricted shares on April 1, 2013, with the other Executives, because he received an award of restricted stock when he was hired in late 2012. 44 <12345678> JOB TITLE Fulton Financial Combo REVISION 10 SERIAL DATE Thursday, March 20, 2014 JOB NUMBER 263922 TYPE PAGE NO. 45 OPERATOR RaMelP OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END TABLE Option Awards 1 Stock Awards 2 Name Number of Securities Underlying Unexercised Options (#) Exercisable Number of Securities Underlying Unexercised Options (#) Unexercisable Option Exercise Price ($) Option Expiration Date Number of Shares or Units of Stock That Have Not Vested (#) 3 Market Value of Shares or Units of Stock That Have Not Vested ($) 4 Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#) Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($) E. Philip Wenger E. Philip Wenger E. Philip Wenger E. Philip Wenger E. Philip Wenger E. Philip Wenger Charles J. Nugent Charles J. Nugent Charles J. Nugent Charles J. Nugent Charles J. Nugent Charles J. Nugent James E. Shreiner James E. Shreiner James E. Shreiner James E. Shreiner James E. Shreiner James E. Shreiner Craig A. Roda Craig A. Roda Craig A. Roda Craig A. Roda Craig A. Roda Craig A. Roda Craig A. Roda Philmer H. Rohrbaugh 45,939 40,687 24,000 24,000 10,296 - 63,001 56,437 36,000 36,000 15,444 - 45,939 40,687 24,000 24,000 10,296 - 28,876 21,000 16,000 18,000 7,722 10,636 - - 0 0 0 0 0 - 0 0 0 0 0 - 0 0 0 0 0 - 0 0 0 0 0 5,319 - - 0 0 0 0 0 - 0 0 0 0 0 - 0 0 0 0 0 - 0 0 0 0 0 0 - - 15.38 6/30/2014 17.12 6/30/2015 15.89 6/30/2016 14.415 6/30/2017 9.965 6/30/2018 - - - - - - - - - - - - 79,555 1,041,375 15.38 6/30/2014 17.12 6/30/2015 15.89 6/30/2016 14.415 6/30/2017 9.965 6/30/2018 - - - - - - - - - - - - 94,631 1,238,720 15.38 6/30/2014 17.12 6/30/2015 15.89 6/30/2016 14.415 6/30/2017 9.965 6/30/2018 - - - - - - - - - - - - 77,951 1,020,379 15.38 6/30/2014 17.12 6/30/2015 15.89 6/30/2016 14.415 6/30/2017 9.965 6/30/2018 10.88 6/30/2021 - - - - - - - - - - - - - - - - 45,617 597,127 20,581 269,405 - - - - - 0 - - - - - 0 - - - - - 0 - - - - - - 0 0 - - - - - 0 - - - - - 0 - - - - - 0 - - - - - - 0 0 45 <12345678>JOB TITLE Fulton Financial Combo REVISION 10 SERIAL DATE Thursday, March 20, 2014 JOB NUMBER 263922 TYPE PAGE NO. 46 OPERATOR RaMelP 1 The number of securities underlying the options and the option exercise price has been adjusted for stock dividends and stock splits, if any, that have occurred since the option grant date. 2 Restricted stock awards listed were granted July 1, 2011, August 8, 2011, April 1, 2012 and April 1, 2013. Pursuant to the 2004 Stock Plan, dividends paid by Fulton on restricted stock awards are reinvested and subject to the same restrictions as the original award. Therefore, the number of securities underlying the restricted stock awards has been adjusted as of December 31, 2013 for dividends that have occurred since the grant date. As of December 31, 2013, the dividends reflected in the awards to Messrs. Wenger, Nugent, Shreiner, Roda and Rohrbaugh were: 3,326, 4,577, 3,912, 1,679, and 581, respectively. 3 The restricted stock awards cliff vest (100%) three years from the date of the original grant. Shares listed are as of December 31, 2013. Mr. Nugent’s unvested restricted stock awards vested upon his retirement on December 31, 2013. 4 Market value of restricted shares is based on the December 31, 2013 closing price of $13.09. OPTION EXERCISES AND STOCK VESTED TABLE 1 Option Awards Stock Awards Number of Shares Acquired on Exercise (#) 0 0 0 0 0 Value Realized on Exercise ($) 0 0 0 0 0 Number of Shares Acquired on Vesting (#) 25,248 125,730 26,031 11,800 0 Value Realized on Vesting 2 ($) 293,760 1,600,003 302,481 137,293 0 Name E. Philip Wenger Charles J. Nugent James E. Shreiner Craig A. Roda Philmer H. Rohrbaugh 1 Except for Mr. Rohrbaugh, all of the Executives had restricted stock that vested during 2013. 2 Shares that vested on April 1, 2013 for Messrs. Nugent and Shreiner were valued at $11.56 per share, the average of the high and low trading price on April 1, 2013. Shares that vested on July 1, 2013 for Messrs. Wenger, Nugent, Shreiner and Roda were valued at $11.635 per share, the average of the high and low trading price on July 1, 2013. Mr. Nugent retired on December 31, 2013, and 94,631 of his share vested upon retirement and were valued at $13.13 per share, the average of the high and low trading price on December 31, 2013. 46 <12345678>JOB TITLE Fulton Financial Combo REVISION 10 SERIAL DATE Thursday, March 20, 2014 JOB NUMBER 263922 TYPE PAGE NO. 47 OPERATOR RaMelP PENSION BENEFITS TABLE 1 Name Plan Name Number of Years Credited Service Present Value of Accumulated Benefit Payments During Last Fiscal Year (#) ($) ($) E. Philip Wenger Charles J. Nugent James E. Shreiner Craig A. Roda Philmer H. Rohrbaugh NA NA NA NA NA - - - - - - - - - - - - - - - 1 In 2013, none of the Executives participated in or had an account balance in any qualified or nonqualified defined benefit plans sponsored by Fulton or any Fulton affiliate bank. NONQUALIFIED DEFERRED COMPENSATION TABLE Name Executive Contributions in Last FY Registrant Contributions in Last FY 1 Aggregate Earnings in Last FY 2 Aggregate Withdrawals/ Distributions Aggregate Balance at Last FYE 3 E. Philip Wenger Charles J. Nugent James E. Shreiner Craig A. Roda Philmer H. Rohrbaugh ($) 50,282 30,179 13,436 15,026 0 ($) 100,564 60,358 38,504 34,438 0 ($) 88,220 227,891 64,377 23,786 0 ($) 0 0 0 0 0 ($) 565,184 1,007,678 328,008 199,826 0 1 Fulton’s contributions toward nonqualified deferred compensation for each of the Executives are listed in this column. See the table contained in footnote 8 of the “Summary Compensation Table” on page 41. Amounts listed as registrant contributions in this Nonqualified Deferred Compensation Table are also included as part of the Executives’ “Total All Other Compensation” in the Summary Compensation Table. 2013 contributions were credited to each of the Executive’s accounts in early 2014. 2 The Executives direct the investment of their nonqualified deferred compensation contributions into various standard investment options offered from a set menu of investment funds. In 2013, the available investment funds included Goldman Sachs Fin’l Institutional Money Market Fund #474 (FSMXX), Goldman Sachs Fin’l Square Government Fund #465 (FGTXX), Goldman Sachs Core Fixed Income Institutional (GSFIX), Federated Total Return Bond Fund (FTRBX), Vanguard Windsor II - Admiral Shares (VWNAX), T. Rowe Price Growth Stock (PRGFX), Vanguard 500 Index Fund (VFINX), Goldman Sachs Growth Opportunities I (GGOIX), Vanguard Small Cap Index Blend (NAESX), Vanguard Small Cap Growth Index Fund (VSGAX) and Fidelity Adv Diversified International I (FDVIX). The Executives may change their individual elections by completing a new election form. A discussion of the Deferred Compensation Agreements and Defined Benefit Pension Plans is included on page 35. 3 Balances include the 2013 contributions made by Fulton and credited to the Executives’ accounts in early 2014. 47 <12345678>JOB TITLE Fulton Financial Combo REVISION 10 SERIAL DATE Thursday, March 20, 2014 JOB NUMBER 263922 TYPE PAGE NO. 48 OPERATOR RaMelP POTENTIAL PAYMENTS UPON TERMINATION AND GOLDEN PARACHUTE COMPENSATION TABLE Name Cash ($) Equity ($) Pension/NQDC ($) Perquisites/ Benefits ($) Tax Reimbursement ($) Other ($) Total ($) Voluntary Termination 1 or Termination for Cause as of December 31, 2013 2 3 E. Philip Wenger James E. Shreiner Craig A. Roda Philmer H. Rohrbaugh 0 0 0 0 32,175 32,175 47,637 0 0 0 0 0 0 0 0 0 0 0 0 0 Termination Without Cause or for Good Reason – Before a Change in Control as of December 31, 2013 4 5 E. Philip Wenger James E. Shreiner Craig A. Roda 900,000 411,000 380,175 Philmer H. Rohrbaugh 456,188 32,175 32,175 47,637 0 0 0 0 0 12,000 12,000 12,000 12,000 0 0 0 0 Termination Without Cause or for Good Reason - Upon or After a Change in Control as of December 31, 2013 6 7 8 9 E. Philip Wenger 2,806,740 1,073,550 James E. Shreiner 1,286,058 1,052,554 Craig A. Roda 982,961 644,764 Philmer H. Rohrbaugh 1,087,039 269,405 $280,674 $128,606 $98,296 $108,704 Termination Due to Retirement as of December 31, 2013 10 11 E. Philip Wenger Charles J. Nugent 12 James E. Shreiner Craig A. Roda Philmer H. Rohrbaugh 0 0 0 0 0 1,073,550 1,270,895 1,052,554 644,764 269,405 Termination Due to Disability as of December 31, 2013 13 14 E. Philip Wenger 990,000 1,073,550 James E. Shreiner 452,100 1,052,554 Craig A. Roda 418,193 644,764 Philmer H. Rohrbaugh 501,807 269,405 Termination Due to Death as of December 31, 2013 15 16 17 E. Philip Wenger 1,800,000 1,073,550 James E. Shreiner 822,000 1,052,554 Craig A. Roda 760,350 644,764 Philmer H. Rohrbaugh 912,376 269,405 0 0 0 0 0 0 0 0 0 0 0 0 0 74,000 74,000 74,000 74,000 2,575 2,025 2,475 2,650 1,625 18,000 18,000 18,000 18,000 0 0 0 0 544,875 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 32,175 32,175 47,637 0 944,175 455,175 439,812 468,188 4,779,839 2,541,217 1,800,021 1,539,148 1,076,125 1,272,920 1,055,029 647,414 271,030 2,081,550 1,522,654 1,080,956 789,212 1,154,209 250,000 4,277,759 527,150 487,557 585,041 250,000 2,651,704 250,000 2,142,671 0 1,766,822 1 Voluntary Termination. In the event an Executive’s employment is voluntarily terminated by the Executive other than for “Good Reason,” which is defined in the Employment Agreements and described in footnote 4 below, Fulton’s obligations are limited to the payment of the Executive’s base salary through the effective date of the Executive’s termination date, together with any applicable expense reimbursements and all accrued and unpaid benefits and vested benefits in accordance with the applicable employee benefit plans. No other payments are required, and under the 2004 Stock Plan, unexercised stock options and unvested restricted stock grants are forfeited by the Executive as a result of voluntary termination. 48 <12345678>JOB TITLE Fulton Financial Combo REVISION 10 SERIAL DATE Thursday, March 20, 2014 JOB NUMBER 263922 TYPE PAGE NO. 49 OPERATOR RaMelP 2 Termination for Cause. If an Executive’s employment is terminated for “Cause,” Fulton is not obligated to make any further payments to the Executive under the Employment Agreement, other than amounts (including salary, expense reimbursement, etc.) accrued under the Employment Agreement as of the date of such termination. Under the 2004 Stock Plan, unexercised stock options and unvested restricted stock grants are forfeited by an Executive terminated for Cause, which is defined in the Employment Agreement to include an act of dishonesty constituting a felony, use of alcohol or other drugs which interferes with the performance by the Executive of the Executive’s duties, intentional refusal by the Executive to perform duties, or conduct that brings public discredit on, or injures the reputation of, Fulton. 3 The value listed under Equity is the value of the Executive’s vested and in the money stock options as of December 31, 2013 based on Fulton’s closing price of $13.09. 4 Termination Without Cause or for Good Reason - Before a Change in Control. If an Executive terminates the Executive’s employment for Good Reason or his employment is terminated by Fulton “Without Cause,” the Executive is entitled to receive his base salary for a specified period of time and, in the sole discretion of Fulton, the Executive also may receive an additional cash bonus. For the Executives in this section, that period is one year. The Executive also would continue to participate in employee health and other benefit plans for which the Executive is eligible during the specified time period. If the Executive is not eligible to continue to participate in any employee benefit plan, the Executive will be compensated on an annual basis for such plan at Fulton’s cost plus any permitted gross up for any taxes applicable thereto. Under the 2004 Stock Plan, unexercised stock options and unvested restricted stock grants are forfeited by an Executive terminated Without Cause or for Good Reason. Good Reason is defined in the Employment Agreement to include a breach by Fulton of its material obligations without remedy, a significant change in the Executive’s authority, duties, compensation or benefits, or a relocation of the Executive outside a certain distance from where he previously was based. Without Cause is defined in the Employment Agreement to include any reason other than for Cause. 5 Cash amount listed for each Executive includes a severance payment based on the Executive’s 2013 base salary times the applicable multiple. The amounts listed under Cash assume no discretionary bonus was paid to the Executives by Fulton. Equity amounts listed are the value of vested stock options as of December 31, 2013. Perquisites/Benefits include a monthly estimate of $1,000 for the value of health and benefit expenses paid by Fulton for the severance period attributed to each Executive. 6 Termination Without Cause or for Good Reason - Upon or After a Change in Control. The Executives and other employees have contributed to the building of Fulton into the successful enterprise it is today, and Fulton believes that it is important to protect them in the event of a “Change in Control.” Further, Fulton believes that the interests of shareholders will be best served if the interests of the Executives are aligned with them, and providing Change in Control benefits should eliminate or mitigate any reluctance of the Executives to pursue potential Change in Control transactions that may be in the best interests of shareholders. Based on a review in 2006 by the Hay Group, Fulton’s Compensation Consultant at that time, of typical Change in Control provisions offered by Fulton’s peers and the recommendation of the Hay Group, Fulton determined that the potential Change in Control benefits it offers the Executives are typical for the financial services industry and reasonable relative to the overall value of Fulton. A Change in Control is defined in the Employment Agreements to include the acquisition of the beneficial ownership of more than fifty percent of the total fair market value or voting power of the stock of Fulton by any one person or group of persons acting in concert, a change in the composition of the Board of Fulton during any period of twelve consecutive months such that a majority of the Board is replaced by directors whose appointment was not endorsed by a majority of the Board before such appointment or election, the acquisition by any person or group of persons acting in concert during any twelve month period of thirty percent or more of the total voting power of the stock of Fulton or of forty percent or more of the total assets (on a gross fair value basis) of Fulton. If, during the period beginning ninety days before a Change in Control and ending two years after such Change in Control, an Executive is terminated by Fulton Without Cause or an Executive resigns for Good Reason, Fulton is required to pay the Executive a multiple of the sum of the Executive’s: (i) annual base salary immediately before the Change in Control; and (ii) the highest annual cash bonus or other incentive compensation awarded to the Executive over the prior three years. The Executive also is entitled to receive: (i) an amount equal to that portion of Fulton’s retirement plan, 401(k) plan or deferred compensation plan contributions for the Executive which were not vested, plus the amount of any federal, state or local income taxes due on such amount; (ii) payment of up to $10,000 for outplacement services; and (iii) continuation of other employee benefits to the same extent provided to employees generally for the multiple period. The HR Committee set the Change in Control payment multiple at three years in the Employment Agreements for Mr. Nugent because this was the multiple used in his prior severance agreement. For the other Executives, the HR Committee used a multiple of two years based on the recommendation of the compensation consultant at the time each agreement was approved. 49 <12345678> JOB TITLE Fulton Financial Combo REVISION 10 SERIAL DATE Thursday, March 20, 2014 JOB NUMBER 263922 TYPE PAGE NO. 50 OPERATOR RaMelP Except for Mr. Roda’s and Mr. Rohbaugh’s Employment Agreements, the other Employment Agreements provide that, in the event any payment or distribution by Fulton to or for the benefit of an Executive would be subject to excise tax as a Golden Parachute, the Executive will be entitled to receive an additional payment equal to the total excise tax imposed. The determination that a “gross up” payment is required and its amount is to be made by a tax adviser, and Fulton is responsible for the adviser’s fees and expenses. Fulton’s Compensation Consultant advised the HR Committee in 2006 that this “gross up provision” was a typical provision in such agreements. In keeping with Fulton’s objective to offer a competitive contract when they were offered, this provision was included in the Employment Agreements in 2006, but more recent agreements, such as Mr. Roda’s and Rohrbaugh’s, do not contain a “gross up provision.” Generally, the 2004 Stock Plan provides for vesting of unvested stock options and restricted shares upon a Change in Control, disability, retirement or death of an Executive. 7 Cash amounts listed are 2013 base salary and highest annual cash incentive awards paid for the last three years times the applicable multiple for each Executive. The Cash amount for Mr. Roda and Mr. Rohrbaugh has been reduced by $229,283 and $127,585 pursuant to the terms of their Employment Agreements to the extent required to avoid a federal excise tax imposition pursuant to the regulations promulgated under Section 280G of the Tax Code. Equity amount is the value of all “in the money” options and restricted stock as of December 31, 2013. Perquisites/Benefits include $10,000 for outplacement services, $1,000 per month during the severance period for the value of health and benefit expenses paid by Fulton, $20,000 per year for club memberships, vehicle and other expenses paid by Fulton for the severance period attributed to each Executive. 8 Amount listed under Pension/NQDC represents the aggregate dollar value of Fulton’s contributions to 401(k) and other retirement benefits as a result of this termination event. 9 Except for Mr. Roda and Mr. Rohrbaugh, the Executives are eligible to receive Tax Reimbursement for any excise tax imposed for this termination event pursuant to their Employment Agreements. Mr. Shreiner’s payment for this event did not require a tax reimbursement. The amounts under Tax Reimbursements for all the Executives were calculated as of December 31, 2013. 10 Termination Due to Retirement. In the event an Executive terminates his employment due to retirement upon attaining age sixty-five, Fulton is obligated to pay the Executive’s base salary through the effective date of the Executive’s retirement, together with any applicable expense reimbursements and all accrued and unpaid benefits and vested benefits in accordance with the applicable employee benefit plans. Fulton would have no further obligation under the Employment Agreement; however, assuming that each Executive attained the age of sixty-five and retired as of December 31, 2013, each would have received a lump sum payment of $25 for each year of service as of December 31, 2013, a payment made to all retiring employees, plus each would have received retiree health benefits, as a supplement to the Executives’ Medicare benefits at sixty-five, at an annual estimated cost to Fulton of approximately $1,500. In the event an Executive terminates employment due to retirement upon attaining age sixty, and the Executive has ten or more years of consecutive service with Fulton, unvested options and restricted shares awarded under Fulton’s option plans would automatically vest. Assuming that all the Executives attained the age of sixty and retired as of December 31, 2013, their options were valued at the $13.09 closing price of Fulton common stock on December 31, 2013. The Executives would have two years from the date of retirement to exercise their options in accordance with the terms of the awards. 11 Equity amount is the value of all “in the money” options and restricted stock as of December 31, 2013. Perquisites/ Benefits include a lump sum service award and $1,500 which is an estimate of Fulton’s annual cost of Medicare supplement benefits for the Executive. 12 Mr. Nugent retired as Fulton’s Chief Financial Officer effective on December 31, 2013, and other termination events are not provided as a result. 13 Termination Due to Disability. Following an Executive’s “Disability,” defined in the Employment Agreements to be a medically determinable physical or medical impairment that is expected to result in death or to last for at least twelve months, and that either renders the Executive unable to engage in any substantial gainful activity or qualifies the Executive for benefits under a Fulton disability plan, the employment of the Executive would terminate automatically, in which event Fulton is not thereafter obligated to make any further payments under the Employment Agreement, other than amounts (including salary, expense reimbursement, etc.) accrued as of the date of such termination, plus an amount equal to at least six months’ base salary in effect immediately prior to the date of the Disability. After this six month salary continuation period, for as long as the Executive continues to be disabled, the Executive will continue to receive at least 60% of the Executive’s base salary until the earlier of the Executive’s death or December 31 of the calendar year 50 <12345678> JOB TITLE Fulton Financial Combo REVISION 10 SERIAL DATE Thursday, March 20, 2014 JOB NUMBER 263922 TYPE PAGE NO. 51 OPERATOR RaMelP in which the Executive attains age sixty-five. To the extent it does not duplicate benefits already being provided, an Executive will also receive those benefits customarily provided by Fulton to disabled former employees, which benefits shall include, but are not limited to, life, medical, health, accident insurance and a survivor’s income benefit. 14 Cash amount for all the Executives is six months at full salary and then 60% of salary for next 12 months. Equity amount is the value of all restricted stock as of December 31, 2013. Perquisites/Benefits include a monthly estimate of $1,000 for the value of health and benefit expenses paid by Fulton for 18 months. 15 Termination Due to Death. In the event of a termination of employment as a result of an Executive’s death, the Executive’s dependents, beneficiaries or estate, as the case may be, would receive such survivor’s income and other benefits as they may be entitled to under the terms of Fulton’s benefit programs, which includes the Survivors Benefit Life Insurance and twice base salary amount plus taxes due as a result of the payment under the Death Benefit Agreement described on page 35. 16 The Cash amount for all Executives is twice the Executive’s 2013 base salary under the Death Benefit Agreement. Mr. Rohrbaugh is not eligible to receive the Survivors Benefit Life Insurance Payment because he was hired after the plan eligibility date, the amounts listed under “Other” are a $250,000 payment for the Survivors Benefit Life Insurance which the other Executives are eligible to receive, but this benefit was discontinued in 2014 by Fulton. 17 Equity amount is the value of all “in the money” options and restricted stock as of December 31, 2013. 51 <12345678>JOB TITLE Fulton Financial Combo REVISION 10 SERIAL DATE Thursday, March 20, 2014 JOB NUMBER 263922 TYPE PAGE NO. 52 OPERATOR RaMelP NON-BINDING SAY-ON-PAY RESOLUTION TO APPROVE THE COMPENSATION OF THE NAMED EXECUTIVE OFFICERS – PROPOSAL TWO Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd- Frank Act, Fulton is providing its shareholders with the opportunity to vote on an advisory (non-binding) resolution at the 2014 Annual Meeting to approve Fulton’s executive compensation as described in the Compensation Discussion and Analysis, the tabular disclosures of the Named Executive Officers’ compensation (“Compensation Tables”), and other related information in this proxy statement. This proposal, commonly known as a “Say-on-Pay” proposal, gives shareholders the opportunity to endorse or not endorse Fulton’s Executive pay program. At Fulton’s 2013 Annual Meeting, Fulton presented a similar proposal to its shareholders and, not counting broker non-votes, approximately 91% of the shareholders who returned a ballot voted in favor of, and approved, Fulton’s 2013 Say-on-Pay proposal. The HR Committee considered the number of votes cast in favor of Fulton’s 2013 Say-on-Pay proposal to be a positive endorsement of Fulton’s current pay programs and practices. Fulton will continue to monitor the level of support for each Say-on-Pay proposal. However, because the shareholder vote is not binding, the outcome of the 2014 vote or any future vote may not be construed as overruling any decision by Fulton’s Board of Directors or HR Committee regarding executive compensation. In 2011, Fulton submitted to shareholders a non-binding proposal, asking shareholders whether Fulton should submit its Say-on-Pay proposal to shareholders every one, two or three years. This type of proposal is commonly known as a “Say-When-on-Pay” proposal. The shareholders approved Fulton’s recommendation that the Say-on-Pay proposal should be submitted to shareholders on an annual basis. Although Fulton believes that having an annual Say-on-Pay vote is appropriate for 2014, Fulton’s HR Committee and Board of Directors will continue to evaluate the frequency of the non- binding Say-on-Pay proposal and might recommend that shareholders approve a different frequency in the future. Under current SEC rules, publicly traded companies are required, no less frequently than once every six years, to provide for a separate shareholder Say-When-on-Pay advisory vote in proxy statements for annual meetings to determine whether the Say-on-Pay vote will occur every one, two or three years, and Fulton anticipates submitting a new “Say-When-on-Pay” proposal to shareholders on or before Fulton’s annual meeting of shareholders in 2017. As further described in the “Compensation Discussion and Analysis” section of this proxy statement starting on page 23, Fulton’s executive compensation philosophy and program are intended to achieve three objectives: align interests of the Executives with shareholder interests; link the Executives’ pay to performance; and attract, motivate and retain executive talent. Fulton’s Executive compensation program currently includes a mix of base salary, incentive bonus, equity-based plans, retirement plans, health plans and other benefits. Fulton believes that its compensation program, policies and procedures are reasonable and appropriate and compare favorably with the compensation programs, policies and procedures of its peers. The Board recommends that shareholders, in a non-binding proposal, vote “FOR” the following resolution: “RESOLVED, that the compensation paid to Fulton’s Named Executive Officers, as disclosed in this proxy statement pursuant to Item 402 of SEC Regulation S-K, including the Compensation Discussion and Analysis, the Compensation Tables and any related material contained in the proxy statement, is hereby APPROVED.” Approval of the non-binding resolution regarding the compensation of the Named Executive Officers would require that the number of votes cast in favor of the proposal exceed the number of votes cast against it. Abstentions and broker non-votes will not be counted as votes cast and, therefore, will not affect the determination as to whether the proposal is approved. Because your vote is advisory, it will not be binding upon Fulton. However, Fulton’s HR Committee and Board of Directors will take into account the outcome of the vote when considering future Executive compensation arrangements, but no determination has been made as to what action, if any, the HR Committee or Board of Directors might take if shareholders do not approve this advisory proposal. Recommendation of the Board of Directors The Board of Directors recommends that the shareholders vote FOR the non-binding resolution to approve the compensation of the Named Executive Officers. 52 <12345678>JOB TITLE Fulton Financial Combo REVISION 10 SERIAL DATE Thursday, March 20, 2014 JOB NUMBER 263922 TYPE PAGE NO. 53 OPERATOR RaMelP APPROVAL OF THE AMENDED AND RESTATED EMPLOYEE STOCK PURCHASE PLAN – PROPOSAL THREE General Information On January 21, 2014, Fulton’s Board of Directors approved amendments to the Amended and Restated Employee Stock Purchase Plan (the “Plan”) to increase the number of shares for which options are authorized to be granted under the Plan and to make other changes to update the Plan document. The Plan is broad based, and its purpose is to advance the interests of Fulton and its shareholders by encouraging employees to acquire a stake in the future of Fulton by purchasing shares of its common stock. Under the Plan, the Board of Directors is authorized to grant options to employees of Fulton and its affiliates to purchase shares of the common stock of Fulton with up to a 15% price discount. As of December 31, 2013, approximately 3,620 Fulton employees were eligible to participate in the Plan. The Plan originally was adopted and approved by the Board of Directors on February 18, 1986, and subsequently approved by the shareholders at the Annual Meeting of shareholders held on April 15, 1986. The Plan has been amended three times since then, to provide that the Plan would continue in existence until terminated by the Board of Directors, rather than terminating after ten years, and to increase the number of shares for which options may be granted. The Plan permits the Board of Directors to amend, modify, suspend or terminate the Plan at any time, although the Board may not, without the consent of the shareholders of Fulton, make any amendment which increases the number of shares for which options may be granted, changes the class of eligible employees, or materially increases the benefits accruing to an employee under the Plan. The Board of Directors originally was authorized to grant options to purchase up to 100,000 shares of the common stock of Fulton. The Plan was amended in 1999 to increase by 550,000 the number of shares for which options may be granted. In 2007, the Plan was amended for an additional increase of 1,500,000 shares. The number of shares for which options may be granted is subject to adjustment for stock splits, stock dividends, reorganizations, recapitalizations and other changes in the capital structure of Fulton. Nevertheless, it is anticipated that the number of shares of Fulton common stock for which options may be granted under the Plan will soon be exhausted. The Board of Directors believes that it is in the best interests of Fulton and its shareholders for the Plan to continue. In January 2014, the Board of Directors therefore approved an amendment to the Plan, subject to shareholder approval at the Annual Meeting, to increase by 2,000,000 shares the number of shares of common stock for which options are authorized to be granted, so that the Plan can continue its existence once the shares previously authorized are exhausted. Summary of the Plan A copy of the Plan is attached to this Proxy Statement as Exhibit A. The following is a summary of the more significant terms of the Plan: The Plan authorizes the Board of Directors to grant options to purchase shares of Fulton common stock to employees of Fulton and its affiliates. The number of shares for which options may be granted is subject to adjustment for stock splits, stock dividends, reorganizations, recapitalizations, and other changes in the corporate structure of Fulton. Since the shareholders originally approved the Plan, the adjustments for stock splits and stock dividends have increased the authorized shares to 4.066 million shares, of which of 333,919 shares were available as of December 31, 2013. When an option is exercised, Fulton delivers authorized but unissued shares or treasury shares. The Plan is administered by the Human Resources Committee of the Board of Directors or those persons to whom responsibility for administration of the Plan has been delegated by the Board of Directors (the “Committee”), provided that the Committee shall at all times consist of at least three directors who are not eligible to receive options under the Plan. The Committee has complete discretion to determine whether or not options will be granted under the Plan in any year and, if so, the total number of shares that will be optioned in such year. Each option expires on the date specified by the Committee at the time it is granted, except that all options granted under the Plan must expire no later than five years from the date of grant. 53 <12345678>JOB TITLE Fulton Financial Combo REVISION 10 SERIAL DATE Thursday, March 20, 2014 JOB NUMBER 263922 TYPE PAGE NO. 54 OPERATOR RaMelP When options are granted under the Plan, options must be granted proportionately to all employees of Fulton and its affiliates who were employed by Fulton or any affiliate on December 31 of the year immediately preceding the year in which options are granted, except that the Committee may elect to exclude those employees who customarily work twenty hours or less per week. Only those members of the Board of Directors who are also employees of Fulton or one of its affiliates are eligible to participate in the Plan. When options are granted, each eligible employee is granted an option to purchase the number of whole shares that can be purchased, at the applicable option price established by the Committee, with a percentage of his or her total compensation for the immediately preceding calendar year. The Committee may limit the number of shares that can be purchased pursuant to each option, and no employee may be granted an option to purchase stock with an aggregate fair market value of more than $25,000 during any calendar year. Currently the Committee limits purchases to $7,500 per calendar year. The Committee may also place other limitations on options granted under the Plan, such as restricting transfer of the stock purchased under the Plan. The option price per share is determined by the Committee, but may not be less than the lesser of: (i) 85% of the fair market value of the stock on the day of the grant, or (ii) 85% of the fair market value of the stock on the date of exercise. An option which is exercised more than 27 months after the date of grant, however, must be exercised at a price equal to 85% of the fair market value of the shares on the date of exercise. As of March 13, 2014, the closing and the fair market value of a share of Fulton common stock was $12.58. The Plan is designed to be a qualified employee stock purchase plan within the meaning of Section 423 of the Tax Code. Employees will not recognize income when they enroll in the Plan or when they purchase shares. All tax consequences are deferred until the employee disposes of the shares. Employees who purchase shares under the Plan may qualify for favorable tax treatment if they hold the shares for the longer of: (i) two years after an option to purchase is granted, or (ii) one year after the shares are purchased. If this holding period is complied with, the employee will not recognize any taxable income in connection with the shares in the year in which the shares are purchased, even if purchased at a discount. If the employee sells or otherwise disposes of the shares following the expiration of the holding period, the employee will have to include as compensation in his or her gross income for the taxable year in which the shares are sold or otherwise disposed of an amount equal to the lesser of: (i) the excess of the fair market value of the shares at the time the option was granted over the exercise price, or (ii) the excess of the fair market value of the shares at the time of disposition over the exercise price. If an employee recognizes ordinary income by selling or otherwise disposing of shares before the end of the holding period, Fulton will generally be entitled to a tax deduction equal to the participant’s ordinary income. Otherwise, Fulton will not be entitled to any income tax deduction with respect to shares purchased under the Plan. During the lifetime of an optionee, an option may be exercised only by the optionee and only if the optionee is an employee of Fulton or one of its affiliates at the time of exercise. If an optionee’s employment terminates by reason of retirement, the option may be exercised by the optionee or the heirs or personal representatives of the optionee for a period of three months following retirement. 54 <12345678>JOB TITLE Fulton Financial Combo REVISION 10 SERIAL DATE Thursday, March 20, 2014 JOB NUMBER 263922 TYPE PAGE NO. 55 OPERATOR RaMelP The benefits that will be received by eligible employees, including the named executive officers, under the Plan will depend on each individual’s elections to participate and the fair market value of Fulton’s common stock at various future dates. Therefore, it is not possible to determine the benefits that will be received by named executive officers or other employees if the amendment to increase the number of reserved Plan shares is approved. However, the table below as of December 31, 2013 sets forth certain information regarding the number of shares of Fulton common stock purchased during fiscal year 2013 pursuant to the Plan by each of (i) the named executive officers, (ii) all current executive officers as a group, and (iii) all employees, other than executive officers, as a group. Non-executive members of the Board of Directors are not eligible to participate in the Plan. Name and Principal 2013 Position E. Philip Wenger, Chairman and Chief Executive Officer Charles J. Nugent, Senior Executive Vice President and Chief Financial Officer James E. Shreiner, Senior Executive Vice President Craig A. Roda, Senior Executive Vice President Philmer H. Rohrbaugh, Senior Executive Vice President and Chief Risk Officer Executive Officers as a Group (5 persons) Shares Purchased during Fiscal Year 2013 (#) 0 0 0 753 0 753 Employees as a Group, excluding executive officers (1,273 persons) 140,855 Vote Required A majority of the votes cast is necessary to approve the amendment of the Employee Stock Purchase Plan. Abstentions and broker non-votes will be counted as shares that are present at the meeting, but will not be counted as votes cast on the proposal to amend the Employee Stock Purchase Plan. Recommendation of the Board of Directors The Board of Directors believes that the proposal to amend the Plan for the purpose of increasing by 2,000,000 shares the number of shares of common stock for which options are authorized to be granted under the Plan is in the best interests of Fulton Financial Corporation and its shareholders, and recommends that the shareholders vote FOR the amendment of the Employee Stock Purchase Plan. 55 <12345678>JOB TITLE Fulton Financial Combo REVISION 10 SERIAL DATE Thursday, March 20, 2014 JOB NUMBER 263922 TYPE PAGE NO. 56 OPERATOR RaMelP RELATIONSHIP WITH INDEPENDENT PUBLIC ACCOUNTANTS For the years ended December 31, 2013 and December 31, 2012, Fulton engaged KPMG LLP (“KPMG”), independent registered public accountants, to audit Fulton’s financial statements. The fees incurred for services rendered by KPMG for the years ended December 31, 2013 and 2012 are summarized in the following table. Audit Fees – Annual Audit and Quarterly Reviews (1) Audit Fees – Issuance of Comfort Letters and Consents Audit Fees – Statutory Audit Audit Fees Subtotal Audit Related Fees (2) Tax Fees (3) All Other Fees (4) TOTAL 2013 2012 $ 1,609,500 26,000 41,000 $ 1,494,280 0 42,640 1,676,500 1,536,920 17,000 75,860 82,150 17,160 57,570 161,030 $ 1,851,510 $ 1,772,680 (1) Amounts presented for 2013 are based upon the audit engagement letter and additional fees paid. Final billings for 2013 may differ. (2) Fees paid for a required agreed-upon procedures report related to student lending. (3) Includes fees rendered in connection with tax services relating to Federal and state tax matters. (4) Fees paid related to a review of our merger and acquisition and risk assessment processes. The appointment of KPMG for the fiscal year ended December 31, 2014 was approved by the Audit Committee of the Board of Directors of Fulton at a meeting on February 26, 2014. Representatives of KPMG are expected to be present at the 2014 Annual Meeting with the opportunity to make a statement and will be available to respond to appropriate questions. The Audit Committee has carefully considered whether the provision of the non-audit services described above which were performed by KPMG in 2013 and 2012 would be incompatible with maintaining the independence of KPMG in performing its audit services and has determined that, in its judgment, the independence of KPMG has not been compromised. All fees paid to KPMG in 2013 and 2012 were pre-approved by the Audit Committee. The Audit Committee pre-approves all auditing and permitted non-auditing services, including the fees and terms thereof, to be performed by its independent auditor, subject to the de minimus exceptions for non-auditing services permitted by the Exchange Act. However, these types of services are approved prior to completion of the services. The Audit Committee may form and delegate authority to, subcommittees consisting of one or more members, when appropriate, including the authority to grant pre-approvals of audit and permitted non-audit services. Any decisions of such subcommittees to grant pre- approvals are presented to the full Audit Committee for ratification at its next scheduled meeting. Based on its review and discussion of the audited 2013 financial statements of Fulton with management and KPMG, the Audit Committee recommended to the Board of Directors that the financial statements be included in the Annual Report on Form 10-K for filing with the SEC. A copy of the report of the Audit Committee of its findings that resulted from its financial reporting oversight responsibilities is attached as Exhibit B. 56 <12345678>JOB TITLE Fulton Financial Combo REVISION 10 SERIAL DATE Thursday, March 20, 2014 JOB NUMBER 263922 TYPE PAGE NO. 57 OPERATOR RaMelP RATIFICATION OF INDEPENDENT AUDITOR – PROPOSAL FOUR Fulton’s Audit Committee has selected the firm of KPMG to continue as Fulton’s independent auditor for the fiscal year ending December 31, 2014. Although shareholder approval of the selection of KPMG is not required by law, the Board of Directors believes that it is advisable to give shareholders an opportunity to ratify this selection as is a common practice with other publicly traded companies. Assuming the presence of a quorum at the Annual Meeting, the affirmative vote of the majority of the votes cast is required to ratify the appointment of KPMG as Fulton’s independent auditor for the fiscal year ending December 31, 2014. If Fulton’s shareholders do not approve this proposal at the 2014 Annual Meeting, the Audit Committee will consider the results of the shareholder vote on this proposal when selecting an independent auditor for 2014, but no determination has been made as to what action, if any, the Audit Committee would take if shareholders do not ratify the appointment of KPMG. KPMG has conducted the audit of the financial statements of Fulton and its subsidiaries for the years ended December 31, 2002 through 2013. Representatives of KPMG are expected to be present at the meeting, will be given an opportunity to make a statement if they desire to do so, and will be available to answer appropriate questions from shareholders. Recommendation of the Board of Directors The Board of Directors recommends that shareholders vote FOR ratification of the appointment of KPMG LLP as Fulton’s independent auditor for the fiscal year ending December 31, 2014. 57 <12345678>JOB TITLE Fulton Financial Combo REVISION 10 SERIAL DATE Thursday, March 20, 2014 JOB NUMBER 263922 TYPE PAGE NO. 58 OPERATOR RaMelP ADDITIONAL INFORMATION A copy of Fulton’s Annual Report on Form 10-K as filed with the SEC, including financial statements, is available without charge to shareholders upon written request addressed to the Corporate Secretary, Fulton Financial Corporation, P.O. Box 4887, Lancaster, Pennsylvania 17604. The Fulton Annual Report on Form 10-K for year ended December 31, 2013 and this proxy statement are posted and available on Fulton’s website at www.fult.com. Copies of the current governance documents and future updates, including but not limited to the Fulton Code of Conduct, Audit Committee Charter, HR Committee Charter, Nominating and Corporate Governance Committee Charter, Risk Committee Charter and Fulton’s Corporate Governance Guidelines, are also posted and available on Fulton’s website at www.fult.com. Only one proxy statement is being delivered to multiple security holders sharing an address unless Fulton has received contrary instructions from one or more of the security holders. Fulton will promptly deliver, upon written or oral request, a separate copy of the proxy statement to a security holder at a shared address to which a single copy of the document was delivered. Such a request should be made to the Corporate Secretary, Fulton Financial Corporation, P.O. Box 4887, Lancaster, Pennsylvania 17604, (717) 291-2411. Requests to receive a separate mailing for future proxy statements or to limit multiple copies to the same address should be made orally or in writing to the Corporate Secretary at the foregoing address or phone number. If you would like to reduce the costs incurred by Fulton in mailing proxy material, you can consent to receiving future proxy statements, proxy cards and annual reports electronically via e-mail or the Internet. To sign up for electronic delivery, please go to www.proxyvote.com and have your proxy card in hand when you access the website, then follow the instructions at www.proxyvote.com to obtain your records and to create an electronic voting instruction form. Follow the instructions for voting by Internet and, when prompted, indicate that you agree to receive or access shareholder communications electronically in future years. OTHER MATTERS The Board of Directors of Fulton knows of no matters other than those discussed in this proxy statement which will be presented at the 2014 Annual Meeting. However, if any other matters are properly brought before the meeting, any proxy given pursuant to this solicitation will be voted in accordance with the recommendations of the Board of Directors of Fulton. BY ORDER OF THE BOARD OF DIRECTORS Lancaster, Pennsylvania March 26, 2014 E. PHILIP WENGER Chairman of the Board, President and Chief Executive Officer 58 <12345678>JOB TITLE Fulton Financial Combo REVISION 10 SERIAL DATE Thursday, March 20, 2014 JOB NUMBER 263922 TYPE PAGE NO. a-1 OPERATOR RaMelP Exhibit A AMENDED AND RESTATED FULTON FINANCIAL CORPORATION EMPLOYEE STOCK PURCHASE PLAN 1. PURPOSE OF THE PLAN The Employee Stock Purchase Plan was initially approved at the Annual Meeting of Shareholders held on April 15, 1986 to advance the interests of Fulton Financial Corporation (“Company”) and its shareholders by encouraging its employees and the employees of its affiliates to acquire a stake in the future of the Company by purchasing shares of the common stock of the Company. Under the Employee Stock Purchase Plan, the Board of Directors were authorized to grant options to purchase up to a total of one hundred thousand (100,000) shares of the common stock of the Company. The Employee Stock Purchase Plan was most recently amended in 1999 to increase by five hundred fifty thousand (550,000) the number of shares permitted to be purchased, and in 2007 to provide for the purchase of up to an additional one million five hundred thousand (1,500,000) shares. The Employee Stock Purchase Plan in 2014 is now being amended and restated to provide for the purchase of up to an additional two million (2,000,000) shares. It is intended that this Amended and Restated Employee Stock Purchase Plan (“Plan”) shall be an employee stock purchase plan within the meaning of Section 423 of the Internal Revenue Code of 1986, as amended. 2. DEFINITIONS For purposes of the Plan, the following words or phrases have the meanings assigned to them below: (a) “Affiliate” shall mean a parent or subsidiary corporation as defined in Section 425 of the Code (substituting “Company” for “employer corporation”), including a parent or a subsidiary which becomes such after the adoption of the Plan. (b) “Board” shall mean the Board of Directors of the Company. (c) “Code” shall mean the Internal Revenue Code of 1986, as amended. (d) “Committee” shall mean the Human Resources Committee of the Board or such other Committee of the Board or persons to which responsibility for administration of the Plan has been delegated by the Board; provided, however, that the Committee shall at all times consist of at least three Disinterested directors. (e) (f) “Company” shall mean Fulton Financial Corporation. “Date of Grant” in respect of any option granted under the Plan shall mean the date on which that option is granted by the Board. (g) “Date of Exercise” in respect of any option granted under the Plan shall be the date or dates specified by the Committee. (h) “Disinterested” in respect of a director shall mean a director of the Company who is not eligible to receive options under the Plan. (i) (j) “NASDAQ” shall mean The NASDAQ Stock Market LLC. “Optionee” shall mean an employee to whom an option has been granted pursuant to the Plan. (k) “Plan” shall mean this Amended and Restated Employee Stock Purchase Plan. (l) “Stock” shall mean the $2.50 par value common stock of the Company. A-1 <12345678>JOB TITLE Fulton Financial Combo REVISION 10 SERIAL DATE Thursday, March 20, 2014 JOB NUMBER 263922 TYPE PAGE NO. a-2 OPERATOR RaMelP (m) “Total compensation” shall mean the total remuneration paid to an employee by the Company and its affiliates during any calendar year, as reported on the employee’s Federal Income Tax Withholding Statement(s) (Form W-2). 3. ADMINISTRATION OF THE PLAN (a) The Plan shall be administered by the Human Resources Committee (the “Committee”) of the Board or such other Committee of the Board or persons to which responsibility for administration of the Plan has been delegated by the Board; provided, however, that the Committee shall at all times consist of at least three Disinterested directors. No Committee member shall be eligible (or shall have been eligible within one year prior to his appointment) to receive options under the Plan or to be selected as a participant under any discretionary plan of the Company or any of its affiliates, entitling him to acquire stock, stock options or stock appreciation rights of the Company or any of its affiliates. (b) The Committee shall be vested with full authority to adopt, amend and rescind such rules, regulations and procedures as it deems necessary or desirable to administer the Plan and to interpret the provisions of the Plan, unless otherwise determined by the Board. Any determination, decision or action of the Committee in connection with the construction, interpretation, administration or application of the Plan shall be final, conclusive and binding upon all Optionees and any person claiming under or through an Optionee, unless otherwise determined by the Board. (c) Any determination, decision or action of the Committee provided for in the Plan may be made or taken by action of a majority of the Disinterested members of the Board if it so determines, with the same force and effect as if such determination, decision or action had been made or taken by the Committee. No member of the Committee or of the Board shall be liable for any determination, decision or action made in good faith with respect to the Plan or any option granted under the Plan. 4. STOCK SUBJECT TO THE PLAN Subject to shareholder approval at the Annual Meeting of Shareholders on May 8, 2014, the Board shall have the authority from time to time to grant options under the Plan to purchase an additional 2,000,000 shares of Stock, subject to adjustment as provided in Section 10 below. As the Board may determine from time to time, the Stock optioned may consist either in whole or in part of authorized but unissued shares or shares held in treasury. 5. ELIGIBILITY When options are granted under the Plan, options shall be granted to all employees of the Company or any affiliate who were employed by the Company or any affiliate on December 31 of the year immediately preceding the year in which options are granted, except that the Committee may elect to exclude those employees who customarily work 20 hours or less per week. 6. ALLOCATION OF OPTIONED STOCK (a) When options are granted under the Plan, each eligible employee shall be granted an option to purchase the number of whole shares that can be purchased, at the applicable option price established by the Committee, with a percentage (which shall be uniform for all eligible employees) of his total compensation for the immediately preceding calendar year; provided, however, that the Committee may limit the maximum number of shares that may be purchased pursuant to each option provided that such limitation is uniform for all eligible employees. (b) All options granted under the Plan shall be subject to the following additional limitations: (i) No option shall be granted to any employee who, immediately after the grant, would own stock possessing five percent or more of the total combined voting power of the Company or any of its affiliates. In computing the stock ownership of an employee for purposes of this limitation, the rules of Section 425(d) of the Code shall apply and stock which an employee may purchase under the Plan or under any other plan maintained by the Company shall be treated as stock owned by that employee. A-2 <12345678>JOB TITLE Fulton Financial Combo REVISION 10 SERIAL DATE Thursday, March 20, 2014 JOB NUMBER 263922 TYPE PAGE NO. a-3 OPERATOR RaMelP (ii) No option shall be granted to any employee which at the Date of Grant, would permit his rights to purchase stock under the Plan and all other employee stock purchase plans of the Company and its affiliates to accrue at a rate exceeding $25,000 of fair market value (determined pursuant to Section 7 below) for each calendar year in which such option is outstanding at any time. 7. OPTION PRICE (a) The option price per share of the Stock that may be purchased pursuant to each option shall be determined by the Committee, subject to approval by the Board, but shall not in any event be less than the lesser of (i) 85% of the fair market value per share of the Stock on the Date of Grant, or (ii) 85% of the fair market value per share of the Stock on the Date of Exercise, subject to adjustment as set forth in Section 10 below. (b) During such time as the Stock is not listed on an established stock exchange but is listed in NASDAQ, the fair market value per share shall be the average of the highest and lowest trading prices for the Stock on the applicable date or, if no trade of Stock occurred on that day, the fair market value shall be determined by reference to such prices on the next preceding day on which such prices were quoted. (c) During such time as the Stock is not listed on an established stock exchange or NASDAQ, the fair market value per share shall be the average of the closing dealer “bid” and “ask” prices for the Stock, as quoted by NASDAQ for the applicable date or, if no “bid” and “ask” prices are quoted for that day, the fair market value shall be determined by reference to such prices on the next preceding day on which such prices were quoted. (d) If the Stock is listed on an established stock exchange or exchanges, the fair market value shall be deemed to be the closing price of the Stock on such stock exchange or exchanges on the applicable date or, if no sale of the Stock has been made on any stock exchange on that day, the fair market value shall be determined in reference to such prices on the next preceding day on which such prices were quoted. (e) In the event the Stock is not traded on an established stock exchange and no closing dealer “bid” and “ask” prices are available, then the fair market value of the Stock shall be as determined in good faith by the Committee. 8. TERMS AND CONDITIONS OF OPTIONS (a) Each eligible employee who desires to accept all or any part of the option to purchase shares of Stock under the Plan shall signify his or her election to do so by authorizing the Company or Affiliate, in the form and manner prescribed by the Company, to make payroll deductions. (b) Each option granted under the Plan shall expire on the date determined by the Committee; provided, however, that, subject to the provisions of paragraph (d) below, each option shall terminate not later than the date which is five years from the Date of Grant, and provided further, that options exercised more than 27 months after the Date of Grant must be exercised at an option price per share equal to 85% of the fair market value per share on the Date of Exercise. (c) The Committee may from time to time establish such further terms, conditions and limitations on the exercise of options granted under the Plan as it may, in its sole discretion, deem appropriate, and which are not inconsistent with Section 423 of the Code, including, without limitation, payroll deduction requirements, restrictions on exercise dates, restrictions on transfer of the Stock purchased pursuant to the options granted under the Plan and participation in the dividend reinvestment plan of the Company. (d) An option granted pursuant to the Plan may be exercised only while the Optionee is employed by the Company or one of its affiliates and, if not fully exercised prior to termination of employment, will expire on the date of termination, whether by death, disability, or otherwise; provided, however, that in the event of a termination of employment by reason of retirement, the option may be exercised by the Optionee or his heirs or personal representatives for a period of three months following termination of employment. (e) During the lifetime of an Optionee, an option granted pursuant to the Plan shall be exercisable only by the Optionee and shall not be assignable or transferable by him other than by will or the laws of descent and distribution as provided in subsection (d) of this section. A-3 <12345678>JOB TITLE Fulton Financial Combo REVISION 10 SERIAL DATE Thursday, March 20, 2014 JOB NUMBER 263922 TYPE PAGE NO. a-4 OPERATOR RaMelP 9. EXERCISE OF OPTIONS Each Optionee who elects to exercise an option granted pursuant to this Plan shall comply with such rules, regulations and procedures regarding the exercise of options, as the Committee shall from time to time establish. 10. CHANGES IN CAPITAL STRUCTURE (a) In the event of any change in the Stock subject to the Plan or the Stock subject to any option granted hereunder, through merger, consolidation, reorganization, recapitalization, reincorporation, stock split, stock dividend or other change in the corporate structure of the Company, the Committee shall appropriately adjust the number of shares subject to the Plan and, where appropriate, the maximum number of shares subject to each outstanding option. Such adjustment shall not result in the issuance of fractional shares. Each such adjustment shall be made in such manner as not to constitute a “modification” of the option as defined in Section 425 of the Code. (b) If the Company is succeeded by another corporation in a merger or consolidation or if more than 50% of its stock is acquired by another corporation, all options granted under the Plan shall be assumed by the successor corporation and each such option shall be applicable to the stock of the successor corporation, with only such modifications as may be necessary to continue the status of such option as an option granted under an employee stock purchase plan within the meaning of Section 423 of the Code. (c) The grant of an option pursuant to the Plan shall not affect in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes in its capital or business structure or to merge, consolidate, dissolve, liquidate, sell or transfer all or any part of its business or assets. 11. REGISTRATION OF STOCK No option granted pursuant to the Plan shall be exercisable in whole or in part if at any time the Committee shall determine in its discretion that the listing, registration or qualification of the shares of Stock subject to such option on any securities exchange or under any applicable law, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition of, or in connection with, the granting of such option or the issuance of shares thereunder, unless such listing, registration, qualification, consent or approval may be effected or obtained free of any conditions not acceptable to the Board. 12. AMENDMENT OR TERMINATION OF THE PLAN (a) The Board may at any time amend, modify, suspend or terminate the Plan; provided that, except as provided in Section 10, above, the Board may not, without the consent of the shareholders of the Company, make any amendment or modification which: (i) increases the maximum number of shares of Stock as to which options may be granted under the Plan, (ii) changes the class of eligible employees, (iii) increases materially the benefits accruing to an employee under the Plan, or (iv) otherwise requires the approval of the shareholders of the Company in order to maintain the exemption available under Rule 16b-3 (or any similar rule) under the Securities Exchange Act of 1934. (b) Notwithstanding the provisions of paragraph (a) above, the Board reserves the right to amend or modify the terms and provisions of the Plan and of any outstanding options granted under the Plan to the extent necessary to qualify the options granted under the Plan for such favorable federal income tax treatment (including deferral of taxation upon exercise) as may be afforded options granted under an employee stock purchase plan within the meaning of Section 423 of the Code, the regulations promulgated thereunder, and any amendments or replacements thereof. A-4 <12345678>JOB TITLE Fulton Financial Combo REVISION 10 SERIAL DATE Thursday, March 20, 2014 JOB NUMBER 263922 TYPE PAGE NO. a-5 OPERATOR RaMelP (c) No amendment, modification or termination of the Plan (whether by action of the Board or by expiration of the Plan term) shall in any manner affect any option theretofore granted under the Plan without the consent of the Optionee or any person claiming under or through the Optionee. 13. EFFECTIVE DATE The Plan shall become effective on the date on which it is adopted by the Board, provided that the Plan is approved by the shareholders of the Company within twelve months thereafter. The Board may issue options pursuant to the Plan prior to its approval by the shareholders of the Company, provided that all such options are contingent upon shareholder approval of the Plan within said twelve-month period. A-5 <12345678>JOB TITLE Fulton Financial Combo REVISION 10 SERIAL DATE Thursday, March 20, 2014 JOB NUMBER 263922 TYPE PAGE NO. B-1 OPERATOR RaMelP EXHIBIT B February 26, 2014 REPORT OF AUDIT COMMITTEE To the Board of Directors of Fulton Financial Corporation: We have reviewed and discussed with management Fulton Financial Corporation’s audited financial statements as of, and for the year ended, December 31, 2013. We have discussed with representatives of KPMG LLP, Fulton Financial Corporation’s independent auditor, the matters required to be discussed by Auditing Standard No. 16, Communications with Audit Committees issued by the Public Company Accounting Oversight Board (“PCAOB”). We have received and reviewed the written disclosures and the letter from the independent auditor required by the PCAOB Ethics and Independence Rule 3526, Communication with Audit Committees Concerning Independence, as amended, by the PCAOB, and have discussed with the auditor the auditor’s independence. Based on the reviews and discussions referred to above, we recommend to the Board of Directors that the financial statements referred to above be included in Fulton Financial Corporation’s Annual Report on Form 10-K for the year ended December 31, 2013. John M. Bond, Jr., Chair Denise L. Devine, Vice Chair George W. Hodges Albert Morrison III Ernest J. Waters <12345678>UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 _______________________________________________________ FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2013, or TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 0-10587 _______________________________________________________ FULTON FINANCIAL CORPORATION (Exact name of registrant as specified in its charter) PENNSYLVANIA (State or other jurisdiction of incorporation or organization) One Penn Square, P. O. Box 4887, Lancaster, Pennsylvania (Address of principal executive offices) 23-2195389 (I.R.S. Employer Identification No.) 17604 (Zip Code) (717) 291-2411 (Registrant’s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Common Stock, $2.50 par value Name of exchange on which registered The NASDAQ Stock Market, LLC Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No 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 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 No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check One): Large accelerated filer Non-accelerated filer Accelerated filer Smaller reporting company Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No The aggregate market value of the voting Common Stock held by non-affiliates of the registrant, based on the average bid and asked prices on June 30, 2013, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $2.2 billion. The number of shares of the registrant’s Common Stock outstanding on January 31, 2014 was 191,381,000. Portions of the Definitive Proxy Statement of the Registrant for the Annual Meeting of Shareholders to be held on May 8, 2014 are incorporated by reference in Part III. 1 Description PART I Item 1. Item 1A. Item 1B. Item 2. Item 3. Item 4. PART II Item 5. Item 6. Item 7. Item 7A. Item 8. Item 9. Item 9A. Item 9B. PART III Item 10. Item 11. Item 12. Item 13. Item 14. PART IV Item 15. TABLE OF CONTENTS Business ............................................................................................................................................................................ Risk Factors ...................................................................................................................................................................... Unresolved Staff Comments............................................................................................................................................. Properties .......................................................................................................................................................................... Legal Proceedings............................................................................................................................................................. Mine Safety Disclosures................................................................................................................................................... Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities....... Selected Financial Data .................................................................................................................................................... Management’s Discussion and Analysis of Financial Condition and Results of Operations........................................... Quantitative and Qualitative Disclosures About Market Risk.......................................................................................... Financial Statements and Supplementary Data: ............................................................................................................... Consolidated Balance Sheets.................................................................................................................................... Consolidated Statements of Income ......................................................................................................................... Consolidated Statements of Comprehensive Income ............................................................................................... Consolidated Statements of Shareholders’ Equity.................................................................................................... Consolidated Statements of Cash Flows .................................................................................................................. Notes to Consolidated Financial Statements ............................................................................................................ Management Report On Internal Control Over Financial Reporting ....................................................................... Report of Independent Registered Public Accounting Firm..................................................................................... Quarterly Consolidated Results of Operations (unaudited)...................................................................................... Changes in and Disagreements With Accountants on Accounting and Financial Disclosure .......................................... Controls and Procedures................................................................................................................................................... Other Information ............................................................................................................................................................. Directors, Executive Officers and Corporate Governance ............................................................................................... Executive Compensation .................................................................................................................................................. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ........................ Certain Relationships and Related Transactions, and Director Independence ................................................................. Principal Accounting Fees and Services........................................................................................................................... Page 3 14 24 24 24 24 25 27 29 59 66 67 68 69 70 71 117 118 119 120 120 120 121 121 121 121 121 Exhibits, Financial Statement Schedules.......................................................................................................................... 122 Signatures ......................................................................................................................................................................... Exhibit Index .................................................................................................................................................................... 125 127 2 PART I Item 1. Business General Fulton Financial Corporation (the Corporation) was incorporated under the laws of Pennsylvania on February 8, 1982 and became a bank holding company through the acquisition of all of the outstanding stock of Fulton Bank on June 30, 1982. In 2000, the Corporation became a financial holding company as defined in the Gramm-Leach-Bliley Act (GLB Act), which allowed the Corporation to expand its financial services activities under its holding company structure (See "Competition" and "Supervision and Regulation"). The Corporation directly owns 100% of the common stock of six community banks and ten non-bank entities. As of December 31, 2013, the Corporation had approximately 3,620 full-time equivalent employees. The common stock of Fulton Financial Corporation is listed for quotation on the Global Select Market of The NASDAQ Stock Market under the symbol FULT. The Corporation’s internet address is www.fult.com. Electronic copies of the Corporation’s 2013 Annual Report on Form 10-K are available free of charge by visiting "Investor Relations" at www.fult.com. Electronic copies of quarterly reports on Form 10-Q and current reports on Form 8-K are also available at this Internet address. These reports, as well as any amendments thereto, are posted as soon as reasonably practicable after they are electronically filed with the Securities and Exchange Commission (SEC). Bank and Financial Services Subsidiaries The Corporation’s six subsidiary banks are located primarily in suburban or semi-rural geographical markets throughout a five- state region (Pennsylvania, Delaware, Maryland, New Jersey and Virginia). Each of these banking subsidiaries delivers financial services in a highly personalized, community-oriented style, and decisions are generally made by the local management team in each market. Where appropriate, operations are centralized through common platforms and back-office functions. From time to time, in some markets and in certain circumstances, merging subsidiary banks allows the Corporation to leverage one bank’s stronger brand recognition over a larger market. It also enables the Corporation to create operating and marketing efficiencies and avoid direct competition among subsidiary banks. The Corporation’s subsidiary banks are located in areas that are home to a wide range of manufacturing, distribution, health care and other service companies. The Corporation and its banks are not dependent upon one or a few customers or any one industry, and the loss of any single customer or a few customers would not have a material adverse impact on any of the subsidiary banks. Each of the subsidiary banks offers a full range of consumer and commercial banking products and services in its local market area. Personal banking services include various checking account and savings deposit products, certificates of deposit and individual retirement accounts. The subsidiary banks offer a variety of consumer lending products to creditworthy customers in their market areas. Secured consumer loan products include home equity loans and lines of credit, which are underwritten based on loan-to- value limits specified in the Corporation's lending policy. Subsidiary banks also offer a variety of fixed and variable-rate products, including construction loans and jumbo loans. Residential mortgages are offered through Fulton Mortgage Company, which operates as a division of each subsidiary bank. Consumer loan products also include automobile loans, automobile and equipment leases, personal lines of credit and checking account overdraft protection. Commercial banking services are provided to small and medium sized businesses (generally with sales of less than $100 million) in the subsidiary banks’ market areas. The Corporation's policies limit the maximum total lending commitment to an individual borrower to $39.0 million as of December 31, 2013, which is below the Corporation’s regulatory lending limit. Commercial lending options include commercial, financial, agricultural and real estate loans. Floating, adjustable and fixed rate loans are provided, with floating and adjustable rate loans generally tied to an index such as the Prime Rate or the London Interbank Offered Rate. The commercial lending policy of the Corporation's subsidiary banks encourages relationship banking and provides strict guidelines related to customer creditworthiness and collateral requirements. In addition, equipment leasing, letters of credit, cash management services and traditional deposit products are offered to commercial customers. Investment management, trust, brokerage, insurance and investment advisory services are offered to consumer and commercial banking customers in the market areas serviced by the Corporation's subsidiary banks by the Corporation's Fulton Bank, N.A. subsidiary bank. The Corporation’s subsidiary banks deliver their products and services through traditional branch banking, with a network of full service branch offices. Electronic delivery channels include a network of automated teller machines, telephone banking, mobile banking and online banking. The variety of available delivery channels allows customers to access their account information and perform certain transactions, such as transferring funds and paying bills, at virtually any hour of the day. 3 The following table provides certain information for the Corporation’s banking subsidiaries as of December 31, 2013: Subsidiary Main Office Location Total Assets Total Deposits (dollars in millions) Branches (1) Fulton Bank, N.A................................ Lancaster, PA Fulton Bank of New Jersey................. Mt. Laurel, NJ The Columbia Bank............................ Columbia, MD Lafayette Ambassador Bank............... Bethlehem, PA FNB Bank, N.A. ................................. Danville, PA Swineford National Bank ................... Middleburg, PA $ $ 9,516 3,302 1,960 1,386 348 295 $ 6,722 2,734 1,531 1,115 272 250 119 71 38 23 8 7 266 (1) Remote service facilities (mainly stand-alone automated teller machines) are excluded. See additional information in "Item 2. Properties." Non-Bank Subsidiaries The Corporation owns 100% of the common stock of six non-bank subsidiaries, which are consolidated for financial reporting purposes: (i) Fulton Reinsurance Company, LTD, which engages in the business of reinsuring credit life and accident and health insurance directly related to extensions of credit by the banking subsidiaries of the Corporation; (ii) Fulton Financial Realty Company, which holds title to or leases certain properties upon which Corporation branch offices and other facilities are located; (iii) Central Pennsylvania Financial Corp., which owns certain limited partnership interests in partnerships invested primarily in low and moderate income housing projects; (iv) FFC Management, Inc., which owns certain investment securities and other passive investments; (v) FFC Penn Square, Inc., which owns trust preferred securities issued by a subsidiary of Fulton Bank, N.A; and (vi) Fulton Insurance Services Group, Inc., which engages in the sale of various life insurance products. The Corporation owns 100% of the common stock of four non-bank subsidiaries which are not consolidated for financial reporting purposes. The following table provides information for these non-bank subsidiaries, whose sole assets consist of junior subordinated deferrable interest debentures issued by the Corporation, as of December 31, 2013 (dollars in thousands): Subsidiary Fulton Capital Trust I................................................................................................. Columbia Bancorp Statutory Trust ............................................................................ Columbia Bancorp Statutory Trust II......................................................................... Columbia Bancorp Statutory Trust III ....................................................................... State of Incorporation Pennsylvania Delaware Delaware Delaware $ Total Assets 154,640 6,186 4,124 6,186 Competition The banking and financial services industries are highly competitive. Within its geographical region, the Corporation’s subsidiaries face direct competition from other commercial banks, varying in size from local community banks to larger regional and national banks, credit unions and non-bank entities. With the growth in electronic commerce, the Corporation's subsidiary banks also face competition from financial institutions that do not have a physical presence in the Corporation’s geographical markets. The industry is also highly competitive due to the GLB Act. Under the GLB Act, banks, insurance companies and securities firms may affiliate under a financial holding company structure, allowing expansion into non-banking financial services activities that were previously restricted. These activities include a full range of banking, securities and insurance activities, including securities and insurance underwriting, issuing and selling annuities and merchant banking activities. While the Corporation does not currently engage in all of these activities, the ability to do so without separate approval from the Federal Reserve Board (FRB) enhances the ability of the Corporation – and financial holding companies in general – to compete more effectively in all areas of financial services. As a result of the GLB Act, there is a great deal of competition for customers that were traditionally served by the banking industry. While the GLB Act increased competition, it also provided opportunities for the Corporation to expand its financial services offerings. The Corporation competes through the variety of products that it offers and the quality of service that it provides to its customers. However, there is no guarantee that these efforts will insulate the Corporation from competitive pressure, which could impact its pricing decisions for loans, deposits and other services and could ultimately impact financial results. 4 Market Share Deposit market share information is compiled as of June 30 of each year by the Federal Deposit Insurance Corporation (FDIC). The Corporation’s banks maintain branch offices in 52 counties across five states. In 15 of these counties, the Corporation ranked in the top 5 in deposit market share (based on deposits as of June 30, 2013). The following table summarizes information about the counties in which the Corporation has branch offices and its market position in each county. No. of Financial Institutions Deposit Market Share (June 30, 2013) County Lancaster .............. Berks..................... Bucks.................... Centre ................... Chester.................. Columbia .............. Cumberland .......... Dauphin ................ Delaware............... Lebanon ................ Lehigh................... Lycoming.............. Montgomery ......... Montour................ Northampton......... Northumberland ... State PA PA PA PA PA PA PA PA PA PA PA PA PA PA PA PA PA Schuylkill ............. PA Snyder................... PA Union.................... PA York...................... DE New Castle ........... Sussex................... DE Anne Arundel ....... MD Baltimore.............. MD Baltimore City ...... MD Cecil ..................... MD Frederick............... MD Howard ................. MD Montgomery ......... MD Prince George’s .... MD Washington........... MD NJ Atlantic ................. NJ Burlington............. NJ Camden................. NJ Cumberland .......... NJ Gloucester............. Population (2013 Est.) Banking Subsidiary Banks/ Thrifts Credit Unions Rank 18 20 36 17 35 6 18 16 34 11 22 11 45 5 17 18 18 8 8 15 20 16 30 40 34 7 18 20 36 19 13 16 22 21 12 22 15 13 20 4 9 2 6 10 17 6 14 11 33 3 12 4 3 1 3 14 25 6 12 20 17 4 5 5 24 27 5 8 14 11 5 6 531,000 Fulton Bank, N.A. 415,000 Fulton Bank, N.A. 627,000 Fulton Bank, N.A. 156,000 Fulton Bank, N.A. 511,000 Fulton Bank, N.A. 67,000 FNB Bank, N.A. 241,000 Fulton Bank, N.A. 271,000 Fulton Bank, N.A. 563,000 Fulton Bank, N.A. 136,000 Fulton Bank, N.A. 358,000 Lafayette Ambassador Bank 118,000 FNB Bank, N.A. 813,000 Fulton Bank, N.A. 18,000 FNB Bank, N.A. 300,000 Lafayette Ambassador Bank 94,000 Swineford National Bank FNB Bank, N.A. 146,000 Fulton Bank, N.A. 40,000 Swineford National Bank 45,000 Swineford National Bank 439,000 Fulton Bank, N.A. 551,000 Fulton Bank, N.A. 208,000 Fulton Bank, N.A. 559,000 The Columbia Bank 825,000 The Columbia Bank 622,000 The Columbia Bank 102,000 The Columbia Bank 243,000 The Columbia Bank 308,000 The Columbia Bank 1,025,000 The Columbia Bank 892,000 The Columbia Bank 150,000 The Columbia Bank 276,000 Fulton Bank of New Jersey 452,000 Fulton Bank of New Jersey 513,000 Fulton Bank of New Jersey 158,000 Fulton Bank of New Jersey 290,000 Fulton Bank of New Jersey 5 % 23.7% 3.8% 1.8% 1.4% 3.0% 4.2% 1.5% 3.7% 0.2% 31.3% 3.6% 0.8% 0.4% 26.4% 13.7% 1.7% 4.0% 4.0% 27.0% 7.2% 10.2% 0.2% 7.2% 0.3% 0.7% 0.3% 10.4% 0.6% 9.4% 0.2% 0.8% 19.7% 1.1% 0.7% 2.1% 1.8% 13.5% 2 8 17 16 11 5 15 7 33 1 10 14 28 2 3 16 9 9 2 4 4 13 4 27 25 16 4 17 4 35 22 2 13 19 10 11 2 State Population (2013 Est.) Banking Subsidiary Banks/ Thrifts Credit Unions Rank % No. of Financial Institutions Deposit Market Share (June 30, 2013) NJ NJ NJ NJ NJ NJ NJ NJ NJ VA VA VA VA VA VA VA 126,000 Fulton Bank of New Jersey 369,000 Fulton Bank of New Jersey 832,000 Fulton Bank of New Jersey 628,000 Fulton Bank of New Jersey 501,000 Fulton Bank of New Jersey 583,000 Fulton Bank of New Jersey 65,000 Fulton Bank of New Jersey 330,000 Fulton Bank of New Jersey 107,000 Fulton Bank of New Jersey 232,000 Fulton Bank, N.A. 1,136,000 Fulton Bank, N.A. 320,000 Fulton Bank, N.A. 42,000 Fulton Bank, N.A. 183,000 Fulton Bank, N.A. 214,000 Fulton Bank, N.A. 453,000 Fulton Bank, N.A. 16 28 47 29 31 22 8 31 13 14 41 22 14 12 17 17 7 24 32 13 17 8 4 13 4 10 28 18 4 7 12 11 12 22 36 26 15 18 1 9 5 11 46 19 11 14 15 11 2.7% 0.8% 0.3% 0.5% 1.2% 0.6% 26.0% 3.1% 9.4% 1.6% 0.1% 0.7% 2.2% 0.5% 0.3% 1.5% County Hunterdon............. Mercer .................. Middlesex ............. Monmouth ............ Morris ................... Ocean.................... Salem.................... Somerset ............... Warren .................. Chesapeake City ... Fairfax .................. Henrico ................. Manassas .............. Newport News...... Richmond City ..... Virginia Beach...... Supervision and Regulation The Corporation operates in an industry that is subject to various laws and regulations that are enforced by a number of federal and state agencies. Changes in these laws and regulations, including interpretation and enforcement activities, could impact the cost of operating in the financial services industry, limit or expand permissible activities or affect competition among banks and other financial institutions. The following discussion summarizes the current regulatory environment for financial holding companies and banks, including a summary of the more significant laws and regulations. Regulators – The Corporation is a registered financial holding company, and its subsidiary banks are depository institutions whose deposits are insured by the FDIC. The Corporation and its subsidiaries are subject to various regulations and examinations by regulatory authorities. The following table summarizes the charter types and primary regulators for each of the Corporation’s subsidiary banks: Charter Subsidiary Fulton Bank, N.A. ........................................................................................................... National Fulton Bank of New Jersey ............................................................................................. NJ The Columbia Bank ........................................................................................................ MD Lafayette Ambassador Bank ........................................................................................... PA FNB Bank, N.A............................................................................................................... National Swineford National Bank................................................................................................ National Fulton Financial (Parent Company) ................................................................................ N/A Primary Regulator(s) OCC NJ/FDIC MD/FDIC PA/Federal Reserve Bank OCC OCC Federal Reserve Bank OCC - Office of the Comptroller of the Currency Federal statutes that apply to the Corporation and its subsidiaries include the GLB Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), the Bank Holding Company Act (BHCA), the Federal Reserve Act and the Federal Deposit Insurance Act, among others. In general, these statutes and related interpretations establish the eligible business activities of the Corporation, certain acquisition and merger restrictions, limitations on intercompany transactions, such as loans and dividends, and capital adequacy requirements, among other things. 6 The Corporation is subject to regulation and examination by the Federal Reserve Bank, and is required to file periodic reports and to provide additional information that the Federal Reserve Bank may require. In addition, the Federal Reserve Bank must approve certain proposed changes in organizational structure or other business activities before they occur. The BHCA imposes certain restrictions upon the Corporation regarding the acquisition of substantially all of the assets of or direct or indirect ownership or control of any bank for which it is not already the majority owner. Dodd-Frank Act – The Dodd-Frank Act was enacted in July 2010 and resulted in significant financial regulatory reform. The Dodd-Frank Act also changed the responsibilities of the current federal banking regulators. Among other things, the Dodd-Frank Act created the Financial Stability Oversight Council, with oversight authority for monitoring and regulating systemic risk, and the Consumer Financial Protection Bureau (CFPB), which has broad regulatory and enforcement powers over consumer financial products and services. Effective July 21, 2011, the CFPB became responsible for administering and enforcing numerous federal consumer financial laws enumerated in the Dodd-Frank Act. The Dodd-Frank Act also provided that, for banks with total assets of more than $10 billion, the CFPB would have exclusive or primary authority to examine those banks for, and enforce compliance with, the federal consumer financial laws. As of December 31, 2013, none of the Corporation's subsidiary banks had total assets of more than $10 billion, however, the Corporation's largest subsidiary bank, Fulton Bank, N. A., had $9.5 billion in assets. Although not subject to CFPB examination, the Corporation's subsidiary banks remain subject to the review and supervision of other applicable regulatory authorities, and such authorities may enforce compliance with regulations issued by the CFPB. In the event that Fulton Bank, N.A.'s total assets exceed $10 billion in the future, Fulton Bank, N.A. would become subject to supervision, examination and enforcement by the CFPB. The scope of the Dodd-Frank Act impacts many aspects of the financial services industry, and it requires the development and adoption of numerous regulations, some of which have not yet been issued. The effects of the Dodd-Frank Act on the financial services industry will depend, in large part, upon the extent to which regulators exercise the authority granted to them under the Dodd-Frank Act and the approaches taken in implementing regulations. Additional uncertainty regarding the effects of the Dodd- Frank Act exists due to court decisions and the potential for additional legislative changes to the Dodd-Frank Act. The Dodd-Frank Act's provisions that have received the most public attention have generally been those which apply only to larger institutions with total consolidated assets of $50 billion or more. However, the Dodd-Frank Act contains numerous other provisions that affect all bank holding companies, including the Corporation. The following is a listing of significant provisions of the Dodd-Frank Act, and, if applicable, the resulting regulatory rules adopted, that apply (or will apply), most directly to the Corporation and its subsidiaries: • Federal deposit insurance – On April 1, 2011, the FDIC's revised deposit insurance assessment base changed from total domestic deposits to average total assets, minus average tangible equity. In addition, the Dodd-Frank Act created a two scorecard system, one for large depository institutions that have more than $10 billion in assets and another for highly complex institutions that have over $50 billion in assets. See details under the heading "Federal Deposit Insurance" below. • Debit card interchange fees – In June 2011, the FRB adopted regulations, which became effective on October 1, 2011, setting maximum permissible interchange fees issuers can receive or charge on electronic debit card transactions and network exclusivity arrangements (the "Current Rule"). Recently, there has been litigation regarding certain provisions of the Current Rule, including the level of the maximum permissible debit card interchange fees. The final outcome of such litigation or any future litigation, or any further rulemaking by the FRB, 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. • • Interest on demand deposits – Beginning in July 2011, depository institutions were no longer prohibited from paying interest on business transaction and other accounts. Stress testing – In October 2012, the FRB issued final rules regarding company-run stress testing. In accordance with these rules, the Corporation is required to conduct an annual stress test in the manner specified, and using assumptions for baseline, adverse and severely adverse scenarios announced by the FRB. The stress test is designed to assess the potential impact of the various scenarios on the Corporation's earnings, capital levels and capital ratios over at least a nine-quarter time horizon. The Corporation's board of directors and its senior management will be required to consider the results of the stress test in the normal course of business, including as part of its capital planning process and the evaluation of the adequacy of its capital. As required, the Corporation will use data as of September 30, 2013 to conduct the stress test, using scenarios that were released by the FRB in November 2013. Stress test results must be reported to the Federal Reserve Bank in March 2014. Public disclosure of summary stress test results under the severely adverse scenario will begin in June 2015 for stress tests commencing in the fall of 2014. While the Corporation believes that both the quality and magnitude of its capital base are sufficient to support its current operations given its risk profile, the results of the stress testing process may lead the Corporation to retain additional capital or alter the mix of its capital components. 7 Under similar rules adopted by the OCC, national banks and federal savings associations with total consolidated assets of more than $10 billion are also required to conduct annual stress tests. Although the total consolidated assets of Fulton Bank, N.A., the Corporation's largest subsidiary bank, are less than $10 billion, if Fulton Bank, N.A.’s assets exceed $10 billion in the future, it will become subject to the OCC’s stress test rules. • Ability-to-pay rules and qualified mortgages – As required by the Dodd-Frank Act, the CFPB issued a series of final rules in January 2013 amending Regulation Z, implementing by the Truth in Lending Act, requiring mortgage lenders to make a reasonable and good faith determination based on verified and documented information that a consumer applying for a residential mortgage loan has a reasonable ability to repay the loan according to its terms. These final rules, most of which became effective January 10, 2014, prohibit creditors, such as the Corporation's bank subsidiaries, from extending residential mortgage loans without regard for the consumer's ability to repay and add restrictions and requirements to residential mortgage origination and servicing practices. In addition, these rules restrict the imposition of prepayment penalties and compensation practices relating to residential mortgage loan origination. Mortgage lenders are required to determine consumers’ ability to repay in one of two ways. The first alternative requires the mortgage lender to consider eight underwriting factors when making the credit decision. Alternatively, the mortgage lender can originate "qualified mortgages," which are entitled to a presumption that the creditor making the loan satisfied the ability-to-repay requirements. In general, a "qualified mortgage" is a residential mortgage loan that does not have certain high risk features, such as negative amortization, interest-only payments, balloon payments, or a term exceeding 30 years. In addition, to be a qualified mortgage, the points and fees paid by a consumer cannot exceed 3% of the total loan amount and the borrower’s total debt-to-income ratio must be no higher than 43% (subject to certain limited exceptions for loans eligible for purchase, guarantee or insurance by a government sponsored entity or a federal agency). Compliance with these rules has increased the Corporation's overall regulatory compliance costs and required changes to the underwriting practices of the Corporation's subsidiaries with respect to mortgage loans. Moreover, these rules will adversely affect the volume of mortgage loans that are underwritten by the Corporation's subsidiaries and may subject the Corporation to increased potential liability related to such residential mortgage origination activities. The Corporation estimates that approximately 5% of its total residential mortgage loan originations in 2013 would not have been considered "qualified mortgages." • Volcker Rule – As mandated by the Dodd-Frank Act, in December 2013, the OCC, FRB, FDIC, SEC and Commodity Futures Trading Commission issued final rulings (the "Final Rules") implementing certain prohibitions and restrictions on the ability of a banking entity and non-bank financial company supervised by the FRB to engage in proprietary trading and have certain ownership interests in, or relationships with, a "covered fund" (the so-called "Volcker Rule"). The Final Rules generally treat as a covered fund any entity that would be an investment company under the Investment Company Act of 1940 (the "1940 Act") but for the application of the exemptions from SEC registration set forth in Section 3(c)(1) (fewer than 100 beneficial owners) or Section 3(c)(7) (qualified purchasers) of the 1940 Act. The Final Rules also require regulated entities to establish an internal compliance program that is consistent with the extent to which it engages in activities covered by the Volcker Rule, which must include making regular reports about those activities to regulators. Although the Final Rules provide some tiering of compliance and reporting obligations based on size, the fundamental prohibitions of the Volcker Rule apply to banking entities of any size, including the Corporation. Banking entities have until July 21, 2015 to conform their activities and investments to the requirements of the Final Rules. While the Corporation does not engage in proprietary trading or in any other activities prohibited by the Final Rules, the Corporation will continue to evaluate whether any of its investments that fall within the definition of a "covered fund" and would need to be disposed of by July 21, 2015. However, based on the Corporation's evaluation to date, it does not currently expect the Final Rules will have a material effect on its business, financial condition or results of operations. • Incentive compensation – As required by the Dodd-Frank Act, a joint interagency proposed regulation was issued in April 2011. The proposed rule would require the reporting of incentive-based compensation arrangements by a covered financial institution and prohibit incentive-based compensation arrangements at a covered financial institution that provides excessive compensation or that could expose the institution to inappropriate risks that could lead to material financial loss. The proposed rule, if adopted as currently proposed, could limit the manner in which the Corporation structures incentive compensation for its executives. Capital Requirements – There are a number of restrictions on financial and bank holding companies and FDIC-insured depository subsidiaries that are designed to minimize potential loss to depositors and the FDIC insurance funds. Also, a bank holding company is required to serve as a source of financial strength to its depository institution subsidiaries and to commit resources to support such institutions in circumstances where it might not do so absent such policy. Under the BHCA, the FRB has the authority to require a bank holding company to terminate any activity or to relinquish control of a non-bank subsidiary upon the FRB’s 8 determination that such activity or control constitutes a serious risk to the financial soundness and stability of a depository institution subsidiary of the bank holding company. Bank holding companies are required to comply with the FRB’s risk-based capital guidelines, which require a minimum ratio of total capital to risk-weighted assets of 8.00%. At least half of the total capital is required to be Tier 1 capital. In addition to the risk-based capital guidelines, the FRB has adopted a minimum leverage capital ratio under which a bank holding company must maintain a level of Tier 1 capital to average total consolidated assets of at least 3.00% in the case of a bank holding company which has the highest regulatory examination rating and is not contemplating significant growth or expansion. For all other bank holding companies, the minimum ratio of Tier 1 capital to total assets is 4.00%. Depository institutions are required to comply with similar capital guidelines issued by their primary federal regulator. Bank holding companies and depository institutions with supervisory, financial, operational, or managerial weaknesses, as well as those that are anticipating or experiencing significant growth, are expected to maintain capital ratios well above the minimum levels. Moreover, higher capital ratios may be required for any bank holding company and depository institution if warranted by its particular circumstances or risk profile. In all cases, bank holding companies and depository institutions should hold capital commensurate with the level and nature of the risks, including the volume and severity of problem loans, to which they are exposed. The Basel Committee on Banking Supervision (Basel) is a committee of central banks and bank regulators from major industrialized countries that develops broad policy guidelines for use by each country’s regulators with the purpose of ensuring that financial institutions have adequate capital given the risk levels of assets and off-balance sheet financial instruments. In December 2010, Basel released frameworks for strengthening international capital and liquidity regulations, referred to as Basel III. In July 2013, the FRB 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 III framework for strengthening international capital standards. The U.S. Basel III Capital Rules substantially revise the risk-based capital requirements applicable to bank holding companies and depository institutions. The new minimum regulatory capital requirements established by the U.S. Basel III Capital Rules are effective for the Corporation beginning on January 1, 2015, and become fully phased in on January 1, 2019. When fully phased in, the U.S. Basel III Capital Rules will require the Corporation and its bank subsidiaries to: • Meet a new minimum Common Equity Tier 1 capital ratio of 4.50% of risk-weighted assets and a minimum Tier 1 capital ratio of 6.00% of risk-weighted assets; • Continue to require the current minimum Total capital ratio of 8.00% of risk-weighted assets and the minimum Tier 1 leverage capital ratio of 4.00% of average assets; • Maintain a "capital conservation buffer" of 2.50% above the minimum risk-based capital requirements, which must be maintained to avoid restrictions on capital distributions and certain discretionary bonus payments; and • Comply with a revised definition of capital to improve the ability of regulatory capital instruments to absorb losses as a result of which certain non-qualifying capital instruments, including cumulative preferred stock and trust preferred securities, will be excluded as a component of Tier 1 capital for institutions of the Corporation's size. The U.S. Basel III Capital Rules use a standardized approach for risk weightings that 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. The new rules provide that the failure to maintain the "capital conservation buffer" will result in restrictions on capital distributions and discretionary cash bonus payments to executive officers. As a result, under the U.S. Basel III Capital Rules, if any of the Corporation's bank subsidiaries fails to maintain the required minimum capital conservation buffer, the Corporation will be subject to limits, and possibly prohibitions, on its ability to obtain capital distributions from such subsidiaries. If the Corporation does not receive sufficient cash dividends from its bank subsidiaries, it may not have sufficient funds to pay dividends on its capital stock, service its debt obligations or repurchase its common stock. In addition, the Corporation and its bank subsidiaries may be limited in their ability to pay certain cash bonuses to executive officers which may make it more difficult to retain key personnel. As of December 31, 2013, the Corporation believes its current capital levels would meet the fully-phased in minimum capital requirements, including capital conservation buffer, as prescribed in the U.S. Basel III Capital Rules. The Basel III liquidity framework also includes new liquidity requirements that, if implemented by U.S. bank regulators, may require the Corporation to maintain increased levels of liquid assets or alter its strategies for liquidity management. The Basel III liquidity framework requires banks and bank holding companies to measure their liquidity against specific ratios. One ratio, referred 9 to as the Liquidity Coverage Ratio, or LCR, is designed to ensure that sufficient high quality liquid resources are available for a one month period in case of a stress scenario. A second ratio, referred to as the Net Stable Funding Ratio (NSFR), is designed to promote resiliency over longer-term time horizons by creating additional incentives for banks to fund their activities with more stable sources of funding on an ongoing structural basis. These new liquidity standards are subject to further rulemaking, and their terms may change before implementation. In October 2013, U.S. bank regulators proposed rules implementing portions of the Basel III liquidity framework for large, internationally active banking organizations, and the FRB proposed similar, but less stringent rules , applicable to bank holding companies with consolidated assets of $50.0 billion or more. Because of the Corporation's size, neither of these proposed rules as currently drafted will apply to it. U.S. bank regulators have not proposed rules implementing the Basel III liquidity framework and have not determined to what extent they will apply to banking organizations that are not large, internationally active banking organizations, and that do not have consolidated assets of $50.0 billion or more. Prompt Corrective Regulatory Action – The Federal Deposit Insurance Corporation Improvement Act (FDICIA) established a system of prompt corrective action to resolve the problems of undercapitalized institutions. Under this system, the federal bank regulators are required to take certain, and authorized to take other, supervisory actions against undercapitalized institutions, based upon five categories of capitalization which FDICIA created: "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized," and "critically undercapitalized," the severity of which depends upon the institution’s degree of capitalization. Generally, a capital restoration plan must be filed with the institution’s primary federal regulator within 45 days of the date an institution receives notice that it is "undercapitalized," "significantly undercapitalized" or "critically undercapitalized," and the plan must be guaranteed by any parent holding company. In addition, various mandatory supervisory actions become immediately applicable to the institution, including restrictions on growth of assets and other forms of expansion. Under current federal banking regulations, generally, an insured depository institution is treated as well capitalized if its total risk-based capital ratio is 10.00% or greater, its Tier 1 risk-based capital ratio is 6.00% or greater and its Tier 1 leverage capital ratio is 5.00% or greater, and it is not subject to any order or directive to meet a specific capital level. As of December 31, 2013, each of the Corporation’s bank subsidiaries’ capital ratios were above the minimum levels required to be considered "well capitalized" by its primary federal regulator. Loans and Dividends from Subsidiary Banks – There are various restrictions on the extent to which the Corporation's bank subsidiaries can make loans or extensions of credit to, or enter into certain transactions with, its affiliates, which would include the Corporation and its non-banking subsidiaries. In general, these restrictions require that such loans be secured by designated amounts of specified collateral and are limited, as to any one of the Corporation or its non-bank subsidiaries, to 10% of the lending bank’s regulatory capital (20% in the aggregate to all such entities). The Dodd-Frank Act expanded these restrictions, effective in July 2012, to cover securities lending, repurchase agreement and derivatives activities that the Corporation’s bank subsidiaries may have with an affiliate. For safety and soundness reasons, banking regulations also limit the amount of cash that can be transferred from subsidiary banks to the Parent Company in the form of dividends. Dividend limitations vary, depending on the subsidiary bank’s charter and whether or not it is a member of the Federal Reserve System. Generally, subsidiaries are prohibited from paying dividends when doing so would cause them to fall below the regulatory minimum capital levels. Additionally, limits may exist on paying dividends in excess of net income for specified periods. See Note K, "Regulatory Matters," in the Notes to Consolidated Financial Statements for additional information regarding regulatory capital and dividend and loan limitations. Federal Deposit Insurance – Substantially all of the deposits of the Corporation’s subsidiary banks are insured up to the applicable limits by the Deposit Insurance Fund (DIF) of the FDIC, generally up to $250,000 per insured depositor. The subsidiary banks pay deposit insurance premiums based on assessment rates established by the FDIC. The FDIC has established a risk-based assessment system under which institutions are classified and pay premiums according to their perceived risk to the DIF. An institution’s base assessment rate is generally subject to following adjustments: (1) a decrease for the institution’s long- term unsecured debt, including most senior and subordinated debt, (2) an increase for brokered deposits above a threshold amount and (3) an increase for unsecured debt held that is issued by another insured depository institution. On April 1, 2011, as required by the Dodd-Frank Act, the deposit insurance assessment base changed from total domestic deposits to average total assets, minus average tangible equity. In addition, the FDIC also created a two scorecard system, one for large depository institutions that have $10 billion or more in assets and another for highly complex institutions that have $50 billion or more in assets. As of December 31, 2013, none of the Corporation’s individual subsidiary banks had assets of $10 billion or more and, therefore, did not meet the classification of large depository institutions. The FDIC annually establishes for the DIF a designated reserve ratio, or DRR, of estimated insured deposits. The DRR is currently 2.00%. The FDIC is authorized to change deposit insurance assessment rates as necessary to maintain the DRR, without further notice-and-comment rulemaking, provided that: (1) no such adjustment can be greater than three basis points from one quarter to 10 the next, (2) adjustments cannot result in rates more than three basis points above or below the base rates and (3) rates cannot be negative. The Dodd-Frank Act increased the minimum DRR to 1.35% of insured deposits, which must be reached by September 30, 2020, and provides that in setting the assessment rates necessary to meet the new requirement, the FDIC shall offset the effect of this provision on insured depository institutions with total consolidated assets of less than $10 billion, so that more of the cost of raising the reserve ratio will be borne by the institutions with more than $10 billion in assets. In October 2010, the FDIC adopted a restoration plan to ensure that the DIF reserve ratio reaches 1.35% by September 30, 2020. The FDIC is expected to pursue further rulemaking regarding the method that will be used to reach the reserve ratio of 1.35% so that more of the cost of raising the reserve ratio to 1.35% will be borne by institutions with more than $10 billion in assets. To the extent that any of the Corporation’s subsidiary banks’ assets exceeds $10 billion in the future, such rulemaking could result in an increase in the deposit insurance assessments for such banks. USA Patriot Act – Anti-terrorism legislation enacted under the USA Patriot Act of 2001 (Patriot Act) expanded the scope of anti- money laundering laws and regulations and imposed significant new compliance obligations for financial institutions, including the Corporation’s subsidiary banks. These regulations include obligations to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing. Among other requirements, the Patriot Act and the related regulations impose the following requirements with respect to financial institutions: • Establishment of anti-money laundering programs. • Establishment of a program specifying procedures for obtaining identifying information from customers seeking to open new accounts, including verifying the identity of customers within a reasonable period of time. • Establishment of enhanced due diligence policies, procedures and controls designed to detect and report money laundering. • Prohibition on correspondent accounts for foreign shell banks and compliance with recordkeeping obligations with respect to correspondent accounts of foreign banks. Failure to comply with the Patriot Act’s requirements could have serious legal, financial, regulatory and reputational consequences. In addition, bank regulators will consider a holding company’s effectiveness in combating money laundering when ruling on BHCA and Bank Merger Act applications. The Corporation has adopted policies, procedures and controls to address compliance with the Patriot Act and will continue to revise and update its policies, procedures and controls to reflect required changes. Residential Lending Laws – As a residential mortgage lender, the Corporation and its bank subsidiaries are subject to multiple federal consumer protection status and regulations, including, but not limited to, the Truth-In-Lending Act, the Home Mortgage Disclosure Act, the Fair Credit Reporting Act, the Fair Debt Collection Act and the Flood Disaster Protection Act. Failure to comply with these and similar statutes and regulations can result in the Corporation and its bank subsidiaries becoming subject to formal or informal enforcement actions, civil money penalties and consumer litigation. Community Reinvestment – Under the Community Reinvestment Act (CRA), each of the Corporation’s subsidiary banks has a continuing and affirmative obligation, consistent with its safe and sound operation, to ascertain and meet the credit needs of its entire community, including low and moderate income areas. The CRA does not establish specific lending requirements or programs for financial institutions, nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its particular community. The CRA requires an institution’s primary federal regulator, in connection with its examination of the institution, to assess the institution's record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such institution. The assessment focuses on three tests: (1) a lending test, to evaluate the institution’s record of making loans, including community development loans, in its designated assessment areas; (2) an investment test, to evaluate the institution’s record of investing in community development projects, affordable housing, and programs benefiting low or moderate income individuals and areas and small businesses; and (3) a service test, to evaluate the institution’s delivery of banking services throughout its CRA assessment area, including low and moderate income areas. The CRA also requires all institutions to make public disclosure of their CRA ratings. As of December 31, 2013, all of the Corporation’s subsidiary banks are rated as "satisfactory." Regulations require that the Corporation’s subsidiary banks publicly disclose certain agreements that are in fulfillment of CRA. None of the Corporation’s subsidiary banks have any such agreements in place at this time. Standards for Safety and Soundness – Pursuant to the requirements of FDICIA, as amended by the Riegle Community Development and Regulatory Improvement Act of 1994, the federal bank regulatory agencies adopted guidelines establishing general standards relating to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate 11 risk exposure, asset growth, asset quality, earnings, compensation, fees and benefits. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director or principal shareholder. An institution must submit a compliance plan to its regulator if it is notified that it is not satisfying any of such safety and soundness standards. If the institution fails to submit an acceptable compliance plan or fails in any material respect to implement an accepted compliance plan, the regulator must issue an order directing corrective actions and may issue an order directing other actions of the types to which a significantly undercapitalized institution is subject under the "prompt corrective action" provisions of FDICIA. If the institution fails to comply with such an order, the regulator may seek to enforce such order in judicial proceedings and to impose civil money penalties. Privacy Protection – The Corporation’s bank subsidiaries are subject to regulations implementing the privacy protection provisions of the GLB Act. These regulations require each of the Corporation’s bank subsidiaries to disclose its privacy policy, including identifying with whom it shares "nonpublic personal information," to customers at the time of establishing the customer relationship and annually thereafter. The regulations also require the bank to provide its customers with initial and annual notices that accurately reflect its privacy policies and practices. In addition, to the extent its sharing of such information is not covered by an exception, the bank is required to provide its customers with the ability to "opt-out" of having the bank share their nonpublic personal information with unaffiliated third parties. The Corporation’s bank subsidiaries are subject to regulatory guidelines establishing standards for safeguarding customer information. These regulations implement certain provisions of the GLB Act. The guidelines describe the federal bank regulatory agencies’ expectations for the creation, implementation and maintenance of an information security program, which would include administrative, technical and physical safeguards appropriate to the size and complexity of the institution and the nature and scope of its activities. The standards set forth in the guidelines are intended to ensure the security and confidentiality of customer records and information, protect against any anticipated threats or hazards to the security or integrity of such records and protect against unauthorized access to or use of such records or information that could result in substantial harm or inconvenience to any customer. Federal Reserve System – FRB regulations require depository institutions to maintain cash reserves against their transaction accounts (primarily NOW and demand deposit accounts). A reserve of 3% is to be maintained against aggregate transaction accounts between $13.3 million and $89.0 million (subject to adjustment by the FRB) plus a reserve of 10% (subject to adjustment by the FRB between 8% and 14%) against that portion of total transaction accounts in excess of $89.0 million. The first $13.3 million of otherwise reservable balances (subject to adjustment by the FRB) is exempt from the reserve requirements. Each of the Corporation’s bank subsidiaries is in compliance with the foregoing requirements. Required reserves must be maintained in the form of either vault cash, an account at a Federal Reserve Bank or a pass-through account as defined by the FRB. Pursuant to the Emergency Economic Stabilization Act of 2008, the Federal Reserve Banks pay interest on depository institutions’ required and excess reserve balances. The interest rate paid on required reserve balances is currently the average target federal funds rate over the reserve maintenance period. The rate on excess balances will be set equal to the lowest target federal funds rate in effect during the reserve maintenance period. FHLB members are also authorized to borrow from the Federal Reserve "discount window," but FRB regulations require institutions to exhaust all FHLB sources before borrowing from a Federal Reserve Bank. Sarbanes-Oxley Act of 2002 – The Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley), which was signed into law in July 2002, impacts all companies with securities registered under the Securities Exchange Act of 1934, including the Corporation. Sarbanes-Oxley created new requirements in the areas of corporate governance and financial disclosure including, among other things, (i) increased responsibility for Chief Executive Officers and Chief Financial Officers with respect to the content of filings with the SEC; (ii) enhanced requirements for audit committees, including independence and disclosure of expertise; (iii) enhanced requirements for auditor independence and the types of non-audit services that auditors can provide; (iv) accelerated filing requirements for SEC reports; (v) disclosure of a code of ethics; (vi) increased disclosure and reporting obligations for companies, their directors and their executive officers; and (vii) new and increased civil and criminal penalties for violations of securities laws. Many of the provisions became effective immediately, while others became effective as a result of rulemaking procedures delegated by Sarbanes- Oxley to the SEC. Section 404 of Sarbanes-Oxley requires management to issue a report on the effectiveness of its internal controls over financial reporting. In addition, the Corporation’s independent registered public accountants are required to issue an opinion on the effectiveness of the Corporation’s internal control over financial reporting. These reports can be found in Item 8, "Financial Statements and Supplementary Data." Certifications of the Chief Executive Officer and the Chief Financial Officer as required by Sarbanes-Oxley and the resulting SEC rules can be found in the "Signatures" and "Exhibits" sections. 12 Executive Officers As of December 31, 2013, the executive officers of the Corporation are as follows: Name E. Philip Wenger Age 56 Patrick S. Barrett 50 Curtis J. Myers Craig H. Hill Meg R. Mueller Charles J. Nugent Craig A. Roda 45 58 49 65 57 Philmer H. Rohrbaugh 61 Office Held and Term of Office Director of the Corporation since 2009. Mr. Wenger was appointed Chairman of the Board, President and Chief Executive Officer of the Corporation in January 2013. He previously served as President and Chief Operating Officer of the Corporation from 2008 to 2012, a Director of Fulton Bank, N.A. from 2003 to 2009, Chairman of Fulton Bank, N.A. from 2006 to 2009 and has been employed by the Corporation in a number of positions since 1979. Senior Executive Vice President and Chief Financial Officer of the Corporation effective January 1, 2014. Mr. Barrett joined the Corporation as Senior Executive Vice President in November 2013. He held multiple roles with SunTrust Banks, Inc. in the three years prior to joining the Corporation, ending as Chief Financial Officer of SunTrust Wholesale Bank from 2011 to 2013. Mr. Barrett previously held a number of senior finance and managing director roles with JPMorgan Chase & Co. from 2003 to 2010, ending as Managing Director - Investor Relations. He spent 10 years as a Certified Public Accountant with Deloitte Touche Tohmatsu from 1993 to 2003, ending as an Audit Partner, Financial Services in 2003. Senior Executive Vice President of the Corporation; and President and Chief Operating Officer of Fulton Bank, N.A. since July 2013. President and Chief Operating Officer of Fulton Bank, N.A. and Executive Vice President of the Corporation since August 2011. President and Chief Operating Officer of Fulton Bank, N.A. since February 2009. Mr. Myers has been employed by Fulton Bank, N.A. in a number of positions since 1990. Senior Executive Vice President of the Corporation since January 2006. Executive Vice President and Director of Human Resources from 1999 through 2005. Mr. Hill serves as the Corporation's Senior Executive Vice President of Human Resources, Corporate Communications and Administrative Services. Senior Executive Vice President and Chief Credit Officer of the Corporation since July 2013. Executive Vice President and Chief Credit Officer since 2010. Ms. Mueller has been employed by the Corporation in a number of positions since 1996. Retired, effective December 31, 2013. Mr. Nugent served as Senior Executive Vice President and Chief Financial Officer of the Corporation since January 2001 and Executive Vice President and Chief Financial Officer of the Corporation from 1992 to 2001. Mr. Nugent has served as a director of the Federal Home Loan Bank of Pittsburgh since 2010. Senior Executive Vice President of Community Banking of the Corporation since July 2011; and Chairman and Chief Executive Officer of Fulton Bank, N.A., since February 2009. Chief Executive Officer and President of Fulton Bank, N.A. from 2006 to 2009. Senior Executive Vice President and Chief Risk Officer of the Corporation since November 2012. Mr. Rohrbaugh was a managing partner of KPMG, LLP's Chicago office from 2009 to 2012; Vice Chairman Industries and part of the U.S. Management Committee of KPMG from 2006 to 2009; and joined KPMG in 2002. He has more than 25 years of experience in various management positions. Mr. Rohrbaugh is a Certified Public Accountant and currently serves as a director of a public manufacturing company. Angela M. Sargent 46 Senior Executive Vice President and Chief Information Officer of the Corporation since July 2013. Executive Vice President and Chief Information Officer since 2002. Ms. Sargent has been employed by the Corporation in a number of positions since 1992. James E. Shreiner 64 Senior Executive Vice President of the Corporation since January 2006 and Executive Vice President of the Corporation and Executive Vice President of Fulton Bank, N.A. from 2000 to 2005. Mr. Shreiner serves as Senior Executive Vice President of Operations and Credit. 13 Item 1A. Risk Factors An investment in the Corporation's common stock involves certain risks, including, among others, the risks described below. In addition to the other information contained in this report, you should carefully consider the following risk factors. Difficult conditions in the economy and the capital markets may materially adversely affect the Corporation's business and results of operations. The Corporation's results of operations and financial condition are affected by conditions in the capital markets and the economy generally. The Corporation's financial performance is highly dependent upon the business environment in the markets where the Corporation operates and in the U.S. as a whole. Unfavorable or uncertain economic and market conditions can be caused by declines in economic growth, business activity or investor or business confidence, limitations on the availability or increases in the cost of credit and capital, increases in inflation or interest rates, high unemployment, natural disasters or a combination of these or other factors. Specifically, the business environment impacts the ability of borrowers to pay interest on, and repay principal of, outstanding loans and the value of collateral securing those loans, as well as demand for loans and other products and services the Corporation offers. If the quality of the Corporation’s loan portfolio declines, the Corporation may have to increase its provision for credit losses, which would negatively impact its results of operations, and could result in charge-offs of a higher percentage of its loans. Unlike large, national institutions, the Corporation is not able to spread the risks of unfavorable local economic conditions across a large number of diversified economies and geographic locations. If the communities in which the Corporation operates do not grow, or if prevailing economic conditions locally or nationally are unfavorable, its business could be adversely affected. In addition, increased market competition in a lower demand environment could adversely affect the profit potential of the Corporation. Since emerging from a recession during the second half of 2009, the U.S. economy has generally been improving; however, the pace of economic growth has been somewhat sluggish and uneven. There can be no assurance that this improvement will continue, and certain sectors of the economy remain weak and unemployment remains elevated. Some state and local governments and many businesses are still experiencing serious financial difficulty. Loan demand shows signs of improvement; however, intense competition among lenders is contributing to downward pressure on loan yields. Confidence levels of both individuals and businesses in the economy appear to be improving, but their confidence remains fragile. The Corporation is subject to certain risks in connection with the establishment and level of its allowance for credit losses. The allowance for credit losses consists of the allowance for loan losses and the reserve for unfunded lending commitments. While the Corporation believes that its allowance for credit losses as of December 31, 2013 is sufficient to cover incurred losses in the loan portfolio on that date, the Corporation may be required to increase its provision for credit losses due to changes in the risk characteristics of the loan portfolio, thereby negatively impacting its results of operations. The allowance for loan losses represents management’s estimate of losses inherent in the loan portfolio as of the balance sheet date and is recorded as a reduction to loans. Management’s estimate of losses inherent in the loan portfolio is dependent on the proper application of its methodology for determining its allowance needs. The most critical judgments underpinning that methodology include: the ability to identify potential problem loans in a timely manner; proper collateral valuation of impaired loans evaluated for impairment; proper measurement of allowance needs for pools of loans measured for impairment; and an overall assessment of the risk profile of the loan portfolio. The Corporation determines the appropriate level of the allowance for credit losses based on many quantitative and qualitative factors, including, but not limited to: the size and composition of the loan portfolio; changes in risk ratings; changes in collateral values; delinquency levels; historical losses; and economic conditions. If the Corporation’s assumptions and judgments regarding such matters prove to be inaccurate, its allowance for credit losses might not be sufficient, and additional provisions for credit losses might need to be made. Depending on the amount of such provisions for credit losses, the adverse impact of the Corporation’s earnings could be material. In addition, as the Corporation’s loan portfolio grows, it will generally be necessary to increase the allowance for credit losses through additional provisions, which would adversely impact the Corporation’s operating results. Furthermore, bank regulators may require the Corporation to make additional provisions for credit losses or otherwise recognize further loan charge-offs or impairments following their periodic reviews of the Corporation’s loan portfolio, underwriting procedures and allowance for credit losses. Any increase in the Corporation’s allowance for credit losses or loan charge-offs as required by such regulatory authorities could have a material adverse effect on the Corporation’s financial condition and results of operations. See Item 7, "Management’s 14 Discussion and Analysis of Financial Condition and Results of Operations," "Financial Condition - Provision and Allowance for Credit Losses." Economic downturns and the composition of the Corporation’s loan portfolio subject the Corporation to credit risk. Economic downturns and the composition of the Corporation’s loan portfolio subject the Corporation to credit risk. National, regional and local economic conditions can impact the Corporation’s loan portfolio. For example, an increase in unemployment, a decrease in real estate values or increases in interest rates, as well as other factors, could weaken the economies of the communities the Corporation serves. Weakness in the market areas served by the Corporation may depress the Corporation’s earnings and consequently its financial condition because: • • • borrowers may not be able to pay interest on, and repay their principal of, outstanding loans; the value of the collateral securing the Corporation’s loans to borrowers may decline; and demand for loans, as well as and other products and services the Corporation offers, may decline. Approximately $5.7 billion, or 44%, of the Corporation’s loan portfolio was in commercial mortgage and construction loans at December 31, 2013. The Corporation did not have a concentration of credit risk with any single borrower, industry or geographical location. However, commercial mortgage and construction loans generally involve a greater degree of credit risk than residential mortgage loans because they typically have larger balances and are more affected by adverse conditions in the economy. Because payments on commercial mortgage loans often depend on the successful operation and management of the properties and the businesses which operate from within them, repayment of such loans may be affected by factors outside the borrower’s control, such as adverse conditions in the real estate markets, adverse economic conditions or changes in government regulation. See Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations," "Financial Condition - Loans." Changes in interest rates may have an adverse effect on the Corporation's net income. The Corporation is affected by fiscal and monetary policies of the federal government, including those of the FRB, which regulates the national money supply and engages in other lending and investment activities in order to manage recessionary and inflationary pressures, many of which affect interest rates charged on loans and paid on deposits. Net interest income is the most significant component of the Corporation's net income, accounting for approximately 75% of total revenues in 2013. The narrowing of interest rate spreads, the difference between interest rates earned on loans and investments and interest rates paid on deposits and borrowings, could adversely affect the Corporation's net interest income and financial condition. The Corporation cannot predict or control changes in interest rates. Low market interest rates, which have been projected by many to continue for some time, have pressured net interest margins. Interest-earning assets, such as loans and investments, have been originated, acquired or repriced at lower rates, reducing the average rate earned on those assets. While the average rate paid on interest-bearing liabilities, such as deposits and borrowings, has also declined, the decline has not always occurred at the same pace as the decline in the average rate earned on interest-earning assets, resulting in a narrowing of the net interest margin. For example, competition sometimes requires the Corporation to lower rates charged on loans more than the decline in market rates would otherwise indicate. Competition may also require the Corporation to pay higher rates on deposits than market rates would otherwise indicate, further narrowing net interest margin. Further, due to historically low market interest rates, rates paid on deposits may reach a “natural floor” below which rates may not be able to be lowered. See Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations," "Net Interest Income." Movements in interest rates can also cause demand for some of the Corporation’s products and services to be cyclical. As a result, the Corporation may need to periodically scale certain of its businesses, including its personnel, to match increases and decreases in demand and volume. The need to change the scale of these businesses is challenging and there is often a lag between changes in the businesses and the Corporation’s reaction to these changes. For example, demand for residential mortgage loans has historically tended to increase during periods when interest rates were declining, and to decrease during periods when interest rates were rising. During 2012, long-term interest rates in general, and those for residential mortgage loans in particular, were at or near historic lows. This low level of interest rates contributed to a significant increase in the volume of residential mortgage loans originated by the Corporation, a significant increase in gains realized on the sale of some of those loans to investors in the secondary market, and significant growth in the Corporation's residential mortgage loans held in its loan portfolio during 2012. This level of growth was not repeated in 2013 and, as a result, the Corporation’s income related to residential mortgage loans declined. 15 Changes in interest rates or disruption in liquidity markets may adversely affect the Corporation’s sources of funding; liquidity planning at both the bank and holding company levels has become an area of increased regulatory emphasis. The Corporation must maintain sufficient funds to respond to the needs of its depositors and borrowers. The Corporation’s liquidity management emphasizes core deposits and repayments and maturities of loans and investments as its primary sources of liquidity. These primary sources of liquidity can be supplemented by FHLB advances, borrowings from the Federal Reserve Bank, proceeds from the sales of loans and liquidity resources of the holding company. Lower-cost, core deposits may be adversely affected by changes in interest rates and the supplemental sources of liquidity are often more expensive and may not always be as readily available. Technology and other factors have also made it more convenient for customers to transfer low-cost deposits into higher- cost deposits or into alternative investments or deposits of other banks or non-bank providers; these funding changes can also increase the Corporation’s funding costs and/or create liquidity challenges. While the Corporation attempts to manage its liquidity through models, assumptions and estimates used in the models do not always accurately forecast the impact of changes in customer behavior. For example, the Corporation may face limitations on its ability to fund loan growth if customers move funds out of the Corporation’s subsidiary banks’ deposit accounts in response to increases in interest rates. In the current, unusually low interest rate environment, customers are less sensitive to interest rates when making deposit decisions. However, should interest rates rise, customers may become more aware of interest rate differences and alternative opportunities, which could cause them to move funds into those other opportunities and out of deposit accounts maintained by the Corporation’s bank subsidiaries. Due to regulatory limitations on the Corporation’s ability to rely on short term funding sources, any significant movements of deposits away from traditional depository accounts which negatively impacts the Corporation’s loan-to-deposit ratio could restrict its ability to achieve growth in loans or result in the necessity to pay higher interest rates on deposit products in order to retain deposits to fund loans. Market conditions have been negatively impacted by disruptions in the liquidity markets in the past, and such disruptions or an adverse change in the Corporation's results of operations or financial condition could, in the future, have a negative impact on secondary sources of liquidity. See Part II, Item 7A, "Quantitative and Qualitative Disclosures About Market Risk," "Interest Rate Risk, Asset/Liability Management and Liquidity." Liquidity must also be managed at the holding company level. Banking regulators are paying close attention to liquidity at the holding company level, in addition to consolidated and bank liquidity levels. 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. These factors have affected some institutions' ability to pay dividends and have required some institutions to establish borrowing facilities at the holding company level. As discussed under Part I, Item 1, "Business," "Supervision and Regulation," proposals included within the Basel III liquidity framework include new liquidity requirements which, if implemented by U.S. bank regulators, may require the Corporation to maintain increased levels of liquid assets or alter its strategies for liquidity management. Price fluctuations in securities markets, as well as other market events, such as a disruption in credit and other markets and the abnormal functioning of markets for securities, could have an impact on the Corporation's results of operations. The market value of the Corporation's securities investments, which include municipal securities, auction rate securities, corporate debt securities and equity investments, as well as the revenues the Corporation earns from its trust and investment management services business, are particularly sensitive to price fluctuations and market events. Declines in the values of the Corporation’s securities holdings, combined with adverse changes in the expected cash flows from these investments, could result in other-than- temporary impairment charges: • Municipal Securities. As of December 31, 2013, the Corporation had $284.8 million of municipal securities issued by various municipalities in its investment portfolio. Ongoing uncertainty with respect to the financial viability of municipal insurers places greater emphasis on the underlying strength of issuers. Increasing pressure on local tax revenues of issuers due to adverse economic conditions could also have a negative impact on the underlying credit quality of issuers. The Corporation evaluates existing and potential holdings primarily on the underlying credit worthiness of the issuing municipality and then, to a lesser extent, on the credit enhancement corresponding to the individual issuance. As of December 31, 2013, approximately 95% of municipal securities were supported by the general obligation of corresponding municipalities. In addition, approximately 84% of these securities were school district issuances that are supported by the general obligation of the corresponding municipalities as of December 31, 2013. 16 • Auction Rate Securities. As of December 31, 2013, the Corporation had $159.3 million of investments in Auction Rate Certificates (ARCs). Recent market prices for ARCs represent forced liquidations or distressed sales and do not provide an accurate basis for determining their fair value. The Corporation does not have the intent to sell the ARCs and does not believe it will more likely than not be required to sell any of the ARCs prior to a recovery of their fair value to amortized cost, which may be at maturity. However, if the Corporation chose to liquidate these securities prior to their maturity, it would likely have to do so at such "distressed" sale prices and would likely do so at a loss. • Corporate Debt Securities. As of December 31, 2013, the Corporation had $98.7 million of corporate debt securities issued by financial institutions. Declines in the values of these securities, combined with adverse changes in the expected cash flows from these investments, could result in other-than-temporary impairment charges • Equity Investments. The Corporation's holdings of equity investments include stocks of publicly traded financial institutions, including shares of a single financial institution which, as of December 31, 2013, had a fair value of $29.3 million. The Corporation's holdings of this financial institution constituted approximately 72% of the fair value of the Corporation's aggregate holdings of publicly traded financial institutions as of that date. • Investment Management and Trust Services Revenues. The Corporation's investment management and trust services revenue, which is partially based on the value of the underlying investment portfolios, can also be impacted by fluctuations in the securities markets. If the values of those investment portfolios decrease, whether due to factors influencing U.S. securities markets, in general, or otherwise, the Corporation's revenue could be negatively impacted. In addition, the Corporation's ability to sell its brokerage services is dependent, in part, upon consumers' level of confidence in securities markets. See also Part II, Item 7A, "Quantitative and Qualitative Disclosures About Market Risk." The supervision and regulation to which the Corporation is subject is increasing and can be a competitive disadvantage; the Corporation may incur fines, penalties and other negative consequences from regulatory violations, including inadvertent or unintentional violations. Virtually every aspect of the Corporation's operations is subject to extensive regulation and, in the current economic, political and regulatory climate, the Corporation and its bank subsidiaries are subject to heightened regulatory scrutiny, especially given the Corporation's size and complexity. The Corporation has six banking subsidiaries. The Corporation and its subsidiaries are subject to regulation by a variety of federal and state banking regulatory agencies. This corporate structure presents challenges, in terms of compliance with different, and potentially inconsistent, regulatory requirements. As a result, the time, expense and internal and external resources associated with regulatory compliance continue to increase, and balancing the need to address regulatory changes and effectively manage growth in non-interest expenses has become more challenging than it has been in the past. Thus, the Corporation’s compliance obligations increase the Corporation's expense, require management's attention and can be a disadvantage from a competitive standpoint with respect to non-regulated competitors and larger bank competitors. Compliance with banking statutes and regulations is important to the Corporation’s ability to engage in new activities and to consummate certain transactions. Bank regulators are scrutinizing banks through longer and more extensive bank examinations in both the safety and soundness and compliance areas. The results of such examinations could result in a delay in receiving required regulatory approvals for potential new activities and transactional matters. In the event that the Corporation’s compliance record would be determined to be unsatisfactory, such approvals may not be able to be obtained. Federal and state banking regulators also possess broad powers to take supervisory actions, as they deem appropriate. These supervisory actions may result in higher capital requirements, higher deposit insurance premiums and limitations on the Corporation’s operations and expansion activities that could have a material adverse effect on its business and profitability. 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, the Corporation has invested considerable resources in initiatives designed to strengthen its risk management framework and regulatory compliance programs. Further, failure to comply with these regulatory requirements, including inadvertent or unintentional violations, may result in the assessment of fines and penalties, the commencement of informal or formal regulatory enforcement actions against the Corporation or its bank subsidiaries. As an example, three of the Corporation's bank subsidiaries were recently subject to civil money penalties for certain alleged failures to comply with the Flood Disaster Protection Act. Other negative consequences also can result from such failures, including regulatory restrictions on the Corporation's activities, including restrictions on the Corporation’s ability to grow through acquisition, reputational damage, restrictions on the ability of institutional investment managers to invest in the 17 Corporation's securities and increases in the Corporation's costs of doing business. The occurrence of one or more of these events may have a material adverse effect on the Corporation's business, financial condition or results of operations. Among other areas that the Corporation continues to focus substantial resources on to improve its compliance functions are the requirements under the Flood Disaster Protection Act, the Bank Secrecy Act, the Patriot Act and related anti-money laundering regulations. Although the Corporation has made progress in continuing to build-out its risk and compliance management infrastructures, the pace at which it has progressed may not be consistent with current regulatory expectations. As a result, the Corporation believes that there is an increasing risk that it, or one or more of its bank subsidiaries, may become subject to regulatory enforcement action in addition to the civil monetary penalties recently imposed against three of its banking subsidiaries. Any such enforcement action by the Corporation’s banking regulators would likely require that it accelerate its efforts to resolve identified deficiencies and improve its compliance functions 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 or one or more of its bank subsidiaries. Management has accelerated its efforts to resolve 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. See also Part I, Item 1, Business, "Supervision and Regulation." Financial reform legislation continues to have a significant impact on the Corporation's business and results of operations; however, until more implementing regulations are adopted, the extent to which the legislation will impact the Corporation is uncertain. On July 21, 2010, the President of the United States signed into law the Dodd-Frank Act. The scope of the Dodd-Frank Act impacted many aspects of the financial services industry, and it requires the development and adoption of many regulations, a significant number of which have not yet been adopted or fully implemented. The effects of the Dodd-Frank Act on the financial services industry will depend, in large part, upon the extent to which regulators exercise the authority granted to them under the Dodd- Frank Act and the approaches taken in implementing regulations. The delay in the implementation of many of the regulations mandated by the Dodd-Frank Act on the timelines contemplated by such legislation has resulted in a lack of clear regulatory guidance to banks. The resulting uncertainty has caused banks to take a cautious approach to business initiatives and planning. Additional uncertainty regarding the effect of the Dodd-Frank Act exists due to court decisions and the potential for additional legislative changes to the Dodd-Frank Act. The Corporation, as well as the broader financial services industry, is continuing to assess the potential impact of the Dodd-Frank Act (and its possible impact on customers' behaviors) on its business and operations but, at this stage, the extent of the impact cannot be fully determined with any degree of certainty. However, the Corporation has been impacted, and will likely continue to be in the future, by the so-called Durbin Amendment to the Dodd-Frank Act, which reduced debit card interchange revenue of banks; and revised FDIC deposit insurance assessments. The Durbin amendment is currently the subject of litigation that could result in a further reduction to permissible interchange income, although the outcome of that litigation is not yet final. The Corporation also is likely to be impacted by the Dodd-Frank Act in the areas of corporate governance, capital requirements, risk management, stress testing and regulation under consumer protection laws. The Dodd-Frank Act established the CFPB. Among other things, the CFPB was given rulemaking authority over most providers of consumer financial services in the U.S., examination and enforcement authority over the consumer operations of large banks, as well as interpretive authority with respect to numerous existing consumer financial services regulations. The CFPB began exercising these oversight authorities over the largest banks during 2011. Because the CFPB is a relatively new agency, the impact on the Corporation, including its retail banking and mortgage businesses, is largely uncertain. However, any new regulatory requirements, or modified interpretations of existing regulations, will affect the Corporation's consumer business practices and operations, potentially resulting in increased compliance costs. Furthermore, the CFPB represents an additional source of potential enforcement or litigation against the Corporation and, as a relatively new agency with a focus on consumer protection, the CFPB may have new or different enforcement or litigation strategies than those typically utilized by other regulatory agencies. Such actions could further increase the Corporation's costs. Pursuant to the Dodd-Frank Act, the CFPB issued a series of final rules in January 2013 related to mortgage loan origination and mortgage loan servicing. These final rules, most provisions of which became effective January 10, 2014, prohibit creditors, such as the Corporation's bank subsidiaries, from extending residential mortgage loans without regard for the consumer's ability to 18 repay, provide certain safe harbor protections for the origination of loans that meet the requirements for a "qualified mortgage" and add restrictions and requirements to residential mortgage origination and servicing practices. In addition, these rules restrict the imposition of prepayment penalties and compensation practices relating to residential mortgage loan origination. Compliance with these rules will likely increase the Corporation’s overall regulatory compliance costs and required the Corporation’s bank subsidiaries to change their underwriting practices. Moreover, these rules may adversely affect the volume of mortgage loans that the Corporation’s bank subsidiaries originate and may subject those subsidiaries to increased potential liability related to their residential loan origination activities. See also Part I, Item 1, "Business," "Supervision and Regulation." Additional growth, particularly at the Corporation's largest subsidiary, Fulton Bank, N.A., will subject it to additional regulation and increased supervision. The Dodd-Frank Act imposes additional regulatory requirements on institutions with $10 billion or more in assets. The Corporation's largest bank subsidiary, Fulton Bank, N.A., had $9.5 billion in assets as of December 31, 2013. Additional growth that results in Fulton Bank, N.A. having assets of $10 billion or more would subject Fulton Bank, N.A. to the following: Supervision, examination and enforcement by the CFPB with respect to consumer financial protection laws; Stress testing requirements; • • • A modified methodology for calculating FDIC insurance assessments and potentially higher assessment rates as a result of institutions with $10 billion or more in assets being required to bear a greater portion of the cost of raising the reserve ratio to 1.35% as required by the Dodd-Frank Act; • Heightened compliance standards under the Volcker Rule; and • Enhanced supervision as a larger financial institution. See also Part I, Item 1, "Business," "Supervision and Regulation." The Corporation is exposed to many types of operational and other risks; some of these risks are associated with third-party vendors and other financial institutions. The Corporation is exposed to many types of operational risk, including the risk of human error or fraud by employees and outsiders, unsatisfactory performance by employees and vendors, clerical and record-keeping errors, and computer and telecommunications systems malfunctions. Reputation risk, or the risk to the Corporation's earnings and capital from negative public opinion, is inherent in the Corporation's business. Negative public opinion could result from the Corporation's actual or alleged conduct in any number of activities, including lending practices, corporate governance, regulatory, compliance, mergers and acquisitions, and disclosure, sharing or inadequate protection of customer information and from actions taken by government regulators and community organizations in response to that conduct. Because the Corporation conducts the majority of its businesses under the "Fulton" brand, negative public opinion about one business could affect the Corporation's other businesses. The Corporation relies upon certain third-party vendors to provide products and services necessary to maintain its day-to-day operations. For example, the Corporation's businesses are dependent on its ability to process a large number of increasingly complex transactions; a significant amount of this processing is provided to the Corporation by third-party vendors. Accordingly, the Corporation’s operations are exposed to the risk that these vendors might not perform in accordance with applicable contractual arrangements or service level agreements. The failure of an external vendor to perform in accordance with applicable contractual arrangements or service level agreements could be disruptive to the Corporation’s operations, which could have a material adverse effect on the Corporation’s financial condition and results of operations. The commercial soundness of many financial institutions may be closely interrelated as a result of credit, trading, execution of transactions or other relationships between the institutions. As a result, concerns about, or a default or threatened default by, one institution could lead to significant market-wide liquidity and credit problems, losses or defaults by other institutions. This is sometimes referred to as "systemic risk" and may adversely affect financial intermediaries, such as clearing agencies, clearing houses, banks, securities firms and exchanges, with which the Corporation interacts on a daily basis, and therefore could adversely affect the Corporation. Any of these operational or other risks could result in the Corporation's diminished ability to operate one or more of its businesses, financial loss, potential liability to customers, inability to secure insurance, reputational damage and regulatory intervention, which could materially adversely affect the Corporation. 19 The Corporation's framework for managing risks may not be effective in mitigating risk and loss to the Corporation; for example, the Corporation’s internal control may be ineffective. The Corporation’s risk management framework is subject to inherent limitations, and there may exist, or develop in the future, risks that the Corporation has not anticipated or identified. If the Corporation's risk management framework proves to be ineffective, the Corporation could suffer unexpected losses and could be materially adversely affected. In addition, the Corporation historically has followed a "super-community" banking strategy under which the Corporation has operated its subsidiary banks autonomously to maximize the advantage of community banking and service to its customers. This banking strategy challenges the Corporation's efforts to manage risk efficiently and effectively through a centralized risk management and compliance function. The evolving need for organization-wide risk management procedures may require further changes in the Corporation's historical multi-bank, de-centralized operating approach. One critical component of the Corporation’s risk management framework is its system of internal controls. Management regularly reviews and updates the Corporation’s internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide reasonable, but not absolute, assurances that the objectives of the controls are met. Any failure or circumvention of the Corporation’s controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on the Corporation’s business, results of operations, and financial condition. See Part II, Item 9A, "Controls and Procedures." Loss of, or failure to adequately safeguard, confidential or proprietary information may adversely affect the Corporation's operations, net income or reputation. The Corporation regularly collects, processes, transmits and stores significant amounts of its own confidential information, as well as confidential information regarding its customers, employees and others that is necessary to the conduct of its business. In some cases, this confidential or proprietary information is collected, compiled, processed, transmitted or stored by third parties on behalf of the Corporation. A failure in or breach of the Corporation's operational or information security systems, or those of the Corporation's third-party service providers, as a result of cyber attacks or information security breaches or due to employee error, malfeasance or other disruptions could adversely affect the Corporation’s business, result in the disclosure or misuse of confidential or proprietary information, damage the Corporation’s reputation, increase the Corporation’s costs and/or cause losses and could subject the Corporation to significant regulatory consequences. As a result, cyber security and the continued development and enhancement of the controls and processes designed to protect the Corporation's systems, computers, software, data and networks from attack, damage or unauthorized access remain a priority for the Corporation. The safeguards employed by the Corporation do not provide absolute assurance that mishandling, misuse or loss of the information will not occur, and that if mishandling, misuse or loss of the information did occur, those events will be promptly detected and addressed. As information security risks and cyber threats continue to evolve (and possibly increase as technological developments may further increase cyber threats), the Corporation may be required to expend additional resources to continue to enhance its information security measures and/or to investigate and remediate any information security vulnerabilities. If the goodwill that the Corporation has recorded in connection with its acquisitions becomes impaired, it could have a negative impact on the Corporation's results of operations. In the past, the Corporation supplemented its internal growth with strategic acquisitions of banks, branches and other financial services companies. If the purchase price of an acquired company exceeds the fair value of the company's net assets, the excess is carried on the acquirer's balance sheet as goodwill. Companies must evaluate goodwill for impairment at least annually. A more frequent evaluation could be triggered by, for example, a broad price decline in the shares of comparable publicly traded financial institutions. Write-downs of the amount of any impairment, if necessary, are to be charged to earnings in the period in which the impairment occurs. There can be no assurance that future evaluations of goodwill will not result in impairment charges. The Corporation continually encounters technological change. The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology- driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. The Corporation’s future success depends, in part, upon its ability to address the needs of its customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in the Corporation’s operations. Many of the Corporation’s competitors have substantially greater resources to invest in technological improvements. The Corporation may not be able to effectively implement new technology-driven products and services, be successful in marketing these products and services to its customers, or effectively deploy new technologies to improve 20 the efficiency of its operations. Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse impact on the Corporation’s business, financial condition and results of operations. Further, the costs of new technology, including personnel, can be high in both absolute and relative terms. There can be no assurance, given the past pace of change and innovation, that the Corporation’s technology, either purchased or developed internally, will meet or continue to meet the needs of the Corporation and the needs of its customers. The competition the Corporation faces is significant and may reduce the Corporation's customer base and negatively impact the Corporation's results of operations. There is significant competition among commercial banks in the market areas served by the Corporation. In addition, as a result of the deregulation of the financial services industry, the Corporation also competes with other providers of financial services, such as savings and loan associations, credit unions, consumer finance companies, securities firms, insurance companies, commercial finance and leasing companies, the mutual funds industry, full service brokerage firms and discount brokerage firms, some of which are subject to less extensive regulations than the Corporation is with respect to the products and services they provide and have different cost structures. Some of the Corporation's competitors have greater resources, higher lending limits, lower cost of funds and may offer other services not offered by the Corporation. The Corporation also experiences competition from a variety of institutions outside its market areas. Some of these institutions conduct business primarily over the Internet and may thus be able to realize certain cost savings and offer products and services at more favorable rates and with greater convenience to the customer. Competition may adversely affect the rates the Corporation pays on deposits and charges on loans, thereby potentially adversely affecting the Corporation's profitability. The Corporation's profitability depends upon its continued ability to successfully compete in the market areas it serves. Further, intense competition among lenders is contributing to downward pressure on loan yields. See Part I, Item 1, "Business," "Competition." The Corporation may not be able to attract and retain skilled people. The Corporation’s success depends, in large part, on its ability to attract and retain skilled people. Competition for the best people in most activities engaged in by the Corporation can be intense, and the Corporation may not be able to hire sufficiently skilled people or to retain them. As an example and as noted above, the Corporation is engaged in an effort to enhance its compliance and risk management functions. As many of the Corporation’s peers are engaged in similar efforts, the competition for personnel with skills in these areas can be significant and, to the extent that the Corporation is able to attract qualified personnel, the expense associated with hiring such personnel may be substantial. The unexpected loss of services of one or more of the Corporation’s key personnel could have a material adverse impact on the Corporation’s business because of their skills, knowledge of the Corporation’s markets, years of industry experience and the difficulty of promptly finding qualified replacement personnel. The Corporation's future growth may require the Corporation to raise additional capital in the future, but that capital may not be available when it is needed or may be available only at an excessive cost. The Corporation is required by regulatory authorities to maintain adequate levels of capital to support its operations. The Corporation anticipates that current capital levels will satisfy regulatory requirements for the foreseeable future. The Corporation, however, may at some point choose to raise additional capital to support its continued growth. The Corporation's ability to raise additional capital will depend, in part, on conditions in the capital markets at that time, which are outside of the Corporation's control. Accordingly, the Corporation may be unable to raise additional capital, if and when needed, on terms acceptable to the Corporation, or at all. If the Corporation cannot raise additional capital when needed, its ability to further expand operations through internal growth and acquisitions could be materially impacted. In the event of a material decrease in the Corporation's stock price, future issuances of equity securities could result in dilution of existing shareholder interests. Capital planning has taken on more importance due to regulatory requirements and the Basel III capital standards. Consistent with current regulatory guidance, the Corporation conducts an annual stress test. The Corporation's board of directors and its senior management will be required to consider the results of the stress test in the normal course of business, including as part of its capital planning process and the evaluation of the adequacy of its capital. The Corporation will also be required to report the results of the annual stress test to the Federal Reserve and, beginning with the stress test conducted in the fall of 2014, publicly disclose a summary of the results of the stress test completed under the severely adverse scenario. The results of the stress testing process may lead the Corporation to retain additional capital or alter the mix of its capital components. In addition, the implementation of certain regulations with regard to regulatory capital could disproportionately affect the Corporation's regulatory capital position relative to that of its competitors, including those who may not be subject to the same regulatory requirement. 21 In 2013, the federal banking regulatory agencies implemented the U.S. Basel III Capital Rules, including: (i) new minimum Common Equity Tier 1 capital ratio of 4.50% of risk-weighted assets, (ii) increased minimum Tier 1 capital ratio (from 4.00% to 6.00% of risk-weighted assets), (iii) retention of the current minimum Total capital ratio of 8.00% of risk-weighted assets and the minimum Tier 1 leverage capital ratio at 4.00% of average assets and (iv) a new "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. As a result of the implementation of the new capital standards, certain non-qualifying capital instruments, including cumulative preferred stock and trust preferred securities, will be excluded as a component of Tier 1 capital for institutions of the Corporation’s size. The fully phased-in capital standards under the U.S. Basel III Capital Rules require banks to maintain more capital than the minimum levels required under current regulatory capital standards. The new minimum regulatory capital requirements begin to apply to the Corporation in 2015. The required minimum capital conservation buffer will be phased in incrementally starting on January 1, 2016 and will be fully phased in on January 1, 2019. The failure to meet the established capital requirements could result in the federal banking regulators placing limitations or conditions on the activities of the Corporation or its bank subsidiaries or restricting the commencement of new activities, and such failure could subject the Corporation or its bank subsidiaries to a variety of enforcement remedies, including limiting the ability of the Corporation or its bank subsidiaries to pay dividends, issuing a directive to increase capital and terminating FDIC deposit insurance. In addition, the failure to comply with the capital conservation buffer will result in restrictions on capital distributions and discretionary cash bonus payments to executive officers. As of December 31, 2013, the Corporation believes its current capital levels would meet the fully-phased in minimum capital requirements, including capital conservation buffers, as set forth in the U.S. Basel III Capital Rules. See Part I, Item 1, "Business," "Supervision and Regulation - Capital Requirements." The Corporation is a holding company and relies on dividends from its subsidiaries for substantially all of its revenue and its ability to make dividends, distributions and other payments. The Corporation is a separate and distinct legal entity from its banking and nonbanking subsidiaries, and depends on the payment of dividends from its subsidiaries, principally its banking subsidiaries, for substantially all of its revenues. As a result, the Corporation's ability to make dividend payments on its common stock depends primarily on certain federal and state regulatory considerations and the receipt of dividends and other distributions from its subsidiaries. There are various regulatory and prudential supervisory restrictions, which may change from time to time, that impact the ability of the Corporation’s banking subsidiaries to pay dividends or make other payments to it. There can be no assurance that the Corporation’s banking subsidiaries will be able to pay dividends at past levels, or at all, in the future. If the Corporation does not receive sufficient cash dividends or is unable to borrow from its banking subsidiaries, then the Corporation may not have sufficient funds to pay dividends to its shareholders, repurchase its common stock or service its debt obligations. See Part I, Item 1, "Business," "Supervision and Regulation - Loans and Dividends from Subsidiary Banks." A downgrade in the credit ratings of the Corporation or its bank subsidiaries could have a material adverse impact on the Corporation. Fitch, Inc. and Moody's Investors Service, Inc. continuously evaluate the Corporation and its subsidiaries, and their ratings of the Corporation and its subsidiary's long-term and short-term debt are based on a number of factors, including financial strength, as well as factors not entirely within its and its subsidiaries' control, such as conditions affecting the financial services industry generally. Moreover, Fitch and Moody's have indicated that they are evaluating the impact of the Dodd-Frank Act on the rating support assumptions currently included in their methodologies. In light of these reviews and the continued focus on the financial services industry generally, the Corporation and its subsidiaries may not be able to maintain their current respective ratings. Ratings downgrades by Fitch or Moody's could have a significant and immediate impact on the Corporation's funding and liquidity through cash obligations, reduced funding capacity and collateral triggers. A reduction in the Corporation's or its subsidiaries' credit ratings could also increase the Corporation's borrowing costs and limit its access to the capital markets. Downgrades in the credit or financial strength ratings assigned to the counterparties with whom the Corporation transacts, could create the perception that the Corporation's financial condition will be adversely impacted as a result of potential future defaults by such counterparties. Additionally, the Corporation could be adversely affected by a general, negative perception of financial institutions caused by the downgrade of other financial institutions. Accordingly, ratings downgrades for other financial institutions could affect the market price of the Corporation's stock and could limit access to or increase its cost of capital. 22 Anti-takeover provisions could negatively impact the Corporation's shareholders. Provisions of banking laws, Pennsylvania corporate law and of the Corporation's Amended and Restated Articles of Incorporation and Bylaws could make it more difficult for a third party to acquire control of the Corporation or have the effect of discouraging a third party from attempting to acquire control of the Corporation. The Corporation's Amended and Restated Articles of Incorporation and Bylaws include certain provisions which may be considered to be "anti-takeover" in nature because they may have the effect of discouraging or making more difficult the acquisition of control over the Corporation by means of a hostile tender offer, exchange offer, proxy contest or similar transaction. These provisions are intended to protect the Corporation's shareholders by providing a measure of assurance that the Corporation's shareholders will be treated fairly in the event of an unsolicited takeover bid and by preventing a successful takeover bidder from exercising its voting control to the detriment of the other shareholders. However, the anti-takeover provisions set forth in the Corporation's Amended and Restated Articles of Incorporation and Bylaws, taken as a whole, may discourage a hostile tender offer, exchange offer, proxy solicitation or similar transaction relating to the Corporation's common stock. To the extent that these provisions actually discourage such a transaction, holders of the Corporation's common stock may not have an opportunity to dispose of part or all of their stock at a higher price than that prevailing in the market. In addition, some of these provisions make it more difficult to remove, and thereby may serve to entrench, the Corporation's incumbent directors and officers, even if their removal would be regarded by some shareholders as desirable. The ability of a third party to acquire the Corporation is also limited under applicable banking regulations. The BHCA requires any "bank holding company" (as defined in that Act) to obtain the approval of the FRB prior to acquiring more than 5% of the Corporation’s outstanding common stock. Any person other than a bank holding company is required to obtain prior approval of the FRB to acquire 10% or more of the Corporation’s outstanding common stock under the Change in Bank Control Act of 1978. Any holder of 25% or more of the Corporation’s outstanding common stock, other than an individual, is subject to regulation as a bank holding company under the BHCA. In addition, the delays associated with obtaining necessary regulatory approvals for acquisitions of interests in bank holding companies also tend to make more difficult certain acquisition structures, such as a tender offer. While these provisions do not prohibit an acquisition, they would likely act as a deterrent factor to an unsolicited takeover attempt. 23 Item 1B. Unresolved Staff Comments None. Item 2. Properties The following table summarizes the Corporation’s full-service branch properties, by subsidiary bank, as of December 31, 2013. Remote service facilities (mainly stand-alone automated teller machines) are excluded. Subsidiary Bank Fulton Bank, N.A. ........................................................................................................... Fulton Bank of New Jersey ............................................................................................. The Columbia Bank......................................................................................................... Lafayette Ambassador Bank............................................................................................ FNB Bank, N.A. .............................................................................................................. Swineford National Bank ................................................................................................ Owned Leased 47 39 9 5 6 5 72 32 29 18 2 2 Total Branches 119 71 38 23 8 7 Total.......................................................................................................................... 111 155 266 The following table summarizes the Corporation’s other significant administrative properties. Banking subsidiaries also maintain administrative offices at their respective main banking branches, which are included within the preceding table. Entity Fulton Bank, N.A./Fulton Financial Corporation ........... Fulton Financial Corporation .......................................... Fulton Bank, N.A. ........................................................... Property Corporate Headquarters Operations Center Operations Center Owned/ Leased (1) Location Lancaster, PA East Petersburg, PA Owned Owned Mantua, NJ (1) Includes approximately 100,000 square feet which is owned by an independent third-party who financed the construction through a loan from Fulton Bank, N.A. The Corporation is leasing this space from the third-party in an arrangement accounted for as a capital lease. The lease term expires in 2027. The Corporation owns the remainder of the Corporate Headquarters location. This property also includes a Fulton Bank, N.A. branch, which is included in the preceding table. Item 3. Legal Proceedings The Corporation and its subsidiaries are involved in various legal proceedings in the ordinary course of business of the Corporation. The Corporation periodically evaluates the possible impact of pending litigation matters based on, among other factors, the advice of counsel, available insurance coverage and recorded liabilities and reserves for probable legal liabilities and costs. In addition, from time to time, the Corporation is the subject of investigations or other forms of regulatory or governmental inquiry covering a range of possible issues and, in some cases, these may be part of similar reviews of the specified activities of other industry participants. These inquiries could lead to administrative, civil or criminal proceedings, and could possibly result in fines, penalties, restitution or the need to alter the Corporation’s business practices, and cause the Corporation to incur additional costs. The Corporation’s practice is to cooperate fully with regulatory and governmental investigations. As of the date of this report, the Corporation believes that any liabilities, individually or in the aggregate, which may result from the final outcomes of pending proceedings will not have a material adverse effect on the financial position, the operating results and/or the liquidity of the Corporation. However, legal proceedings are often unpredictable, and the actual results of such proceedings cannot be determined with certainty. Item 4. Mine Safety Disclosures Not applicable. 24 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Common Stock As of December 31, 2013, the Corporation had 192.7 million shares of $2.50 par value common stock outstanding held by approximately 42,000 holders of record. The closing price per share of the Corporation’s common stock on December 31, 2013 was $13.09. The common stock of the Corporation is traded on the Global Select Market of The NASDAQ Stock Market under the symbol FULT. The following table presents the quarterly high and low prices of the Corporation’s stock and per share cash dividends declared for each of the quarterly periods in 2013 and 2012: Price Range High Low Per Share Dividend 2013 First Quarter............................................................................................................... $ 11.91 $ 9.78 $ Second Quarter .......................................................................................................... Third Quarter ............................................................................................................. Fourth Quarter ........................................................................................................... 11.91 13.08 13.40 2012 First Quarter............................................................................................................... $ 10.80 $ Second Quarter .......................................................................................................... Third Quarter ............................................................................................................. Fourth Quarter ........................................................................................................... 10.68 10.72 10.49 10.30 11.23 11.50 9.18 9.32 8.75 9.22 $ 0.08 0.08 0.08 0.08 0.07 0.07 0.08 0.08 Restrictions on the Payments of Dividends The Corporation is a separate and distinct legal entity from its banking and nonbanking subsidiaries, and depends on the payment of dividends from its subsidiaries, principally its banking subsidiaries, for substantially all of its revenues. As a result, the Corporation's ability to make dividend payments on its common stock depends primarily on certain federal and state regulatory considerations and the receipt of dividends and other distributions from its subsidiaries. There are various regulatory and prudential supervisory restrictions, which may change from time to time, that impact the ability of its banking subsidiaries to pay dividends or make other payments to it. For additional information regarding the regulatory restrictions applicable to the Corporation and its subsidiaries, see Part I, Item 1, "Business - Supervision and Regulation," Part I, Item 1A, "Risk Factors - The Corporation is a holding company and relies on dividends from its subsidiaries for substantially all of its revenue and its ability to make dividends, distributions and other payments" and Part II, Item 8, "Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note K - Regulatory Matters" of this Report. Securities Authorized for Issuance under Equity Compensation Plans The following table provides information about options outstanding under the Corporation’s Amended and Restated Equity and Cash Incentive Compensation Plan and the number of securities remaining available for future issuance under the Corporation's Amended and Restated Equity and Cash Incentive Compensation Plan, the 2011 Directors' Equity Participation Plan and the Employee Stock Purchase Plan as of December 31, 2013: Plan Category Equity compensation plans approved by security holders......... Equity compensation plans not approved by security holders... Total ..................................................................................... Equity compensation plans approved by security holders Weighted-average exercise price of outstanding options, warrants and rights Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in first column) (1) 5,567,701 — 5,567,701 $ $ 13.25 N/A 13.25 11,803,838 — 11,803,838 (1) Consists of 11,032,143 shares that may be awarded under the Amended and Restated Equity and Cash Incentive Compensation Plan, 437,776 shares that may be awarded under the 2011 Directors' Equity Participation Plan and 333,919 of shares that may be purchased under the Employee Stock Purchase Plan. Excludes accrued purchase rights under the Employee Stock Purchase Plan as of December 31, 2013 as the number of shares to be purchased is indeterminable until the time shares are issued. 25 Performance Graph The following graph shows cumulative investment returns to shareholders based on the assumptions that (A) an investment of $100.00 was made on December 31, 2008, in each of the following: (i) Fulton Financial Corporation common stock; (ii) the stock of all companies on the NASDAQ Bank Index; (iii); the stock all companies on the Standard and Poor's 500 index (S&P 500); and (B) all dividends were reinvested in such securities over the past five years. The graph is not indicative of future price performance. The graph below is furnished under this Part II, Item 5 of this Form 10-K and shall not be deemed to be "soliciting material" or to be "filed" with the SEC or subject to Regulation 14A or 14C, or to the liabilities of Section 18 of the Exchange Act of 1934, as amended. Index Fulton Financial Corporation.......................... S&P 500.......................................................... NASDAQ Bank Index .................................... 2008 100.00 100.00 100.00 $ $ $ 2009 92.28 126.46 83.70 $ $ $ 2010 110.76 145.51 95.55 $ $ $ 2011 107.28 148.59 85.52 $ $ $ 2012 108.28 172.37 101.50 $ $ $ 2013 151.41 228.19 143.84 $ $ $ Year Ending December 31 Issuer Purchases of Equity Securities Not applicable. 26 Item 6. Selected Financial Data 5-YEAR CONSOLIDATED SUMMARY OF FINANCIAL RESULTS (dollars in thousands, except per-share data) 2013 2012 2011 2010 2009 SUMMARY OF OPERATIONS Interest income............................................................. $ Interest expense ........................................................... Net interest income ...................................................... Provision for credit losses............................................ Investment securities gains, net ................................... Non-interest income, excluding investment securities gains......................................................................... Gain on sale of Global Exchange Division.................. Non-interest expense ................................................... Income before income taxes ........................................ Income taxes ................................................................ Net income................................................................... Preferred stock dividends and discount accretion ....... Net income available to common shareholders ........... $ PER COMMON SHARE Net income (basic)....................................................... $ Net income (diluted) .................................................... Cash dividends............................................................. RATIOS Return on average assets.............................................. Return on average common shareholders’ equity........ Return on average tangible common shareholders’ $ $ $ 609,689 82,495 527,194 40,500 8,004 179,660 — 461,433 212,925 51,085 161,840 — 161,840 0.84 0.83 0.32 0.96% 7.88 10.76 3.50 63.39 38.55 equity (1).................................................................. Net interest margin ...................................................... Efficiency ratio (1)....................................................... Dividend payout ratio .................................................. PERIOD-END BALANCES Total assets................................................................... $ 16,934,634 2,568,434 Investment securities ................................................... 12,782,220 Loans, net of unearned income.................................... 12,491,186 Deposits ....................................................................... 1,258,629 Short-term borrowings................................................. Federal Home Loan Bank (FHLB) advances and 883,584 2,063,187 long-term debt.......................................................... Shareholders’ equity .................................................... AVERAGE BALANCES Total assets................................................................... $ 16,811,337 2,718,173 Investment securities ................................................... 12,578,524 Loans, net of unearned income.................................... 12,473,184 Deposits ....................................................................... 1,196,323 Short-term borrowings................................................. FHLB advances and long-term debt ............................ Shareholders’ equity .................................................... 889,461 2,053,821 $ $ $ 647,496 103,168 544,328 94,000 3,026 207,171 6,215 449,294 217,446 57,601 159,845 — 159,845 0.80 0.80 0.30 0.98% 7.79 10.73 3.76 57.61 37.50 $ $ $ 693,698 133,538 560,160 135,000 4,561 182,932 — 416,242 196,411 50,838 145,573 — 145,573 0.73 0.73 0.20 0.90% 7.45 10.54 3.90 54.27 27.40 $ $ $ 745,373 186,627 558,746 160,000 701 181,548 — 408,254 172,741 44,409 128,332 (16,303) 112,029 0.59 0.59 0.12 0.78% 6.29 9.39 3.80 53.32 20.34 786,467 265,513 520,954 190,020 1,079 172,843 — 415,524 89,332 15,408 73,924 (20,169) 53,755 0.31 0.31 0.12 0.45% 3.54 5.96 3.52 57.77 38.71 $ 16,533,097 2,721,082 12,146,971 12,484,163 868,399 $ 16,375,174 2,596,347 11,971,223 12,535,015 597,033 $ 16,280,005 2,763,951 11,935,128 12,396,641 674,077 $ 16,640,095 3,164,910 11,974,742 12,105,449 868,940 894,253 2,081,656 1,040,149 1,992,539 1,119,450 1,880,389 1,540,773 1,936,482 $ 16,257,776 2,766,552 11,968,567 12,392,580 690,883 933,727 2,050,994 $ 16,114,343 2,637,130 11,906,447 12,455,065 495,791 1,034,475 1,953,396 $ 16,436,457 2,856,171 11,960,262 12,351,190 587,602 1,326,449 1,977,166 $ 16,491,607 3,044,153 11,977,105 11,643,724 1,043,279 1,712,630 1,889,561 (1) Ratio represents a financial measure derived by methods other than Generally Accepted Accounting Principles ("GAAP"). See reconciliation of this non- GAAP financial measure to the most directly comparable GAAP measure under the following heading, "Supplemental Reporting of Non-GAAP Based Financial Measures." 27 Supplemental Reporting of Non-GAAP Based Financial Measures This Annual Report on Form 10-K contains supplemental financial information, as detailed below, which has been derived by methods other than Generally Accepted Accounting Principles ("GAAP"). The Corporation has presented these non-GAAP financial measures because it believes that these measures provide useful and comparative information to assess trends in the Corporation's results of operations. Presentation of these non-GAAP financial measures is consistent with how the Corporation evaluates its performance internally, and these non-GAAP financial measures are frequently used by securities analysts, investors and other interested parties in the evaluation of companies in the Corporation's industry. Management believes that these non- GAAP financial measures, in addition to GAAP measures, are also useful to investors to evaluate the Corporation's results. Investors should recognize that the Corporation's presentation of these non-GAAP financial measures might not be comparable to similarly- titled measures of other companies. These non-GAAP financial measures should not be considered a substitute for GAAP basis measures, and the Corporation strongly encourages a review of its consolidated financial statements in their entirety. Following are reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measure as of and for the year ended December 31: 2013 2012 2011 2010 2009 (in thousands, except per share data and percentages) Return on average common shareholders' equity (tangible) Net income ...................................................................... $ 161,840 Plus: Intangible amortization, net of tax ......................... 1,584 Numerator .................................................................. $ 163,424 $ $ 159,845 1,970 161,815 $ $ 145,573 2,767 148,340 $ $ 112,029 3,406 115,435 $ $ 53,755 3,736 57,491 Average common shareholders' equity............................ $ 2,053,821 $ 2,050,994 $ 1,953,396 $ 1,780,148 $ 1,520,093 Less: Average goodwill and intangible assets................. (534,431) Average tangible shareholders' equity (denominator) $ 1,519,390 (542,600) (545,920) (550,271) (555,270) $ 1,508,394 $ 1,407,476 $ 1,229,877 $ 964,823 Return on average common shareholders' equity (tangible), annualized....................................... Efficiency ratio 10.76% 10.73% 10.54% 9.39% 5.96% Non-interest expense ....................................................... $ Less: Intangible amortization .......................................... 461,433 (2,438) Numerator .................................................................. $ 458,995 Net interest income (fully taxable equivalent) (1) .......... $ Plus: Total Non-interest income...................................... Less: Investment securities gains, net ............................. 544,474 187,664 (8,004) $ $ $ $ $ $ 449,294 (3,031) 446,263 561,190 216,412 (3,026) $ $ $ 416,242 (4,257) 411,985 576,232 187,493 (4,561) $ $ $ 408,254 (5,240) 403,014 574,257 182,249 (701) 415,524 (5,747) 409,777 536,499 173,922 (1,079) Denominator .............................................................. $ 724,134 $ 774,576 $ 759,164 $ 755,805 $ 709,342 Efficiency ratio ..................................................... 63.39% 57.61% 54.27% 53.32% 57.77% Non-performing assets to tangible common shareholders' equity and allowance for credit losses Non-performing assets (numerator) ................................ $ 169,329 $ 237,199 $ 317,331 $ 361,731 $ 305,028 Tangible common shareholders' equity........................... $ 1,530,111 $ 1,546,093 $ 1,448,330 $ 1,332,410 $ 1,013,629 Plus: Allowance for credit losses Tangible common shareholders' equity and allowance 204,917 225,439 258,177 275,498 257,553 for credit losses (denominator).................................... $ 1,735,028 Non-performing assets to tangible common $ 1,771,532 $ 1,706,507 $ 1,607,908 $ 1,271,182 shareholders' equity and allowance for credit losses ................................................................... 9.76% 13.39% 18.60% 22.50% 24.00% (1) Presented on a fully taxable equivalent basis, using a 35% Federal tax rate and statutory interest expense disallowances. 28 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations This 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 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 other financial information presented in this report. FORWARD-LOOKING STATEMENTS The Corporation has made, and may continue to make, certain forward-looking statements with respect to its financial condition and results of operations. Do not unduly rely on forward-looking statements. Forward-looking statements can be identified by the use of words such as "may," "should," "will," "could," "estimates," "predicts," "potential," "continue," "anticipates," "believes," "plans," "expects," "future," "intends" and similar expressions which are intended to identify forward-looking statements. These forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties, some of which are beyond the Corporation's control and ability to predict, that could cause actual results to differ materially from those expressed in the forward-looking statements. The Corporation undertakes no obligation, other than as required by law, to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Many factors could affect future financial results including, without limitation: • • • • • • • • • • • • the impact of adverse changes in the economy and real estate markets, including protracted periods of low-growth and sluggish loan demand; increases in non-performing assets, which may require the Corporation to increase the allowance for credit losses, charge- off loans and incur elevated collection and carrying costs related to such non-performing assets; the 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; capital and liquidity strategies, including the expected impact of the capital and liquidity requirements upon adoption of the U.S. Basel III Capital Rules; investment securities gains and losses, including other-than-temporary declines in the value of securities which may result in charges to earnings; non-interest income growth, including the impact of potential regulatory changes; 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 Act; operational risk, i.e. the risk of loss resulting from human error, inadequate or failed internal processes and systems, outsourcing arrangements, compliance and legal risk and external events; the level of non-interest expenses, including salaries and employee benefits expenses, operating risk losses, amortization of intangible assets and goodwill impairment; and the effect of competition on rates of deposit and loan growth and net interest margin. OVERVIEW Fulton Financial Corporation is a financial holding company comprised of six wholly owned banking subsidiaries which provide a full range of retail and commercial financial services in Pennsylvania, Delaware, Maryland, New Jersey and Virginia. The Corporation generates the majority of its revenue through net interest income, or the difference between interest earned on loans and investments and interest paid on deposits and borrowings. Growth in net interest income is dependent upon balance sheet growth and/or maintaining or increasing the net interest margin, which is net interest income (fully taxable-equivalent, or FTE) as a percentage of average interest-earning assets. The Corporation also generates revenue through fees earned on the various services and products offered to its customers and through gains on sales of assets, such as loans, investments, lines of business or properties. Offsetting these revenue sources are provisions for credit losses on loans, non-interest expenses and income taxes. 29 The following table presents a summary of the Corporation’s earnings and selected performance ratios: Net income (in thousands) .............................................................................................................. $ 161,840 0.83 Diluted net income per share .......................................................................................................... $ 0.96% Return on average assets................................................................................................................. 7.88% Return on average equity ................................................................................................................ 10.76% Return on average tangible equity (1) ............................................................................................ 3.50% Net interest margin (2).................................................................................................................... 63.39% Efficiency ratio (1).......................................................................................................................... $ $ 2013 2012 159,845 0.80 0.98% 7.79% 10.73% 3.76% 57.61% (1) Ratio represents a financial measure derived by methods other than Generally Accepted Accounting Principles ("GAAP"). See reconciliation of this non- GAAP financial measure to the most directly comparable GAAP measure under the heading, "Supplemental Reporting of Non-GAAP Based Financial Measures" in Item 6, "Selected Financial Data." (2) 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. During 2013, the Corporation continued to focus on achieving its corporate objectives, which included the following: • Net Income Per Share Growth - Diluted net income per share increased $0.03, or 3.8%, in comparison to 2012 due to a decrease in weighted average diluted shares outstanding as a result of the Corporation's repurchase of 8.0 million shares in 2013 and an increase in net income. Net income increased $2.0 million, or 1.2%, in comparison to 2012. This increase was driven largely by a $53.5 million decrease in the provision for credit losses and a $6.5 million reduction in income tax expense, partially offset by a $17.1 million decrease in net interest income, a $28.7 million decrease in non-interest income, mainly in mortgage banking income, and a $12.1 million increase in non-interest expenses, most notably a $9.3 million increase in salaries and employee benefits. • Quality Loan Growth and Net Interest Margin Management - Average loans increased $610.0 million, or 5.1%, in comparison to 2012, with notable increases in commercial mortgages, commercial loans, home equity loans and residential mortgages. The Corporation's loan growth occurred throughout most of its markets. During 2013, growth in average loans partially mitigated the negative impact of the decline in net interest margin, from 3.76% in 2012 to 3.50% in 2013. Net interest margin compression resulted from the decline in yields on interest-earning assets outpacing the decline in the cost of interest-bearing liabilities. Net interest margin compression slowed as the year progressed, and the Corporation anticipates that this trend will continue in 2014. • Asset Quality Improvement - Overall asset quality improved in 2013, with decreases in non-performing loans, net charge- offs and overall delinquency levels resulting in a 56.9% decrease in the provision for credit losses. • Core Deposit Growth - Average demand and savings deposit accounts increased $669.0 million, or 7.7%, in comparison to 2012. As a result, the Corporation was able to fund its loan growth with lower cost core deposits as opposed to higher cost time deposits, while also executing its customer relationship banking strategy. • Return on Average Assets and Return on Average Equity Improvement - Return on average assets improves when net income increases at a higher rate than average assets. In 2013, return on average assets decreased two basis points in comparison to 2012, due to a 3.4% increase in average assets, which exceeded the 1.2% increase in net income. As noted above, average asset growth was largely attributable to the 5.1% increase in average loans. The increases in average balances are expected to have a positive impact on future earnings. In 2013, return on average equity increased nine basis points, or 1.2%, in comparison to 2012. This increase resulted from the growth in net income exceeding a 0.1% increase in average shareholders’ equity. During 2013, capital was deployed for organic growth, and 8.0 million shares were repurchased for a total cost of $90.9 million. As of December 31, 2013, the Corporation had a share repurchase program in place, pursuant to which an additional 4.0 million shares, or approximately 2.1% of outstanding shares, could be repurchased. During the first quarter of 2014, the Corporation repurchased 4.0 million shares under this repurchase plan at an average cost of $12.45 per share, completing this repurchase program on February 19, 2014. • Enhance Compliance and Risk Management Infrastructure - The time and expense associated with regulatory compliance and risk management efforts continues to increase. Virtually every aspect of the Corporation’s operations is subject to 30 extensive regulation and, in recent years, a combination of financial reform legislation and heightened scrutiny by banking regulators has significantly increased expectations regarding what constitutes an effective risk and compliance management infrastructure. To keep pace with these expectations, over the past two years, the Corporation has invested considerable resources in initiatives designed to strengthen its risk management framework and regulatory compliance programs. Among the areas that the Corporation continues to focus substantial resources on to improve its compliance functions are the requirements under the Flood Disaster Protection Act, the Bank Secrecy Act, the Patriot Act and related anti- money laundering regulations. Although the Corporation has made progress in continuing to build-out its risk and compliance management infrastructures, the pace at which it has progressed may not be consistent with current regulatory expectations. As a result, the Corporation believes that there is an increasing risk that it, or one or more of its bank subsidiaries, may become subject to regulatory enforcement action in addition to the civil monetary penalties recently imposed against three of its banking subsidiaries. Any such enforcement action by the Corporation’s banking regulators would likely require that it accelerate its efforts to resolve identified deficiencies and improve its compliance functions 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 or one or more of its bank subsidiaries. Management has accelerated its efforts to resolve 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 results of operations in future periods. • Expense Management - Non-interest expenses increased $12.1 million, or 2.7%, in comparison to 2012, driven largely by regulatory compliance and risk management efforts, as discussed above, and a core processing system conversion. The expense categories with the most notable increases were salaries and employee benefits, other outside services, data processing, software expense and professional fees. These increases were somewhat mitigated by a $3.8 million decrease in other real estate owned (OREO) and repossession expenses, reflecting the improvement in asset quality. During 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 $3.5 million and $975,000, respectively, during 2013 and 2012. The Corporation expects that data processing and software expenses will increase as a result of the conversion and continued investments in its information technology infrastructure. To mitigate the increases in expenses associated with investments in technology and the build out of its risk management and compliance infrastructure, the Corporation has implemented a series of initiatives intended to reduce non-interest expenses by approximately $8 million annually. These initiatives include the consolidation of 13 branches in early 2014, which will result in the transfer of deposits, employees and other branch resources to existing branch locations. Approximately $2 million of expenses, consisting of lease termination costs and the write-off of leasehold improvements, will be incurred in 2014 to complete the branch consolidation. Ongoing estimated annual expense reductions associated with the branch consolidations will be approximately $3 million. Other initiatives include the streamlining of subsidiary bank management structures and certain changes to employee benefits plans. These initiatives will result in one-time gains, net of charges, of $2.7 million in 2014. Ongoing estimated annual expense reductions associated with these initiatives will be approximately $5 million in 2014. 31 CRITICAL ACCOUNTING POLICIES The following is a summary of those accounting policies that the Corporation considers to be most important to the presentation of its financial condition and results of operations, as they require management’s most difficult judgments as a result of the need to make estimates about the effects of matters that are inherently uncertain. See additional information regarding these critical accounting policies in Note A, "Summary of Significant Accounting Policies," in the Notes to the Consolidated Financial Statements. 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 losses inherent 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 losses inherent in its unfunded loan commitments and is recorded in other liabilities on the consolidated balance sheet. The Corporation’s allowance for loan losses includes: 1) specific allowances allocated to impaired loans evaluated for impairment under the Financial Accounting Standards Board's Accounting Standards Codification (FASB ASC) Section 310-10-35; and 2) allowances calculated for pools of loans evaluated for impairment under FASB ASC Subtopic 450-20. Management's estimate of incurred losses in the loan portfolio is based on a methodology that includes the following critical judgments: • The ability to identify potential problem loans in a timely manner. For commercial loans, commercial mortgages and construction loans to commercial borrowers, an internal risk rating process is used. The Corporation believes that internal risk ratings are the most relevant credit quality indicator for these types of loans. The migration of loans through the various internal risk rating categories is a significant component of the allowance for credit loss methodology for these loans, 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 an independent assessment of risk rating accuracy. Ratings may be changed based on the ongoing monitoring procedures performed by loan officers or credit administration staff, or if specific loan review activities identify a deterioration or an improvement in the loan. The Corporation does not assign internal risk ratings for residential mortgages, home equity loans, residential mortgages, consumer loans, lease receivables, and construction loans to individuals secured by residential real estate, as these portfolios consist of a larger number of loans with smaller balances. Instead, these portfolios are evaluated for risk through the monitoring of delinquency status. • Proper collateral valuation of impaired loans evaluated for impairment under FASB ASC Section 310-10-35. Substantially all of the Corporation’s impaired loans to borrowers with total outstanding loan balances greater than $1.0 million are 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. For loans secured by real estate, estimated fair values are determined primarily through appraisals performed by certified third-party appraisers, discounted to arrive at expected sale prices, net of estimated selling costs. When a real estate secured loan becomes impaired, a decision is made regarding whether an updated appraisal of the real estate is necessary. This decision is based on various considerations, including: the age of the most recent appraisal; the loan-to-value ratio based on the original appraisal; the condition of the property; the Corporation’s experience and knowledge of the real estate market; the purpose of the loan; environmental factors; payment status; the strength of any guarantors; and the existence and age of other indications of value such as broker price opinions, among others. The Corporation generally obtains updated third-party appraisals for impaired loans secured predominately by real estate every 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%. • Proper measurement of allowance needs for pools of loans measured for impairment under FASB ASC Subtopic 450-20. For loan loss allocation purposes, loans are segmented into pools with similar characteristics. These pools are 32 established by general loan type, or "portfolio segments," as presented in the table under the heading, "Loans, Net of Unearned Income," within Note D, "Loans and Allowance for Credit Losses," in the Notes to Consolidated Financial Statements. 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 are based on collateral types and include direct consumer installment loans and indirect automobile loans. Commercial loans, commercial mortgages and construction loans to commercial borrowers are further segmented into separate pools based on internally assigned risk ratings. Residential mortgages, home equity loans, consumer loans, and lease receivables are further segmented into separate pools based on delinquency status. A loss rate is calculated for each pool through a regression analysis based on historical losses as loans migrate through the various risk rating or delinquency categories. Estimated loss rates are based on a probability of default and a loss given default. The loss rate is adjusted to consider qualitative factors, such as economic conditions and trends. • Overall assessment of the risk profile of the loan portfolio. The allocation of the allowance for credit losses is reviewed to evaluate its appropriateness in relation to the overall risk profile of the loan portfolio. The Corporation considers risk factors such as: local and national economic conditions; trends in delinquencies and non-accrual loans; the diversity of borrower industry types; and the composition of the portfolio by loan type. An unallocated allowance is maintained for factors and conditions that exist at the balance sheet date, but are not specifically identifiable, and to recognize the inherent imprecision in estimating and measuring loss exposure. For additional details related to the allowance for credit losses, see Note D, "Loans and Allowance for Credit Losses," in the Notes to Consolidated Financial Statements. Goodwill - Goodwill recorded in connection with acquisitions is not amortized to expense, but is tested at least annually for impairment. A quantitative annual impairment test is not required if, based on a qualitative analysis, the Corporation determines that the existence of events and circumstances indicate that it is more likely than not that goodwill is not impaired. The Corporation completes its annual goodwill impairment test as of October 31st of each year. The Corporation tests for impairment by first allocating its goodwill and other assets and liabilities, as necessary, to defined reporting units. A fair value is then determined for each reporting unit. If the fair values of the reporting units exceed their book values, no write-down of the recorded goodwill is necessary. If the fair values are less than the book values, an additional valuation procedure is necessary to assess the proper carrying value of the goodwill. Reporting unit valuation is inherently subjective, with a number of factors based on assumptions and management judgments. Among these are future growth rates for the reporting units, selection of comparable market transactions, discount rates and earnings capitalization rates. Changes in assumptions and results due to economic conditions, industry factors and reporting unit performance and cash flow projections could result in different assessments of the fair values of reporting units and could result in impairment charges. If an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount, an interim impairment test is required. Such events may include adverse changes in legal factors or in the business climate, unanticipated competition, the loss of key employees, or similar events. For additional details related to the annual goodwill impairment test, see Note F, "Goodwill and Intangible Assets," in the Notes to Consolidated Financial Statements. Income Taxes – The provision for income taxes is based upon income before income taxes, adjusted for the effect of certain tax- exempt income, non-deductible expenses and credits. In addition, certain items of income and expense are reported in different periods for financial reporting and tax return purposes. The tax effects of these temporary differences are recognized currently in the deferred income tax provision or benefit. Deferred tax assets or liabilities are computed based on the difference between the financial statement and income tax bases of assets and liabilities using the applicable enacted marginal tax rate. The Corporation must also evaluate the likelihood that deferred tax assets will be recovered through future taxable income. If any such assets are more likely than not to not be recovered, a valuation allowance must be recognized. The assessment of the carrying value of deferred tax assets is based on certain assumptions, changes in which could have a material impact on the Corporation’s consolidated financial statements. 33 The Corporation accounts for uncertain tax positions by applying a recognition threshold and measurement attribute for tax positions taken or expected to be taken in a tax return. Recognition and measurement of tax positions is based on management’s evaluations of relevant tax code and appropriate industry information about audit proceedings for comparable positions at other organizations. Virtually all of the Corporation’s unrecognized tax benefits relate to positions that are taken on an annual basis on state tax returns. Increases to unrecognized tax benefits will occur as a result of accruing for the nonrecognition of the position for the current year. Decreases will occur as a result of the lapsing of the statute of limitations for the oldest outstanding year which includes the position or through settlements of positions with the tax authorities. See also Note L, "Income Taxes," in the Notes to Consolidated Financial Statements. Fair Value Measurements – FASB ASC Topic 820 establishes a fair value hierarchy for the inputs to valuation techniques used to measure assets and liabilities at fair value based on 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 both on a recurring and nonrecurring basis into the above three levels. The determination of fair value for assets categorized as Level 3 items involves a great deal of subjectivity due to the use of unobservable inputs. In addition, determining when a market is no longer active and placing little or no reliance on distressed market prices requires the use of management’s judgment. The Corporation's Level 3 assets include available for sale debt securities in the form of pooled trust preferred securities, certain single-issuer trust preferred securities issued by financial institutions and auction rate securities. The Corporation also categorizes impaired loans, net of allowance allocations, other real estate owned (OREO) and mortgage servicing rights as Level 3 assets measured at fair value on a non-recurring basis. The Corporation engages third-party valuation experts to assist in valuing interest rate swap derivatives and most available-for- sale investment securities, both measured at fair value on a recurring basis, and mortgage servicing rights, which are measured at fair value on a non-recurring basis. The pricing data and market quotes the Corporation obtains from outside sources are reviewed internally for reasonableness. See Note R, "Fair Value Measurements," in the Notes to Consolidated Financial Statements for the disclosures required by FASB ASC Topic 820. New Accounting Standards 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, as a reduction to a deferred tax asset for a net operating loss carryforward or a similar tax loss. ASU Update 2013-11 is effective for interim and annual reporting periods beginning after December 15, 2013. For the Corporation, this standards update is effective with its March 31, 2014 quarterly report on Form 10-Q. The adoption of ASC Update 2013-11 is not expected to have a material impact on the Corporation's consolidated financial statements. In December 2013, the FASB issued Accounting Standards Update 2013-12, “Definition of a Public Business Entity - An Addition to the Master Glossary." ASC Update 2013-12 amends the Master Glossary of the FASB ASC to include one definition of public business entity and identifies the types of business entities that are excluded from the scope of the FASB's private company decision- making framework. ASC Update 2013-12 does not have an effective date, but the term "public business entity" will be used in all future ASC updates. The Corporation meets the definition of a public business entity, and the adoption of ASC Update 2013-12 did not have a significant impact on the Corporation's consolidated financial statements. In January 2014, the FASB issued Accounting Standards Update 2014-01, "Accounting for Investments in Qualified Affordable Housing Projects." ASC Update 2014-01provides guidance on accounting for investments made by a reporting entity in flow- through limited liability entities that manage or invest in affordable housing projects that qualify for the low income housing tax credit. ASC Update 2014-01 is effective for public business entities' interim and annual reporting periods beginning after December 15, 2014. For the Corporation, this standards update is effective with its March 31, 2015 quarterly report on Form 10-Q. The adoption of ASC Update 2014-01 is not expected to have a material impact on the Corporation's consolidated financial statements. 34 In January 2014, the FASB issued Accounting Standards Update 2014-04, "Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure." ASC Update 2014-04 clarifies when an in substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. ASC Update 2014-04 is effective for public business entities' interim and annual reporting periods beginning after December 15, 2014. For the Corporation, this standards update is effective with its March 31, 2015 quarterly report on Form 10- Q. The adoption of ASC Update 2014-04 is not expected to have a material impact on the Corporation's consolidated financial statements. 35 RESULTS OF OPERATIONS Net Interest Income Net interest income is the most significant component of the Corporation’s net income. The Corporation manages the risk associated with changes in interest rates through the techniques described within Item 7A, "Quantitative and Qualitative Disclosures About Market Risk." The following table provides a comparative average balance sheet and net interest income analysis for 2013 compared to 2012 and 2011. 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 tax-equivalent amounts. 2013 2012 2011 Average Balance Interest (1) Yield/ Rate Average Balance Interest (1) Yield/ Rate Average Balance Interest (1) Yield/ Rate (dollars in thousands) ASSETS Interest-earning assets: Loans, net of unearned income (2) .... $ 12,578,524 Taxable investment securities (3)...... 2,391,650 Tax-exempt investment securities (3) Equity securities (3)........................... 285,174 38,722 Total investment securities................... 2,715,546 Loans held for sale ............................ Other interest-earning assets ............. 36,561 229,444 54,321 14,577 1,829 70,727 1,551 2,264 Total interest-earning assets ................. 15,560,075 626,969 Noninterest-earning assets: Cash and due from banks .................. Premises and equipment.................... Other assets (3).................................. Less: Allowance for loan losses ........ 207,931 226,041 1,037,338 (220,048) $ 552,427 4.39% $ 11,968,567 $ 575,534 4.81% $ 11,906,447 $ 605,672 5.09% 2.27 5.11 4.72 2.60 4.24 0.99 4.03 2,401,343 287,763 35,151 2,724,257 54,351 207,415 67,349 15,942 1,639 84,930 2,064 1,830 14,954,590 664,358 2.80 5.54 4.66 3.12 3.80 0.88 4.45 2,223,376 330,087 37,011 80,184 18,520 1,593 2,590,474 100,297 43,470 249,672 1,958 1,843 14,790,063 709,770 3.61 5.61 4.31 3.87 4.50 0.74 4.80 234,494 219,236 1,099,616 (250,160) 274,138 207,081 1,119,339 (276,278) Total Assets.................................. $ 16,811,337 $ 16,257,776 $ 16,114,343 LIABILITIES AND EQUITY Interest-bearing liabilities: Demand deposits ............................... $ 2,822,583 Savings deposits ................................ 3,363,943 $ Time deposits..................................... Total interest-bearing deposits.............. Short-term borrowings ...................... Long-term debt .................................. 3,129,162 9,315,688 1,196,323 889,461 Total interest-bearing liabilities...... 11,401,472 Noninterest-bearing liabilities: Demand deposits ............................... Other.................................................. 3,157,496 198,548 Total Liabilities.................................. 14,757,516 Shareholders’ equity............................. 2,053,821 Total Liabilities and Shareholders' Equity......................................... $ 16,811,337 Net interest income/net interest margin (FTE)................................................ Tax equivalent adjustment.................... Net interest income............................... 3,656 4,096 29,018 36,770 2,420 43,305 82,495 0.12 0.93 0.39 0.20 4.87 0.72 0.13% $ 2,560,831 $ 3,356,070 3,717,556 9,634,457 690,883 933,727 4,187 6,002 46,706 56,895 1,068 45,205 11,259,067 103,168 2,758,123 189,592 14,206,782 2,050,994 0.16% $ 2,391,043 $ 5,312 0.22% 11,536 66,235 83,083 746 49,709 133,538 0.34 1.54 0.83 0.15 4.81 1.15 0.18 1.26 0.59 0.15 4.84 0.92 3,365,445 4,297,105 10,053,593 495,791 1,034,475 11,583,859 2,401,472 175,616 14,160,947 1,953,396 $ 16,257,776 $ 16,114,343 544,474 3.50% 561,190 3.76% 576,232 3.90% (17,280) $ 527,194 (16,862) $ 544,328 (16,072) $ 560,160 (1) (2) (3) Includes dividends earned on equity securities. Includes non-performing loans. Includes amortized historical cost for available for sale securities; the related unrealized holding gains (losses) are included in other assets. 36 The following table summarizes the changes in FTE interest income and expense resulting from changes in average balances (volumes) and changes in rates: 2013 vs. 2012 Increase (decrease) due to change in Rate Net Volume 2012 vs. 2011 Increase (decrease) due to change in Rate Volume Net Interest income on: (in thousands) Loans and leases........................................... $ Taxable investment securities....................... Tax-exempt investment securities ................ Equity securities ........................................... Loans held for sale ....................................... Other interest-earning assets ........................ Total interest income............................. $ 19,078 (270) (142) 168 (644) 205 18,395 $ (42,185) $ (23,107) $ (12,758) (1,223) 22 131 229 (13,028) (1,365) 190 (513) 434 $ (55,784) $ (37,389) $ 3,178 6,067 (2,349) (82) 441 (339) 6,916 $ (33,316) $ (30,138) (12,835) (2,578) 46 106 (13) $ (52,328) $ (45,412) (18,902) (229) 128 (335) 326 Interest expense on: Demand deposits .......................................... $ Savings deposits ........................................... Time deposits ............................................... Short-term borrowings ................................. Long-term debt ............................................. Total interest expense............................ $ $ $ (785) $ (531) $ 254 (1,125) 7 (5,534) (6,663) (19,529) 951 322 (2,039) (4,504) (7,490) $ (13,183) $ (20,673) $ (12,461) $ (17,909) $ (30,370) (1,481) $ (5,502) (11,274) 23 325 356 (32) (8,255) 299 (4,829) (1,906) (17,688) 1,352 (1,900) (1,913) (11,025) 401 139 Note: Changes which are partially attributable to both volume and rate are allocated to the volume and rate components presented above based on the percentage of the direct changes that are attributable to each component. Comparison of 2013 to 2012 FTE net interest income decreased $16.7 million, or 3.0%, to $544.5 million in 2013. Net interest margin decreased 26 basis points, or 6.9%, to 3.50% in 2013 from 3.76% in 2012. FTE interest income decreased $37.4 million, or 5.6%. A 42 basis point, or 9.4%, decrease in yields on interest-earning assets resulted in a $55.8 million decrease in interest income, partially offset by an $18.4 million increase in FTE interest income as a result of a $605.5 million, or 4.0%, increase in average interest-earning assets. Average investment securities decreased $8.7 million, or 0.3%, in comparison to 2012. The average yield on investment securities decreased 52 basis points, or 16.7%, to 2.60% in 2013 from 3.12% in 2012, as the reinvestment of cash flows and purchases of mortgage-backed securities and collateralized mortgage obligations were made at yields that were lower than the overall portfolio yield. The decrease in the investment portfolio yield was partially mitigated by a $2.1 million decrease in net amortization of investment securities premiums, which had a 7 basis point positive impact on the overall change in the portfolio yield. Average loans and average FTE yields, by type, are summarized in the following table: 2013 2012 Balance Yield Balance Yield (dollars in thousands) Increase (Decrease) in Balance $ % Real estate - commercial mortgage ......................... $ 4,864,460 3,680,772 Commercial - industrial, financial and agricultural. 1,734,622 Real estate - home equity ........................................ 1,312,127 Real estate - residential mortgage............................ 591,540 Real estate - construction......................................... 299,127 Consumer................................................................. 95,876 Leasing and other .................................................... Total.................................................................. $ 12,578,524 4.65% $ 4,619,587 4.11 3,551,056 4.22 1,605,088 4.13 1,185,928 4.11 620,166 4.87 307,746 8.70 78,996 4.39% $11,968,567 5.14% $ 244,873 129,716 4.48 129,534 4.46 126,199 4.58 (28,626) 4.20 (8,619) 5.53 12.41 16,880 4.81% $ 609,957 5.3% 3.7 8.1 10.6 (4.6) (2.8) 21.4 5.1% 37 The $374.6 million, or 4.6%, increase in commercial loans and commercial mortgages was attributable to both new and existing customers. The $129.5 million, or 8.1%, increase in home equity loans was a result of certain promotions, while the $126.2 million, or 10.6%, 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 during 2013 of 4.39% represented a 42 basis point, or 8.7%, decrease in comparison to 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 rates lower than the overall portfolio yield. Interest expense decreased $20.7 million, or 20.0%, to $82.5 million in 2013 from $103.2 million in 2012. Interest expense decreased $13.2 million due to a 20 basis point, or 21.7%, decrease in the average cost of total interest-bearing liabilities. While total interest- bearing liabilities increased $142.4 million, or 1.3%, the change in the overall funding mix resulted in an additional $7.5 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 was significantly lower, resulting in the interest expense decrease. Average deposits and interest rates, by type, are summarized in the following table: 2013 2012 Balance Rate Balance Rate (dollars in thousands) Increase (Decrease) in Balance $ % Noninterest-bearing demand ................................... $ 3,157,496 2,822,583 Interest-bearing demand .......................................... 3,363,943 Savings .................................................................... 9,344,022 Total demand and savings................................ 3,129,162 Time deposits........................................................... Total deposits.................................................... $ 12,473,184 —% $ 2,758,123 0.13 2,560,831 0.12 3,356,070 0.08 8,675,024 0.93 3,717,556 0.29% $12,392,580 —% $ 399,373 261,752 7,873 668,998 (588,394) 80,604 0.16 0.18 0.12 1.26 0.46% $ 14.5% 10.2 0.2 7.7 (15.8) 0.7% The $669.0 million, or 7.7%, increase in average total demand and savings account balances was primarily due to a $340.6 million, or 8.3%, increase in personal account balances, a $270.4 million, or 9.4%, increase in business account balances and a $61.6 million, or 3.8%, increase in municipal account balances. The $588.4 million, or 15.8%, decrease in time deposits occurred in accounts with balances less than $100,000 across most original maturity terms. The average cost of interest-bearing deposits decreased 20 basis points, or 33.9%, to 0.39% in 2013 from 0.59% in 2012 primarily due a decrease in higher cost time deposits and an increase in lower cost 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. 38 Average borrowings and interest rates, by type, are summarized in the following table: 2013 2012 Balance Rate Balance Rate (dollars in thousands) Increase (Decrease) in Balance $ % Short-term borrowings: Customer repurchase agreements..................... $ Customer short-term promissory notes ............ Total short-term customer funding............ Federal funds purchased................................... Short-term FHLB advances (1) ........................ Total short-term borrowings ..................... 186,851 98,882 285,733 612,508 298,082 1,196,323 0.11% $ 0.05 0.09 0.23 0.24 0.20 206,842 138,632 345,474 335,573 9,836 690,883 0.12% $ (19,991) (39,750) 0.06 (59,741) 0.10 276,935 0.21 288,246 0.29 505,440 0.15 Long-term debt: FHLB Advances ............................................... Other long-term debt ........................................ Total long-term debt.................................. 519,876 369,585 889,461 Total.......................................... $ 2,085,784 4.14 563,905 5.90 369,822 4.87 933,727 2.19% $ 1,624,610 (44,029) 4.14 (237) 5.91 (44,266) 4.84 2.85% $ 461,174 (9.7)% (28.7) (17.3) 82.5 29.3 73.2 (7.8) (0.1) (4.7) 28.4 % (1) Represents FHLB advances with an original maturity term of less than one year. Total short-term borrowings increased $505.4 million, or 73.2%, primarily due to increases in short-term FHLB advances and Federal funds purchased. The $44.3 million decrease in long-term debt was due to the repayment of FHLB advances, which were not replaced with new long-term borrowings. The overall increase in borrowings of $461.2 million, or 28.4%, was driven by the growth in average loans exceeding the increase in average deposits. The average cost of total borrowings decreased 66 basis points, or 23.2%, to 2.19% in 2013 from 2.85% in 2012, primarily due to an increase in lower cost short-term FHLB advances and Federal funds purchased. Comparison of 2012 to 2011 FTE net interest income decreased $15.0 million, or 2.6%, from $576.2 million in 2011 to $561.2 million in 2012. Net interest margin decreased 14 basis points, or 3.6%, from 3.90% in 2011 to 3.76% in 2012. FTE interest income decreased $45.4 million, or 6.4%. A 35 basis point, or 7.3%, decrease in yields on interest-earning assets resulted in a $52.3 million decrease in interest income, while a $164.5 million, or 1.1%, increase in average interest-earning assets resulted in a $6.9 million increase in interest income. The increase in average interest-earning assets was primarily due to a $133.8 million, or 5.2%, increase in average investments. The average yield on investment securities decreased 75 basis points, or 19.4%, to 3.12% in 2012 from 3.87% in 2011, as the reinvestment of cash flows and purchases of mortgage-backed securities and collateralized mortgage obligations were made at yields that were lower than the overall portfolio yield. A $6.1 million, or 101.7%, increase in net premium amortization, due primarily to higher prepayments on mortgage-backed securities and collateralized mortgage obligations, contributed 21 basis points to the decrease in average investment yields and 4 basis points to the decrease in net interest margin. Average loans and average FTE yields, by type, are summarized in the following table: 2012 2011 Balance Yield Balance Yield (dollars in thousands) Increase (Decrease) in Balance $ % Real estate - commercial mortgage ......................... $ 4,619,587 3,551,056 Commercial - industrial, financial and agricultural. 1,605,088 Real estate - home equity ........................................ 1,185,928 Real estate - residential mortgage............................ 620,166 Real estate - construction......................................... 307,746 Consumer................................................................. 78,996 Leasing and other .................................................... Total.................................................................. $ 11,968,567 5.14% $ 4,458,205 3,681,321 4.48 1,627,308 4.46 1,036,742 4.58 700,070 4.20 333,199 5.53 12.41 69,602 4.81% $ 11,906,447 5.49% $ 161,382 (130,265) 4.72 (22,220) 4.62 149,186 5.10 (79,904) 4.30 (25,453) 5.96 9,394 12.82 62,120 5.09% $ 3.6% (3.5) (1.4) 14.4 (11.4) (7.6) 13.5 0.5% 39 The average yield on loans during 2012 of 4.81% represented a 28 basis point, or 5.5%, decrease in comparison to 2011. The decrease in average yields on loans was attributable to increased refinancing activity, repayments of higher-yielding loans and new loan production at rates lower than the overall portfolio yield. Interest expense decreased $30.4 million, or 22.7%, to $103.2 million in 2012 from $133.5 million in 2011 as the result of a change in the overall funding mix. Interest expense decreased $17.9 million due to a 23 basis point, or 20.0%, decrease in the average cost of total interest-bearing liabilities. Interest expense decreased an additional $12.5 million as a result of a $324.8 million, or 2.8%, decrease in average interest-bearing liabilities. Average deposits and interest rates, by type, are summarized in the following table: 2012 2011 Balance Rate Balance Rate (dollars in thousands) Increase (Decrease) in Balance $ % Noninterest-bearing demand..................................... $ 2,758,123 2,560,831 Interest-bearing demand ........................................... 3,356,070 Savings...................................................................... 8,675,024 Total demand and savings ................................. 3,717,556 Time deposits............................................................ Total deposits..................................................... $ 12,392,580 —% $ 2,401,472 2,391,043 0.16 3,365,445 0.18 8,157,960 0.12 4,297,105 1.26 0.46% $12,455,065 —% $ 356,651 169,788 0.22 (9,375) 0.34 517,064 0.21 (579,549) 1.54 0.67% $ (62,485) 14.9 % 7.1 (0.3) 6.3 (13.5) (0.5)% Average total deposits decreased $62.5 million, or 0.5%, due to a decrease in certificates of deposit being largely offset by an increase in core demand and savings accounts. The average cost of interest-bearing deposits decreased 24 basis points, or 28.9%, from 0.83% in 2011 to 0.59% in 2012 due primarily to the repricing of certificates of deposit to lower rates and, to a lesser degree, a reduction in average rates paid on interest-bearing demand and savings deposits. Excluding early redemptions, $3.0 billion of time deposits matured during 2012 at a weighted average rate of 0.96%, while $2.6 billion of time deposits were issued at a weighted average rate of 0.41%. Average borrowings and interest rates, by type, are summarized in the following table: 2012 2011 Balance Rate Balance Rate (dollars in thousands) Increase (Decrease) in Balance $ % Short-term borrowings: Customer repurchase agreements....................... $ Customer short-term promissory notes .............. Total short-term customer funding.............. Federal funds purchased..................................... Short-term FHLB advances (1) .......................... Total short-term borrowings ....................... 206,842 138,632 345,474 335,573 9,836 690,883 0.12% $ 0.06 0.10 0.21 0.29 0.15 208,144 174,624 382,768 113,023 — 495,791 0.13% $ 0.13 0.13 0.22 — 0.15 (1,302) (35,992) (37,294) 222,550 9,836 195,092 Long-term debt: FHLB Advances ................................................. Other long-term debt .......................................... Total long-term debt.................................... 563,905 369,822 933,727 Total............................................ $ 1,624,610 651,268 4.14 383,207 5.91 4.84 1,034,475 2.85% $ 1,530,266 4.14 5.94 4.81 3.30% $ (87,363) (13,385) (100,748) 94,344 (0.6)% (20.6) (9.7) 196.9 N/M 39.3 (13.4) (3.5) (9.7) 6.2 % (1) Represents FHLB advances with an original maturity term of less than one year. N/M - Not meaningful Average short-term borrowings increased $195.1 million, or 39.3%, due to an increase in Federal funds purchased. Average long- term debt decreased $100.7 million, or 9.7%, due to maturities of FHLB advances, which were not replaced with new long-term borrowings. The average cost of short-term borrowings was 0.15% in both 2012 and 2011, while the average cost of long-term debt increased slightly, to 4.84% in 2012 from 4.81% in 2011. In December 2012, the Corporation prepaid approximately $20 million of FHLB advances, with a weighted average interest rate of 4.38% and maturing in January 2017. The Corporation incurred a $3.0 million penalty in connection with prepaying these FHLB advances, recorded as a component of other non-interest expense. 40 Provision for Credit Losses The provision for credit losses was $40.5 million for 2013, a decrease of $53.5 million, or 56.9%, in comparison to 2012. The provision for credit losses for 2012 decreased $41.0 million, or 30.4%, in comparison to 2011. The provision for credit losses is recognized as an expense in the consolidated statements of income and is the amount necessary to adjust the allowance for credit losses to its appropriate balance, as determined through the Corporation's allowance methodology. The Corporation determines the appropriate level of the allowance for credit losses based on many quantitative and qualitative factors, including, but not limited to: the size and composition of the loan portfolio, changes in risk ratings, changes in collateral values, delinquency levels, historical losses and economic conditions. See further discussion of the Corporation's allowance methodology under the heading "Critical Accounting Policies." 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 and Allowance for Credit Losses." Non-Interest Income and Expense Comparison of 2013 to 2012 Non-Interest Income The following table presents the components of non-interest income for the past two years: 2013 Increase (decrease) % $ 2012 (dollars in thousands) Service charges on deposit accounts: Overdraft fees .............................................................................. $ Cash management fees ................................................................ Other ............................................................................................ Total service charges on deposit accounts........................... Investment management and trust services ...................................... Other service charges and fees: Merchant fees .............................................................................. Debit card income........................................................................ Letter of credit fees...................................................................... Foreign currency processing income........................................... Other ............................................................................................ Total other service charges and fees.................................... Mortgage banking income: Gain on sales of mortgage loans.................................................. Mortgage servicing income ......................................................... Total mortgage banking income........................................... Credit card income ........................................................................... Gain on sale of Global Exchange ..................................................... Other income .................................................................................... Total, excluding investment securities gains........................ Investment securities gains............................................................... Total............................................................................... $ 28,222 11,883 15,365 55,470 41,706 13,783 9,191 4,889 1,245 7,849 36,957 24,609 6,047 30,656 8,706 — 6,165 179,660 8,004 187,664 $ $ $ 33,329 11,004 17,169 61,502 38,239 12,472 8,716 5,052 10,431 7,674 44,345 46,310 (1,710) 44,600 7,944 6,215 10,541 213,386 3,026 216,412 $ (5,107) 879 (1,804) (6,032) 3,467 1,311 475 (163) (9,186) 175 (7,388) (21,701) 7,757 (13,944) 762 (6,215) (4,376) (33,726) 4,978 (28,748) (15.3)% 8.0 (10.5) (9.8) 9.1 10.5 5.4 (3.2) (88.1) 2.3 (16.7) (46.9) (453.6) (31.3) 9.6 (100.0) (41.5) (15.8) 164.5 (13.3)% The $5.1 million, or 15.3%, decrease in overdraft fee income included a $3.1 million decrease in fees assessed on personal accounts and a $2.0 million decrease in fees assessed on commercial accounts. The overall decline in these fees resulted from a reduction in the number of overdraft items paid, largely due to changes in customer behavior. The $3.5 million, or 9.1%, increase in investment management and trust services was due primarily to a $2.2 million, or 13.8%, increase in brokerage revenue and a $1.3 million, or 5.7%, 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. 41 Merchant fee income increased $1.3 million, or 10.5%, due to increases in the number of merchant customers and sales volumes in 2013. In December 2012, the Corporation's Fulton Bank, N.A. subsidiary sold its Global Exchange Group division (Global Exchange) for a gain of $6.2 million. Global Exchange provided international payment solutions to meet the needs of companies, law firms and professionals. Foreign currency processing income decreased $9.2 million, or 88.1%, in 2013, largely due to this sale. Mortgage banking income decreased $13.9 million, or 31.3%. Gains on sales of mortgage loans decreased $21.7 million, or 46.9%, due to a $993.2 million, or 39.7%, decrease in new loan commitments and an 11.9% decrease in pricing spreads during 2013. Both decreases resulted from an increase in mortgage interest rates in mid-2013. The decline in new loan commitments was mainly in refinancing volumes, which represented approximately 48% of new loan commitments in 2013 compared to 69% during 2012. Mortgage servicing income increased $7.8 million, largely a result of a $3.6 million reversal of the valuation allowance for mortgage servicing rights (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 $4.4 million, or 41.5%, 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 investments in corporate owned life insurance in 2012. Investment securities gains of $8.0 million for 2013 included $3.8 million of net realized gains on sales of financial institution stocks and $4.4 million of net realized gains on 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 $3.0 million for 2012 included $3.8 million of net realized gains on sales of securities, partially offset by other-than-temporary impairment charges of $809,000. See Note C, "Investment Securities," in the Notes to Consolidated Financial Statements for additional details. Non-Interest Expense The following table presents the components of non-interest expense for each of the past two years: Salaries and employee benefits ......................................................... $ Net occupancy expense ..................................................................... Other outside services ....................................................................... Data processing ................................................................................. Equipment expense ........................................................................... Professional fees ............................................................................... FDIC insurance ................................................................................. Software ............................................................................................ Operating risk loss ............................................................................ Marketing .......................................................................................... OREO and repossession expense ...................................................... Telecommunications ......................................................................... Supplies ............................................................................................. Postage .............................................................................................. Intangible amortization ..................................................................... FHLB prepayment penalty................................................................ Other.................................................................................................. Total ........................................................................................... $ 2013 253,240 46,944 18,856 16,555 15,419 13,150 11,605 11,560 9,290 7,705 7,364 7,362 5,331 4,879 2,438 — 29,735 461,433 $ $ Increase (decrease) % $ 2012 (dollars in thousands) 243,915 44,663 17,752 14,936 14,243 11,522 11,996 9,520 9,454 8,240 11,182 6,884 4,891 4,625 3,031 3,007 29,433 449,294 $ $ 9,325 2,281 1,104 1,619 1,176 1,628 (391) 2,040 (164) (535) (3,818) 478 440 254 (593) (3,007) 302 12,139 3.8% 5.1 6.2 10.8 8.3 14.1 (3.3) 21.4 (1.7) (6.5) (34.1) 6.9 9.0 5.5 (19.6) (100.0) 1.0 2.7% Salaries and employee benefits increased $9.3 million, or 3.8%, with salaries increasing $6.1 million, or 3.0%, and employee benefits increasing $3.2 million, or 7.7%. The increase in salaries was primarily due to an increase in staffing levels and normal merit increases. Average full-time equivalent employees increased to 3,607 in 2013 from 3,520 in 2012. The $3.2 million increase in employee benefits was primarily due to higher health insurance expense, driven by higher claims, and an increase in defined benefit plan expenses. Net occupancy expense increased $2.3 million, or 5.1%, as a result of new branches opened in late 2012 and an increase in rent expense. Other outside services increased $1.1 million, or 6.2%, due to increases in consulting expense, incurred primarily for risk management and compliance, and employment agency fees for new hires. 42 Data processing increased $1.6 million, or 10.8%, primarily due to growth in transaction volumes and the impact of the core processing system conversion. Equipment expense increased $1.2 million, or 8.3%, mainly in depreciation expense related to assets acquired to support the core system conversion and the overall information technology infrastructure. Professional fees increased $1.6 million, or 14.1%, due to an increase in legal costs associated with regulatory compliance and risk management efforts, partially offset by lower legal expenses for workout costs associated with problem assets. Software expense increased $2.0 million, or 21.4%, due to increased maintenance and license costs associated with the core processing system conversion. OREO and repossession expense decreased $3.8 million, or 34.1%, due to a $1.9 million decrease in collections and repossession expense, a $963,000 decrease in property maintenance costs, a $645,000 increase in net gains on sales of properties, and a $409,000 decrease in valuation provisions. These decreases reflect the continued improvement in overall asset quality. In December 2012, the Corporation prepaid approximately $20 million of FHLB advances, incurring a $3.0 million penalty. As noted previously, the Corporation successfully completed its conversion to a new core processing system during 2013. Total implementation costs specifically associated with this conversion were approximately $3.5 million and $975,000, respectively, during 2013 and 2012. Comparison of 2012 to 2011 Non-Interest Income The following table presents the components of non-interest income: 2012 Increase (decrease) % $ 2011 (dollars in thousands) Service charges on deposit accounts: Overdraft fees ............................................................................... $ Cash management fees ................................................................. Other............................................................................................. Total service charges on deposit accounts............................ Other service charges and fees: Merchant fees ............................................................................... Foreign currency processing income............................................ Debit card income ........................................................................ Letter of credit fees ...................................................................... Other............................................................................................. Total other service charges and fees..................................... Mortgage banking income: Gain on sales of mortgage loans .................................................. Mortgage servicing income .......................................................... Total mortgage banking income............................................ Investment management and trust services....................................... Credit card income ............................................................................ Gain on sale of Global Exchange...................................................... Other income..................................................................................... Total, excluding investment securities gains......................... Investment securities gains ............................................................... Total.................................................................................. $ 33,329 11,004 17,169 61,502 12,472 10,431 8,716 5,052 7,674 44,345 46,310 (1,710) 44,600 38,239 7,944 6,215 10,541 213,386 3,026 216,412 $ $ 32,062 10,590 15,426 58,078 10,126 9,400 15,535 5,038 7,383 47,482 22,207 3,467 25,674 36,483 7,004 — 8,211 182,932 4,561 187,493 $ $ 1,267 414 1,743 3,424 2,346 1,031 (6,819) 14 291 (3,137) 24,103 (5,177) 18,926 1,756 940 6,215 2,330 30,454 (1,535) 28,919 4.0% 3.9 11.3 5.9 23.2 11.0 (43.9) 0.3 3.9 (6.6) 108.5 (149.3) 73.7 4.8 13.4 — 28.4 16.6 (33.7) 15.4% The $1.3 million, or 4.0%, increase in overdraft fees was due to an increase in the per-item fee charged. Commercial account overdraft fees increased $634,000, or 7.3%, while fees on personal accounts increased $633,000, or 2.7%. The $6.8 million, or 43.9%, decrease in debit card income was the result of new regulations, effective October 2011, that established maximum interchange fees that issuers could charge on debit card transactions, as required under the Dodd-Frank Act. During 2011, changes to various fee pricing structures were made to mitigate the negative effect of the reduction in debit card interchange fees. These fee changes had a positive impact on cash management fees ($414,000, or 3.9%, increase), other service charges on deposit 43 accounts ($1.7 million, or 11.3%, increase) and merchant fees ($2.3 million, or 23.2%, increase). Also contributing to the increase in other service charges on deposit accounts was an increase in the number of accounts, while higher transaction volumes also contributed to the growth in merchant fees. Mortgage banking income increased $18.9 million, or 73.7%. Gains on sales of mortgage loans increased $24.1 million, or 108.5%, due to a $918.5 million, or 58.0%, increase in new loan commitments and a 32.1% increase in pricing spreads during 2012. The increase in new loan commitments was largely driven by an increase in refinancing volume resulting from historically low interest rates. The increase in gains on sales of mortgage loans was partially offset by a $4.5 million increase in MSR amortization due to prepayments of serviced loans and a $2.1 million impairment charge for MSRs recorded in the third quarter of 2012. The impairment charge was the result of an increase in forecasted mortgage prepayments, which caused a decline in the fair value of the MSR asset. Foreign currency processing income increased $1.0 million, or 11.0%, due primarily to an increase in volumes. The $1.8 million, or 4.8%, increase in investment management and trust services was due primarily to a $1.5 million, or 10.5%, increase in brokerage revenue and a $421,000, or 2.0%, increase in trust commissions. These increases resulted from the Corporation's expanded focus on generating recurring revenue in the brokerage business, increased sales of new trust business, and an improvement in the market values of existing assets under management. The $940,000, or 13.4%, increase in credit card income was due to an increase in the volume of transactions on previously issued cards and an increase in average balances, which generate fees under a joint marketing agreement with an independent third-party issuer. The $2.3 million, or 28.4%, increase in other income was due to gains on the sales of two branches and one operations facility and gains on investments in corporate owned life insurance. Investment securities gains of $3.0 million for 2012 included $3.8 million of net realized gains on sales of securities, partially offset by other-than-temporary impairment charges of $809,000. During 2012, the Corporation recorded other-than-temporary impairment charges of $356,000 for financial institutions stocks, $434,000 for auction rate securities and $19,000 for pooled trust preferred securities issued by financial institutions. The $4.6 million of net gains in 2011 included $7.5 million of net realized gains on sales of securities, partially offset by other-than-temporary impairment charges of $2.9 million. During 2011, the Corporation recorded other-than-temporary impairment charges of $1.4 million for pooled trust preferred securities issued by financial institutions, $1.2 million for financial institutions stocks and $292,000 for auction rate securities. Non-Interest Expense The following table presents the components of non-interest expense: Salaries and employee benefits ......................................................... $ Net occupancy expense ..................................................................... Other outside services ....................................................................... Data processing ................................................................................. Equipment expense ........................................................................... FDIC insurance premiums ................................................................ Professional fees ............................................................................... OREO and repossession expense ...................................................... Software ............................................................................................ Operating risk loss ............................................................................ Marketing .......................................................................................... Telecommunications ......................................................................... Supplies ............................................................................................. Postage .............................................................................................. Intangible amortization ..................................................................... FHLB prepayment penalty................................................................ Other.................................................................................................. Total ........................................................................................... $ N/M - Not meaningful 44 2012 243,915 44,663 17,752 14,936 14,243 11,996 11,522 11,182 9,520 9,454 8,240 6,884 4,891 4,625 3,031 3,007 29,433 449,294 $ $ Increase (decrease) % $ 2011 (dollars in thousands) 227,435 44,003 10,421 13,544 12,870 14,480 12,159 9,578 8,400 1,328 9,667 8,119 5,507 5,065 4,257 — 29,409 416,242 $ $ 16,480 660 7,331 1,392 1,373 (2,484) (637) 1,604 1,120 8,126 (1,427) (1,235) (616) (440) (1,226) 3,007 24 33,052 7.2% 1.5 70.3 10.3 10.7 (17.2) (5.2) 16.7 13.3 611.9 (14.8) (15.2) (11.2) (8.7) (28.8) N/M 0.1 7.9% Salaries and employee benefits increased $16.5 million, or 7.2%, with salaries increasing $12.6 million, or 6.6%, and employee benefits increasing $3.9 million, or 10.4%. The increase in salaries expense was largely due to annual merit increases in 2012, overtime and temporary employee expense to support residential lending, a $6.9 million increase in employee bonus and incentive compensation expense and a $585,000 increase in stock-based compensation expense. The $3.9 million increase in employee benefits was primarily due to a $2.3 million increase in healthcare costs and a $1.4 million increase in defined benefit plan expenses. Other outside services increased $7.3 million, or 70.3%, due primarily to a $5.9 million increase in consulting services related to compliance and risk management, an increase in employment agency fees and the outsourcing of certain functions. Data processing increased $1.4 million, or 10.3%, primarily due to increased transaction volumes. The $1.4 million, or 10.7%, increase in equipment expense was largely due to depreciation expense related to the addition of assets supporting the information technology infrastructure. The $2.5 million, or 17.2%, decrease in FDIC insurance expense was due, in part, to a change in how the insurance assessment is calculated. Effective April 1, 2011, the assessment was based on total average assets minus average tangible equity, as compared to the previous calculation, which was based on average domestic deposits. 2011 included three months of expense assessed under the FDIC's prior methodology. Also contributing to the decrease was lower assessment rates based on improvements in subsidiary bank impaired asset levels. OREO and repossession expense increased $1.6 million, or 16.7%, due to a $2.2 million increase in valuation provisions and a $1.4 million decrease in net gains on sales, partially offset by a $2.0 million decrease in repossession and other OREO expenses. This expense category is expected to be volatile as the Corporation continues to work through its non-performing assets. Software expense increased $1.1 million, or 13.3%, due to additional maintenance costs related to the addition of assets supporting the information technology infrastructure. The $8.1 million increase in operating risk loss was largely due to estimated losses associated with previously sold residential mortgages. Provisions for such losses were $4.9 million in 2012, as compared to a credit of $1.1 million in 2011. The charges in 2012 included $3.4 million related to a specific investor program with the FHLB and $1.5 million related to alleged breaches of representations and warranties made in connection with previously sold residential mortgages. The remaining increase in operating risk loss was primarily due to a $1.2 million increase in debit card fraud losses. Marketing expense decreased $1.4 million, or 14.8%, largely due to $1.3 million of expense related to the merger of the Corporation's New Jersey banks in the fourth quarter of 2011. Telecommunications expense decreased $1.2 million, or 15.2%, largely due to a renegotiated contract for data lines. The $1.2 million, or 28.8%, decrease in intangible amortization was primarily due to core deposit intangible assets, which are amortized on an accelerated basis. The proceeds from the sale of Global Exchange and short-term borrowings were used to prepay approximately $20 million of FHLB advances. The Corporation incurred a $3.0 million penalty in connection with prepaying these FHLB advances. In 2012, the Corporation also incurred implementation costs of $975,000 related to its core processing system conversion. Income Taxes Income tax expense for 2013 was $51.1 million, a decrease of $6.5 million, or 11.3%, from 2012. Income tax expense for 2012 increased $6.8 million, or 13.3%, from 2011. The Corporation’s effective tax rate (income taxes divided by income before income taxes) was 24.0%, 26.5% and 25.9% in 2013, 2012 and 2011, respectively. The Corporation’s effective tax rates are generally lower than the 35% federal statutory rate due to investments in tax-free municipal securities and tax credits earned from investments in partnerships that generate such credits under various federal programs (Tax Credit Investments). Net credits associated with Tax Credit Investments were $10.3 million, $9.6 million and $8.5 million in 2013, 2012 and 2011, respectively. In addition, a $3.5 million ($2.3 million, net of federal tax) decrease in the valuation allowance for certain state deferred tax assets resulting from net operating loss carryforwards 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. For additional information regarding income taxes, see Note L, "Income Taxes," in the Notes to Consolidated Financial Statements. 45 FINANCIAL CONDITION The table below presents condensed consolidated ending balance sheets for the Corporation. December 31 2013 2012 (dollars in thousands) Increase (decrease) % $ Assets Cash and due from banks .................................................... $ Other interest-earning assets................................................ Loans held for sale............................................................... 218,540 $ 256,300 $ 248,161 21,351 244,959 67,899 Investment securities ........................................................... 2,568,434 2,721,082 Loans, net of allowance....................................................... 12,579,440 11,923,068 Premises and equipment ...................................................... Goodwill and intangible assets............................................ 226,021 533,076 Other assets.......................................................................... 539,611 Total Assets................................................................... $ 16,934,634 Liabilities and Shareholders’ Equity Deposits ............................................................................... $ 12,491,186 Short-term borrowings......................................................... 1,258,629 Long-term debt .................................................................... Other liabilities .................................................................... 883,584 238,048 227,723 535,563 556,503 $ 16,533,097 $ 12,484,163 $ $ 868,399 894,253 204,626 Total Liabilities ................................................................. 14,871,447 14,451,441 Total Shareholders’ Equity................................................ 2,063,187 Total Liabilities and Shareholders’ Equity................... $ 16,934,634 2,081,656 $ 16,533,097 $ (37,760) 3,202 (46,548) (152,648) 656,372 (1,702) (2,487) (16,892) 401,537 7,023 390,230 (10,669) 33,422 420,006 (18,469) 401,537 (14.7)% 1.3 (68.6) (5.6) 5.5 (0.7) (0.5) (3.0) 2.4 % 0.1 % 44.9 (1.2) 16.3 2.9 (0.9) 2.4 % Loans held for sale Loans held for sale represent residential mortgage loans which the Corporation intends to sell to third-party investors as part of its mortgage banking activities. The $46.5 million, or 68.6%, decrease in loans held for sale resulted from a decrease in loans originated for sale in December 2013 as compared to December 2012, due to an increase in interest rates. As noted within the "Non-Interest Income" section of Management's Discussion, the Corporation's mortgage banking income in 2013 decreased in comparison to 2012 due to a decrease in both volumes of new loan commitments and a decrease in spreads on loans sold. 46 Investment Securities The following table presents the carrying amount of investment securities held to maturity (HTM) and available for sale (AFS) as of the dates shown: U.S. Government securities ................................ $ U.S. Government sponsored agency securities... State and municipal............................................. Corporate debt securities .................................... 2013 AFS 525 726 284,849 98,749 HTM 2012 AFS December 31 Total (in thousands) HTM 2011 AFS Total $ — $ 325 $ 325 $ — $ 334 $ 334 — — — 2,397 315,519 112,842 2,397 5,987 315,519 112,842 179 — 4,073 322,018 123,306 10,060 322,197 123,306 Collateralized mortgage obligations ................... 1,032,398 — 1,211,119 1,211,119 — 1,001,209 1,001,209 Mortgage-backed securities ................................ Auction rate securities ........................................ 945,712 159,274 Total debt securities.......................................... 2,522,233 Equity securities.................................................. 46,201 Total ............................................................ $2,568,434 292 — 292 — 879,621 149,339 879,913 149,339 503 — 880,097 225,211 880,600 225,211 2,671,162 2,671,454 6,669 2,556,248 2,562,917 49,628 49,628 — 33,430 33,430 $ 292 $2,720,790 $2,721,082 $ 6,669 $2,589,678 $2,596,347 Total investment securities decreased $152.6 million, or 5.6%, to $2.6 billion at December 31, 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 2013 were 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. As of December 31, 2013, the weighted average remaining lives of collateralized mortgage obligations and mortgage-backed securities were four and five years, respectively. The net pre-tax unrealized loss on available for sale investment securities was $39.8 million as of December 31, 2013, compared to a $41.5 million net pre-tax unrealized gain 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 7A, "Quantitative and Qualitative Disclosures About Market Risk." Loans The following table presents loans outstanding, by type, as of the dates shown, and the change in loans for the most recent year: December 31 2013 vs. 2012 Increase (decrease) 2013 2012 2011 2010 2009 $ % (dollars in thousands) Real estate – commercial mortgage.................... $ 5,101,922 $ 4,664,426 $ 4,602,596 $ 4,375,980 $ 4,292,300 $ 437,496 9.4% Commercial – industrial, financial and agricultural ..................................................... Real estate – home equity................................... 3,628,420 3,612,065 3,639,368 3,704,384 3,699,198 1,764,197 1,632,390 1,624,562 1,641,777 1,644,260 Real estate – residential mortgage...................... 1,337,380 1,257,432 1,097,503 Real estate – construction................................... Consumer............................................................ Leasing and other ............................................... 573,672 283,124 103,301 584,118 309,864 93,914 615,445 318,874 79,869 996,381 801,185 350,498 72,121 921,979 978,267 361,720 84,733 Gross loans ................................................... 12,792,016 12,154,209 11,978,217 11,942,326 11,982,457 16,355 131,807 79,948 (10,446) (26,740) 9,387 637,807 Unearned income................................................ (9,796) (7,238) (6,994) (7,198) (7,715) (2,558) 0.5 8.1 6.4 (1.8) (8.6) 10.0 5.2 35.3 Loans, net of unearned income..................... $ 12,782,220 $ 12,146,971 $ 11,971,223 $ 11,935,128 $ 11,974,742 $ 635,249 5.2% The Corporation does not have a concentration of credit risk with any single borrower, industry or geographical location within the Corporation's footprint. The Corporation's policies limit the maximum total lending commitment to an individual borrower to $39.0 million at December 31, 2013, which is below the Corporation's maximum lending limit. As of December 31, 2013, the Corporation had 60 relationships with total borrowing commitments between $20.0 million and $39.0 million. 47 Approximately $5.7 billion, or 44.4%, of the Corporation’s loan portfolio was in commercial mortgage and construction loans as of December 31, 2013. The performance of these loans can be adversely impacted by fluctuations in real estate values. The Corporation limits its maximum exposure to any builder or developer to $28.0 million, and limits its exposure to any one development project to $15.0 million. Geographically, the $437.5 million, or 9.4%, increase in commercial mortgages occurred throughout all markets, with increases in Pennsylvania ($154.0 million, or 6.2%), Maryland ($123.4 million, or 29.5%), New Jersey ($67.6 million, or 5.6%), Virginia ($64.1 million, or 17.8%) and Delaware ($28.4 million, or 17.0%). 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, as of December 31: 2013 Delinquency Rate $ % of Total $ (dollars in thousands) 2012 Delinquency Rate % of Total Commercial..................................... $ Commercial - residential................. Other ............................................... Total Real estate - construction....... $ 269,497 235,369 68,806 573,672 0.8% 8.2 0.8 3.8% 47.0% $ 41.0 12.0 100.0% $ 226,350 288,552 69,216 584,118 3.6% 8.2 2.6 38.8% 49.4 11.8 5.7% 100.0% Construction loans decreased $10.4 million, or 1.8%. Geographically, the decrease in construction loans occurred in the Virginia ($26.4 million, or 21.9%), Pennsylvania ($24.9 million, or 7.9%) and Maryland ($6.6 million, or 9.8%) markets, partially offset by increases in the New Jersey ($25.3 million, 38.8%) and Delaware ($22.2 million, or 138.5%) markets. In comparison to December 31, 2009, construction loans have decreased $404.6 million, or 41.4%, as the Corporation has actively reduced its exposure to credit risk in this portfolio. The following table summarizes the industry concentrations within the commercial loan portfolio as of December 31: Services........................................................................................................................................... Manufacturing................................................................................................................................. Retail............................................................................................................................................... Construction.................................................................................................................................... Wholesale ....................................................................................................................................... Health care ...................................................................................................................................... Real estate (1) ................................................................................................................................. Agriculture...................................................................................................................................... Arts and entertainment.................................................................................................................... Transportation................................................................................................................................. Financial services............................................................................................................................ Other ............................................................................................................................................... Total......................................................................................................................................... 2013 2012 19.2% 17.4% 13.5 11.0 10.0 9.7 8.1 7.0 5.8 2.7 2.5 1.6 8.9 14.7 10.1 10.3 10.5 8.2 7.4 5.7 2.6 3.0 2.2 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. 48 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 as of December 31: 2013 2012 (dollars in thousands) Commercial - industrial, financial and agricultural......................................................................... $ Real estate - commercial mortgage ................................................................................................. 129,840 87,868 Total............................................................................................................................................ $ 217,708 $ $ 81,978 47,637 129,615 Total shared national credits increased $88.1 million, or 68.0%, in comparison to 2012. The Corporation's shared national credits are to borrowers located in its geographical markets and the increase was due to normal lending activities consistent with the Corporation's underwriting policies. This increase was due to additions which were all located within the Corporation's geographical markets. As of December 31, 2013, none of the shared national credits were past due, as compared to one past due shared national credit, which constituted 2.7% of the total balance, as of December 31, 2012. Home equity loans increased $131.8 million, or 8.1%, primarily a result of an increase in 15-year fixed rate loans due to certain promotions. Geographically, the increase was in the Pennsylvania ($107.2 million, or 11.3%), New Jersey ($14.4 million, or 5.2%) and Delaware ($10.0 million, 11.7%) markets. Residential mortgages increased $80.0 million, or 6.4%, due primarily to an increase in fixed rate mortgages. During the second half of 2012, the Corporation elected to retain certain 15-year fixed rate mortgages in portfolio instead of selling them to third- party investors. A portion of these loans closed during the first quarter of 2013, driving some of the growth since December 31, 2012. Geographically, the increase in residential mortgages was primarily in the Pennsylvania ($37.4 million, or 5.8%), Virginia ($26.3 million, or 11.7%) and Maryland ($9.9 million, or 6.7%) markets. Consumer loans decreased $26.7 million, or 8.6%, due to a decrease in direct consumer loans, partially offset by a $7.2 million, or 5.0%, increase in indirect automobile loans. Leasing and other loans increased $9.4 million, or 10.0%, including a $23.7 million, or 31.2%, increase in leases, due primarily to growth in equipment leases. 49 Provision and Allowance for Credit Losses The Corporation accounts for the credit risk associated with lending activities through the allowance for credit losses and the provision for credit losses. A summary of the Corporation’s loan loss experience follows: 2013 2012 2011 2010 2009 (dollars in thousands) Loans, net of unearned income outstanding at end of year....................... $ 12,782,220 $ 12,146,971 $ 11,971,223 $ 11,935,128 $ 11,974,742 Daily average balance of loans, net of unearned income.......................... $ 12,578,524 $ 11,968,567 $ 11,906,447 $ 11,960,262 $ 11,977,105 Balance of allowance for credit losses at beginning of year..................... $ 225,439 $ 258,177 $ 275,498 $ 257,553 $ 180,137 Loans charged off: Commercial – industrial, financial and agricultural ........................ Real estate – commercial mortgage ................................................. Consumer and home equity ............................................................. Real estate – residential mortgage ................................................... Real estate – construction ................................................................ Leasing and other............................................................................. 30,383 20,829 10,070 9,705 6,572 2,653 41,868 51,988 13,470 4,509 26,250 2,281 52,301 26,032 9,686 32,533 38,613 2,168 35,865 28,209 11,210 6,896 66,412 2,833 34,761 15,530 10,770 7,056 44,909 6,048 Total loans charged off..................................................................... 80,212 140,366 161,333 151,425 119,074 Recoveries of loans previously charged off: Commercial – industrial, financial and agricultural ........................ Real estate – commercial mortgage ................................................. Consumer and home equity ............................................................. Real estate – residential mortgage ................................................... Real estate – construction ................................................................ Leasing and other............................................................................. Total recoveries................................................................................ Net loans charged off ................................................................................ Provision for credit losses......................................................................... 9,281 3,494 2,378 548 2,682 807 19,190 61,022 40,500 Balance at end of year............................................................................... $ 204,917 Components of Allowance for Credit Losses: Allowance for loan losses ......................................................................... $ 202,780 Reserve for unfunded lending commitments (1) ...................................... 2,137 Allowance for credit losses....................................................................... $ 204,917 $ $ $ 4,282 3,371 1,811 459 2,814 891 13,628 126,738 94,000 225,439 223,903 1,536 225,439 2,521 1,967 1,431 325 1,746 1,022 9,012 152,321 135,000 258,177 256,471 1,706 258,177 4,536 1,008 1,540 9 1,296 981 9,370 142,055 160,000 275,498 274,271 1,227 275,498 $ $ $ 1,679 536 1,678 150 1,194 1,233 6,470 112,604 190,020 257,553 256,698 855 257,553 $ $ $ $ $ $ Selected Asset Quality Ratios: Net charge-offs to average loans............................................................... Allowance for loan losses to loans outstanding........................................ Allowance for credit losses to loans outstanding...................................... Non-performing assets (2) to total assets.................................................. Non-performing assets (2) to total loans and OREO ................................ Non-accrual loans to total loans................................................................ 0.49% 1.59% 1.60% 1.00% 1.32% 1.05% 1.06% 1.84% 1.86% 1.43% 1.95% 1.52% 1.28% 2.14% 2.16% 1.94% 2.64% 2.15% 1.19% 2.30% 2.31% 2.22% 3.02% 2.35% 0.94% 2.14% 2.15% 1.83% 2.54% 1.99% Allowance for credit losses to non-performing loans ............................... 132.82% 106.82% 90.11% 83.80% 91.42% Non-performing assets (2) to tangible common shareholders’ equity and allowance for credit losses (3) ....................................................... 9.76% 13.39% 18.60% 22.50% 24.00% Includes accruing loans past due 90 days or more. (1) Reserve for unfunded lending commitments recorded within other liabilities on the consolidated balance sheets. (2) (3) Ratio represents a financial measure derived by methods other than Generally Accepted Accounting Principles ("GAAP"). See reconciliation of this non- GAAP financial measure to the most directly comparable GAAP measure under the heading, "Supplemental Reporting of Non-GAAP Based Financial Measures" in Item 6, "Selected Financial Data." The provision for credit losses decreased $53.5 million, or 56.9%, in comparison to 2012 due to improvements in credit quality metrics, including a decrease in net loans charged off, a reduction in the level non-performing loans and lower delinquencies. Net charge-offs decreased $65.7 million, or 51.9%, to $61.0 million in 2013 from $126.7 million in 2012. This decrease was primarily due to a $31.3 million, or 64.3%, decrease in commercial mortgage net charge-offs, a $19.5 million, or 83.4%, decrease 50 in construction loan net charge-offs and a $16.5 million, or 43.9%, decrease in commercial loan net charge-offs, partially offset by a $5.1 million, or 126.1%, increase in residential mortgage net charge-offs. Of the $61.0 million of net charge-offs recorded in 2013, 50.4% were for loans originated in Pennsylvania, 38.2% in New Jersey and 7.4% in Maryland. During 2013 and 2012, the Corporation sold $41.8 million and $50.5 million, respectively, of non-accrual commercial mortgage, commercial and construction loans to investors. When an appropriate price can be obtained, these sales can be advantageous as they reduce the cost of resolving problem credits and enable the Corporation to redeploy resources to other work-out and collection efforts. Total charge-offs for 2013 and 2012 associated with these transactions were $18.0 million and $24.6 million, respectively. The following table presents a summary of these transactions: 2013 2012 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 ................... $ 21,760 $ 23,600 $ 9,930 $ 55,290 $ 43,960 $ 19,990 $ 7,720 $ 71,670 Charge-offs prior to sale..... (4,890) (3,890) (4,680) (13,460) (10,780) (6,130) (4,300) (21,210) Net recorded investment in loans sold ....................... Proceeds from sale, net of selling expenses ............. Total charge-off upon sale.. $ Existing allocation for credit losses on sold loans ............................... $ 16,870 10,410 19,710 10,050 5,250 3,400 41,830 33,180 13,860 23,860 17,620 6,020 3,420 2,270 50,460 25,910 (6,460) $ (9,660) $ (1,850) $ (17,970) $ (15,560) $ (7,840) $ (1,150) $ (24,550) (6,620) $ (5,780) $ (1,320) $ (13,720) $ (16,780) $ (8,910) $ (1,920) $ (27,610) The following table presents non-performing assets as of December 31: 2013 2012 Non-accrual loans (1) (2) (3) ................................. $ Accruing loans past due 90 days or more (2) ........ Total non-performing loans ............................ OREO..................................................................... Total non-performing assets ........................... $ 133,753 20,524 154,277 15,052 169,329 $ $ 184,832 26,221 211,053 26,146 237,199 2011 (in thousands) 257,761 $ 28,767 286,528 30,803 317,331 $ $ $ 2010 2009 280,688 48,084 328,772 32,959 361,731 $ $ 238,360 43,359 281,719 23,309 305,028 (1) In 2013, the total interest income that would have been recorded if non-accrual loans had been current in accordance with their original terms was approximately $9.7 million. The amount of interest income on non-accrual loans that was included in 2013 was approximately $347,000. (2) Accrual of interest is generally discontinued when a loan becomes 90 days past due as to principal and interest. When interest accruals are discontinued, interest credited to income is reversed. Non-accrual loans may be restored to accrual status when all delinquent principal and interest has been paid currently for six consecutive months or the loan is considered secured and in the process of collection. Certain loans, primarily adequately collateralized residential mortgage loans, may continue to accrue interest after reaching 90 days past due. (3) Excluded from the amounts presented as of December 31, 2013 were $68.1 million of loans, modified under TDRs. These loans were reviewed for impairment under FASB ASC Section 310-10-35, but continue to accrue interest and are, therefore, not included in non-accrual loans. All non-accrual loans as of December 31, 2013 were reviewed for impairment under FASB ASC Section 310-10-35. 51 The following table presents loans whose terms were modified under TDRs as of December 31: 2013 2012 Real estate – residential mortgage .............................................. $ 28,815 19,758 Real estate – commercial mortgage ............................................ 10,117 Real estate – construction ........................................................... 8,045 Commercial – industrial, financial and agricultural.................... 1,376 Real estate - home equity and consumer..................................... 68,111 Total accruing TDRs .............................................................. 30,209 Non-accrual TDRs (1)................................................................. Total TDRs............................................................................. $ 98,320 $ 32,993 34,672 10,564 5,745 1,534 85,508 31,245 $ 116,753 (1) Included within non-accrual loans in the preceding table. 2011 (in thousands) $ 32,331 22,425 7,645 3,581 193 66,175 32,587 $ 98,762 2010 2009 $ 37,826 18,778 5,440 5,502 263 67,809 51,175 $ 118,984 $ $ 24,639 15,997 — 1,459 — 42,095 15,875 57,970 Total TDRs modified during 2013 and still outstanding as of December 31, 2013 totaled $28.6 million. Of these loans, $9.8 million, or 34.3%, had a payment default, which the Corporation defines as a single missed scheduled payment, subsequent to modification during 2013. Total TDRs modified during 2012 and still outstanding as of December 31, 2012 totaled $61.9 million. Of these loans, $21.2 million, or 34.2%, had a payment default subsequent to modification during 2012. The following table presents the changes in non-accrual loans for the years ended December 31: Commercial - Industrial, Financial and Agricultural Real Estate - Commercial Mortgage Real Estate - Construction Real Estate - Residential Mortgage Real Estate - Home Equity (in thousands) Consumer Leasing Total Balance of non-accrual loans at December 31, 2011......... $ Additions........................... Payments ........................... Charge-offs (1).................. Transfers to OREO............ Transfers to accrual status. Balance of non-accrual loans at December 31, 2012......... Additions........................... Payments ........................... Charge-offs (1).................. Transfers to OREO............ Transfers to accrual status. Balance of non-accrual loans at December 31, 2013......... $ 75,704 $ 109,412 $ 58,894 $ 7,834 $ 5,493 $ 60,229 (24,947) (41,586) (3,555) (150) 65,695 41,804 (31,336) (29,754) (4,788) (4,911) 66,390 (62,224) (50,249) (7,344) (1,025) 54,960 40,195 (32,236) (20,412) (702) (1,239) 24,830 (28,271) (20,262) (3,765) — 31,426 13,769 (14,195) (6,572) (3,166) (341) 18,952 (512) (3,913) (1,258) — 21,103 19,277 (3,222) (9,612) (2,306) (2,958) 14,405 (1,349) (5,845) (1,079) — 11,625 12,566 (3,453) (6,289) (332) (845) 368 374 (39) (690) — — 13 573 (4) (575) — (5) $ 56 $ 257,761 703 (593) (156) — — 10 266 (35) (241) — — 185,883 (117,935) (122,701) (17,001) (1,175) 184,832 128,450 (84,481) (73,455) (11,294) (10,299) 36,710 $ 40,566 $ 20,921 $ 22,282 $ 13,272 $ 2 $ — $ 133,753 (1) Excludes charge-offs of loans on accrual status. Non-accrual loans decreased $51.1 million, or 27.6%, in 2013 due mainly to decrease in non-accrual loan additions from $185.9 million in 2012 to $128.5 million in 2013, while balances continued to be reduced through payments and charge-offs. 52 The following table presents non-performing loans, by type, as of the dates shown and the changes in non-performing loans for the most recent year: 2013 2012 Real estate – commercial mortgage ....... $ 44,068 Commercial – industrial, financial and agricultural ......................................... Real estate – residential mortgage ......... Real estate – construction ...................... Real estate – home equity ...................... Consumer ............................................... Leasing................................................... 38,021 31,347 21,267 16,983 2,543 48 Total non-performing loans ............ $ 154,277 $ 57,120 66,954 34,436 32,005 17,204 3,315 19 $ 211,053 December 31 2011 2010 (dollars in thousands) $ 93,720 2009 $ 61,052 $ 113,806 2013 vs. 2012 Increase (decrease) $ % $ (13,052) (22.9)% 80,944 16,336 60,744 11,207 3,384 107 $ 286,528 87,455 50,412 84,616 10,188 2,154 227 $ 328,772 69,604 45,748 92,841 10,790 1,529 155 $ 281,719 (28,933) (3,089) (10,738) (221) (772) 29 $ (56,776) (43.2) (9.0) (33.6) (1.3) (23.3) 152.6 (26.9)% Non-performing commercial mortgages decreased $13.1 million, or 22.9%, in comparison to December 31, 2012. Geographically, the decrease occurred in the New Jersey ($7.7 million, or 28.8%), Pennsylvania ($3.6 million, or 17.4%) and Virginia ($2.9 million, or 52.5%) markets. Non-performing commercial loans decreased $28.9 million, or 43.2%, in comparison to December 31, 2012. Geographically, the decrease occurred in the Pennsylvania ($20.1 million, or 43.1%), New Jersey ($5.5 million, or 46.1%), Maryland ($2.0 million, or 42.1%) and Virginia ($1.4 million, or 40.2%) markets. Non-performing residential mortgages decreased $3.1 million, or 9.0%, in comparison to December 31, 2012. Geographically, the increase occurred primarily in the Pennsylvania ($1.5 million, or 12.1%), Virginia ($1.1 million, or 13.2%) and New Jersey ($1.1 million, or 12.8%) markets. Non-performing construction loans decreased $10.7 million, or 33.6%, in comparison to December 31, 2012. Geographically, the decrease occurred in the New Jersey ($7.8 million, or 62.5%), Virginia ($2.7 million, or 80.1%) and Maryland ($2.2 million, or 33.6%) markets, partially offset by an increase in the Pennsylvania ($2.0 million, or 21.0%) market. The following table summarizes OREO, by property type, as of December 31: 2013 2012 Residential properties...................................................................................................................... $ Commercial properties .................................................................................................................... Undeveloped land ........................................................................................................................... Total OREO ............................................................................................................................. $ $ (in thousands) 7,052 5,586 2,414 15,052 $ 6,788 15,482 3,876 26,146 As noted under the heading "Critical Accounting Policies" within Management's Discussion, the Corporation's ability to identify potential problem loans in a timely manner is key to maintaining an adequate allowance for credit losses. For commercial loans, commercial mortgages and construction loans to commercial borrowers, an internal risk rating process is used to monitor credit quality. For a complete description of the Corporation's risk ratings, refer to the "Allowance for Credit Losses" section within Note A, "Summary of Significant Accounting Policies," 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. 53 Total internally risk rated loans were $9.2 billion and $8.8 billion as of December 31, 2013 and 2012, respectively. The following table presents internal risk ratings for commercial loans, commercial mortgages and construction loans to commercial borrowers, by class segment, as of December 31: Special Mention 2013 vs. 2012 Increase (decrease) Substandard or Lower 2013 vs. 2012 Increase (decrease) Total Criticized Loans 2013 2012 $ % 2013 2012 $ % 2013 2012 (dollars in thousands) Real estate - commercial mortgage ..... $ 141,013 $ 157,640 $ (16,627) (10.5)% $ 196,922 $ 251,452 $ (54,530) (21.7)% $ 337,935 $ 409,092 Commercial - secured.......................... 111,613 137,277 (25,664) (18.7) 125,382 194,952 (69,570) (35.7) Commercial -unsecured....................... 11,666 5,421 6,245 115.2 2,755 6,000 (3,245) (54.1) 236,995 14,421 332,229 11,421 Total commercial - industrial, financial and agricultural ............ 123,279 142,698 (19,419) (13.6) 128,137 200,952 (72,815) (36.2) 251,416 343,650 Construction - commercial residential. 31,522 Construction - commercial .................. 2,932 52,434 2,799 (20,912) (39.9) 133 4.8 57,806 8,124 79,581 12,081 (21,775) (27.4) (3,957) (32.8) 89,328 11,056 132,015 14,880 Total real estate - construction (excluding construction - other).. 34,454 55,233 (20,779) (37.6) 65,930 91,662 (25,732) (28.1) 100,384 146,895 Total..................................................... $ 298,746 $ 355,571 $ (56,825) (16.0)% $ 390,989 $ 544,066 $ (153,077) (28.1)% $ 689,735 $ 899,637 % of total risk rated loans .................... 3.2% 4.0% 4.2% 6.2% 7.4% 10.2% As of December 31, 2013, total loans with risk ratings of substandard or lower were $153.1 million, or 28.1%, less than 2012, while special mention loans were $56.8 million, or 16.0%, lower. Overall reductions in criticized loans, while not the sole factor for measuring allocations on the above loan types, contributed to a decrease in allocations for impaired loans of $16.0 million, or 20.2%, in 2013. The following table presents a summary of delinquency status and rates, as a percentage of total loans, for loans that do not have internal risk ratings, by class segment, as of December 31: Delinquent (1) Non-performing (2) Total Past Due 2013 2012 2013 2012 2013 2012 $ % $ % $ % $ % $ % $ % (dollars in thousands) Real estate - home equity ............... $ 16,029 0.91% $ 12,645 0.77% $ 16,983 0.96% $ 17,204 1.06% $ 33,012 1.87% $ 29,849 1.83% 23,279 1.74 32,123 2.55 31,347 2.34 34,436 2.74 54,626 4.08 66,559 5.29 — — 865 3,795 1.25 2.28 548 2,391 0.80 1.81 904 3,170 1.31 1.90 548 5,977 0.80 4.51 1,769 6,965 2.56 4.18 indirect............. 3,312 2.20 2,270 1.58 152 0.10 145 0.11 3,464 2.30 2,415 1.69 Total Consumer ....... Leasing and other and Overdrafts . 6,898 2.44 6,065 1.96 2,543 0.89 3,315 1.07 9,441 3.33 9,380 3.03 581 0.62 711 0.82 48 0.05 19 0.02 629 0.67 730 0.84 Total ..................... $ 46,787 1.32% $ 52,409 1.56% $ 51,469 1.45% $ 55,878 1.67% $ 98,256 2.77% $ 108,287 3.23% (1) (2) Includes all accruing loans 30 days to 89 days past due. Includes all accruing loans 90 days or more past due and all non-accrual loans. As of December 31, 2013, delinquency rates for the above class segments decreased slightly, primarily due to a decrease in residential mortgage delinquencies, partially offset by increases in home equity delinquencies 30 to 89 days past due. 54 Real estate - residential mortgage.......... Real estate - construction - other................. Consumer - direct. 3,586 2.70 Consumer - The following table summarizes the allocation of the allowance for loan losses: 2013 2012 2011 2010 2009 % of Loans In Each Category Allowance Allowance % of Loans In Each % of Loans In Each % of Loans In Each Category Allowance Category Allowance Category Allowance % of Loans In Each Category (dollars in thousands) Real estate - commercial mortgage.................. $ Commercial - industrial, financial and agricultural........ Real estate - residential mortgage.................. Consumer, home equity, leasing & other......................... Real estate - construction.................. Unallocated .................. 55,659 39.9% $ 62,928 38.4 % $ 85,112 36.8 % $ 40,831 36.8 % $ 32,257 35.9 % 50,330 28.4 60,205 29.7 74,896 31.0 101,436 31.0 96,901 30.9 33,082 10.5 34,536 10.4 22,986 8.3 17,425 8.3 13,704 7.7 34,852 16.7 27,895 16.7 17,321 17.2 14,963 17.2 13,620 17.3 12,649 16,208 4.5 N/A 17,287 21,052 4.8 N/A 30,066 26,090 6.7 N/A 58,117 41,499 6.7 N/A 67,388 32,828 8.2 N/A $ 202,780 100.0% $ 223,903 100.0 % $ 256,471 100.0 % $ 274,271 100.0 % $ 256,698 100.0 % N/A – Not applicable Management believes that the $202.8 million allowance for loan losses as of December 31, 2013 is sufficient to cover incurred losses in the loan portfolio. See additional disclosures in Note A, "Summary of Significant Accounting Policies," and Note D, "Loans and Allowance for Credit Losses," in the Notes to Consolidated Financial Statements and "Critical Accounting Policies," in Management’s Discussion. Other Assets Other assets decreased $16.9 million, or 3.0%, to $539.6 million as of December 31, 2013. As of December 31, 2012, the Corporation had $53.2 million of receivables outstanding related to investment securities sales that had not settled at the end of the year. The Corporation had no such receivables outstanding as of December 31, 2013. In addition, prepaid FDIC insurance assessments decreased $23.6 million, as the FDIC refunded $21.0 million in prepaid assessments during 2013, and OREO decreased $11.1 million. These decreases were partially offset by a $50.2 million increase in Tax Credit Investments and an $11.3 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 summarizes the changes in ending deposits, by type: 2013 Increase (decrease) % $ 2012 (dollars in thousands) Noninterest-bearing demand.......................................................... $ 3,283,172 2,945,210 Interest-bearing demand................................................................. 3,344,882 Savings........................................................................................... 9,573,264 Total demand and savings....................................................... 2,917,922 Time deposits ................................................................................. Total deposits.......................................................................... $ 12,491,186 $ 3,009,966 2,755,603 3,335,256 9,100,825 3,383,338 $ 12,484,163 $ $ 273,206 189,607 9,626 472,439 (465,416) 7,023 9.1% 6.9 0.3 5.2 (13.8) 0.1% Non-interest bearing demand deposits increased $273.2 million, or 9.1%, primarily due to an increase in business account balances. Interest-bearing demand accounts increased $189.6 million, or 6.9%, due to a $118.2 million, or 7.2%, increase in personal account balances and an $84.5 million, or 8.4%, increase in municipal account balances. The $9.6 million, or 0.3%, increase in savings account balances was due to a $70.5 million, or 3.5%, increase in personal account balances and a $16.6 million, or 2.2%, increase in business account balances, partially offset by a $77.5 million, or 14.0%, decrease in municipal account balances. The $465.4 million, or 13.8%, decrease in time deposits was in accounts with balances less than $100,000 across most original maturity terms, partially offset by a $172.6 million increase in time deposits with balances of $100,000 or more. 55 The increase in personal interest-bearing demand and savings account balances resulted from a combination of factors, including the Corporation's promotional efforts, customers' migration away from certificates of deposit and increased savings by customers. The following table summarizes the changes in ending borrowings, by type: 2013 Increase (Decrease) % 2012 (dollars in thousands) $ Short-term borrowings: Customer repurchase agreements.............................................. $ Customer short-term promissory notes ..................................... Total short-term customer funding..................................... Federal funds purchased............................................................ Short-term FHLB Advances (1)................................................ Total short-term borrowings ......................................... 175,621 100,572 276,193 582,436 400,000 1,258,629 $ 156,238 119,691 275,929 592,470 — 868,399 Long-term debt: FHLB Advances............................................................................. Other long-term debt...................................................................... Total long-term debt........................................................... 513,854 369,730 883,584 Total borrowings....................................................... $ 2,142,213 524,817 369,436 894,253 $ 1,762,652 $ $ 19,383 (19,119) 264 (10,034) 400,000 390,230 (10,963) 294 (10,669) 379,561 12.4% (16.0) 0.1 (1.7) N/M 44.9 (2.1) 0.1 (1.2) 21.5% (1) Represents FHLB advances with an original maturity term of less than one year. N/M - Not meaningful The $390.2 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. The $11.0 million, or 2.1%, decrease in FHLB advances was a result of FHLB maturities, which were not replaced with new long-term borrowings. Other liabilities Other liabilities increased $33.4 million, or 16.3%, to $238.0 million as of December 31, 2013. The increase in other liabilities was primarily due to a $15.4 million increase in dividends payable to shareholders and $6.2 million of investment securities purchases executed prior to December 31, 2013, but not settled until after December 31, 2013. Also contributing to the increase in other liabilities was an increase in commitments to Tax Credit Investments. These increases were partially offset by an $11.3 million decrease in the funded status of the defined benefit pension plan. Shareholders’ Equity Total shareholders’ equity decreased $18.5 million, or 0.9%, to $2.1 billion, or 12.2% of total assets, as of December 31, 2013. The decrease was due primarily to $90.9 million of common stock repurchases, $61.9 million of dividends on shares outstanding and a $52.8 million net increase in after-tax unrealized holding losses on available for sale investment securities, partially offset by $161.8 million of net income. In January 2013, the Corporation announced that its board of directors had approved a share repurchase program pursuant to which the Corporation was authorized to repurchase of up to eight million shares, through June 30, 2013. In June 2013, the Corporation announced that its board of directors had extended the timeframe for this stock repurchase program to September 30, 2013. During 2013, the Corporation repurchased 8.0 million shares, completing this repurchase program. In October 2013, the Corporation announced that its board of directors had approved a share repurchase program pursuant to which the Corporation was authorized to repurchase up to 4 million shares, or approximately 2.1% of its outstanding shares, through March 2014. During the first quarter of 2014, the Corporation repurchased 4.0 million shares under this repurchase plan at an average cost of $12.45 per share, completing this repurchase program on February 19, 2014. The Corporation and its subsidiary banks are subject to regulatory capital requirements administered by various banking regulators. Failure to meet minimum capital requirements can initiate certain actions by regulators that could have a material effect on the Corporation’s financial statements. The regulations require that banks maintain minimum amounts and ratios of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and Tier I capital to average assets (as defined). As of December 31, 2013, the Corporation and each of its bank subsidiaries met the minimum capital requirements. In addition, all of 56 the Corporation’s bank subsidiaries’ capital ratios exceeded the amounts required to be considered "well capitalized" as defined in the regulations. See also Note K, "Regulatory Matters," in the Notes to Consolidated Financial Statements. The following table summarizes the Corporation’s capital ratios in comparison to regulatory requirements at December 31: Total capital (to risk weighted assets).................................................... Tier I capital (to risk weighted assets)................................................... Tier I capital (to average assets)............................................................ 2013 15.0% 13.1% 10.6% 2012 15.6% 13.4% 11.0% Regulatory Minimum for Capital Adequacy 8.0% 4.0% 4.0% In July 2013, the FRB approved final rules (the "U.S. Basel III Capital Rules") establishing a new comprehensive capital framework for U.S. banking organizations and implementing the Basel Committee on Banking Supervision's December 2010 framework for strengthening international capital standards. The U.S. Basel III Capital Rules substantially revise the risk-based capital requirements applicable to bank holding companies and depository institutions. The new minimum regulatory capital requirements established by the U.S. Basel III Capital Rules are effective for the Corporation beginning on January 1, 2015, and become fully phased in on January 1, 2019. When fully phased in, the U.S. Basel III Capital Rules will require the Corporation and its bank subsidiaries to: • Meet a new minimum Common Equity Tier 1 capital ratio of 4.50% of risk-weighted assets and a Tier 1 capital ratio of 6.00% of risk-weighted assets; • Continue to require the current minimum Total capital ratio of 8.00% of risk-weighted assets and the minimum Tier 1 leverage capital ratio of 4.00% of average assets; • Maintain a "capital conservation buffer" of 2.50% above the minimum risk-based capital requirements, which must be maintained to avoid restrictions on capital distributions and certain discretionary bonus payments; and • Comply with a revised definition of capital to improve the ability of regulatory capital instruments to absorb losses as a result of which certain non-qualifying capital instruments, including cumulative preferred stock and trust preferred securities, will be excluded as a component of Tier 1 capital for institutions of the Corporation's size. The U.S. Basel III Capital Rules use a standardized approach for risk weightings that 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 December 31, 2013 the Corporation believes its current capital levels would meet the fully-phased in minimum capital requirements, including capital conservation buffer, as prescribed in the U.S. Basel III Capital Rules. 57 Contractual Obligations and Off-Balance Sheet Arrangements The Corporation has various financial obligations that require future cash payments. These obligations include the payment of liabilities recorded on the Corporation’s consolidated balance sheet as well as contractual obligations for purchased services or for operating leases. The following table summarizes the Corporation's significant contractual obligations to third parties, by type, that were fixed and determinable as of December 31, 2013: One Year or Less One to Three Years Payments Due In Three to Five Years (in thousands) Over Five Years Total Deposits with no stated maturity (1)................. $ 9,573,264 1,860,872 Time deposits (2) .............................................. 1,258,629 Short-term borrowings (3) ................................ 6,091 Long-term debt (3)............................................ 16,598 Operating leases (4) .......................................... 20,391 Purchase obligations (5) ................................... 1,651 Uncertain tax positions (6)................................ $ — $ — $ 798,223 — 381,555 30,372 31,563 — 175,267 — 314,892 24,123 11,817 — — $ 9,573,264 2,917,922 1,258,629 883,584 131,528 63,771 1,651 83,560 — 181,046 60,435 — — Includes demand deposits and savings accounts, which can be withdrawn by customers at any time. (1) (2) See additional information regarding time deposits in Note H, "Deposits," in the Notes to Consolidated Financial Statements. (3) See additional information regarding borrowings in Note I, "Short-Term Borrowings and Long-Term Debt," in the Notes to Consolidated Financial Statements. (4) See additional information regarding operating leases in Note P, "Leases," in the Notes to Consolidated Financial Statements. (5) (6) Includes information technology, telecommunication and data processing outsourcing contracts. Includes accrued interest. See additional information related to uncertain tax positions in Note L, "Income Taxes," in the Notes to Consolidated Financial Statements. In addition to the contractual obligations listed in the preceding table, 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. These financial instruments include commitments to extend credit and standby letters of credit, which involve, to varying degrees, elements of credit and interest rate risk that are not recognized on the consolidated balance sheets. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Standby letters of credit are conditional commitments issued to guarantee the financial or performance obligation of a customer to a third party. Commitments and standby letters of credit do not necessarily represent future cash needs as they may expire without being drawn. The following table presents the Corporation’s commitments to extend credit and letters of credit as of December 31, 2013 (in thousands): Commercial and other .............................................................................................................................. $ Home equity ............................................................................................................................................. Commercial mortgage and construction .................................................................................................. Total commitments to extend credit.................................................................................................. $ Standby letters of credit............................................................................................................................ $ Commercial letters of credit ..................................................................................................................... Total letters of credit ......................................................................................................................... $ 2,773,415 1,245,589 360,574 4,379,578 391,445 36,344 427,789 58 Item 7A. Quantitative and Qualitative Disclosures About Market Risk Market risk is the exposure to economic loss that arises from changes in the values of certain financial instruments. The types of market risk exposures generally faced by financial institutions include interest rate risk, equity market price risk, debt security market price risk, foreign currency price risk and commodity price risk. Due to the nature of its operations, only equity market price risk, debt security market price risk and interest rate risk are significant to the Corporation. Equity Market Price Risk Equity market price risk is the risk that changes in the values of equity investments could have a material impact on the financial position or results of operations of the Corporation. As of December 31, 2013, the Corporation’s equity investments consisted of $40.6 million of common stocks of publicly traded financial institutions and $5.6 million of other equity investments. The equity investments most susceptible to market price risk are the financial institutions stocks, which had a cost basis of $28.5 million and a fair value of $40.6 million as of December 31, 2013, including an investment in a single financial institution with a cost basis of $20.0 million and a fair value of $29.3 million. The fair value of this investment accounted for 72.1% 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, gross unrealized gains and gross unrealized losses in this portfolio were approximately $12.2 million and $66,000, respectively, as of December 31, 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 $65.0 million investment in FHLB stock, which the Corporation is required to own in order to borrow 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 and dividend payments. Finally, the Corporation’s investment management and trust services income may be impacted by fluctuations in the equity markets. A portion of this revenue is based on the value of the underlying investment portfolios, many of which include equity investments. If the values of those investment portfolios decrease, whether due to factors influencing U.S. securities markets in general or otherwise, the Corporation’s revenue would be negatively impacted. In addition, the Corporation’s ability to sell its brokerage services in the future will be dependent, in part, upon consumers’ level of confidence in financial markets. Debt Security Market Price Risk Debt security market price risk is the risk that changes in the values of debt securities, unrelated to interest rate changes, could have a material impact on the financial position or results of operations of the Corporation. The Corporation’s debt security investments consist primarily of U.S. government sponsored agency issued mortgage-backed securities and collateralized mortgage obligations, state and municipal securities, U.S. government debt securities, auction rate securities and corporate debt securities. All of the Corporation's investments in mortgage-backed securities and collateralized mortgage obligations have principal payments that are guaranteed by U.S. government sponsored agencies. Municipal Securities As of December 31, 2013, the Corporation owned $284.8 million of municipal securities issued by various municipalities. Ongoing uncertainty with respect to the financial strength of municipal bond insurers places much greater emphasis on the underlying strength of issuers. Continued pressure on local tax revenues of issuers due to adverse economic conditions could have an adverse impact on the underlying credit quality of issuers. The Corporation evaluates existing and potential holdings primarily based on the creditworthiness of the issuing municipality and then, to a lesser extent, on any underlying credit enhancement. Municipal securities can be supported by the general obligation of the issuing municipality, allowing the securities to be repaid by any means available to the issuing municipality. As of December 31, 2013, approximately 95% of municipal securities were supported by the general obligation of corresponding municipalities. Approximately 84% of these securities were school district issuances, which are also supported by the states of the issuing municipalities. Auction Rate Securities As of December 31, 2013, the Corporation’s investments in student loan auction rate securities, also known as auction rate certificates (ARCs), had a cost basis of $172.3 million and a fair value of $159.3 million. 59 ARCs are long-term securities that were structured to allow their sale in periodic auctions, resulting in both the treatment of ARCs as short-term instruments in normal market conditions and fair values that could be derived based on periodic auction prices. However, beginning in 2008, market auctions for these securities began to fail due to an insufficient number of buyers, resulting in an illiquid market. 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 December 31, 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 the ARCs is also a factor in the determination of their estimated fair value. As of December 31, 2013, approximately $151 million, or 95%, of the ARCs were rated above investment grade, with approximately $8 million, or 5%, AAA rated and $104 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 $5 million, or 61%, of the loans underlying these ARCs have principal payments which are guaranteed by the federal government. In total, approximately $155 million, or 98%, of the loans underlying the ARCs have principal payments which are guaranteed by the federal government. At December 31, 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 as of December 31, 2013: Amortized Cost Estimated Fair Value Single-issuer trust preferred securities................................................................................................ $ Subordinated debt ............................................................................................................................... Pooled trust preferred securities ......................................................................................................... Corporate debt securities issued by financial institutions.............................................................. $ $ (in thousands) 47,481 47,405 2,997 97,883 $ 40,531 50,327 5,306 96,164 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 $7.0 million as of December 31, 2013. The Corporation did not record any other-than-temporary impairment charges for single-issuer trust preferred securities in 2013, 2012 or 2011. 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 $11.3 million as of December 31, 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 as of December 31, 2013 were not rated by any ratings agency. The Corporation held eight pooled trust preferred securities as of December 31, 2013. Each of these securities, with a total amortized cost of $3.0 million and an estimated fair value of $5.3 million, were rated below investment grade by at least one ratings agency, with ratings ranging from C to Ca. For each of these securities, 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 flow model. The most significant input to the expected cash flow 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 asset ratios, of the individual financial institution issuers that comprise each pooled trust preferred security to estimate its expected deferral rate. During 2013, the Corporation recorded $97,000 of other-than-temporary impairment charges for pooled trust preferred securities. Additional impairment charges for corporate debt securities issued by financial institutions may be necessary in the future depending upon the performance of the individual investments. 60 See Note C, "Investment Securities," in the Notes to Consolidated Financial Statements for further discussion related to the Corporation’s other-than-temporary impairment evaluations for debt securities, and see Note R, "Fair Value Measurements," in the Notes to Consolidated Financial Statements for further discussion related to the fair values of debt securities. Interest Rate Risk, Asset/Liability Management and Liquidity Interest rate risk creates exposure in two primary areas. First, changes in rates have an impact on the Corporation’s liquidity position and could affect its ability to meet obligations and continue to grow. Second, movements in interest rates can create fluctuations in the Corporation’s net interest income and changes in the economic value of its equity. The Corporation employs various management techniques to minimize its exposure to interest rate risk. An Asset/Liability Management Committee (ALCO), consisting of key financial and senior management personnel, meets on a regular basis. The ALCO is responsible for reviewing the interest rate sensitivity and liquidity positions of the Corporation, approving asset and liability management policies, and overseeing the formulation and implementation of strategies regarding balance sheet positions. From a liquidity standpoint, the Corporation must maintain a sufficient level of liquid assets to meet the cash needs of its customers, who, as depositors, may want to withdraw funds or who, as borrowers, need credit availability. Liquidity is provided on a continuous basis through scheduled and unscheduled principal and interest payments on outstanding loans and investments and through the availability of deposits and borrowings. The Corporation also maintains secondary sources that provide liquidity on a secured and unsecured basis to meet short-term and long-term needs. The consolidated statements of cash flows provide details related to the sources and uses of cash. The Corporation generated $301.6 million in cash from operating activities during 2013, mainly due to net income, as adjusted for non-cash charges, including the provision for credit losses and depreciation and amortization. Also contributing to the increase in cash from operating activities was the proceeds received from the sales of mortgage loans in excess of cash used from originations. Investing activities resulted in a net cash outflow of $598.7 million in 2013 due mainly to a net increase in loans. Financing activities resulted in a net cash inflow of $259.4 million in 2013 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 to shareholders. 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. The Corporation meets its cash needs mainly through dividends from subsidiary banks. Secondary sources of liquidity include loans from subsidiary banks and external borrowings. Management continuously monitors liquidity and capital needs and will implement appropriate strategies, as necessary, to meet regulatory and business requirements. As of December 31, 2013, liquid assets (defined as cash and due from banks, short-term investments, deposits in other financial institutions, Federal funds sold, loans held for sale and securities available for sale) totaled $2.8 billion, or 16.6% of total assets, as compared to $3.0 billion, or 18.4% of total assets, as of December 31, 2012. 61 The following table presents the expected maturities of available for sale investment securities, at estimated fair value, as of December 31, 2013 and the weighted average yields of such securities (calculated based on historical cost): MATURING Within One Year Yield Amount After One But Within Five Years Yield Amount After Five But Within Ten Years Yield Amount (dollars in thousands) — —% $ After Ten Years Yield Amount — —% $ — —% U.S. Government securities.................... $ U.S. Government sponsored agency securities ............................................. 525 0.14% $ — — State and municipal (1) .......................... 30,666 2.47 Auction rate securities (2) ...................... Corporate debt securities ........................ — — 655 2.43 106 22,867 1.49 5.40 46 196,629 1.37 5.49 — — — — 44,338 4.39 6,089 3.70 574 34,687 159,274 47,667 0.81 6.62 1.69 2.58 Total................................................. $ 31,846 2.43% $ 67,311 4.73% $ 202,764 5.43% $ 242,202 2.52% Collateralized mortgage obligations (3) . $1,032,398 Mortgage-backed securities (3) .............. $ 945,712 1.94% 2.61% (1) Weighted average yields on tax-exempt securities have been computed on a fully taxable-equivalent basis assuming a tax rate of 35% and statutory interest expense disallowances. (2) Maturities of auction rate securities are based on contractual maturities. (3) Maturities for mortgage-backed securities and collateralized mortgage obligations are dependent upon the interest rate environment and prepayments on the underlying loans. For the purpose of this table, all balances and weighted average rates are shown in one period. As of December 31, 2013, the weighted average remaining lives of collateralized mortgage obligations and mortgage-backed securities were four and five years, respectively. The Corporation’s investment portfolio consists mainly of mortgage-backed securities and collateralized mortgage obligations which have stated maturities that may differ from actual maturities due to borrowers’ ability to prepay obligations. Cash flows from such investments are dependent upon the performance of the underlying mortgage loans and are generally influenced by the level of interest rates. As rates increase, cash flows generally decrease as prepayments on the underlying mortgage loans decrease. As rates decrease, cash flows generally increase as prepayments increase. The following table presents the approximate contractual maturity and interest rate sensitivity of certain loan types subject to changes in interest rates as of December 31, 2013: One Year or Less One Through Five Years More Than Five Years Total (in thousands) Commercial, financial and agricultural: Adjustable and floating rate ...................................... $ Fixed rate................................................................... Total ................................................................... $ Real estate – mortgage (1): Adjustable and floating rate ...................................... $ Fixed rate................................................................... Total ................................................................... $ Real estate – construction: Adjustable and floating rate ...................................... $ Fixed rate................................................................... Total ................................................................... $ 897,277 284,302 1,181,579 1,118,712 487,132 1,605,844 174,792 73,449 248,241 $ $ $ $ $ $ 1,700,557 259,979 1,960,536 3,066,632 955,488 4,022,120 154,676 23,977 178,653 $ $ $ $ $ $ 406,505 79,800 486,305 1,906,593 668,942 2,575,535 103,481 43,297 146,778 $ $ $ $ $ $ 3,004,339 624,081 3,628,420 6,091,937 2,111,562 8,203,499 432,949 140,723 573,672 (1) Includes commercial mortgages, residential mortgages and home equity loans. 62 Contractual maturities of time deposits of $100,000 or more outstanding as of December 31, 2013 were as follows (in thousands): Three months or less ................................................................................................................................................ $ Over three through six months ................................................................................................................................. Over six through twelve months .............................................................................................................................. Over twelve months ................................................................................................................................................. 199,590 200,869 314,840 375,378 Total................................................................................................................................................................... $ 1,090,677 The Corporation maintains liquidity sources in the form of demand and savings deposits, time deposits, repurchase agreements and short-term promissory notes. Additional liquidity can generally be obtained from these sources, if necessary, by increasing interest rates. The positive impact to liquidity resulting from higher interest rates could have a detrimental impact on the net interest margin and net income if rates on interest-earning assets do not have a corresponding increase. 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 December 31, 2013, the Corporation had $513.9 million of term advances outstanding from the FHLB with an additional borrowing capacity of approximately $1.7 billion under these facilities. Advances from the FHLB are secured by FHLB stock, qualifying residential mortgages, investments and other assets. As of December 31, 2013, the Corporation had aggregate availability under Federal funds lines of $1.6 billion, with $582.4 million of that amount outstanding. A combination of commercial real estate loans, commercial loans and securities are pledged to the Federal Reserve Bank of Philadelphia to provide access to Federal Reserve Bank Discount Window borrowings. As of December 31, 2013 and 2012, the Corporation had $2.0 billion of collateralized borrowing availability at the Discount Window, and no outstanding borrowings. 63 The following table provides information about the Corporation's interest rate sensitive financial instruments as of December 31, 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 dollars amounts are in thousands. 2014 2015 2016 2017 2018 Beyond Total Expected Maturity Period Estimated Fair Value Fixed rate loans (1) ..................... $1,041,701 $ 504,759 $ 375,127 $ 366,056 $ 226,072 $ 696,610 $ 3,210,325 $ 3,204,624 Average rate ....................... 3.97% 4.52% 4.37% 4.60% 4.21% 4.05% 4.21% Floating rate loans (1) (2) ........... 2,195,289 1,421,509 1,154,186 989,919 1,390,154 2,416,793 9,567,850 9,480,105 Average rate ....................... 3.83% 4.09% 4.10% 4.08% 3.89% 4.08% 4.00% Fixed rate investments (3)........... 387,362 308,732 261,873 242,972 197,245 951,845 2,350,029 2,316,771 Average rate ....................... 2.55% 2.63% 2.64% Floating rate investments (3) ...... Average rate ....................... — — 48 177,246 1.39% 2.15% Other interest-earning assets (4) . 185,339 Average rate ....................... 0.13% Total............................................ $3,809,691 — — — — 2.80% 4,955 0.92% — — 2.72% 59 2.18% — — 2.86% 2.74% 41,951 224,259 205,462 1.48% 2.00% — — 185,339 241,811 0.09% $2,235,048 $1,968,432 $1,603,902 $1,813,530 $4,107,199 $ 15,537,802 $15,448,773 Average rate...................... 3.56% 3.98% 3.78% 4.00% 3.80% 3.69% 3.75% Fixed rate deposits (5)................. $1,533,182 $ 526,686 $ 251,262 $ 93,414 $ 64,926 $ 29,554 $ 2,499,024 $ 2,512,388 Average rate ....................... 0.63% 1.32% 1.21% 1.40% 1.58% 1.83% 0.90% Floating rate deposits (6) ............ 4,812,438 714,534 380,373 347,505 328,339 125,801 6,708,990 6,705,078 Average rate ....................... 0.08% 0.05% 0.05% 0.06% Fixed rate borrowings (7)............ 7,542 145,725 236,595 315,494 Average rate ....................... 4.71% 4.60% 4.00% 4.85% Floating rate borrowings (8) ....... 1,258,629 Average rate ....................... 0.10% Total............................................ $7,611,791 — — — — — — 0.06% 518 4.68% — — 0.10% 0.07% 161,214 867,088 866,949 6.18% 4.82% 16,496 1,275,125 1,267,664 2.38% 0.13% $1,386,945 $ 868,230 $ 756,413 $ 393,783 $ 333,065 $ 11,350,227 $11,352,079 Average rate...................... 0.20% 1.01% 1.46% 2.23% 0.32% 3.31% 0.63% (1) (2) (3) (4) (5) (6) (7) (8) Amounts are based on contractual payments and maturities, adjusted for expected prepayments. Excludes $4.0 million of overdraft balances. Line of credit amounts are based on historical cash flow assumptions, with an average life of approximately 5 years. 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. Excludes Federal Reserve Bank and FHLB stock as such restricted investments do not have maturity dates. Amounts are based on contractual maturities of time deposits. Estimated based on history of deposit flows. Amounts are based on contractual maturities of debt instruments, adjusted for possible calls. Amounts also include junior subordinated deferrable interest debentures. Amounts include Federal funds purchased, short-term promissory notes and securities sold under agreements to repurchase, which mature in less than 90 days, in addition to junior subordinated deferrable interest debentures. The preceding table and discussion addressed the liquidity implications of interest rate risk and focused on expected cash flows from financial instruments. Expected maturities, however, do not necessarily reflect the net interest income impact of interest rate changes. Certain financial instruments, such as adjustable rate loans, have repricing periods that differ from expected cash flow periods. Included within the $9.6 billion of floating rate loans above are $3.7 billion of loans, or 39.0% of the total, that float with the prime interest rate, $1.7 billion, or 17.6%, of loans which float with other interest rates, primarily the London Interbank Offered Rate (LIBOR), and $4.2 billion, or 43.4%, of adjustable rate loans. The $4.2 billion of adjustable rate loans include loans that are fixed rate instruments for a certain period of time, and then convert to floating rates. 64 The following table presents the percentage of adjustable rate loans, as of December 31, 2013, stratified by the period until their next repricing: Fixed Rate Term One year............................................................................................................................................................................... Two years............................................................................................................................................................................. Three years........................................................................................................................................................................... Four years ............................................................................................................................................................................ Five years............................................................................................................................................................................. Greater than five years......................................................................................................................................................... Percent of Total Adjustable Rate Loans 30.1% 17.1 16.0 13.5 14.1 9.2 As of December 31, 2013, approximately $5.8 billion of loans had interest rate floors, with approximately $3.1 billion priced at their interest rate floor. Of this total, approximately $3.0 billion are scheduled to reprice during the next twelve months. The weighted average interest rate increase that would be necessary for these loans to begin repricing to higher rates was approximately 0.64%. The Corporation uses three complementary methods to measure and manage interest rate risk. They are static gap analysis, simulation of net interest income, and estimates of economic value of equity. Using these measurements in tandem provides a reasonably comprehensive summary of the magnitude of the Corporation's interest rate risk, level of risk as time evolves, and exposure to changes in interest rates. 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 the Corporation’s assets and liabilities into repricing periods. The sum 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 December 31, 2013, the cumulative six-month ratio of RSA/RSL was 1.05. Simulation of net interest income is performed for the next twelve-month period. A variety of interest rate scenarios are used to measure the effects of sudden and gradual movements upward and downward in the yield curve. These results are compared to the results obtained in a flat or unchanged interest rate scenario. Simulation of net interest income is used primarily to measure the Corporation’s short-term earnings exposure to rate movements. The Corporation’s policy limits the potential exposure of net interest income, in a non-parallel instantaneous shock, to 10% of the base case net interest income for a 100 basis point shock in interest rates, 15% for a 200 basis point shock and 20% for a 300 basis point shock. A "shock" is an immediate upward or downward movement of interest rates. The shocks do not take into account changes in customer behavior that could result in changes to mix and/or volumes in the balance sheet, nor do they account for competitive pricing over the forward 12-month period. The following table summarizes the expected impact of interest rate shocks on net interest income (due to the current level of interest rates, the 200 and 300 basis point downward shock scenarios are not shown): Rate Shock (1) +300 bp ............................................................................................................... +200 bp ............................................................................................................... +100 bp ............................................................................................................... –100 bp ............................................................................................................... Annual change in net interest income + $37.7 million + $22.0 million + $ 6.5 million – $19.1 million % Change + 7.4% + 4.3% + 1.3% – 3.7% (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 December 31, 2013, the Corporation was within economic value of equity policy limits for every 100 basis point shock. 65 Item 8. Financial Statements and Supplementary Data CONSOLIDATED BALANCE SHEETS (dollars in thousands, except per-share data) Assets Cash and due from banks............................................................................................................ $ Interest-bearing deposits with other banks ................................................................................. Federal Reserve Bank and Federal Home Loan Bank stock ...................................................... Loans held for sale...................................................................................................................... Investment securities: December 31 2013 2012 $ 218,540 163,988 84,173 21,351 256,300 173,257 71,702 67,899 Held to maturity (estimated fair value of $319 in 2012) ..................................................... Available for sale................................................................................................................. Loans, net of unearned income................................................................................................... Allowance for loan losses........................................................................................................... Net Loans...................................................................................................................... Premises and equipment ............................................................................................................. Accrued interest receivable......................................................................................................... Goodwill and intangible assets ................................................................................................... Other assets................................................................................................................................. — 2,568,434 12,782,220 (202,780) 12,579,440 226,021 44,037 533,076 495,574 Total Assets................................................................................................................... $ 16,934,634 292 2,720,790 12,146,971 (223,903) 11,923,068 227,723 45,786 535,563 510,717 $ 16,533,097 Liabilities Deposits: Noninterest-bearing ............................................................................................................. $ Interest-bearing.................................................................................................................... Total Deposits............................................................................................................... 3,283,172 9,208,014 12,491,186 $ 3,009,966 9,474,197 12,484,163 Short-term borrowings: Federal funds purchased ...................................................................................................... Other short-term borrowings ............................................................................................... Total Short-Term Borrowings....................................................................................... Accrued interest payable............................................................................................................. Other liabilities ........................................................................................................................... Federal Home Loan Bank advances and long-term debt............................................................ Total Liabilities............................................................................................................. Shareholders’ Equity Common stock, $2.50 par value, 600 million shares authorized, 217.8 million shares issued 582,436 676,193 1,258,629 15,218 222,830 883,584 14,871,447 592,470 275,929 868,399 19,330 185,296 894,253 14,451,441 in 2013 and 216.8 million shares issued in 2012................................................................. Additional paid-in capital ........................................................................................................... Retained earnings........................................................................................................................ Accumulated other comprehensive (loss) income...................................................................... Treasury stock, 25.2 million shares in 2013 and 17.6 million shares in 2012............................ 544,568 1,432,974 463,843 (37,341) (340,857) 2,063,187 Total Shareholders’ Equity........................................................................................... Total Liabilities and Shareholders’ Equity................................................................... $ 16,934,634 542,093 1,426,267 363,937 5,675 (256,316) 2,081,656 $ 16,533,097 See Notes to Consolidated Financial Statements 66 CONSOLIDATED STATEMENTS OF INCOME (dollars in thousands, except per-share data) Interest Income Loans, including fees ..................................................................................................................... $ Investment securities: 2013 2012 2011 540,667 $ 564,616 $ 596,390 Taxable................................................................................................................................... Tax-exempt ............................................................................................................................ Dividends ............................................................................................................................... Loans held for sale ......................................................................................................................... Other interest income..................................................................................................................... Total Interest Income........................................................................................... Interest Expense Deposits.......................................................................................................................................... Short-term borrowings ................................................................................................................... Long-term debt............................................................................................................................... Total Interest Expense......................................................................................... Net Interest Income ............................................................................................. Provision for credit losses.............................................................................................................. Net Interest Income After Provision for Credit Losses........................................ Non-Interest Income Service charges on deposit accounts.............................................................................................. Investment management and trust services.................................................................................... Other service charges and fees....................................................................................................... Mortgage banking income ............................................................................................................. Gain on sale of Global Exchange................................................................................................... Other .............................................................................................................................................. Investment securities gains, net: Other-than-temporary impairment losses .............................................................................. Less: Portion of loss (gain) recognized in other comprehensive loss (before taxes)............. Net other-than-temporary impairment losses................................................................. Net gains on sales of investment securities............................................................................ Investment securities gains, net ..................................................................................................... Total Non-Interest Income................................................................................... Non-Interest Expense Salaries and employee benefits...................................................................................................... Net occupancy expense.................................................................................................................. Other outside services .................................................................................................................... Data processing.............................................................................................................................. Equipment expense ........................................................................................................................ Professional fees ............................................................................................................................ FDIC insurance expense ................................................................................................................ Software ......................................................................................................................................... Operating risk loss ......................................................................................................................... Marketing....................................................................................................................................... Other real estate owned and repossession expense........................................................................ Telecommunications ...................................................................................................................... Intangible amortization .................................................................................................................. FHLB advances prepayment penalty ............................................................................................. Other .............................................................................................................................................. Total Non-Interest Expense................................................................................. Income Before Income Taxes............................................................................... Income taxes .................................................................................................................................. Net Income........................................................................................................... $ 54,321 9,475 1,411 1,551 2,264 609,689 36,770 2,420 43,305 82,495 527,194 40,500 486,694 55,470 41,706 36,957 30,656 — 14,871 (202) 78 (124) 8,128 8,004 187,664 253,240 46,944 18,856 16,555 15,419 13,150 11,605 11,560 9,290 7,705 7,364 7,362 2,438 — 39,945 461,433 212,925 51,085 161,840 Per Share: Net Income (Basic) ........................................................................................................................ $ Net Income (Diluted) ..................................................................................................................... Cash Dividends .............................................................................................................................. 0.84 0.83 0.32 $ $ 67,349 10,362 1,275 2,064 1,830 647,496 56,895 1,068 45,205 103,168 544,328 94,000 450,328 61,502 38,239 44,345 44,600 6,215 18,485 (1,107) 298 (809) 3,835 3,026 216,412 243,915 44,663 17,752 14,936 14,243 11,522 11,996 9,520 9,454 8,240 11,182 6,884 3,031 3,007 38,949 449,294 217,446 57,601 159,845 0.80 0.80 0.30 $ $ 80,184 12,039 1,284 1,958 1,843 693,698 83,083 746 49,709 133,538 560,160 135,000 425,160 58,078 36,483 47,482 25,674 — 15,215 (1,997) (913) (2,910) 7,471 4,561 187,493 227,435 44,003 10,421 13,544 12,870 12,159 14,480 8,400 1,328 9,667 9,578 8,119 4,257 — 39,981 416,242 196,411 50,838 145,573 0.73 0.73 0.20 See Notes to Consolidated Financial Statements 67 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in thousands) 2013 2012 2011 Net Income.............................................................................................................................................. $ 161,840 $ 159,845 $ 145,573 Other Comprehensive Income (Loss), net of tax:................................................................................... Unrealized (loss) gain on securities................................................................................................... (49,607) 1,569 8,768 Reclassification adjustment for securities gains included in net income .......................................... (5,203) (1,967) (2,964) Non-credit related unrealized gain on other-than-temporarily impaired debt securities................... Unrealized gain on derivative financial instruments ......................................................................... Unrecognized pension and postretirement income (cost) ................................................................. Amortization (accretion) of net unrecognized pension and postretirement income (cost) ............... 1,977 136 8,369 1,312 1,330 136 240 136 (4,207) (10,672) 859 (48) Other Comprehensive Loss .......................................................................................................... (43,016) (2,280) (4,540) Total Comprehensive Income....................................................................................................... $ 118,824 $ 157,565 $ 141,033 See Notes to Consolidated Financial Statements 68 CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (in thousands, except per share data) Common Stock Shares Outstanding Amount Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Treasury Stock Total Balance at December 31, 2010...................................... 199,050 $ 538,492 $ 1,420,127 $ 158,453 $ 12,495 $ (249,178) $ 1,880,389 Net income.............................................................. Other comprehensive loss....................................... Stock issued, including related tax benefits ........... 1,114 1,894 Stock-based compensation awards ......................... Common stock cash dividends - $0.20 per share ... (649) 4,249 145,573 (39,967) (4,540) 5,590 145,573 (4,540) 6,835 4,249 (39,967) Balance at December 31, 2011...................................... 200,164 $ 540,386 $ 1,423,727 $ 264,059 $ 7,955 $ (243,588) $ 1,992,539 Net income.............................................................. Other comprehensive loss....................................... 159,845 (2,280) Stock issued, including related tax benefits ........... 1,176 1,707 Stock-based compensation awards ......................... Acquisition of treasury stock .................................. (2,115) Common stock cash dividends - $0.30 per share ... (2,294) 4,834 (59,967) 7,631 (20,359) 159,845 (2,280) 7,044 4,834 (20,359) (59,967) Balance at December 31, 2012...................................... 199,225 $ 542,093 $ 1,426,267 $ 363,937 $ 5,675 $ (256,316) $ 2,081,656 Net income.............................................................. Other comprehensive loss....................................... 161,840 (43,016) Stock issued, including related tax benefits ........... 1,427 2,475 Stock-based compensation awards ......................... Acquisition of treasury stock.................................. (8,000) Common stock cash dividends - $0.32 per share ... 1,377 5,330 (61,934) 6,386 (90,927) 161,840 (43,016) 10,238 5,330 (90,927) (61,934) Balance at December 31, 2013...................................... 192,652 $ 544,568 $ 1,432,974 $ 463,843 $ (37,341) $ (340,857) $ 2,063,187 See Notes to Consolidated Financial Statements 69 CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net Income .................................................................................................................. $ Adjustments to reconcile net income to net cash provided by operating activities: 161,840 $ 159,845 $ 145,573 2013 2012 2011 Provision for credit losses ................................................................................... Depreciation and amortization of premises and equipment ................................ Net amortization of investment security premiums ............................................ Deferred income tax expense .............................................................................. Investment securities gains, net........................................................................... Gains on sales of mortgage loans........................................................................ Proceeds from sales of mortgage loans held for sale .......................................... Originations of mortgage loans held for sale ...................................................... Amortization of intangible assets........................................................................ Gain on sale of Global Exchange........................................................................ Stock-based compensation .................................................................................. Excess tax benefits from stock-based compensation .......................................... Decrease in accrued interest receivable .............................................................. Decrease in other assets....................................................................................... Decrease in accrued interest payable .................................................................. Decrease in other liabilities ................................................................................. Total adjustments...................................................................................... Net cash provided by operating activities ................................................ CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales of securities available for sale ............................................ Proceeds from maturities of securities held to maturity...................................... Proceeds from maturities of securities available for sale.................................... Purchase of securities held to maturity ............................................................... Purchase of securities available for sale.............................................................. (Increase) decrease in short-term investments .................................................... Net cash received from sale of Global Exchange ............................................... Net increase in loans ........................................................................................... Net purchases of premises and equipment .......................................................... Net cash used in investing activities ......................................................... CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in demand and savings deposits ..................................................... Net decrease in time deposits .............................................................................. Increase (decrease) in short-term borrowings ..................................................... Additions to long-term debt ................................................................................ Repayments of long-term debt ............................................................................ Net proceeds from issuance of common stock.................................................... Excess tax benefits from stock-based compensation .......................................... Dividends paid..................................................................................................... Acquisition of treasury stock............................................................................... Net cash provided by (used in) financing activities.................................. Net (Decrease) Increase in Cash and Due From Banks .............................................. Cash and Due From Banks at Beginning of Year........................................................ Cash and Due From Banks at End of Year.................................................................. $ Supplemental Disclosures of Cash Flow Information Cash paid during period for: 40,500 25,911 10,002 11,825 (8,004) (24,609) 1,424,896 (1,353,739) 2,438 — 5,330 (302) 1,749 37,236 (4,112) (29,344) 139,777 301,617 267,023 103 637,851 — (776,352) (3,202) — (699,961) (24,209) (598,747) 472,439 (465,416) 390,230 — (10,669) 9,936 302 (46,525) (90,927) 259,370 (37,760) 256,300 218,540 Interest................................................................................................................. $ Income taxes........................................................................................................ 86,607 32,605 See Notes to Consolidated Financial Statements 94,000 22,575 12,151 17,007 (3,026) (46,310) 1,825,562 (1,800,142) 3,031 (6,215) 4,834 (39) 5,312 15,791 (6,356) (3,508) 134,667 294,512 244,312 390 878,721 (346) (1,127,394) 12,853 11,834 (302,486) (38,024) (320,140) 579,759 (630,612) 271,366 5,700 (151,596) 7,005 39 (71,972) (20,359) (10,670) (36,298) 292,598 256,300 109,524 30,985 $ $ 135,000 21,081 6,022 4,378 (4,561) (22,207) 1,228,668 (1,160,516) 4,257 — 4,249 — 2,743 32,581 (7,647) (18,427) 225,621 371,194 427,934 454 667,171 (29) (984,172) (128,106) — (190,101) (25,339) (232,188) 754,392 (616,018) (77,044) 25,000 (104,610) 6,835 — (33,917) — (45,362) 93,644 198,954 292,598 141,185 20,920 $ $ 70 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business: Fulton Financial Corporation (Parent Company) is a multi-bank financial holding company which provides a full range of banking and financial services to businesses and consumers through its six wholly owned banking subsidiaries: Fulton Bank, N.A., Fulton Bank of New Jersey, The Columbia Bank, Lafayette Ambassador Bank, FNB Bank, N.A. and Swineford National Bank. In addition, the Parent Company owns the following non-bank subsidiaries: Fulton Reinsurance Company, LTD, Fulton Financial Realty Company, Central Pennsylvania Financial Corp., FFC Management, Inc., FFC Penn Square, Inc. and Fulton Insurance Services Group, Inc. Collectively, the Parent Company and its subsidiaries are referred to as the Corporation. The Corporation’s primary sources of revenue are interest income on loans and investment securities and fee income on its products and services. Its expenses consist of interest expense on deposits and borrowed funds, provision for credit losses, other operating expenses and income taxes. The Corporation’s primary competition is other financial services providers operating in its region. Competitors also include financial services providers located outside the Corporation’s geographical market as a result of the growth in electronic delivery systems. The Corporation is subject to the regulations of certain Federal and state agencies and undergoes periodic examinations by such regulatory authorities. The Corporation offers, through its banking subsidiaries, a full range of retail and commercial banking services in Pennsylvania, Delaware, Maryland, New Jersey and Virginia. Industry diversity is the key to the economic well-being of these markets, and the Corporation is not dependent upon any single customer or industry. Basis of Financial Statement Presentation: The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States (U.S. GAAP) and include the accounts of the Parent Company and all wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosed amount of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. The Corporation evaluates subsequent events through the date of the filing of this report with the Securities and Exchange Commission (SEC). Federal Reserve Bank and Federal Home Loan Bank (FHLB) Stock: Certain of the Corporation's wholly owned banking subsidiaries are members of the Federal Reserve Bank and FHLB and are required by federal law to hold stock in these institutions according to predetermined formulas. These restricted investments are carried at cost on the consolidated balance sheets and are periodically evaluated for impairment. Investments: Debt securities are classified as held to maturity at the time of purchase when the Corporation has both the intent and ability to hold these investments until they mature. Such debt securities are carried at cost, adjusted for amortization of premiums and accretion of discounts using the effective yield method. The Corporation does not engage in trading activities, however, since the investment portfolio serves as a source of liquidity, most debt securities and all marketable equity securities are classified as available for sale. Securities available for sale are carried at estimated fair value with the related unrealized holding gains and losses reported in shareholders’ equity as a component of other comprehensive income, net of tax. Realized securities gains and losses are computed using the specific identification method and are recorded on a trade date basis. Securities are evaluated periodically to determine whether declines in value are other-than-temporary. For its investments in equity securities, most notably its investments in stocks of financial institutions, the Corporation evaluates the near-term prospects of the issuers in relation to the severity and duration of the impairment. Equity securities with fair values less than cost are considered to be other-than-temporarily impaired if the Corporation does not have the ability and intent to hold the investments for a reasonable period of time that would be sufficient for a recovery of fair value. Impaired debt securities are determined to be other-than-temporarily impaired if the Corporation concludes at the balance sheet date that it has the intent to sell, or believes it will more likely than not be required to sell, an impaired debt security before a recovery of its amortized cost basis. Credit losses on other-than-temporarily impaired debt securities are recorded through earnings, regardless of the intent or the requirement to sell. Credit loss is measured as the difference between the present value of an impaired debt security’s expected cash flows and its amortized cost. Non-credit related other-than-temporary impairment charges are recorded 71 as decreases to accumulated other comprehensive income as long as the Corporation has no intent or expected requirement to sell the impaired debt security before a recovery of its amortized cost basis. Loans and Revenue Recognition: Loan and lease financing receivables are stated at their principal amount outstanding, except for mortgage loans held for sale, which are carried at fair value, as detailed below. Interest income on loans is accrued as earned. Unearned income on lease financing receivables is recognized on a basis which approximates the effective yield method. Premiums and discounts on purchased loans are amortized as adjustments to interest income using the effective yield method. In general, a loan is placed on non-accrual status once it becomes 90 days delinquent as to principal or interest. In certain cases a loan may be placed on non-accrual status prior to being 90 days delinquent if there is an indication that the borrower is having difficulty making payments, or the Corporation believes it is probable that all amounts will not be collected according to the contractual terms of the loan agreement. When interest accruals are discontinued, unpaid interest previously credited to income is reversed. Non-accrual loans may be restored to accrual status when all delinquent principal and interest has been paid currently for six consecutive months or the loan is considered secured and in the process of collection. The Corporation generally applies payments received on non-accruing loans to principal until such time as the principal is paid off, after which time any payments received are recognized as interest income. If the Corporation believes that all amounts outstanding on a non-accrual loan will ultimately be collected, payments received subsequent to its classification as a non-accrual loan are allocated between interest income and principal. A loan that is 90 days delinquent may continue to accrue interest if the loan is both adequately secured and is in the process of collection. An adequately secured loan is one that has collateral with a supported fair value that is sufficient to discharge the debt, and/or has an enforceable guarantee from a financially responsible party. A loan is considered to be in the process of collection if collection is proceeding through legal action or through other activities that are reasonably expected to result in repayment of the debt or restoration to current status in the near future. Loans and lease financing receivables deemed to be a loss are written off through a charge against the allowance for credit losses. Closed-end consumer loans are generally charged off when they become 120 days past due (180 days for open-end consumer loans) if they are not adequately secured by real estate. All other loans are evaluated for possible charge-off when it is probable that the balance will not be collected, based on the ability of the borrower to pay and the value of the underlying collateral. Principal recoveries of loans previously charged off are recorded as increases to the allowance for credit losses. Past due status is determined based on contractual due dates for loan payments. Loan Origination Fees and Costs: Loan origination fees and the related direct origination costs are deferred and amortized over the life of the loan as an adjustment to interest income generally using the effective yield method. For mortgage loans sold, the net amount is included in the gain or loss on the sale of the related loan. Troubled Debt Restructurings (TDRs): Loans whose terms are modified are classified as TDRs if the Corporation grants the borrowers concessions and it is determined that those borrowers are experiencing financial difficulty. Concessions granted under a TDR typically involve a temporary deferral of scheduled loan payments, an extension of a loan’s stated maturity date or a reduction in the interest rate. Non-accrual TDRs can be restored to accrual status if principal and interest payments, under the modified terms, are current for six consecutive months after modification. 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 losses inherent 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. Management believes that the allowance for loan losses and the reserve for unfunded lending commitments are adequate as of the balance sheet date; however, future changes to the allowance or reserve may be necessary based on changes in any of the factors discussed in the following paragraphs. Maintaining an adequate allowance for credit losses is dependent upon various factors, including the ability to identify potential problem loans in a timely manner. For commercial loans, commercial mortgages and construction loans to commercial borrowers, an internal risk rating process is used. The Corporation believes that internal risk ratings are the most relevant credit quality indicator for these types of loans. The migration of loans through the various internal risk rating categories is a significant component of the allowance for credit loss methodology for these loans, 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. 72 The following is a summary of the Corporation's internal risk rating categories: • • • Pass: These loans do not currently pose undue credit risk and can range from the highest to average quality, depending on the degree of potential risk. Special Mention: These loans constitute an undue and unwarranted credit risk, but not to the 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 does not assign internal risk ratings for smaller balance, homogeneous loans, such as home equity, residential mortgage, consumer, lease receivables and construction loans to individuals secured by residential real estate. For these loans, the most relevant credit quality indicator is delinquency status. The migration of loans through the various delinquency status categories is a significant component of the allowance for credit loss methodology for these loans, which bases the probability of default on this migration. The Corporation’s allowance for loan losses includes: 1) specific allowances allocated to impaired loans evaluated for impairment under the Financial Accounting Standards Board's Accounting Standards Codification (FASB ASC) Section 310-10-35; and 2) allowances calculated for pools of loans measured for impairment under FASB ASC Subtopic 450-20. 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 TDRs. An allowance for loan losses is established for an impaired loan if its carrying value exceeds its estimated fair value. Impaired loans to borrowers with total outstanding loans greater than $1.0 million are evaluated individually for impairment. Impaired loans with to borrowers with total outstanding loans 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 December 31, 2013 and 2012, substantially all of the Corporation’s impaired loans to borrowers with total outstanding loan 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 and industrial loans. Commercial and industrial loans may also be secured by real property. For loans secured by real estate, estimated fair values are determined primarily through appraisals performed by certified third- party appraisers, discounted to arrive at expected sale prices, net of estimated selling costs. When a real estate secured loan becomes impaired, a decision is made regarding whether an updated appraisal of the real estate is necessary. This decision is based on various considerations, including: the age of the most recent appraisal; the loan-to-value ratio based on the original appraisal; the condition of the property; the Corporation’s experience and knowledge of the real estate market; the purpose of the loan; environmental factors; payment status; the strength of any guarantors; and the existence and age of other indications of value such as broker price opinions, among others. The Corporation generally obtains updated third-party appraisals for impaired loans secured predominately by real estate every 12 months. As of December 31, 2013 and 2012, approximately 79% and 68%, 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 third-party appraisals that had been updated within the preceding 12 months. When updated appraisals are not obtained for loans evaluated for impairment under FASB ASC Section 310-10-35 that are secured by real estate, fair values are estimated based on the original appraisal values, as long as the original appraisal indicated a strong 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%. For impaired loans with principal balances greater than $1.0 million secured by non-real estate collateral, such as accounts receivable or inventory, estimated fair values are determined based on borrower financial statements, inventory listings, accounts receivable agings or borrowing base certificates. Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets. Liquidation or collection discounts are applied to these assets based upon existing loan evaluation policies. 73 All loans not evaluated for impairment under FASB ASC Section 310-10-35 are evaluated for impairment under FASB ASC Subtopic 450-20, using a pooled loss evaluation approach. In general, these loans include residential mortgages, home equity loans, consumer loans, and lease receivables. Accruing commercial loans, commercial mortgages and construction loans are also evaluated 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," within Note D, "Loans and Allowance for Credit Losses." 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 are based on collateral types and include direct consumer installment loans and indirect automobile loans. The Corporation calculates allowance allocation needs for loans measured under FASB ASC Subtopic 450-20 through the following procedures: • The loans are segmented into pools with similar characteristics, as noted above. Commercial loans, commercial mortgages and construction loans to commercial borrowers are further segmented into separate pools based on internally assigned risk ratings. Residential mortgages, home equity loans, consumer loans, and lease receivables are further segmented into separate pools based on delinquency status. • A loss rate is calculated for each pool through a regression analysis of historical losses as loans migrate through the various risk rating or delinquency categories. Estimated loss rates are based on a probability of default and a loss given default. • The loss rate is adjusted to consider qualitative factors, such as economic conditions and trends. • The resulting adjusted loss rate is applied to the balance of the loans in the pool to arrive at the allowance allocation for the pool. The allocation of the allowance for credit losses is reviewed to evaluate its appropriateness in relation to the overall risk profile of the loan portfolio. The Corporation considers risk factors such as: local and national economic conditions; trends in delinquencies and non-accrual loans; the diversity of borrower industry types; and the composition of the portfolio by loan type. An unallocated allowance is maintained for factors and conditions that exist at the balance sheet date, but are not specifically identifiable, and to recognize the inherent imprecision in estimating and measuring loss exposure. Premises and Equipment: Premises and equipment are stated at cost, less accumulated depreciation and amortization. The provision for depreciation and amortization is generally computed using the straight-line method over the estimated useful lives of the related assets, which are a maximum of 50 years for buildings and improvements, eight years for furniture and five years for equipment. Leasehold improvements are amortized over the shorter of the useful life or the non-cancelable lease term. Interest costs incurred during the construction of major bank premises are capitalized. Other Real Estate Owned: Assets acquired in settlement of mortgage loan indebtedness are recorded as other real estate owned (OREO) and are included in other assets on the consolidated balance sheets, initially at the lower of the estimated fair value of the asset less estimated selling costs or the carrying amount of the loan. Costs to maintain the assets and subsequent gains and losses on sales are included in OREO and repossession expense on the consolidated statements of income. Mortgage Servicing Rights: The estimated fair value of mortgage servicing rights (MSRs) related to residential mortgage loans sold and serviced by the Corporation is recorded as an asset upon the sale of such loans. 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 through a discounted cash flows valuation completed by a third-party valuation expert. Significant inputs to the valuation include 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. To the extent the amortized cost of the MSRs exceeds their estimated fair value, a valuation allowance is established through a charge against servicing income, included as a component of mortgage banking income on the consolidated statements of income. If subsequent valuations indicate that impairment no longer exists, the valuation allowance is reduced through an increase to servicing income. Derivative Financial Instruments: The Corporation manages its exposure to certain interest rate and foreign currency risks through the use of derivatives. None of the Corporation's outstanding derivative contracts are designated as hedges and none are entered into for speculative purposes. Derivative instruments are carried at fair value, with changes in fair values recognized in earnings as components of non-interest income and non-interest expense on the consolidated statements of income. 74 Derivative contracts create counterparty credit risk with both the Corporation's customers and with institutional derivative counterparties. The Corporation manages counterparty credit risk through its credit approval processes, monitoring procedures and obtaining adequate collateral, when 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 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 value during the period recorded within mortgage banking income on the consolidated statements of income. Interest Rate Swaps The Corporation enters into interest rate swaps with certain qualifying commercial loan customers to meet their interest rate risk management needs. The Corporation simultaneously enters into interest rate swaps with dealer counterparties, with identical notional amounts and terms. The net result of these interest rate swaps is that the customer pays a fixed rate of interest and the Corporation receives a floating rate. These interest rate swaps are derivative financial instruments that are recorded at their fair values within other assets and liabilities on the consolidated balance sheets. Changes in fair value during the period are recorded within other non-interest expense on the consolidated statements of income. Foreign Exchange Contracts The Corporation enters into foreign exchange contracts to accommodate the needs of its customers. Foreign exchange contracts are commitments to buy or sell foreign currency on a future date at a contractual price. The Corporation offsets its foreign exchange contract exposure with customers by entering into contracts with third-party correspondent financial institutions to mitigate its exposure to fluctuations in foreign currency exchange rates. The Corporation also holds certain amounts of foreign currency with international correspondent banks. The Corporation's policy limits the total net foreign currency open positions, which includes all outstanding contracts and foreign account balances, to $500,000. Gross derivative assets and liabilities are recorded within other assets and other liabilities, respectively, on the consolidated balance sheets, with changes in fair value during the period recorded within other service charges and fees on the consolidated statements of income. 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. 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. 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 items 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 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 detailed under the heading "Derivative Financial Instruments" above. The Corporation determines fair value for its mortgage loans held for sale based on the price that secondary market investors would pay for loans with similar characteristics, including interest rate and term, as of the date fair value is measured. Changes in fair value during the period are recorded as components of mortgage banking income on the consolidated statements of income. Interest income earned on mortgage loans held for sale is classified within interest income on the consolidated statements of income. 75 Income Taxes: The provision for income taxes is based upon income before income taxes, adjusted primarily for the effect of tax-exempt income, non-deductible expenses and credits received from investments in partnerships that generate such credits under various federal programs (Tax Credit Investments). Certain items of income and expense are reported in different periods for financial reporting and tax return purposes. The tax effects of these temporary differences are recognized currently in the deferred income tax provision or benefit. Deferred tax assets or liabilities are computed based on the difference between the financial statement and income tax bases of assets and liabilities using the applicable enacted marginal tax rate. The deferred income tax provision or benefit is based on the changes in the deferred tax asset or liability from period to period. The Corporation accounts for uncertain tax positions by applying a recognition threshold and measurement attribute for tax positions taken or expected to be taken on a tax return. Recognition and measurement of tax positions is based on management’s evaluations of relevant tax code and appropriate industry information about audit proceedings for comparable positions at other organizations. Virtually all of the Corporation’s unrecognized tax benefits relate to positions that are taken on an annual basis on state tax returns. Increases to unrecognized tax benefits will occur as a result of accruing for the nonrecognition of the position for the current year. Decreases will occur as a result of the lapsing of the statute of limitations or through settlements of positions with the tax authorities. Stock-Based Compensation: The Corporation grants equity awards to employees under its Amended and Restated Equity and Cash Incentive Compensation Plan (Employee Option Plan). Such awards are in the form of stock options or restricted stock. Employees may purchase shares of the Corporation’s common stock under the Corporation's Employee Stock Purchase Plan (ESPP). The Corporation also grants stock or restricted stock to non-employee members of the board of directors under its 2011 Directors' Equity Participation Plan (Directors' Plan). Compensation expense is equal to the fair value of the stock-based compensation awards, net of estimated forfeitures, and is recognized over the vesting period of such awards. The vesting period represents the period during which employees are required to provide service in exchange for such awards. 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 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 period. Restricted stock awards granted 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. Net Income Per Share: Basic net income per common share is calculated as net income divided by the weighted average number of shares outstanding. Diluted net income per common 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 common shares outstanding used to calculate basic and diluted net income per share follows: Weighted average common shares outstanding (basic) ........................................ Impact of common stock equivalents.................................................................... Weighted average common shares outstanding (diluted)...................................... 2013 193,334 1,020 194,354 2012 (in thousands) 199,067 972 200,039 2011 198,912 746 199,658 In 2013, 2012 and 2011, 3.6 million, 5.2 million and 5.2 million stock options, respectively, were excluded from the diluted earnings per share computation as their effect would have been anti-dilutive. Disclosures about Segments of an Enterprise and Related Information: The Corporation does not have any operating segments which require disclosure of additional information. While the Corporation owns six separate banks, each engages in similar activities, provides similar products and services, and operates in the same general geographical area. The Corporation’s non- banking activities are immaterial and, therefore, separate information has not been disclosed. Financial Guarantees: Financial guarantees, which consist primarily of standby and commercial letters of credit, are accounted for by recognizing a liability equal to the fair value of the guarantees and crediting the liability to income over the term of the guarantee. Fair value is estimated based on the fees currently charged to enter into similar agreements with similar terms. 76 Business Combinations and Intangible Assets: The Corporation accounts for its acquisitions using the purchase accounting method. Purchase accounting requires that all assets acquired and liabilities assumed, including certain intangible assets that must be recognized, be recorded at their estimated fair values as of the acquisition date. Any purchase price exceeding the fair value of net assets acquired is recorded as goodwill. Goodwill is not amortized to expense, but is tested for impairment at least annually. A quantitative annual impairment test is not required if, based on a qualitative analysis, the Corporation determines that the existence of events and circumstances indicate that it is more likely than not that goodwill is not impaired. Write-downs of the balance, if necessary as a result of the impairment test, are charged to expense in the period in which goodwill is determined to be impaired. The Corporation performs its annual test of goodwill impairment as of October 31st of each year. If certain events occur which indicate goodwill might be impaired between annual tests, goodwill must be tested when such events occur. Based on the results of its annual impairment test, the Corporation concluded that there was no impairment in 2013, 2012 or 2011. See Note F, "Goodwill and Intangible Assets," for additional details. Intangible Assets are amortized over their estimated lives. Some intangible assets have indefinite lives and are, therefore, not amortized. All intangible assets must be evaluated for impairment if certain events occur. Any impairment write-downs are recognized as expense on the consolidated statements of income. Variable Interest Entities: FASB ASC Topic 810 provides guidance on when to consolidate certain Variable Interest Entities (VIE’s) in the financial statements of the Corporation. VIE’s are entities in which equity investors do not have a controlling financial interest or do not have sufficient equity at risk for the entity to finance activities without additional financial support from other parties. VIEs are assessed for consolidation under ASC Topic 810 when the Corporation holds variable interests in these entities. The Corporation consolidates VIEs when it is deemed to be the primary beneficiary. The primary beneficiary of a VIE is determined to be the party that has the power to make decisions that most significantly affect the economic performance of the VIE and has the obligation to absorb losses or the right to receive benefits that in either case could potentially be significant to the VIE. The Parent Company owns all of the common stock of four subsidiary trusts, which have issued securities (Trust Preferred Securities) in conjunction with the Parent Company issuing junior subordinated deferrable interest debentures to the trusts. The terms of the junior subordinated deferrable interest debentures are the same as the terms of the Trust Preferred Securities. The Parent Company’s obligations under the debentures constitute a full and unconditional guarantee by the Parent Company of the obligations of the trusts. The provisions of FASB ASC Topic 810 related to subsidiary trusts, as interpreted by the SEC, disallow consolidation of subsidiary trusts in the financial statements of the Corporation. As a result, Trust Preferred Securities are not included on the Corporation’s consolidated balance sheets. The junior subordinated debentures issued by the Parent Company to the subsidiary trusts, which have the same total balance and rate as the combined equity securities and Trust Preferred Securities issued by the subsidiary trusts, remain in long-term debt. See Note I, "Short-Term Borrowings and Long-Term Debt," for additional information. The Corporation has made certain Tax Credit Investments under various Federal programs that promote investment in low and moderate income housing and local economic development. Tax Credit Investments are amortized under the effective yield method over the life of the Federal income tax credits generated as a result of such investments, generally six to ten years. As of December 31, 2013 and 2012, the Corporation’s Tax Credit Investments, included in other assets on the consolidated balance sheets, totaled $169.6 million and $119.4 million, respectively. The net income tax benefit associated with these investments was $10.3 million, $9.6 million and $8.5 million in 2013, 2012 and 2011, respectively. None of the Corporation’s Tax Credit Investments were consolidated based on FASB ASC Topic 810 as of December 31, 2013 or 2012. Fair Value Measurements: FASB ASC Topic 820 establishes a fair value hierarchy for the inputs to valuation techniques used to measure assets and liabilities at fair value using the following three categories (from highest to lowest priority): • Level 1 – Inputs that represent quoted prices for identical instruments in active markets. • Level 2 – Inputs that represent quoted prices for similar instruments in active markets, or quoted prices for identical instruments in non-active markets. Also includes valuation techniques whose inputs are derived principally from observable market data other than quoted prices, such as interest rates or other market-corroborated means. • Level 3 – Inputs that are largely unobservable, as little or no market data exists for the instrument being valued. The Corporation has categorized all assets and liabilities required to be measured at fair value on both a recurring and nonrecurring basis into the above three levels. See Note R, "Fair Value Measurements," for additional details. New Accounting Standards: 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 77 unrecognized tax benefit, as a reduction to a deferred tax asset for a net operating loss carryforward or a similar tax loss. ASC Update 2013-11 is effective for interim and annual reporting periods beginning after December 15, 2013. For the Corporation, this standards update is effective with its March 31, 2014 quarterly report on Form 10-Q. The adoption of ASC Update 2013-11 is not expected to have a material impact on the Corporation's consolidated financial statements. In December 2013, the FASB issued Accounting Standards Update 2013-12, "Definition of a Public Business Entity - An Addition to the Master Glossary." ASC Update 2013-12 amends the Master Glossary of the FASB ASC to include one definition of public business entity and identifies the types of business entities that are excluded from the scope of the FASB's private company decision- making framework. ASC Update 2013-12 does not have an effective date, but the term "public business entity" will be used in all future ASC updates. The Corporation meets the definition of a public business entity, and the adoption of ASC Update 2013-12 did not have a significant impact on the Corporation's consolidated financial statements. In January 2014, the FASB issued Accounting Standards Update 2014-01, "Accounting for Investments in Qualified Affordable Housing Projects." ASC Update 2014-01provides guidance on accounting for investments made by a reporting entity in flow- through limited liability entities that manage or invest in affordable housing projects that qualify for the low income housing tax credit. ASC Update 2014-01 is effective for public business entities' interim and annual reporting periods beginning after December 15, 2014. For the Corporation, this standards update is effective with its March 31, 2015 quarterly report on Form 10-Q. The adoption of ASC Update 2014-01 is not expected to have a material impact on the Corporation's consolidated financial statements. In January 2014, the FASB issued Accounting Standards Update 2014-04, "Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure." ASC Update 2014-04 clarifies when an in substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. ASC Update 2014-04 is effective for public business entities' interim and annual reporting periods beginning after December 15, 2014. For the Corporation, this standards update is effective with its March 31, 2015 quarterly report on Form 10- Q. The adoption of ASC Update 2014-04 is not expected to have a material impact on the Corporation's consolidated financial statements. Reclassifications: Certain amounts in the 2012 and 2011 consolidated financial statements and notes have been reclassified to conform to the 2013 presentation. NOTE B – RESTRICTIONS ON CASH AND DUE FROM BANKS The Corporation’s subsidiary banks are required to maintain reserves, in the form of cash and balances with the Federal Reserve Bank, against their deposit liabilities. The amounts of such reserves as of December 31, 2013 and 2012 were $93.1 million and $101.8 million, respectively. 78 NOTE C – INVESTMENT SECURITIES The following tables present the amortized cost and estimated fair values of investment securities as of December 31: Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value (in thousands) 2013 Available for Sale Equity securities .......................................................................... $ U.S. Government securities......................................................... U.S. Government sponsored agency securities ........................... State and municipal securities ..................................................... Corporate debt securities ............................................................. Collateralized mortgage obligations............................................ Mortgage-backed securities......................................................... Auction rate securities ................................................................. 33,922 525 720 281,810 100,468 1,069,138 949,328 172,299 $ 2,608,210 2012 Held to Maturity Mortgage-backed securities......................................................... $ 292 2012 Available for Sale Equity securities .......................................................................... $ U.S. Government securities......................................................... U.S. Government sponsored agency securities ........................... State and municipal securities ..................................................... Corporate debt securities ............................................................. Collateralized mortgage obligations............................................ Mortgage-backed securities......................................................... Auction rate securities ................................................................. 45,530 325 2,376 301,842 112,162 1,195,234 847,790 174,026 $ 2,679,285 $ $ $ $ $ 12,355 — 7 6,483 5,685 8,036 13,881 234 46,681 27 5,016 — 21 13,763 7,858 16,008 31,831 — 74,497 $ $ $ $ $ (76) $ 46,201 525 — (1) 726 (3,444) 284,849 (7,404) 98,749 (44,776) 1,032,398 (17,497) 945,712 (13,259) 159,274 (86,457) $ 2,568,434 — $ 319 (918) $ 49,628 325 — 2,397 — (86) 315,519 (7,178) 112,842 (123) 1,211,119 879,621 — (24,687) 149,339 (32,992) $ 2,720,790 Securities carried at $1.7 billion and $1.8 billion as of December 31, 2013 and 2012 were pledged as collateral to secure public and trust deposits and customer repurchase agreements. Available for sale equity securities include common stocks of financial institutions ($40.6 million at December 31, 2013 and $44.2 million at December 31, 2012) and other equity investments ($5.6 million at December 31, 2013 and $5.4 million at December 31, 2012). As of December 31, 2013, the financial institutions stock portfolio had a cost basis of $28.5 million and a fair value of $40.6 million, including an investment in a single financial institution with a cost basis of $20.0 million and a fair value of $29.3 million. This investment accounted for 72.1% of the Corporation's investments in the common stocks of publicly traded financial institutions. No other investment in the financial institutions stock portfolio exceeded 5% of the portfolio's fair value. 79 The amortized cost and estimated fair value of debt securities as of December 31, 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. Amortized Cost Estimated Fair Value (in thousands) Due in one year or less.................................................................................................................... $ Due from one year to five years ..................................................................................................... Due from five years to ten years..................................................................................................... Due after ten years .......................................................................................................................... Collateralized mortgage obligations ............................................................................................... Mortgage-backed securities ............................................................................................................ 31,717 63,649 200,862 259,594 555,822 1,069,138 949,328 $ 2,574,288 $ 31,846 67,311 202,764 242,202 544,123 1,032,398 945,712 $ 2,522,233 The following table presents information related to gains and losses on the sales of equity and debt securities, and losses recognized for other-than-temporary impairment of investments: Gross Realized Gains Gross Realized Losses Other- than- temporary Impairment Losses Net Gains (Losses) (in thousands) 2013: Equity securities .......................................................................... $ Debt securities ............................................................................. Total...................................................................................... $ 2012: Equity securities .......................................................................... $ Debt securities ............................................................................. Total...................................................................................... $ 2011: Equity securities .......................................................................... $ Debt securities ............................................................................. Total...................................................................................... $ 3,787 4,391 8,178 1,215 2,620 3,835 835 6,655 7,490 $ $ $ $ $ $ (28) $ (22) (50) $ — $ — — $ — $ (19) (19) $ (27) $ (97) (124) $ (356) $ (453) (809) $ (1,212) $ (1,698) (2,910) $ 3,732 4,272 8,004 859 2,167 3,026 (377) 4,938 4,561 The following table presents a summary of other-than-temporary impairment charges recorded as decreases to investment securities gains on the consolidated statements of income, by investment security type: Equity securities - financial institution stocks ...................................................... $ Pooled trust preferred securities............................................................................ Auction rate securities........................................................................................... Total debt securities ....................................................................................... Total other-than-temporary impairment charges .................................... $ 2013 2012 (in thousands) 356 $ 19 434 453 809 $ $ $ 27 97 — 97 124 2011 1,212 1,406 292 1,698 2,910 Other-than-temporary impairment charges related to financial institutions stocks were due to the severity and duration of the declines in fair values of certain bank stock holdings, in conjunction with management’s evaluation of the near-term prospects of each specific issuer. The credit related other-than-temporary impairment charges for debt securities were determined based on expected cash flows models. 80 The following table presents changes in the cumulative credit related other-than-temporary impairment charges, recognized as components of earnings, for debt securities still held by the Corporation at December 31: Balance of cumulative credit losses on debt securities, beginning of year ........................ $ (23,079) $ (22,781) $ (27,560) Additions for credit losses recorded which were not previously recognized as components of earnings .................................................................................................. Reductions for securities sold ............................................................................................ Reductions for increases in cash flows expected to be collected that are recognized (97) 2,468 (453) — (1,698) 6,400 2013 2012 (in thousands) 2011 over the remaining life of the security............................................................................ 77 Balance of cumulative credit losses on debt securities, end of year .................................. $ (20,691) $ (23,079) $ (22,781) 155 17 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, as of December 31, 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) — $ — $ 48 $ (1) $ 48 $ U.S. Government sponsored agency securities................... $ State and municipal securities .. Corporate debt securities .......... Collateralized mortgage obligations............................. Mortgage-backed securities...... Auction rate securities .............. 57,360 7,473 732,774 669,546 — (3,132) (236) (42,837) (17,497) — Total debt securities........... 1,467,153 (63,702) Equity securities ....................... — — 3,203 37,642 21,070 — 157,806 219,769 903 $ 1,467,153 $ (63,702) $ 220,672 $ (312) (7,168) 60,563 45,115 (1,939) — (13,259) (22,679) (76) 753,844 669,546 157,806 1,686,922 903 (22,755) $ 1,687,825 $ (1) (3,444) (7,404) (44,776) (17,497) (13,259) (86,381) (76) (86,457) The Corporation’s mortgage-backed securities and collateralized mortgage obligations 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 declines in market values of state and municipal securities, collateralized mortgage obligations and mortgage-backed securities are 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 did not consider those investments to be other-than-temporarily impaired as of December 31, 2013. The unrealized holding losses on student loan auction rate securities, also known as auction rate certificates (ARCs) are attributable to liquidity issues resulting from the failure of periodic auctions. As of December 31, 2013, approximately $151 million, or 95%, of the ARCs were rated above investment grade, with approximately $8 million, or 5%, AAA rated and $104 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 $5 million, or 61%, of the loans underlying these ARCs have principal payments which are guaranteed by the federal government. In total, approximately $155 million, or 98%, of the loans underlying the ARCs have principal payments which are guaranteed by the federal government. As of December 31, 2013, all ARCs were current and making scheduled interest payments. Based on management’s evaluations, ARCs with a fair value of $159.3 million were not subject to any other-than-temporary impairment charges as of December 31, 2013. The Corporation does not have the intent to sell and does not believe it will more likely than not be required to sell these securities prior to a recovery of their fair value to amortized cost, which may be at maturity. 81 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 values of corporate debt securities as of December 31: 2013 2012 Amortized Cost Estimated Fair Value Amortized Cost Estimated Fair Value Single-issuer trust preferred securities ........................................ $ Subordinated debt........................................................................ Pooled trust preferred securities .................................................. Corporate debt securities issued by financial institutions .... Other corporate debt securities.................................................... Available for sale corporate debt securities.......................... $ 47,481 47,405 2,997 97,883 2,585 100,468 $ $ $ (in thousands) 40,531 50,327 5,306 96,164 2,585 98,749 $ 56,834 47,286 5,530 109,650 2,512 112,162 $ $ 51,656 51,747 6,927 110,330 2,512 112,842 The Corporation’s investments in single-issuer trust preferred securities had an unrealized loss of $7.0 million as of December 31, 2013. The Corporation did not record any other-than-temporary impairment charges for single-issuer trust preferred securities in 2013, 2012 or 2011. 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 $11.3 million as of December 31, 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 as of December 31, 2013 were not rated by any ratings agency. The Corporation held eight pooled trust preferred securities, as of December 31, 2013, with an amortized cost of $3.0 million and an estimated fair value of $5.3 million, that were rated below investment grade by at least one ratings agency, with ratings ranging from C to Ca. For each of these securities, 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 flow model. The most significant input to the expected cash flow 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 asset 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 $98.7 million were not subject to any additional other-than-temporary impairment charges as of December 31, 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. 82 NOTE D – LOANS AND ALLOWANCE FOR CREDIT LOSSES Loans, net of unearned income Loans, net of unearned income are summarized as follows as of December 31: 2013 2012 (in thousands) Real estate – commercial mortgage................................................................................................ $ 5,101,922 3,628,420 Commercial – industrial, financial and agricultural ....................................................................... 1,764,197 Real estate – home equity ............................................................................................................... 1,337,380 Real estate – residential mortgage .................................................................................................. 573,672 Real estate – construction ............................................................................................................... 283,124 Consumer........................................................................................................................................ 99,256 Leasing and other............................................................................................................................ 4,045 Overdrafts ....................................................................................................................................... 12,792,016 Loans, gross of unearned income ............................................................................................ (9,796) Unearned income ............................................................................................................................ Loans, net of unearned income................................................................................................ $ 12,782,220 $ 4,664,426 3,612,065 1,632,390 1,257,432 584,118 309,864 75,521 18,393 12,154,209 (7,238) $ 12,146,971 The Corporation has extended credit to the officers and directors of the Corporation and to their associates. These related-party loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and do not involve more than the normal risk of collection. The aggregate dollar amount of these loans, including unadvanced commitments, was $149.1 million and $118.8 million as of December 31, 2013 and 2012, respectively. During 2013, additions totaled $46.3 million and repayments and other changes in related-party loans totaled $16.0 million. The total portfolio of mortgage loans serviced by the Corporation for unrelated third parties was $4.9 billion and $4.5 billion as of December 31, 2013 and 2012, respectively. Allowance for Credit Losses The following table presents the components of the allowance for credit losses as of December 31: Allowance for loan losses ..................................................................................... $ Reserve for unfunded lending commitments ........................................................ Allowance for credit losses ................................................................................... $ 202,780 2,137 204,917 2013 2012 (in thousands) 223,903 $ 1,536 225,439 $ The following table presents the activity in the allowance for credit losses for the years ended December 31: Balance at beginning of year................................................................................. $ Loans charged off.................................................................................................. Recoveries of loans previously charged off .......................................................... Net loans charged off ..................................................................................... Provision for credit losses ..................................................................................... Balance at end of year ........................................................................................... $ 2013 225,439 (80,212) 19,190 (61,022) 40,500 204,917 2012 (in thousands) 258,177 $ (140,366) 13,628 (126,738) 94,000 225,439 $ 2011 256,471 1,706 258,177 2011 275,498 (161,333) 9,012 (152,321) 135,000 258,177 $ $ $ $ 83 The following table presents the activity in the allowance for loan losses, by portfolio segment, for the years ended December 31, and loans, net of unearned income, and their related allowance for loan losses, by portfolio segment, as of December 31: Real Estate - Commercial Mortgage Commercial - Industrial, Financial and Agricultural Real Estate - Home Equity Real Estate - Residential Mortgage Real Estate - Construction (in thousands) Consumer Leasing and other and Overdrafts Unallocated (1) Total 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.............................................. (51,988) (41,868) (10,147) (4,509) (26,250) (3,323) (2,281) Recoveries of loans previously charged off ...... 3,371 4,282 704 459 2,814 1,107 891 Net loans charged off ........................................ (48,617) (37,586) (9,443) (4,050) (23,436) (2,216) (1,390) — — — (140,366) 13,628 (126,738) Provision for loan losses ................................... Balance at December 31, 2012.......................... 26,433 62,928 22,895 60,205 19,378 22,776 15,600 34,536 10,657 17,287 2,500 2,367 1,745 2,752 (5,038) 94,170 21,052 223,903 Loans charged off.............................................. (20,829) (30,383) (8,193) (9,705) (6,572) (1,877) (2,653) Recoveries of loans previously charged off ...... 3,494 9,281 860 548 2,682 1,518 807 Net loans charged off ........................................ (17,335) (21,102) (7,333) (9,157) (3,890) (359) (1,846) — — — (80,212) 19,190 (61,022) Provision for loan losses (2).............................. 10,066 11,227 12,779 7,703 (748) 1,252 2,464 (4,844) 39,899 Balance at December 31, 2013.......................... $ 55,659 $ 50,330 $ 28,222 $ 33,082 $ 12,649 $ 3,260 $ 3,370 $ 16,208 $ 202,780 Allowance for loan losses at December 31, 2013 Measured for impairment under FASB ASC Subtopic 450-20 .......................................... Evaluated for impairment under FASB ASC Section 310-10-35 ....................................... $ $ Loans, net of unearned income at December 31, 2013 41,215 $ 36,263 $ 19,163 $ 11,337 $ 8,778 $ 3,248 $ 3,370 $ 16,208 $ 139,582 14,444 14,067 9,059 21,745 3,871 12 — N/A 63,198 55,659 $ 50,330 $ 28,222 $ 33,082 $ 12,649 $ 3,260 $ 3,370 $ 16,208 $ 202,780 Measured for impairment under FASB ASC Subtopic 450-20 .......................................... Evaluated for impairment under FASB ASC Section 310-10-35 ....................................... $ 5,041,598 $ 3,583,665 $ 1,749,560 $ 1,286,283 $ 542,634 $ 283,111 $ 93,505 N/A $ 12,580,356 60,324 44,755 14,637 51,097 31,038 13 — N/A 201,864 $ 5,101,922 $ 3,628,420 $ 1,764,197 $ 1,337,380 $ 573,672 $ 283,124 $ 93,505 N/A $ 12,782,220 Allowance for loan losses at December 31, 2012 Measured for impairment under FASB ASC Subtopic 450-20 .......................................... Evaluated for impairment under FASB ASC Section 310-10-35 ....................................... $ $ Loans, net of unearned income at December 31, 2012 41,316 $ 41,421 $ 14,396 $ 10,428 $ 11,028 $ 2,342 $ 2,745 $ 21,052 $ 144,728 21,612 18,784 8,380 24,108 6,259 25 7 N/A 79,175 62,928 $ 60,205 $ 22,776 $ 34,536 $ 17,287 $ 2,367 $ 2,752 $ 21,052 $ 223,903 Measured for impairment under FASB ASC Subtopic 450-20 .......................................... Evaluated for impairment under FASB ASC Section 310-10-35 ....................................... $ 4,574,794 $ 3,540,625 $ 1,619,247 $ 1,203,336 $ 542,128 $ 309,835 $ 86,666 N/A $ 11,876,631 89,632 71,440 13,143 54,096 41,990 29 10 N/A 270,340 $ 4,664,426 $ 3,612,065 $ 1,632,390 $ 1,257,432 $ 584,118 $ 309,864 $ 86,676 N/A $ 12,146,971 (1) (2) The Corporation’s unallocated allowance, which was approximately 8% and 9% of the total allowance for credit losses as of December 31, 2013 and December 31, 2012, respectively, was, in the opinion of management, reasonable and appropriate given that the estimates used in the allocation process are inherently imprecise. For the year ended December 31, 2013, the provision for loan losses excluded a $601,000 increase in the reserve for unfunded lending commitments. The total provision for credit losses, comprised of allocations for both funded and unfunded loans, was $40.5 million for the year ended December 31, 2013. For the year ended December 31, 2012, the provision for loan losses excluded a $170,000 decrease in the reserve for unfunded lending commitments. The total provision for credit losses, comprised of allocations for both funded and unfunded loans, was $94.0 million for the year ended December 31, 2012. N/A – Not applicable. During 2013 and 2012, the Corporation sold $41.8 million and $50.5 million, respectively, of non-accrual commercial mortgage, commercial and construction loans to investors. Total charge-offs associated with these transactions were $18.0 million and $24.6 million in 2013 and 2012, respectively. Charge-offs recorded upon sales occurred based on the third parties' purchase offers, which were 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. 84 The following table presents a summary of these transactions: 2013 2012 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 ................... $ 21,760 $ 23,600 $ 9,930 $ 55,290 $ 43,960 $ 19,990 $ 7,720 $ 71,670 Charge-offs prior to sale..... (4,890) (3,890) (4,680) (13,460) (10,780) (6,130) (4,300) (21,210) Net recorded investment in loans sold ....................... Proceeds from sale, net of selling expenses ............. Total charge-off upon sale.. $ Existing allocation for credit losses on sold loans ............................... $ Impaired Loans 16,870 10,410 19,710 10,050 5,250 3,400 41,830 33,180 13,860 23,860 17,620 6,020 3,420 2,270 50,460 25,910 (6,460) $ (9,660) $ (1,850) $ (17,970) $ (15,560) $ (7,840) $ (1,150) $ (24,550) (6,620) $ (5,780) $ (1,320) $ (13,720) $ (16,780) $ (8,910) $ (1,920) $ (27,610) The following table presents total impaired loans, by class segment, as of December 31: 2013 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 ........ $ Commercial - secured............................. Commercial - unsecured......................... Real estate - home equity ....................... Real estate - residential mortgage .......... Construction - commercial residential ... Construction - commercial ..................... With a related allowance recorded: Real estate - commercial mortgage ........ Commercial - secured............................. Commercial - unsecured......................... Real estate - home equity ....................... Real estate - residential mortgage .......... Construction - commercial residential ... Construction - commercial ..................... Construction - other................................ Consumer - indirect ................................ Consumer - direct ................................... Leasing and other and overdrafts ........... 28,892 $ 24,494 $ 23,890 21,383 — $ — 44,649 $ 34,189 $ 40,409 30,112 — 399 — 18,943 2,996 75,120 43,282 34,267 1,113 20,383 63,682 25,769 485 719 2 11 — — 300 — 13,740 1,976 61,893 35,830 22,324 1,048 14,337 51,097 14,579 195 548 2 11 — — — — — — 14,444 13,315 752 9,059 21,745 3,493 77 301 2 10 — 132 300 486 40,432 6,294 132,702 69,173 52,660 2,142 12,843 53,610 21,336 2,602 576 — 29 10 131 300 486 23,548 5,685 94,451 55,443 39,114 2,083 12,843 53,610 9,831 2,350 576 — 29 10 Total........................................................ $ 264,833 $ 201,864 $ 63,198 $ 347,683 $ 270,340 $ 189,713 139,971 63,198 214,981 175,889 — — — — — — — 21,612 17,187 1,597 8,380 24,108 4,787 1,146 326 — 25 7 79,175 79,175 85 As of December 31, 2013 and 2012, there were $61.9 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 the loans have been charged down to collateral values. Accordingly, no specific valuation allowance was considered to be necessary. The following table presents average impaired loans, by class segment, for the years ended December 31: 2013 2012 2011 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 ...... $ Commercial - secured........................... Commercial - unsecured....................... Real estate - home equity ..................... Real estate - residential mortgage ........ Construction - commercial residential . Construction - commercial ................... With a related allowance recorded: Real estate - commercial mortgage ...... Commercial - secured........................... Commercial - unsecured....................... Real estate - home equity ..................... Real estate - residential mortgage ........ Construction - commercial residential . Construction - commercial ................... Construction - other.............................. Consumer - indirect .............................. Consumer - direct ................................. Leasing and other and overdrafts ......... 28,603 $ 30,299 26 262 695 20,132 3,195 83,212 44,136 27,919 1,411 14,092 52,251 12,335 1,352 523 1 19 11 489 173 — 1 25 256 2 946 706 153 5 65 1,210 168 3 1 — — — $ 41,575 $ 538 $ 44,486 $ 26,443 52 433 989 27,361 3,492 100,345 64,739 45,217 2,604 8,017 44,791 19,284 2,233 974 — 84 83 50 — 2 45 185 19 839 755 97 6 23 1,446 130 17 7 — — — 30,829 177 80 4,242 24,770 2,989 107,573 79,831 78,380 3,864 1,952 53,610 47,529 1,090 1,100 — 189 59 Total...................................................... $ 237,262 $ 3,257 $ 288,371 $ 3,320 $ 375,177 $ 154,050 2,311 188,026 2,481 267,604 647 182 3 — 43 195 22 1,092 1,270 1,231 34 — 1,458 457 17 1 — 2 — 4,470 5,562 (1) All impaired loans, excluding accruing TDRs, were non-accrual loans. Interest income recognized for the years ended December 31, 2013, 2012 and 2011 represent amounts earned on accruing TDRs. 86 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, at December 31: Pass Special Mention Substandard or Lower Total 2013 2012 2013 2012 2013 2012 2013 2012 (dollars in thousands) Real estate - commercial mortgage .................................. $ 4,763,987 $ 4,255,334 $ 141,013 $ 157,640 $ 196,922 $ 251,452 $ 5,101,922 $ 4,664,426 Commercial - secured ................... 3,167,168 Commercial -unsecured ................ 209,836 3,081,215 187,200 111,613 11,666 137,277 5,421 125,382 2,755 194,952 6,000 3,404,163 3,413,444 224,257 198,621 Total commercial - industrial, financial and agricultural ... Construction - commercial residential................................. Construction - commercial ........... Total real estate - construction (excluding construction - other).................................. 3,377,004 3,268,415 123,279 142,698 128,137 200,952 3,628,420 3,612,065 146,041 258,441 156,537 211,470 31,522 2,932 52,434 2,799 57,806 8,124 79,581 12,081 235,369 269,497 288,552 226,350 404,482 368,007 34,454 55,233 65,930 91,662 504,866 514,902 Total .............................................. $ 8,545,473 $ 7,891,756 $ 298,746 $ 355,571 $ 390,989 $ 544,066 $ 9,235,208 $ 8,791,393 % of Total...................................... 92.6% 89.8% 3.2% 4.0% 4.2% 6.2% 100.0% 100.0% The following table presents the delinquency status of home equity, residential mortgage, consumer, leasing and other and construction loans to individuals, by class segment, at December 31: Performing Delinquent (1) Non-performing (2) Total 2013 2012 2013 2012 2013 2012 2013 2012 (dollars in thousands) Real estate - home equity ............ $ 1,731,185 $ 1,602,541 $ 16,029 $ 12,645 $ 16,983 $ 17,204 $ 1,764,197 $ 1,632,390 Real estate - residential mortgage ................................ 1,282,754 1,190,873 23,279 32,123 31,347 34,436 1,337,380 1,257,432 Real estate - construction - other. Consumer - direct........................ Consumer - indirect..................... Total consumer..................... Leasing and other and overdrafts 68,258 126,666 147,017 273,683 92,876 67,447 159,616 140,868 300,484 85,946 — 3,586 3,312 6,898 581 865 3,795 2,270 6,065 711 548 2,391 152 2,543 48 904 3,170 145 3,315 19 68,806 132,643 150,481 283,124 93,505 69,216 166,581 143,283 309,864 86,676 Total ............................................ $ 3,448,756 $ 3,247,291 $ 46,787 $ 52,409 $ 51,469 $ 55,878 $ 3,547,012 $ 3,355,578 % of Total.................................... 97.2% 96.7% 1.3% 1.6% 1.5% 1.7% 100.0% 100.0% (1) (2) Includes all accruing loans 30 days to 89 days past due. Includes all accruing loans 90 days or more past due and all non-accrual loans. The following table presents non-performing assets as of December 31: Non-accrual loans ........................................................................................................................... $ Accruing loans greater than 90 days past due ................................................................................ Total non-performing loans..................................................................................................... Other real estate owned .................................................................................................................. Total non-performing assets .................................................................................................... $ 2013 2012 (in thousands) 133,753 20,524 154,277 15,052 169,329 $ $ 184,832 26,221 211,053 26,146 237,199 87 The following table presents loans whose terms were modified under TDRs as of December 31: 2013 2012 Real-estate - residential mortgage .................................................................................................. $ Real-estate - commercial mortgage................................................................................................ Construction - commercial residential ........................................................................................... Commercial - secured..................................................................................................................... Real estate - home equity ............................................................................................................... Commercial - unsecured................................................................................................................. Consumer - direct ........................................................................................................................... Total accruing TDRs.................................................................................................................. Non-accrual TDRs (1) .................................................................................................................... Total TDRs ................................................................................................................................ $ (1) Included within non-accrual loans in the preceding table. $ (in thousands) 28,815 19,758 10,117 7,933 1,365 112 11 68,111 30,209 98,320 $ 32,993 34,672 10,564 5,624 1,518 121 16 85,508 31,245 116,753 As of December 31, 2013 and 2012, there were $9.6 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 December 31, 2013 and 2012 that were modified during the years ended December 31, 2013 and 2012: 2013 2012 Number of Loans Recorded Investment Number of Loans Recorded Investment (dollars in thousands) 49 Real estate - residential mortgage ................................................................. Real estate - commercial mortgage ............................................................... Construction - commercial residential .......................................................... Real estate - home equity .............................................................................. Commercial - secured ................................................................................... Commercial - unsecured ............................................................................... 12 Consumer - direct.......................................................................................... Construction - commercial............................................................................ — 125 36 16 8 1 3 $ 9,611 9,439 5,285 2,602 1,699 12 1 — 83 29 9 118 28 — 22 1 $ 17,442 23,980 7,804 5,477 6,199 — 23 944 $ 28,649 290 $ 61,869 The following table presents TDRs, by class segment, as of December 31, 2013 and 2012 that were modified during the years ended December 31, 2013 and 2012 and had a post-modification payment default during their respective year of modification. The Corporation defines a payment default as a single missed scheduled payment: 2013 2012 Number of Loans Recorded Investment Number of Loans (dollars in thousands) Recorded Investment Real estate - residential mortgage.................................................................. Real estate - commercial mortgage ............................................................... Real estate - home equity .............................................................................. Construction - commercial residential........................................................... 2 Commercial - secured.................................................................................... Construction - commercial ............................................................................ — Consumer - direct .......................................................................................... — 43 15 19 1 6 $ 4,211 3,683 1,249 568 108 — — 34 8 27 5 8 1 2 $ 8,151 4,849 1,885 3,194 2,129 944 2 $ 9,819 85 $ 21,154 88 The following table presents past due status and non-accrual loans, by portfolio segment and class segment, at December 31: 2013 31-59 Days Past Due 60-89 Days Past Due Past Due and Accruing Non- accrual Days Total Past Due Current Total (in thousands) Real estate - commercial mortgage .................................... $ 15,474 $ 4,009 $ 3,502 $ 40,566 $ 44,068 $ 63,551 $ 5,038,371 $ 5,101,922 Commercial - secured......................................................... Commercial - unsecured..................................................... Total Commercial - industrial, financial and agricultural .. Real estate - home equity ................................................... Real estate - residential mortgage....................................... Construction - commercial ................................................. Construction - commercial residential................................ Construction - other............................................................ Total Real estate - construction .......................................... Consumer - direct ............................................................... Consumer - indirect ............................................................ Total Consumer .................................................................. Leasing and other and overdrafts ....................................... 8,916 332 9,248 13,555 16,969 14 — — 14 2,091 2,864 4,955 559 1,365 125 1,490 2,474 6,310 — 645 — 645 1,495 448 1,943 22 1,311 — 1,311 3,711 9,065 — 346 — 346 2,391 150 2,541 48 35,774 936 36,710 13,272 22,282 2,171 18,202 548 37,085 936 38,021 16,983 31,347 2,171 18,548 548 47,366 3,356,797 3,404,163 1,393 222,864 224,257 48,759 3,579,661 3,628,420 33,012 1,731,185 1,764,197 54,626 1,282,754 1,337,380 2,185 267,312 269,497 19,193 216,176 235,369 548 68,258 68,806 20,921 21,267 21,926 551,746 573,672 — 2 2 — 2,391 152 2,543 48 5,977 3,464 9,441 629 126,666 132,643 147,017 150,481 273,683 283,124 92,876 93,505 $ 60,774 $ 16,893 $ 20,524 $ 133,753 $ 154,277 $ 231,944 $12,550,276 $12,782,220 2012 31-59 Days Past Due 60-89 Days Past Due Past Due and Accruing Non- accrual 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......................................................... Commercial - unsecured..................................................... Total Commercial - industrial, financial and agricultural .. Real estate - home equity ................................................... 8,013 461 8,474 9,579 8,030 12 8,042 3,066 1,060 199 1,259 5,579 Real estate - residential mortgage....................................... 21,827 10,296 13,333 Construction - commercial ................................................. Construction - commercial residential................................ Construction - other............................................................ Total Real estate - construction .......................................... Consumer - direct ............................................................... Consumer - indirect ............................................................ Total Consumer .................................................................. Leasing and other and overdrafts ....................................... — 466 865 1,331 2,842 1,926 4,768 662 — — — — 953 344 1,297 49 — 251 328 579 3,157 145 3,302 9 63,602 2,093 65,695 11,625 21,103 8,035 22,815 576 64,662 2,292 66,954 17,204 34,436 8,035 23,066 904 80,705 3,332,739 3,413,444 2,765 195,856 198,621 83,470 3,528,595 3,612,065 29,849 1,602,541 1,632,390 66,559 1,190,873 1,257,432 8,035 218,315 226,350 23,532 265,020 288,552 1,769 67,447 69,216 31,426 32,005 33,336 550,782 584,118 13 — 13 10 3,170 145 3,315 19 6,965 2,415 9,380 730 159,616 166,581 140,868 143,283 300,484 309,864 85,946 86,676 $ 59,634 $ 31,223 $ 26,221 $ 184,832 $ 211,053 $ 301,910 $11,845,061 $12,146,971 89 NOTE E – PREMISES AND EQUIPMENT The following is a summary of premises and equipment as of December 31: 2013 2012 Land ................................................................................................................................................ $ Buildings and improvements .......................................................................................................... Furniture and equipment................................................................................................................. Construction in progress ................................................................................................................. Less: Accumulated depreciation and amortization......................................................................... $ $ (in thousands) 37,815 281,904 170,970 14,195 504,884 (278,863) 226,021 37,245 270,480 172,263 17,098 497,086 (269,363) 227,723 $ NOTE F – GOODWILL AND INTANGIBLE ASSETS The following table summarizes the changes in goodwill: Balance at beginning of year................................................................................. $ Sale of Global Exchange....................................................................................... Other goodwill (deductions) additions, net........................................................... Balance at end of year ........................................................................................... $ 530,656 — (49) 530,607 2013 2012 (in thousands) 536,005 $ (5,295) (54) 530,656 $ $ $ 2011 535,518 — 487 536,005 In December 2012, the Corporation's Fulton Bank, N.A. subsidiary sold its Global Exchange Group division (Global Exchange) for a gain of $6.2 million. Global Exchange provided international payment solutions to meet the needs of companies, law firms and professionals. As a result of this divestiture, $5.3 million of goodwill allocated to Global Exchange was written-off and included as a reduction to the gain on sale recorded in non-interest income on the consolidated statements of income. All of the Corporation’s reporting units passed the 2013 goodwill impairment test, resulting in no goodwill impairment charges in 2013. Two reporting units, with total allocated goodwill of $172.0 million, had fair values that exceeded adjusted net book values by less than 5%. The remaining five reporting units, with total allocated goodwill of $358.6 million, had fair values that exceeded net book values by approximately 29% in the aggregate. The estimated fair values of the Corporation’s reporting units are subject to uncertainty, including future changes in the trading and acquisition multiples of comparable financial institutions and future operating results of reporting units which could differ significantly from the assumptions used in the valuation of reporting units. The following table summarizes intangible assets as of December 31: 2013 Accumulated Amortization Gross 2012 Accumulated Amortization Net Net Gross (in thousands) Amortizing: Core deposit .................... $ Other................................ Total amortizing ..................... Non-amortizing ...................... 50,279 $ (48,839) $ 1,440 $ 50,279 $ 9,123 59,402 1,263 (9,057) (57,896) (300) 66 1,506 963 9,123 59,402 1,263 $ 60,665 $ (58,196) $ 2,469 $ 60,665 $ (46,766) $ (8,992) (55,758) — (55,758) $ 3,513 131 3,644 1,263 4,907 As a result of the divestiture of Global Exchange, gross intangible assets totaling $2.3 million ($266,000, net of accumulated amortization) that were allocated to Global Exchange were written-off and included as a reduction to the gain on sale recorded in non-interest income on the consolidated statements of income. 90 Core deposit intangible assets are amortized using an accelerated method over the estimated remaining life of the acquired core deposits. As of December 31, 2013, these assets had a weighted average remaining life of approximately two years. Other amortizing intangible assets, consisting primarily of premiums paid on branch acquisitions in prior years that did not qualify for business combinations accounting under FASB ASC Topic 810, had a weighted average remaining life of one year. Amortization expense related to intangible assets totaled $2.4 million, $3.0 million and $4.3 million in 2013, 2012 and 2011, respectively. Future amortization expense is expected to be as follows (in thousands): Year 2014.......................................................................................................................................................................... $ 2015.......................................................................................................................................................................... Total................................................................................................................................................................... $ 1,259 247 1,506 NOTE G – MORTGAGE SERVICING RIGHTS The following table summarizes the changes in MSRs, which are included in other assets on the consolidated balance sheets: Amortized cost: Balance at beginning of year .......................................................................................................... $ Originations of mortgage servicing rights ...................................................................................... Amortization expense ..................................................................................................................... Balance at end of year..................................................................................................................... $ Valuation allowance: Balance at beginning of year .......................................................................................................... $ Reversals (additions) ...................................................................................................................... Balance at end of year..................................................................................................................... $ Net MSRs at end of year................................................................................................................. $ 2013 2012 (in thousands) 39,737 12,072 (9,357) 42,452 $ $ (3,680) $ 3,680 — $ $ 42,452 34,666 15,451 (10,380) 39,737 (1,550) (2,130) (3,680) 36,057 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. The estimated fair value of MSRs was $49.3 million as of December 31, 2013 and $36.1 million as of December 31, 2012. The estimated fair value of MSRs exceeded their book value at December 31, 2013. Therefore, no further adjustment to the valuation allowance was necessary as of December 31, 2013. Estimated MSR amortization expense for the next five years, based on balances as of December 31, 2013 and the contractual remaining lives of the underlying loans, follows (in thousands): Year 2014.......................................................................................................................................................................... $ 2015.......................................................................................................................................................................... 2016.......................................................................................................................................................................... 2017.......................................................................................................................................................................... 2018.......................................................................................................................................................................... 9,432 8,459 7,391 6,220 4,940 91 NOTE H – DEPOSITS Deposits consisted of the following as of December 31: 2013 2012 (in thousands) Noninterest-bearing demand........................................................................................................... $ 3,283,172 2,945,210 Interest-bearing demand ................................................................................................................. 3,344,882 Savings and money market accounts.............................................................................................. 2,917,922 Time deposits.................................................................................................................................. $ 12,491,186 $ 3,009,966 2,755,603 3,335,256 3,383,338 $ 12,484,163 Included in time deposits were certificates of deposit equal to or greater than $100,000 of $1.1 billion and $1.2 billion as of December 31, 2013 and 2012, respectively. The scheduled maturities of time deposits as of December 31, 2013 were as follows (in thousands): Year 2014.......................................................................................................................................................................... $ 1,860,872 532,330 2015.......................................................................................................................................................................... 265,893 2016.......................................................................................................................................................................... 100,606 2017.......................................................................................................................................................................... 74,661 2018.......................................................................................................................................................................... 83,560 Thereafter ................................................................................................................................................................. $ 2,917,922 NOTE I – SHORT-TERM BORROWINGS AND LONG-TERM DEBT Short-term borrowings as of December 31, 2013, 2012 and 2011 and the related maximum amounts outstanding at the end of any month in each of the three years then ended are presented below. The securities underlying the repurchase agreements remain in available for sale investment securities. 2013 December 31 2012 2011 Maximum Outstanding 2012 2013 2011 (in thousands) Federal funds purchased.......................... $ Short-term FHLB advances (1) Customer repurchase agreements............ Customer short-term promissory notes ... 582,436 400,000 175,621 100,572 $ 1,258,629 $ 592,470 — 156,238 119,691 $ 868,399 $ $ 253,470 — 186,735 156,828 597,033 $ 848,179 600,000 215,305 115,129 $ 636,562 25,000 258,734 152,570 $ 381,093 — 235,780 196,562 (1) Represents FHLB advances with an original maturity term of less than one year. As of December 31, 2013, the Corporation had aggregate availability under Federal funds lines of $1.6 billion, with $582.4 million of that amount outstanding. A combination of commercial real estate loans, commercial loans and securities are pledged to the Federal Reserve Bank of Philadelphia to provide access to Federal Reserve Bank Discount Window borrowings. As of December 31, 2013 and 2012, the Corporation had $2.0 billion and $1.9 billion, respectively, of collateralized borrowing availability at the Discount Window, and no outstanding borrowings. 92 The following table presents information related to customer repurchase agreements: 2013 Amount outstanding as of December 31............................................................... $ 175,621 Weighted average interest rate at year end............................................................ Average amount outstanding during the year........................................................ $ 186,851 Weighted average interest rate during the year..................................................... 0.11% 0.12% 2012 (dollars in thousands) $ 156,238 $ 2011 186,735 0.16% 0.12% $ 206,842 $ 208,144 0.12% 0.13% FHLB advances and long-term debt included the following as of December 31: FHLB advances .............................................................................................................................. $ Subordinated debt ........................................................................................................................... Junior subordinated deferrable interest debentures ........................................................................ Other long-term debt....................................................................................................................... Unamortized issuance costs............................................................................................................ $ 2013 2012 (in thousands) 513,854 200,000 171,136 1,243 (2,649) 883,584 $ $ 524,817 200,000 171,136 1,264 (2,964) 894,253 Excluded from the preceding table is the Parent Company’s revolving line of credit with its subsidiary banks. As of December 31, 2013 and 2012, there were no amounts outstanding under this line of credit. This line of credit, with a total commitment of $100.0 million, is secured by equity securities and insurance investments and bears interest at the prime rate minus 1.50%. Although the line of credit and related interest are eliminated in the consolidated financial statements, this borrowing arrangement is senior to the subordinated debt and the junior subordinated deferrable interest debentures. FHLB advances mature through March 2027 and carry a weighted average interest rate of 4.14%. As of December 31, 2013, the Corporation had an additional borrowing capacity of approximately $1.7 billion with the FHLB. Advances from the FHLB are secured by FHLB stock, qualifying residential mortgages, investments and other assets. The following table summarizes the scheduled maturities of FHLB advances and long-term debt as of December 31, 2013 (in thousands): Year 2014.......................................................................................................................................................... $ 2015.......................................................................................................................................................... 2016.......................................................................................................................................................... 2017.......................................................................................................................................................... 2018.......................................................................................................................................................... Thereafter ................................................................................................................................................. $ 6,091 145,289 236,266 314,892 — 181,046 883,584 In May 2007, the Corporation issued $100 million of ten-year subordinated notes, which mature on May 1, 2017 and carry a fixed rate of 5.75% and an effective rate of approximately 5.96% as a result of issuance costs. Interest is paid semi-annually in May and November. In March 2005, the Corporation issued $100 million of ten-year subordinated notes, which mature April 1, 2015 and carry a fixed rate of 5.35% and an effective rate of approximately 5.49% as a result of issuance costs. Interest is paid semi-annually in October and April. The Parent Company owns all of the common stock of four subsidiary trusts, which have issued Trust Preferred Securities in conjunction with the Parent Company issuing junior subordinated deferrable interest debentures to the trusts. The Trust Preferred Securities are redeemable on specified dates, or earlier if the deduction of interest for federal income taxes is prohibited, the Trust Preferred Securities no longer qualify as Tier I regulatory capital, or if certain other events arise. 93 The following table provides details of the debentures as of December 31, 2013 (dollars in thousands): Debentures Issued to Fixed/ Variable Columbia Bancorp Statutory Trust....... Variable Columbia Bancorp Statutory Trust II ... Variable Columbia Bancorp Statutory Trust III.. Variable Fulton Capital Trust I............................ Fixed Interest Rate 2.90% $ 2.13% 2.01% 6.29% 6,186 4,124 6,186 154,640 $ 171,136 Amount Maturity Callable 06/30/34 03/15/35 06/15/35 02/01/36 03/31/14 03/15/14 03/15/14 N/A Call Price 100.0 100.0 100.0 N/A N/A – Not applicable. NOTE J – DERIVATIVE FINANCIAL INSTRUMENTS The following table presents the notional amounts and fair values of derivative financial instruments as of December 31: 2013 2012 Notional Amount Asset (Liability) Fair Value Notional Amount Asset (Liability) Fair Value (in thousands) Interest Rate Locks with Customers Positive fair values ...................................................................... $ Negative fair values..................................................................... Net interest rate locks with customers.................................. 75,217 11,393 $ $ 867 (59) 808 314,416 9,714 $ Forward Commitments Positive fair values ...................................................................... Negative fair values..................................................................... Net forward commitments.................................................... Interest Rate Swaps with Customers Positive fair values ...................................................................... Negative fair values..................................................................... Net interest rate swaps with customers ................................ Interest Rate Swaps with Dealer Counterparties Positive fair values ...................................................................... Negative fair values..................................................................... Net interest rate swaps with dealer counterparties ............... Foreign Exchange Contracts with Customers Positive fair values ...................................................................... Negative fair values..................................................................... Net foreign exchange contracts with customers................... Foreign Exchange Contracts with Correspondent Banks Positive fair values ...................................................................... Negative fair values..................................................................... Net foreign exchange contracts with correspondent banks .. Net derivative fair value asset ......................................... 87,904 2,373 111,899 105,673 105,673 111,899 2,150 12,775 17,348 5,872 $ 1,263 (5) 1,258 2,105 (2,993) (888) 2,993 (2,105) 888 24 (343) (319) 498 (48) 450 2,197 79,152 236,500 130,841 — — 130,841 1,941 10,199 60,106 37,557 $ 6,912 (155) 6,757 707 (915) (208) 7,090 — 7,090 — (7,090) (7,090) 137 (348) (211) 1,064 (1,121) (57) 6,281 94 The following table presents the fair value gains and losses on derivative financial instruments: Interest rate locks with customers................................... $ Forward commitments .................................................... Interest rate swaps with customers ................................. Interest rate swaps with counterparties........................... Foreign exchange contracts with customers ................... Foreign exchange contracts with correspondent banks .. Net fair value (losses) gains on derivative financial instruments .................................................................. $ 2013 2012 (in thousands) 2011 Statements of Income Classification (5,949) $ 1,466 (7,978) 7,978 (108) 507 2,879 2,503 4,346 (4,346) (1,487) 1,648 $ 3,861 Mortgage banking income (11,190) Mortgage banking income 2,744 Other non-interest expense (2,744) Other non-interest expense 1,295 Other service charges and fees (2,133) Other service charges and fees (4,084) $ 5,543 $ (8,167) The Corporation has elected to record mortgage loans held for sale at fair value. The following table presents a summary of mortgage loans held for sale and the impact of the fair value election on the consolidated financial statements as of and for the years ended December 31, 2013 and 2012: Cost (1) Fair Value Balance Sheet Classification Fair Value (Loss) Gain Statements of Income Classification (in thousands) 21,172 $ 21,351 Loans held for sale $ (1,975) Mortgage banking income December 31, 2013: Mortgage loans held for sale ... $ December 31, 2012: Mortgage loans held for sale ... 65,745 67,899 Loans held for sale 469 Mortgage banking income (1) Cost basis of mortgage loans held for sale represents the unpaid principal balance. The fair values of interest rate swap agreements the Corporation enters into with customers and dealer counterparties 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 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 Recognized on the Consolidated Balance Sheets Gross Amounts Not Offset on the Consolidated Balance Sheets Financial Instruments (1) Cash Collateral (2) Net Amount (in thousands) December 31, 2013 Interest rate swap assets................................................................... $ Interest rate swap liabilities ............................................................. $ December 31, 2012 Interest rate swap assets................................................................... $ Interest rate swap liabilities ............................................................. $ 5,098 5,098 7,090 7,090 $ $ $ $ (2,104) $ — $ 2,994 (2,104) $ (730) $ 2,264 — $ — $ 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. 95 NOTE K – REGULATORY MATTERS Regulatory Capital Requirements The Corporation’s subsidiary banks are subject to various regulatory capital requirements administered by banking regulators. Failure to meet minimum capital requirements can initiate certain mandatory – and possibly additional discretionary – actions by regulators that, if undertaken, could have a direct material effect on the Corporation’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the subsidiary banks must meet specific capital guidelines that involve quantitative measures of the subsidiary banks’ assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The subsidiary banks’ capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the subsidiary banks to maintain minimum amounts and ratios of Total and Tier I capital to risk-weighted assets, and of Tier I capital to average assets (as defined in the regulations). Management believes, as of December 31, 2013, that all of its bank subsidiaries meet the capital adequacy requirements to which they were subject. As of December 31, 2013 and 2012, the Corporation’s four significant subsidiaries, Fulton Bank, N.A., Fulton Bank of New Jersey, The Columbia Bank and Lafayette Ambassador Bank, were well capitalized under the regulatory framework for prompt corrective action based on their capital ratio calculations. To be categorized as well capitalized, these banks must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the following table. There are no conditions or events since December 31, 2013 that management believes have changed the institutions’ categories. The following tables present the Total risk-based, Tier I risk-based and Tier I leverage requirements for the Corporation and its significant subsidiaries with total assets in excess of $1 billion. Actual Amount Ratio 2013 For Capital Adequacy Purposes Ratio Amount (dollars in thousands) Well Capitalized Amount Ratio Total Capital (to Risk-Weighted Assets): Corporation ....................................... $ 1,987,737 Fulton Bank, N.A.............................. 1,053,214 Fulton Bank of New Jersey............... The Columbia Bank.......................... Lafayette Ambassador Bank............. 343,341 215,648 155,475 Tier I Capital (to Risk-Weighted Assets): Corporation ....................................... 1,736,567 Fulton Bank, N.A.............................. Fulton Bank of New Jersey............... The Columbia Bank.......................... Lafayette Ambassador Bank............. 941,546 308,210 198,135 140,733 Tier I Capital (to Average Assets): Corporation ....................................... 1,736,567 Fulton Bank, N.A.............................. Fulton Bank of New Jersey............... The Columbia Bank.......................... Lafayette Ambassador Bank............. 941,546 308,210 198,135 140,733 N/A 801,523 248,900 139,594 109,458 N/A 480,914 149,340 83,756 65,675 N/A 469,558 160,312 93,873 69,454 N/A 10.0% 10.0 10.0 10.0 N/A 6.0% 6.0 6.0 6.0 N/A 5.0% 5.0 5.0 5.0 15.0% $ 1,056,974 8.0% 641,218 199,120 111,675 87,566 528,487 320,609 99,560 55,837 43,783 654,532 375,647 128,250 75,098 55,563 8.0 8.0 8.0 8.0 4.0% 4.0 4.0 4.0 4.0 4.0% 4.0 4.0 4.0 4.0 13.1 13.8 15.4 14.2 13.1 11.8 12.4 14.2 12.9 10.6 10.0 9.6 10.6 10.1 96 Actual Amount Ratio 2012 For Capital Adequacy Purposes Ratio Amount (dollars in thousands) Well Capitalized Amount Ratio Total Capital (to Risk-Weighted Assets): Corporation ........................................ $ 1,992,968 1,022,411 Fulton Bank, N.A............................... 337,660 Fulton Bank of New Jersey................ 231,762 The Columbia Bank ........................... 145,391 Lafayette Ambassador Bank .............. Tier I Capital (to Risk-Weighted Assets): Corporation ........................................ $ 1,710,343 896,058 Fulton Bank, N.A............................... 299,852 Fulton Bank of New Jersey................ 214,891 The Columbia Bank ........................... 128,975 Lafayette Ambassador Bank .............. Tier I Capital (to Average Assets): Corporation ........................................ $ 1,710,343 896,058 Fulton Bank, N.A............................... 299,852 Fulton Bank of New Jersey................ 214,891 The Columbia Bank ........................... 128,975 Lafayette Ambassador Bank .............. N/A – Not applicable as "well capitalized" applies to banks only. Dividend and Loan Limitations 15.6% $ 1,023,759 622,643 13.1 191,842 14.1 107,363 17.3 87,119 13.4 13.4 11.5 12.5 16.0 11.8 11.0 10.1 9.5 11.3 9.5 $ 511,880 311,322 95,921 53,681 43,559 $ 624,838 353,206 126,733 76,174 54,569 8.0% 8.0 8.0 8.0 8.0 4.0% 4.0 4.0 4.0 4.0 4.0% 4.0 4.0 4.0 4.0 N/A 778,304 239,802 134,204 108,899 N/A 466,982 143,881 80,522 65,339 N/A 441,507 158,416 95,217 68,211 N/A 10.0% 10.0 10.0 10.0 N/A 6.0% 6.0 6.0 6.0 N/A 5.0% 5.0 5.0 5.0 The dividends that may be paid by subsidiary banks to the Parent Company are subject to certain legal and regulatory limitations. Dividend limitations vary, depending on the subsidiary bank’s charter and primary regulator and whether or not it is a member of the Federal Reserve System. Generally, subsidiaries are prohibited from paying dividends when doing so would cause them to fall below the regulatory minimum capital levels. Additionally, limits may exist on paying dividends in excess of net income for specified periods. The total amount available for payment of dividends by subsidiary banks was approximately $304 million as of December 31, 2013, based on the subsidiary banks maintaining enough capital to be considered well capitalized, as defined above. Under current Federal Reserve regulations, the subsidiary banks are limited in the amount they may loan to their affiliates, including the Parent Company. Loans to a single affiliate may not exceed 10%, and the aggregate of loans to all affiliates may not exceed 20% of each bank subsidiary’s regulatory capital. U.S. Basel III Capital Rules In July 2013, the Federal Reserve Board approved final rules (the "U.S. Basel III Capital Rules") establishing a new comprehensive capital framework for U.S. banking organizations and implementing the Basel Committee on Banking Supervision's December 2010 framework for strengthening international capital standards. The U.S. Basel III Capital Rules substantially revise the risk- based capital requirements applicable to bank holding companies and depository institutions. The new minimum regulatory capital requirements established by the U.S. Basel III Capital Rules are effective for the Corporation beginning on January 1, 2015, and become fully phased in on January 1, 2019. When fully phased in, the U.S. Basel III Capital Rules will require the Corporation and its bank subsidiaries to: • Meet a new minimum Common Equity Tier 1 capital ratio of 4.50% of risk-weighted assets and a minimum Tier 1 capital of 6.00% of risk-weighted assets; • Continue to require the current minimum Total capital ratio of 8.00% of risk-weighted assets and the minimum Tier 1 leverage capital ratio of 4.00% of average assets; 97 • 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 as a result of which certain non-qualifying capital instruments, including cumulative preferred stock and trust preferred securities, will be excluded as a component of Tier 1 capital for institutions of the Corporation's size. The U.S. Basel III Capital Rules use a standardized approach for risk weightings that 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 December 31, 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. NOTE L – INCOME TAXES The components of the provision for income taxes are as follows: Current tax expense (benefit): Federal .......................................................................................................... $ State .............................................................................................................. Deferred tax expense (benefit): Federal .......................................................................................................... State .............................................................................................................. Income tax expense.............................................................................................. $ 2013 2012 (in thousands) 2011 38,573 687 39,260 15,357 (3,532) 11,825 51,085 $ $ $ 41,151 (557) 40,594 17,007 — 17,007 57,601 $ 40,141 6,319 46,460 8,662 (4,284) 4,378 50,838 The differences between the effective income tax rate and the federal statutory income tax rate are as follows: 2013 2012 2011 Statutory tax rate ................................................................................................... Tax-exempt income............................................................................................... Low income housing investments......................................................................... Valuation allowance.............................................................................................. Bank owned life insurance .................................................................................... State income taxes, net of federal benefit ............................................................. Executive compensation ....................................................................................... Non-deductible goodwill....................................................................................... Other, net............................................................................................................... Effective income tax rate ...................................................................................... 35.0% (5.2) (4.9) (2.0) (0.5) 1.1 0.1 — 0.4 24.0% 35.0% (5.0) (4.4) (0.6) (0.8) 0.6 0.5 0.9 0.3 26.5% 35.0% (5.3) (4.3) 4.6 (0.6) (4.0) 0.1 — 0.4 25.9% 98 The net deferred tax asset recorded by the Corporation is included in other assets and consists of the following tax effects of temporary differences as of December 31: Deferred tax assets: Allowance for credit losses ..................................................................................................... $ Unrealized holding losses on securities available for sale ...................................................... State loss carryforwards .......................................................................................................... Deferred compensation............................................................................................................ Other-than-temporary impairment of investments .................................................................. Other accrued expenses ........................................................................................................... Postretirement and defined benefit plans ................................................................................ Other ........................................................................................................................................ Total gross deferred tax assets.......................................................................................... Deferred tax liabilities: Mortgage servicing rights........................................................................................................ Premises and equipment .......................................................................................................... Direct leasing........................................................................................................................... Acquisition premiums/discounts ............................................................................................. Unrealized holding gains on securities available for sale ....................................................... Other ........................................................................................................................................ Total gross deferred tax liabilities .................................................................................... Net deferred tax asset, before valuation allowance.......................................................... Valuation allowance ......................................................................................................... Net deferred tax asset ....................................................................................................... $ 2013 2012 (in thousands) 75,525 13,922 13,724 12,099 10,378 9,987 9,561 10,850 156,046 15,118 9,864 7,948 7,631 — 5,610 46,171 109,875 (11,880) 97,995 $ $ 83,657 — 13,811 11,546 13,951 9,542 14,034 13,477 160,018 12,856 9,893 5,958 6,802 14,527 7,218 57,254 102,764 (16,107) 86,657 In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and/or capital gain income during periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies, such as those that may be implemented to generate capital gains, in making this assessment. The valuation allowance relates to state deferred tax assets and net operating loss carryforwards for which realizability is uncertain. As of December 31, 2013 and 2012, the Corporation had state net operating loss carryforwards of approximately $475 million and $453 million, respectively, which are available to offset future state taxable income, and expire at various dates through 2033. In 2013, a $3.5 million ($2.3 million, net of federal tax) decrease in the valuation allowance for certain state deferred tax assets was recorded as a credit to income tax expense. This decrease resulted from an improvement in forecasts for state taxable income that will allow a larger portion of this deferred tax asset to be realized. The Corporation has $9.8 million of deferred tax assets resulting from unrealized other-than-temporary impairment losses on investment securities, which would be characterized as capital losses for tax purposes. If realized, the income tax benefits of these potential capital losses can only be recognized for tax purposes to the extent of capital gains generated during carryback and carryforward periods. Other deferred tax assets include $1.8 million related to realized capital losses on sales of investment securities that have not been deducted on tax returns as there were no capital gains available for offset in the current or carryback periods. Substantially all of these losses may be carried forward through 2018. If sufficient capital gains are not realized during this period, some or all of this deferred tax asset may need to be written off. The Corporation has the ability to generate sufficient offsetting capital gains in future periods through the execution of certain tax planning strategies, which may include the sale and leaseback of some or all of its branch and office properties. As such, no valuation allowance for the deferred tax assets related to the realized or unrealized capital losses is considered necessary as of December 31, 2013. Based on the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Corporation will realize the benefits of its deferred tax assets, net of the valuation allowance, as of December 31, 2013. 99 Uncertain Tax Positions The following summarizes the changes in unrecognized tax benefits for the years ended December 31: 2013 2012 (in thousands) 2011 Balance at beginning of year .............................................................................................. $ Prior period tax positions ................................................................................................... Current period tax positions ............................................................................................... Settlement with taxing authority ........................................................................................ Lapse of statute of limitations ............................................................................................ Balance at end of year ........................................................................................................ $ 1,453 — 318 — (120) 1,651 $ $ 9,438 (378) 203 (7,171) (639) 1,453 $ $ 4,083 4,492 1,958 — (1,095) 9,438 Virtually all of the Corporation’s unrecognized tax benefits are for positions that are taken on an annual basis on state tax returns. Increases to unrecognized tax benefits will occur as a result of accruing for the nonrecognition of the position for the current year. Decreases will occur as a result of the lapsing of the statute of limitations for the oldest outstanding year which includes the position. These offsetting increases and decreases are likely to continue in the future, including over the next twelve months. While the net effect on total unrecognized tax benefits during this period cannot be reasonably estimated, approximately $238,000 is expected to reverse in 2014 due to lapsing of the statute of limitations. Decreases can also occur through the settlement of a position with the taxing authority. The $378,000 decrease for prior period tax positions in 2012 resulted from changes in state tax regulations, which impacted the amount of positions taken in prior years that will ultimately be recognized. The Corporation settled a portion of its uncertain tax positions with the applicable state taxing authority in 2012 for approximately $7.2 million ($5.2 million including interest and penalties, and net of federal tax benefit). Recognition and measurement of tax positions is based on management’s evaluations of relevant tax code and appropriate industry information about audit proceedings for comparable positions at other organizations. As of December 31, 2013, if recognized, all of the Corporation’s unrecognized tax benefits would impact the effective tax rate. Not included in the table above is $521,000 of federal tax expense on unrecognized state tax benefits which, if recognized, would also impact the effective tax rate. Interest accrued related to unrecognized tax benefits is recorded as a component of income tax expense. Penalties, if incurred, would also be recognized in income tax expense. The Corporation recognized as a benefit approximately $3,000 and $84,000 for interest and penalties in income tax expense related to unrecognized tax positions in 2013 and 2012, respectively, as a result of reversal s exceeding current period expenses. As of December 31, 2013 and 2012, total accrued interest and penalties related to unrecognized tax positions were approximately $439,000 and $442,000, respectively. The Corporation and its subsidiaries file income tax returns in the federal jurisdiction and various states. In most cases, unrecognized tax benefits are related to tax years that remain subject to examination by the relevant taxing authorities. With few exceptions, the Corporation is no longer subject to federal, state and local examinations by tax authorities for years before 2010. NOTE M – EMPLOYEE BENEFIT PLANS The following summarizes the Corporation’s expense under its retirement plans for the years ended December 31: Fulton Financial Corporation 401(k) Retirement Plan ......................................... $ Pension Plan .......................................................................................................... $ 2013 11,807 2,477 14,284 2012 (in thousands) 11,983 $ 1,834 13,817 $ $ $ 2011 11,271 413 11,684 Fulton Financial Corporation 401(k) Retirement Plan – A defined contribution plan that includes two contribution features: • Employer Profit Sharing – elective contributions based on a formula providing for an amount not to exceed 5% of each eligible employee’s covered compensation. During an eligible employee’s first five years of employment, employer contributions vest over a five-year graded vesting schedule. Employees hired after July 1, 2007 are not eligible for this contribution. 100 • 401(k) Contributions – eligible employees may defer a portion of their pre-tax covered compensation on an annual basis, with employer matches of up to 5% of employee contributions. Employee and employer contributions under these features are 100% vested. Defined Benefit Pension Plan – Contributions to the Corporation’s defined benefit pension plan (Pension Plan) are actuarially determined and funded annually, if necessary. The Corporation recognizes the funded status of its Pension Plan and postretirement benefits plan on the consolidated balance sheets and recognizes the changes in that funded status through other comprehensive income. See the heading “Postretirement Benefits” below for a description of the Corporation’s postretirement benefits plan. Pension Plan The net periodic pension cost for the Pension Plan, as determined by consulting actuaries, consisted of the following components for the years ended December 31: Service cost (1)...................................................................................................... $ Interest cost ........................................................................................................... Expected return on assets ...................................................................................... Net amortization and deferral................................................................................ Net periodic pension cost ...................................................................................... $ 2013 202 3,087 (3,194) 2,382 2,477 2012 (in thousands) 157 $ 3,223 (3,230) 1,684 1,834 $ $ $ 2011 60 3,412 (3,348) 289 413 (1) The Pension Plan was curtailed effective January 1, 2008. Pension plan service cost for all years presented was related to administrative costs associated with the plan and not due to the accrual of additional participant benefits. The following table summarizes the changes in the projected benefit obligation and fair value of plan assets for the plan years ended December 31: 2013 2012 Projected benefit obligation at beginning of year........................................................................... $ Service cost..................................................................................................................................... Interest cost..................................................................................................................................... Benefit payments ............................................................................................................................ Change due to change in assumptions ............................................................................................ Experience (gain) loss..................................................................................................................... Projected benefit obligation at end of year ..................................................................................... $ $ (in thousands) 84,032 202 3,087 (3,009) (10,773) (177) 73,362 $ Fair value of plan assets at beginning of year................................................................................. $ Actual return on assets.................................................................................................................... Benefit payments ............................................................................................................................ Fair value of plan assets at end of year........................................................................................... $ 54,772 3,685 (3,009) 55,448 $ $ 77,055 157 3,223 (2,522) 6,070 49 84,032 55,102 2,192 (2,522) 54,772 The following table presents the funded status of the Pension Plan, included in other liabilities on the consolidated balance sheets, as of December 31: Projected benefit obligation............................................................................................................ $ Fair value of plan assets.................................................................................................................. Funded status .................................................................................................................................. $ (73,362) $ 55,448 (17,914) $ (84,032) 54,772 (29,260) 2013 2012 (in thousands) 101 The following table summarizes the changes in the unrecognized net loss included as a component of accumulated other comprehensive loss: Unrecognized Net Loss Net of tax Gross of tax Balance as of December 31, 2011 .................................................................................................. $ Recognized as a component of 2012 periodic pension cost ........................................................... Unrecognized losses arising in 2012 .............................................................................................. Balance as of December 31, 2012 .................................................................................................. Recognized as a component of 2013 periodic pension cost ........................................................... Unrecognized gains arising in 2013 ............................................................................................... Balance as of December 31, 2013 .................................................................................................. $ $ (in thousands) 24,513 (1,684) 7,155 29,984 (2,382) (11,441) 16,161 $ 15,933 (1,095) 4,652 19,490 (1,548) (7,437) 10,505 The total amount of unrecognized net loss that will be amortized as a component of net periodic pension cost in 2014 is expected to be $1.1 million. The following rates were used to calculate net periodic pension cost and the present value of benefit obligations as of December 31: Discount rate-projected benefit obligation............................................................ Expected long-term rate of return on plan assets .................................................. 4.75% 6.00% 3.75% 6.00% 4.25% 6.00% 2013 2012 2011 As of December 31, 2013, 2012 and 2011, the discount rate used to calculate the present value of benefit obligations was determined using the Citigroup Average Life discount rate table, as adjusted based on the Pension Plan's expected benefit payments and rounded to the nearest 0.25%. The 6.00% long-term rate of return on plan assets used to calculate the net periodic pension cost was based on historical returns, adjusted for expectations of long-term asset returns based on the December 31, 2013 weighted average asset allocations. The expected long-term return is considered to be appropriate based on the asset mix and the historical returns realized. The following table presents a summary of the fair values of the Pension Plan’s assets as of December 31: 2013 2012 Estimated Fair Value % of Total Assets (dollars in thousands) Estimated Fair Value % of Total Assets Equity mutual funds .................................................................... $ Equity common trust funds ......................................................... Equity securities ................................................................... Cash and money market funds .................................................... Fixed income mutual funds ......................................................... Corporate debt securities ............................................................. U.S. Government agency securities............................................. Fixed income securities and cash ......................................... Other alternative investment funds.............................................. $ 5,882 8,418 14,300 10,574 9,579 7,815 3,938 31,906 9,242 55,448 $ 25.8% 57.5% 16.7% 100.0% $ 7,318 4,750 12,068 9,422 9,599 7,345 5,474 31,840 10,864 54,772 22.0% 58.2% 19.8% 100.0% Investment allocation decisions are made by a retirement plan committee. The goal of the investment allocation strategy is to match certain benefit obligations with maturities of fixed income securities. Pension Plan assets are invested with a conservative growth objective, with target asset allocations of approximately 25% in equities, 55% in fixed income securities and cash and 20% in alternative investments. Alternative investments may include managed futures, commodities, real estate investment trusts, master limited partnerships, and long-short strategies with traditional stocks and bonds. All alternative investments are in the form of mutual funds, not individual contracts, to enable daily liquidity. 102 The fair values for all assets held by the Pension Plan, excluding equity common trust funds, are based on quoted prices for identical instruments and would be categorized as Level 1 assets under FASB ASC Topic 810. Equity common trust funds would be categorized as Level 2 assets under FASB ASC Topic 810. Estimated future benefit payments are as follows (in thousands): Year 2014.......................................................................................................................................................................... $ 2015.......................................................................................................................................................................... 2016.......................................................................................................................................................................... 2017.......................................................................................................................................................................... 2018.......................................................................................................................................................................... 2019 – 2023.............................................................................................................................................................. $ 2,603 2,796 3,039 3,359 3,714 21,822 37,333 Postretirement Benefits The Corporation currently provides medical benefits 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. Early retirees receive no benefits for the time between their retirement date to the date they attain age 65. Benefits are based on a graduated scale for years of service after attaining the age of 40. The components of the expense for postretirement benefits other than pensions are as follows: Service cost ........................................................................................................... $ Interest cost ........................................................................................................... Expected return on plan assets .............................................................................. Net amortization and deferral................................................................................ Net postretirement benefit cost ............................................................................. $ 2013 228 322 (1) (363) 186 2012 (in thousands) 211 $ 346 (2) (363) 192 $ $ $ 2011 201 428 (3) (363) 263 The following table summarizes the changes in the accumulated postretirement benefit obligation and fair value of plan assets for the years ended December 31: 2013 2012 Accumulated postretirement benefit obligation at beginning of year ............................................ $ Service cost..................................................................................................................................... Interest cost..................................................................................................................................... Benefit payments ............................................................................................................................ Experience gain .............................................................................................................................. Change due to change in assumptions ............................................................................................ Accumulated postretirement benefit obligation at end of year....................................................... $ $ (in thousands) 9,272 228 322 (230) (423) (1,000) 8,169 $ Fair value of plan assets at beginning of year................................................................................. $ Employer contributions .................................................................................................................. Benefit payments ............................................................................................................................ Fair value of plan assets at end of year........................................................................................... $ 45 208 (230) 23 $ $ 103 9,651 211 346 (249) — (687) 9,272 75 219 (249) 45 The following table presents the funded status of the Postretirement Plan, included in other liabilities on the consolidated balance sheets as of December 31: Accumulated postretirement benefit obligation.............................................................................. $ Fair value of plan assets.................................................................................................................. Funded status ........................................................................................................................... $ 2013 2012 (in thousands) (8,169) $ 23 (8,146) $ (9,272) 45 (9,227) The following table summarizes the changes in items recognized as a component of accumulated other comprehensive loss: Unrecognized Prior Service Cost Gross of tax Unrecognized Net Loss (Gain) Balance as of December 31, 2011.................................................. $ Recognized as a component of 2012 postretirement benefit cost.. Unrecognized gains arising in 2012............................................... Balance as of December 31, 2012.................................................. Recognized as a component of 2013 postretirement benefit cost.. Unrecognized gains arising in 2013............................................... Balance as of December 31, 2013.................................................. $ (2,210) $ 363 — (1,847) 363 — (1,484) $ (in thousands) $ 982 — (685) 297 — (1,434) (1,137) $ Total Net of tax (1,228) $ 363 (685) (1,550) 363 (1,434) (2,621) $ (799) 236 (445) (1,008) 236 (932) (1,704) For measuring the postretirement benefit obligation, the annual increase in the per capita cost of health care benefits was assumed to be 7% in year one, declining to an ultimate rate of 5.5% by year three. This health care cost trend rate has a significant impact on the amounts reported. Assuming a 1.0% increase in the health care cost trend rate above the assumed annual increase, the accumulated postretirement benefit obligation would increase by approximately $920,000 and the current period expense would increase by approximately $90,000. Conversely, a 1.0% decrease in the health care cost trend rate would decrease the accumulated postretirement benefit obligation by approximately $760,000 and the current period expense by approximately $70,000. The following rates were used to calculate net periodic postretirement benefit cost and the present value of benefit obligations as of December 31: Discount rate-projected benefit obligation............................................................ Expected long-term rate of return on plan assets .................................................. 4.75% 3.00% 3.75% 3.00% 4.25% 3.00% 2013 2012 2011 As of December 31, 2013 and 2012, the discount rate used to calculate the accumulated postretirement benefit obligation was determined using the Citigroup Average Life discount rate table, as adjusted based on the Postretirement Plan's expected benefit payments and rounded to the nearest 0.25%. Effective February 1, 2014, the Corporation amended the Postretirement Plan, making all active full-time employees ineligible for benefits under this plan. As a result of this amendment, the Corporation recorded a $1.5 million curtailment gain in 2014, as determined by consulting actuaries. The curtailment gain resulted from the recognition of the remaining pre-curtailment prior service cost as of December 31, 2013. In addition, this amendment resulted in a $3.4 million decrease in the accumulated postretirement benefit obligation and a corresponding increase in unrecognized prior service cost credits and unrecognized gains. The total amount of unrecognized prior service costs and unrecognized gains that will be recognized as reductions to net periodic postretirement cost in 2014 are expected to be $237,000 and $70,000, respectively. 104 Estimated future benefit payments under the curtailed Postretirement Plan are as follows (in thousands): Year 2014.......................................................................................................................................................................... $ 2015.......................................................................................................................................................................... 2016.......................................................................................................................................................................... 2017.......................................................................................................................................................................... 2018.......................................................................................................................................................................... 2019 – 2023.............................................................................................................................................................. $ 451 458 459 469 472 2,461 4,770 NOTE N – SHAREHOLDERS’ EQUITY Accumulated Other Comprehensive Loss The following table presents the components of other comprehensive loss for the years ended December 31: Before-Tax Amount Tax Effect (in thousands) Net of Tax Amount 2013: Unrealized (loss) gain on securities ................................................................................................. $ (76,319) $ 26,712 $ (49,607) Reclassification adjustment for securities (gains) losses included in net income ........................... Non-credit related unrealized gain on other-than-temporarily impaired debt securities ................. Unrealized gain on derivative financial instruments ....................................................................... Unrecognized pension and postretirement income (cost)................................................................ Amortization (accretion) of net unrecognized pension and postretirement income (cost).............. (8,004) 3,042 209 12,875 2,019 Total Other Comprehensive Loss............................................................................................... $ (66,178) 2012: Unrealized (loss) gain on securities ................................................................................................. $ Reclassification adjustment for securities (gains) losses included in net income ........................... Non-credit related unrealized gain on other-than-temporarily impaired debt securities ................. Unrealized gain on derivative financial instruments ....................................................................... Unrecognized pension and postretirement income (cost)................................................................ Amortization (accretion) of net unrecognized pension and postretirement income (cost).............. Total Other Comprehensive Loss............................................................................................... $ 2011: Unrealized (loss) gain on securities ................................................................................................. $ Reclassification adjustment for securities (gains) losses included in net income ........................... Non-credit related unrealized gain on other-than-temporarily impaired debt securities ................. Unrealized gain on derivative financial instruments ....................................................................... Unrecognized pension and postretirement income (cost)................................................................ Amortization (accretion) of net unrecognized pension and postretirement income (cost).............. 2,414 (3,026) 2,046 209 (6,470) 1,321 (3,506) 13,490 (4,561) 369 209 (16,418) (74) $ $ $ $ 2,801 (1,065) (73) (4,506) (707) 23,162 (845) 1,059 (716) (73) 2,263 (462) 1,226 (4,722) 1,597 (129) (73) 5,746 26 $ $ $ $ (5,203) 1,977 136 8,369 1,312 (43,016) 1,569 (1,967) 1,330 136 (4,207) 859 (2,280) 8,768 (2,964) 240 136 (10,672) (48) Total Other Comprehensive Loss............................................................................................... $ (6,985) $ 2,445 $ (4,540) 105 The following table presents changes in each component of accumulated other comprehensive income (loss), net of tax, for the years ended December 31: Unrealized Gain (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 Total Unrecognized Pension and Postretirement Plan Income (Cost) (in thousands) Balance as of December 31, 2010 .................................................................... $ 22,354 $ (2,355) $ (4,414) $ (3,090) $ 12,495 Current-period other comprehensive income (loss) ......................................... Amounts reclassified from accumulated other comprehensive income (loss) . Balance as of December 31, 2011 .................................................................... Current-period other comprehensive income (loss) ......................................... Amounts reclassified from accumulated other comprehensive income (loss) . Balance as of December 31, 2012 .................................................................... Other comprehensive income (loss) before reclassifications ........................... Amounts reclassified from accumulated other comprehensive income (loss) . 7,664 (2,964) 27,054 1,275 (1,967) 26,362 (49,607) (4,265) 1,344 — (1,011) 1,624 — 613 1,977 (938) (10,672) (48) (15,134) (4,207) 859 — 136 (2,954) — 136 (18,482) (2,818) 8,369 1,312 — 136 (1,664) (2,876) 7,955 (1,308) (972) 5,675 (39,261) (3,755) Balance as of December 31, 2013 .................................................................... $ (27,510) $ 1,652 $ (8,801) $ (2,682) $ (37,341) Common Stock Repurchase Plans In January 2013, the Corporation announced that its board of directors had approved a share repurchase program pursuant to which the Corporation was authorized to repurchase of up to eight million shares. During 2013, the Corporation repurchased eight million shares, completing this repurchase program. In October 2013, the Corporation announced that its board of directors had approved a share repurchase program pursuant to which the Corporation is authorized to repurchase up to four million shares, or approximately 2.1% of its outstanding shares, through March 2014. During the first quarter of 2014, the Corporation repurchased 4.0 million shares under this repurchase plan at an average cost of $12.45 per share, completing this repurchase program on February 19, 2014. NOTE O – STOCK-BASED COMPENSATION PLANS The following table presents compensation expense and related tax benefits for all equity awards, including stock options and restricted stock, recognized in the consolidated statements of income: Compensation expense.......................................................................................... $ Tax benefit............................................................................................................. Stock-based compensation, net of tax................................................................... $ 5,330 (1,475) 3,855 2013 2012 (in thousands) 4,834 $ (1,253) 3,581 $ $ $ 2011 4,249 (1,192) 3,057 The tax benefit shown in the preceding table is less than the benefit that would be calculated using the Corporation’s 35% statutory federal tax rate. Tax benefits are only recognized over the vesting period for awards that ordinarily will generate a tax deduction when exercised, in the case of non-qualified stock options, or upon vesting, in the case of restricted stock. The Corporation granted 50,000, 15,000 and 1,000 non-qualified stock options in 2013, 2012 and 2011, respectively. 106 The following table presents compensation expense and related tax benefits for restricted stock awards recognized in the consolidated statements of income, and included as a component of total stock-based compensation within the preceding table: Compensation expense.......................................................................................... $ Tax benefit............................................................................................................. Restricted stock compensation, net of tax............................................................. $ 3,705 (1,297) 2,408 2013 2012 (in thousands) 3,506 $ (1,227) 2,279 $ $ $ 2011 3,194 (1,119) 2,075 The following table provides information about stock option activity for the year ended December 31, 2013: Outstanding as of December 31, 2012 ........................................ Granted ................................................................................. Exercised .............................................................................. Forfeited ............................................................................... Expired ................................................................................. Outstanding as of December 31, 2013 ........................................ Exercisable as of December 31, 2013 ......................................... Stock Options 6,076,121 617,869 (451,102) (255,902) (419,285) 5,567,701 4,496,435 $ $ $ Weighted Average Exercise Price Weighted Average Remaining Contractual Term Aggregate Intrinsic Value (in millions) 13.17 11.58 8.38 14.70 13.77 13.25 13.74 4.2 years 3.2 years $ $ 7.2 5.1 The following table provides information about nonvested stock options and restricted stock granted under the Employee Option Plan and Directors' Plan for the year ended December 31, 2013: Nonvested Stock Options Restricted Stock Nonvested as of December 31, 2012........................................... Granted ................................................................................. Vested................................................................................... Forfeited ............................................................................... Nonvested as of December 31, 2013........................................... Options 1,024,168 617,869 (521,503) (49,268) 1,071,266 Weighted Average Grant Date Fair Value 2.07 2.49 2.00 2.05 2.35 $ $ Shares 971,453 424,619 (437,209) (15,824) 943,039 Weighted Average Grant Date Fair Value 10.20 11.63 10.07 10.28 10.90 $ $ As of December 31, 2013, there was $5.1 million of total unrecognized compensation cost related to nonvested stock options and restricted stock that will be recognized as compensation expense over a weighted average period of two years. As of December 31, 2013, the Employee Option Plan had 11.0 million shares reserved for future grants through 2023 and the Directors’ Plan had 438,000 shares reserved for future grants through 2021. The following table presents information about stock options exercised: Number of options exercised ................................................................................ Total intrinsic value of options exercised.............................................................. $ Cash received from options exercised .................................................................. $ Tax deduction realized from options exercised..................................................... $ 451,102 1,612 3,650 1,416 $ $ $ 141,305 402 987 322 $ $ $ 261,272 763 1,855 652 2013 2012 (dollars in thousands) 2011 Upon exercise, the Corporation issues shares from its authorized, but unissued, common stock to satisfy the options. 107 The fair value of stock option awards under the Employee Option Plan was estimated on the grant date using the Black-Scholes valuation methodology, which is dependent upon certain assumptions, as summarized in the following table: Risk-free interest rate ............................................................................................ Volatility of Corporation’s stock........................................................................... Expected dividend yield........................................................................................ Expected life of options ........................................................................................ 1.27% 27.64% 2.48% 7 Years 1.68% 26.60% 2.54% 7 Years 2.35% 22.80% 2.41% 6 Years 2013 2012 2011 The expected life of the options was estimated based on historical activity. Volatility of the Corporation’s stock was based on historical volatility for the period commensurate with the expected life of the options. The risk-free interest rate is the zero-coupon U.S. Treasury rate commensurate with the expected life of the options on the date of the grant. Based on the assumptions above, the Corporation calculated an estimated fair value per option of $2.49, $2.22 and $2.10 for options granted in 2013, 2012 and 2011, respectively. The Corporation granted 617,869 options in 2013, 470,528 options in 2012 and 616,686 options in 2011. Under the ESPP, eligible employees can purchase stock of the Corporation at 85% of the fair market value of the stock on the date of purchase. The ESPP is considered to be a compensatory plan and, as such, compensation expense is recognized for the 15% discount on shares purchased. The following table summarizes activity under the ESPP: ESPP shares purchased.......................................................................................... Average purchase price per share (85% of market value)..................................... $ Compensation expense recognized (in thousands) ............................................... $ 2013 141,608 10.02 251 $ $ 2012 165,456 8.35 244 $ $ 2011 164,610 8.39 244 NOTE P – LEASES Certain branch offices and equipment are leased under agreements that expire at varying dates through 2035. Most leases contain renewal provisions at the Corporation’s option. Total rental expense was approximately $19.0 million in 2013, $19.4 million in 2012 and $18.6 million in 2011. Future minimum payments as of December 31, 2013 under non-cancelable operating leases with initial terms exceeding one year are as follows (in thousands): Year 2014.......................................................................................................................................................................... $ 2015.......................................................................................................................................................................... 2016.......................................................................................................................................................................... 2017.......................................................................................................................................................................... 2018.......................................................................................................................................................................... Thereafter ................................................................................................................................................................. $ 16,598 15,858 14,514 13,168 10,955 60,435 131,528 NOTE Q – 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. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since a portion of the commitments is expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Corporation evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained upon extension of credit is based on management’s credit evaluation of the customer. Collateral held varies but may include accounts receivable, inventory, property, equipment and income producing commercial properties. The Corporation records a reserve for unfunded commitments, included in other liabilities on the consolidated balance 108 sheets, which represents management’s estimate of losses inherent in these commitments. See Note D, "Loans and Allowance for Credit Losses," for additional information. Standby letters of credit are conditional commitments issued to guarantee the financial or performance obligation of a customer to a third-party. The credit risk involved in issuing letters of credit is similar to that involved in extending loan facilities. These obligations are underwritten consistently with commercial lending standards. The maximum exposure to loss for standby letters of credit is equal to the contractual (or notional) amount of the instruments. The following table presents commitments to extend credit and letters of credit: 2013 2012 (in thousands) Commercial and other..................................................................................................................... $ 2,773,415 1,245,589 Home equity.................................................................................................................................... 360,574 Commercial mortgage and construction......................................................................................... Total commitments to extend credit ........................................................................................ $ 4,379,578 $ 2,711,766 964,145 335,830 $ 4,011,741 Standby letters of credit .................................................................................................................. $ Commercial letters of credit ........................................................................................................... Total letters of credit................................................................................................................ $ 391,445 36,344 427,789 $ $ 425,095 26,191 451,286 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 certain residential mortgages 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 December 31, 2013 and 2012, total outstanding repurchase requests totaled approximately $6.1 million and $4.5 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 December 31, 2013, the unpaid principal balance of loans sold under the MPF Program was approximately $178 million. As of December 31, 2013 and 2012, the reserves for estimated credit losses related to loans sold under the MPF Program were $2.5 million and $3.6 million, respectively. Required reserves are calculated based on delinquency status and estimated loss rates established through the Corporation's existing allowance for credit loss methodology. As of December 31, 2013 and 2012, the reserve for losses on residential mortgage loans sold was $8.6 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 December 31, 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, established through charges to earnings, in the future. Other Contingencies The Corporation and its subsidiaries are involved in various legal proceedings in the ordinary course of business of the Corporation. The Corporation periodically evaluates the possible impact of pending litigation matters based on, among other factors, the advice of counsel, available insurance coverage and recorded liabilities and reserves for probable legal liabilities and costs. In addition, from time to time, the Corporation is the subject of investigations or other forms of regulatory or governmental inquiry covering a range of possible issues and, in some cases, these may be part of similar reviews of the specified activities of other industry participants. These inquiries could lead to administrative, civil or criminal proceedings, and could possibly result in fines, penalties, restitution or the need to alter the Corporation’s business practices, and cause the Corporation to incur additional costs. The Corporation’s practice is to cooperate fully with regulatory and governmental investigations. 109 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, legal proceedings are often unpredictable, and the actual results of such proceedings cannot be determined with certainty. NOTE R – FAIR VALUE MEASUREMENTS As required by FASB ASC Topic 820, all assets and liabilities required to be measured at fair value both on a recurring and non- recurring basis have been categorized based on the method of their fair value determination. Following is a summary of the Corporation’s assets and liabilities measured at fair value on a recurring basis and reported on the consolidated balance sheets at December 31: Mortgage loans held for sale ....................................................... $ Available for sale investment securities: 2013 Level 1 Level 2 Level 3 Total — $ (in thousands) 21,351 $ — $ 21,351 Equity securities ................................................................... 46,201 U.S. Government securities.................................................. U.S. Government sponsored agency securities .................... State and municipal securities .............................................. Corporate debt securities ...................................................... Collateralized mortgage obligations..................................... Mortgage-backed securities.................................................. Auction rate securities .......................................................... — — — — — — — Total available for sale investment securities.............................. Other assets.................................................................................. 46,201 15,779 — 525 726 284,849 89,662 1,032,398 945,712 — 2,353,872 7,227 — — — — 9,087 — — 159,274 168,361 — 46,201 525 726 284,849 98,749 1,032,398 945,712 159,274 2,568,434 23,006 Total assets .................................................................... $ Other liabilities ............................................................................ $ 61,980 $ 2,382,450 15,648 $ 5,161 $ $ 168,361 $ 2,612,791 — $ 20,809 Mortgage loans held for sale ....................................................... $ Available for sale investment securities: 2012 Level 1 Level 2 Level 3 Total — $ (in thousands) 67,899 $ — $ 67,899 Equity securities ................................................................... 49,628 U.S. Government securities.................................................. U.S. Government sponsored agency securities .................... State and municipal securities .............................................. Corporate debt securities ...................................................... Collateralized mortgage obligations..................................... Mortgage-backed securities.................................................. Auction rate securities .......................................................... — — — — — — — Total available for sale investment securities.............................. Other assets.................................................................................. 49,628 15,259 — 325 2,397 315,519 102,555 1,211,119 879,621 — 2,511,536 14,710 — — — — 10,287 — — 149,339 159,626 — 49,628 325 2,397 315,519 112,842 1,211,119 879,621 149,339 2,720,790 29,969 Total assets .................................................................... $ Other liabilities ............................................................................ $ 64,887 $ 2,594,145 15,524 $ 8,161 $ $ 159,626 $ 2,818,658 — $ 23,685 110 The valuation techniques used to measure fair value for the items in the table above 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 December 31, 2013 and December 31, 2012 were measured as the price that secondary market investors were offering for loans with similar characteristics. See Note A, "Summary of Significant Accounting Policies" for details related to the Corporation’s election to measure assets and liabilities at fair value. • Available for sale investment securities – Included within this asset category are both equity and debt securities. Level 2 available for sale debt securities are valued by a third-party pricing service commonly used in the banking industry. The pricing service uses pricing models that vary based on asset class and incorporate available market information, including quoted prices of investment securities with similar characteristics. Because many fixed income securities do not trade on a daily basis, pricing models use available information, as applicable, through processes such as benchmark curves, benchmarking of like securities, sector groupings, and matrix pricing. Standard market inputs include: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data, including market research publications. For certain security types, additional inputs may be used, or some of the standard market inputs may not be applicable. Management tests the values provided by the pricing service by obtaining securities prices from an alternative third-party source and comparing the results. This test is done for approximately 75% of the securities valued by the pricing service. Generally, differences by security in excess of 5% are researched to reconcile the difference. • Equity securities – Equity securities consist of stocks of financial institutions ($40.6 million at December 31, 2013 and $44.2 million at December 31, 2012) and other equity investments ($5.6 million at December 31, 2013 and $5.4 million at December 31, 2012). These Level 1 investments are measured at fair value based on quoted prices for identical securities in active markets. • U.S. Government securities/U.S. Government sponsored agency securities/State and municipal securities/ Collateralized mortgage obligations/Mortgage-backed securities – These debt securities are classified as Level 2 investments. Fair values are determined by a third-party pricing service, as detailed above. • Corporate debt securities – This category consists of subordinated debt issued by financial institutions ($50.3 million at December 31, 2013 and $51.7 million at December 31, 2012), single-issuer trust preferred securities issued by financial institutions ($40.5 million at December 31, 2013 and $51.7 million at December 31, 2012), pooled trust preferred securities issued by financial institutions ($5.3 million at December 31, 2013 and $6.9 million at December 31, 2012) and other corporate debt issued by non-financial institutions ($2.6 million at December 31, 2013 and $2.5 million at December 31, 2012). Level 2 investments include subordinated debt, other corporate debt issued by non-financial institutions and $36.7 million and $48.3 million of single-issuer trust preferred securities held at December 31, 2013 and 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 investments in pooled trust preferred securities and certain single-issuer trust preferred securities ($3.8 million at December 31, 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. Level 3 values are tested by management through the performance of a trend analysis of the market price and discount rate. Changes in the price and discount rates are compared to changes in market data, including bond ratings, parity ratios, balances and delinquency levels. 111 • 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 ($15.3 million at December 31, 2013 and $14.1 million at December 31, 2012) and the fair value of foreign currency exchange contracts ($522,000 at December 31, 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 ($2.1 million at December 31, 2013 and $7.6 million at December 31, 2012) and the fair value of interest rate swaps ($5.1 million at December 31, 2013 and $7.1 million at December 31, 2012). The fair values of the 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 J, "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 ($15.3 million at December 31, 2013 and $14.1 million at December 31, 2012) and the fair value of foreign currency exchange contracts ($391,000 at December 31, 2013 and $1.5 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. • 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 ($64,000 at December 31, 2013 and $1.1 million at December 31, 2012) and the fair value of interest rate swaps ($5.1 million at December 31, 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, which are described under the heading "Other assets" above. The following table presents the changes in available for sale investment securities measured at fair value on a recurring basis using unobservable inputs (Level 3) for the years ended December 31: Pooled Trust Preferred Securities Balance as of December 31, 2011 .................................................................. $ Realized adjustments to fair value (1)............................................................ Unrealized adjustments to fair value (2) ........................................................ Sales ............................................................................................................... Settlements - calls........................................................................................... Discount accretion (3) .................................................................................... Balance as of December 31, 2012 .................................................................. Realized adjustments to fair value (1)............................................................ Unrealized adjustments to fair value (2) ........................................................ Sales ............................................................................................................... Settlements - calls........................................................................................... Discount accretion (3) .................................................................................... Balance as of December 31, 2013 .................................................................. $ 5,109 (19) 2,466 — (673) 44 6,927 1,604 1,981 (4,987) (219) — 5,306 Single-issuer Trust Preferred Securities (in thousands) 4,180 $ 19 359 (956) (250) 8 3,360 — 412 — 9 3,781 $ $ Auction Rate Securities (ARCs) $ 225,211 (434) (8,612) — (69,068) 2,242 149,339 — 11,688 (25) (2,725) 997 159,274 (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 sheet. Included as a component of net interest income on the consolidated statements of income. (3) 112 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 financial assets measured at fair value on a nonrecurring basis and reported on the consolidated balance sheets at December 31: Level 1 Level 2 Level 3 Total 2013 Net loans...................................................................................... $ Other financial assets................................................................... Total assets ........................................................................... $ — $ — — $ (in thousands) — $ — — $ 138,666 57,504 196,170 Net loans...................................................................................... $ Other financial assets................................................................... Total assets ........................................................................... $ — $ — — $ (in thousands) — $ — — $ 191,165 62,203 253,368 Level 1 Level 2 Level 3 2012 $ $ $ $ 138,666 57,504 196,170 Total 191,165 62,203 253,368 The valuation techniques used to measure fair value for the items in the table above are as follows: • Net loans – This category consists of loans that were evaluated for impairment under FASB ASC Section 310-10-35 and have been classified as Level 3 assets. The amount shown is the balance of impaired loans, net of the related allowance for loan losses. See Note D, "Loans and Allowance for Credit Losses," for additional details. • Other financial assets – This category includes OREO ($15.1 million at December 31, 2013 and $26.1 million at December 31, 2012) and MSRs net of the MSR valuation allowance ($42.5 million at December 31, 2013 and $36.1 million at December 31, 2012), both classified as Level 3 assets. Fair values for OREO were based on estimated selling prices less estimated selling costs for similar assets in active markets. MSRs are initially recorded at fair value upon the sale of residential mortgage loans to secondary market investors. MSRs are amortized as a reduction to servicing income over the estimated lives of the underlying loans. MSRs are stratified and evaluated for impairment by comparing each stratum's carrying amount to its estimated fair value. Fair values are determined at the end of each quarter through a discounted cash flows valuation. During 2013, the Corporation engaged a third-party valuation expert to estimate the fair value of its MSRs. Significant inputs to the valuation include expected net servicing income, the discount rate and the expected life of the underlying loans. Expected life is based on the contractual terms of the loans, as adjusted for prepayment projections. The weighted average annual constant prepayment rate and the weighted average discount rate used in the December 31, 2013 valuation were 10.5% and 9.1%, respectively. Management tests the reasonableness of the significant inputs to the third-party valuation in comparison to market data. As required by FASB ASC Section 825-10-50, the following table details the book values and the estimated fair values of the Corporation’s financial instruments as of December 31, 2013 and 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 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. 113 2013 2012 Book Value Estimated Fair Value Book Value Estimated Fair Value (in thousands) FINANCIAL ASSETS Cash and due from banks ............................................................ $ Interest-bearing deposits with other banks .................................. Federal Reserve Bank and FHLB stock ...................................... Loans held for sale (1)................................................................. Securities held to maturity........................................................... Securities available for sale (1) ................................................... Loans, net of unearned income (1) .............................................. Accrued interest receivable ......................................................... Other financial assets (1) ............................................................. FINANCIAL LIABILITIES Demand and savings deposits...................................................... $ 9,573,264 2,917,922 Time deposits............................................................................... 1,258,629 Short-term borrowings................................................................. 15,218 Accrued interest payable ............................................................. 124,440 Other financial liabilities (1) ....................................................... 883,584 FHLB advances and long-term debt............................................ 218,540 163,988 84,173 21,351 — 2,568,434 12,782,220 44,037 146,933 $ 218,540 163,988 84,173 21,351 — 2,568,434 12,688,774 44,037 146,933 $ 256,300 173,257 71,702 67,899 292 2,720,790 12,146,971 45,786 201,069 $ 256,300 173,257 71,702 67,899 319 2,720,790 12,127,309 45,786 201,069 $ 9,573,264 2,927,374 1,258,629 15,218 124,440 875,984 $ 9,100,825 3,383,338 868,399 19,330 58,255 894,253 $ 9,100,825 3,413,060 868,399 19,330 58,255 853,547 (1) These financial instruments, or certain financial instruments within these categories, are measured at fair value on the Corporation’s consolidated balance sheets. Descriptions of the fair value determinations for these financial instruments are disclosed above. For short-term financial instruments defined as those with remaining maturities of 90 days or less, and excluding those recorded at fair value on the Corporation’s consolidated balance sheets, book value was considered to be a reasonable estimate of fair value. The following instruments are predominantly short-term: Assets Cash and due from banks Interest-bearing deposits Accrued interest receivable Liabilities Demand and savings deposits Short-term borrowings Accrued interest payable Federal Reserve Bank and FHLB stock represent restricted investments and are carried at cost on the consolidated balance sheets. The estimated fair values of securities held to maturity as of December 31, 2013 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. The estimated fair value of 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. The fair values of these borrowings would be categorized as Level 2 liabilities under FASB Topic 820. 114 NOTE S – CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY CONDENSED BALANCE SHEETS (in thousands) December 31 2013 2012 ASSETS Cash........................................ $ Other assets ............................ Receivable from subsidiaries . $ 8 2,526 21,849 LIABILITIES AND EQUITY 40 Long-term debt ............................. $ 10,126 Payable to non-bank subsidiaries . 20,829 Other liabilities............................. Total Liabilities................... December 31 2013 2012 $ 368,487 42,944 66,313 477,744 368,172 23,733 58,246 450,151 Investments in: Bank subsidiaries ............ Non-bank subsidiaries .... 2,109,696 406,852 2,111,708 389,104 Shareholders’ equity..................... 2,063,187 2,081,656 Total Assets................... $ 2,540,931 $ 2,531,807 Total Liabilities and Shareholders’ Equity. $ 2,540,931 $ 2,531,807 CONDENSED STATEMENTS OF INCOME 2013 2012 (in thousands) 2011 Income: Dividends from subsidiaries........................................................................................ $ 114,438 Other............................................................................................................................ 106,297 Expenses............................................................................................................................. Income before income taxes and equity in undistributed net income of subsidiaries. Income tax benefit .............................................................................................................. 220,735 138,164 82,571 (10,744) 93,315 $ 142,000 $ 91,325 88,380 230,380 124,525 105,855 (10,847) 116,702 78,662 169,987 112,398 57,589 (11,523) 69,112 Equity in undistributed net income (loss) of: Bank subsidiaries ........................................................................................................ 56,552 Non-bank subsidiaries................................................................................................. 11,973 Net Income .................................................................................................................. $ 161,840 46,350 (3,207) $ 159,845 80,908 (4,447) $ 145,573 115 CONDENSED STATEMENTS OF CASH FLOWS Cash Flows From Operating Activities: Net Income ......................................................................................................................... $ 161,840 Adjustments to reconcile net income to net cash provided by operating activities: $ 159,845 $ 145,573 2013 2012 (in thousands) 2011 Stock-based compensation ............................................................................................ Excess tax benefits from stock-based compensation..................................................... Decrease (increase) in other assets ................................................................................ Equity in undistributed net income of subsidiaries ....................................................... Increase in other liabilities and payable to non-bank subsidiaries ................................ Total adjustments.................................................................................................... Net cash provided by operating activities .............................................................. 5,330 (302) 1,893 (68,525) 26,946 (34,658) 127,182 4,834 (39) (6,340) (43,143) 6,885 (37,803) 122,042 Cash Flows From Investing Activities: Investments in bank subsidiaries ................................................................................... Investments in non-bank subsidiaries............................................................................ Net cash used in investing activities ...................................................................... — — — (32,649) — (32,649) Cash Flows From Financing Activities: Repayments of long-term debt ...................................................................................... Net proceeds from issuance of common stock .............................................................. — 9,936 Excess tax benefits from stock-based compensation..................................................... Dividends paid............................................................................................................... Acquisition of treasury stock......................................................................................... Net cash used in financing activities ...................................................................... Net (Decrease) Increase in Cash and Cash Equivalents ................................................ Cash and Cash Equivalents at Beginning of Year......................................................... Cash and Cash Equivalents at End of Year.................................................................... $ 8 $ 40 $ (4,125) 7,005 39 (71,972) (20,359) (89,412) (19) 59 302 (46,525) (90,927) (127,214) (32) 40 4,249 — 2,086 (76,461) 18,428 (51,698) 93,875 (15,000) (41,125) (56,125) (10,619) 6,835 — (33,917) — (37,701) 49 10 59 116 Management Report on Internal Control Over Financial Reporting The management of Fulton Financial Corporation is responsible for establishing and maintaining adequate internal control over financial reporting. Fulton Financial Corporation’s internal control system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2013, using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework (1992). Based on this assessment, management concluded that, as of December 31, 2013, the company’s internal control over financial reporting is effective based on those criteria. /s/ E. PHILIP WENGER E. Philip Wenger Chairman, Chief Executive Officer and President /s/ PATRICK S. BARRETT Patrick S. Barrett Senior Executive Vice President and Chief Financial Officer 117 Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders Fulton Financial Corporation: We have audited the accompanying consolidated balance sheets of Fulton Financial Corporation and subsidiaries (the Company) as of December 31, 2013 and 2012, and the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2013. We also have audited Fulton Financial Corporation’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Fulton Financial Corporation’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Fulton Financial Corporation and subsidiaries as of December 31, 2013 and 2012, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles. Also in our opinion, Fulton Financial Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). /s/ KPMG LLP Philadelphia, Pennsylvania March 3, 2014 118 QUARTERLY CONSOLIDATED RESULTS OF OPERATIONS (UNAUDITED) (in thousands, except per-share data) FOR THE YEAR 2013 Interest income ............................................................................ $ Interest expense ........................................................................... Net interest income...................................................................... Provision for credit losses ........................................................... Non-interest income .................................................................... Non-interest expenses.................................................................. Income before income taxes........................................................ Income tax expense ..................................................................... Net income................................................................................... $ Per share data: Net income (basic) ............................................................... $ Net income (diluted)............................................................. Cash dividends ..................................................................... FOR THE YEAR 2012 Interest income ............................................................................ $ Interest expense ........................................................................... Net interest income...................................................................... Provision for credit losses ........................................................... Non-interest income .................................................................... Non-interest expenses.................................................................. Income before income taxes........................................................ Income tax expense ..................................................................... Net income................................................................................... $ Per share data: Net income (basic) ............................................................... $ Net income (diluted)............................................................. Cash dividends ..................................................................... Mar 31 Three Months Ended Sep 30 Jun 30 Dec 31 151,322 $ 153,078 $ 152,832 $ 152,457 21,678 129,644 15,000 47,259 110,936 50,967 11,740 39,227 0.20 0.20 0.08 $ $ 21,013 132,065 13,500 52,316 117,130 53,751 13,169 40,582 0.21 0.21 0.08 $ $ 20,299 132,533 9,500 47,357 116,605 53,785 13,837 39,948 0.21 0.21 0.08 $ $ 19,505 132,952 2,500 40,732 116,762 54,422 12,339 42,083 0.22 0.22 0.08 166,891 $ 163,985 $ 161,060 $ 155,560 28,196 138,695 28,000 51,638 110,669 51,664 13,532 38,132 0.19 0.19 0.07 $ $ 26,455 137,530 25,500 53,308 112,087 53,251 13,360 39,891 0.20 0.20 0.07 $ $ 25,179 135,881 23,000 51,943 109,982 54,842 13,260 41,582 0.21 0.21 0.08 $ $ 23,338 132,222 17,500 59,523 116,556 57,689 17,449 40,240 0.20 0.20 0.08 119 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable. Item 9A. Controls and Procedures Disclosure 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 its disclosure controls and procedures, as defined in Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon the evaluation, the Corporation’s Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2013, 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 the Corporation’s 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. The "Management Report on Internal Control over Financial Reporting" and the "Report of Independent Registered Public Accounting Firm" may be found in Item 8, "Financial Statements and Supplementary Data" of this document. Changes in Internal Controls There was no change in the Corporation’s "internal control over financial reporting" (as such term is defined in Rule 13a-15(f) under the Exchange Act) that occurred during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting. Item 9B. Other Information Not applicable. 120 PART III Item 10. Directors, Executive Officers and Corporate Governance Incorporated by reference herein is the information appearing under the headings "Information about Nominees, Directors and Independence Standards," "Related Person Transactions," "Section 16(a) Beneficial Ownership Reporting Compliance," "Code of Conduct," "Procedure for Shareholder Nominations," and "Other Board Committees" within the Corporation’s 2014 Proxy Statement. The information concerning executive officers required by this Item is provided under the caption "Executive Officers" within Item 1, Part I, "Business" in this Annual Report. The Corporation has adopted a code of ethics (Code of Conduct) that applies to all directors, officers and employees, including the Chief Executive Officer, the Chief Financial Officer and the Corporate Controller. A copy of the Code of Conduct may be obtained free of charge by writing to the Corporate Secretary at Fulton Financial Corporation, P.O. Box 4887, Lancaster, Pennsylvania 17604-4887, and is also available via the internet at www.fult.com. Item 11. Executive Compensation Incorporated by reference herein is the information appearing under the headings "Information Concerning Compensation" and "Human Resources Committee Interlocks and Insider Participation" within the Corporation’s 2014 Proxy Statement. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Incorporated by reference herein is the information appearing under the heading "Security Ownership of Directors, Nominees, Management and Certain Beneficial Owners" within the Corporation’s 2014 Proxy Statement, and information appearing under the heading "Securities Authorized for Issuance under Equity Compensation Plans" within Item 5, "Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities" in this Annual Report. Item 13. Certain Relationships and Related Transactions, and Director Independence Incorporated by reference herein is the information appearing under the headings "Related Person Transactions" and "Information about Nominees, Directors and Independence Standards" within the Corporation’s 2014 Proxy Statement, and the information appearing in "Note D - Loans and Allowance for Credit Losses," of the Notes to Consolidated Financial Statements in Item 8, "Financial Statements and Supplementary Data" in this Annual Report. Item 14. Principal Accounting Fees and Services Incorporated by reference herein is the information appearing under the heading "Relationship With Independent Public Accountants" within the Corporation’s 2014 Proxy Statement. 121 PART IV Item 15. Exhibits and Financial Statement Schedules (a) The following documents are filed as part of this report: 1. Financial Statements — The following consolidated financial statements of Fulton Financial Corporation and subsidiaries are incorporated herein by reference in response to Item 8 above: (i) (ii) (iii) (iii) (iv) (v) (vi) Consolidated Balance Sheets - December 31, 2013 and 2012. Consolidated Statements of Income - Years ended December 31, 2013, 2012 and 2011. Consolidated Statements of Comprehensive Income - Years ended December 31, 2013, 2012 and 2011. Consolidated Statements of Shareholders’ Equity - Years ended December 31, 2013, 2012 and 2011. Consolidated Statements of Cash Flows - Years ended December 31, 2013, 2012 and 2011. Notes to Consolidated Financial Statements Report of Independent Registered Public Accounting Firm 2. 3. Financial Statement Schedules — All financial statement schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and have therefore been omitted. Exhibits — The following is a list of the Exhibits required by Item 601 of Regulation S-K and filed as part of this report: 3.1 3.2 4.1 4.2 4.3 10.1 10.2 10.3 10.4 10.5 10.6 Articles of Incorporation, as amended and restated, of Fulton Financial Corporation as amended – Incorporated by reference to Exhibit 3.1 of the Fulton Financial Corporation Form 8-K dated June 24, 2011. 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. An Indenture entered into on March 28, 2005 between Fulton Financial Corporation and Wilmington Trust Company as trustee, relating to the issuance by Fulton of $100 million aggregate principal amount of 5.35% subordinated notes due April 1, 2015 – Incorporated by reference to Exhibit 4.1 of the Fulton Financial Corporation Current Report on Form 8-K dated March 31, 2005. Purchase Agreement entered into between Fulton Financial Corporation, Fulton Capital Trust I, FFC Management, Inc. and Sandler O’Neill & Partners, L.P. with respect to the Trust’s issuance and sale in a firm commitment public offering of $150 million aggregate liquidation amount of 6.29% Capital Securities – Incorporated by reference to Exhibit 1.1 of the Fulton Financial Corporation Current Report on Form 8-K dated January 20, 2006. First Supplemental Indenture entered into on May 1, 2007 between Fulton Financial Corporation and Wilmington Trust Company as trustee, relating to the issuance by Fulton of $100 million aggregate principal amount of 5.75% subordinated notes due May 1, 2017 – Incorporated by reference to Exhibit 4.1 of the Fulton Financial Corporation Current Report on Form 8-K dated May 1, 2007. Amended Employment Agreement between Fulton Financial Corporation and Craig H. Hill dated November 12, 2008 – Incorporated by reference to Exhibit 10.2 of the Fulton Financial Corporation Current Report on Form 8- K dated November 14, 2008. Amended Employment Agreement between Fulton Financial Corporation and Charles J. Nugent dated November 12, 2008 – Incorporated by reference to Exhibit 10.3 of the Fulton Financial Corporation Current Report on Form 8-K dated November 14, 2008. Amended Employment Agreement between Fulton Financial Corporation and James E. Shreiner dated November 12, 2008 – Incorporated by reference to Exhibit 10.4 of the Fulton Financial Corporation Current Report on Form 8-K dated November 14, 2008. Amended Employment Agreement between Fulton Financial Corporation and E. Philip Wenger dated November 12, 2008 – Incorporated by reference to Exhibit 10.5 of the Fulton Financial Corporation Current Report on Form 8-K dated November 14, 2008. Employment Agreement between Fulton Financial Corporation and Craig A. Roda dated August 1, 2011 – Incorporated by reference to Exhibit 10.1 of the Fulton Financial Corporation Current Report on Form 8-K dated August 5, 2011. Employment Agreement between Fulton Financial Corporation and Philmer H. Rohrbaugh dated November 1, 2012 – Incorporated by reference to Exhibit 10.1 of the Fulton Financial Corporation Current Report on Form 8-K dated October 22, 2012. 122 10.7 10.8 10.9 Employment Agreement between Fulton Financial Corporation and Meg R. Mueller dated July 1, 2013 – Incorporated by reference to Exhibit 10.1 of the Fulton Financial Corporation Current Report on Form 8-K dated June 21, 2013. Employment Agreement between Fulton Financial Corporation and Curtis J. Myers dated July 1, 2013 – Incorporated by reference to Exhibit 10.2 of the Fulton Financial Corporation Current Report on Form 8-K dated June 21, 2013. Employment Agreement between Fulton Financial Corporation and Angela M. Sargent dated July 1, 2013 – Incorporated by reference to Exhibit 10.1 of the Fulton Financial Corporation Current Report on Form 8-K dated June 21, 2013. 10.10 Employment Agreement between Fulton Financial Corporation and Patrick S. Barrett dated November 4, 2013 – Incorporated by reference to Exhibit 10.1 of the Fulton Financial Corporation Current Report on Form 8-K dated October 24, 2013. 10.11 Form of Death Benefit Only Agreement to Senior Management – Incorporated by reference to Exhibit 10.9 of the Fulton Financial Corporation Annual Report on Form 10K dated March 1, 2007. 10.12 Fulton Financial Corporation Amended and Restated Equity and Cash Incentive Compensation Plan – Incorporated by reference to Exhibit 10.1 of the Fulton Financial Corporation Current Report on Form 8-K dated May 3, 2013. 10.13 Form of Option Award and Form of Restricted Stock Award under the Fulton Financial Corporation Amended and Restated Equity and Cash Incentive Compensation Plan between Fulton Financial Corporation and Officers of the Corporation – Incorporated by reference to Exhibits 10.1 and 10.2 of the Fulton Financial Corporation Current Report on Form 8-K dated June 19, 2013. 10.14 Form of Amendment to Stock Option Agreement for John M. Bond – Incorporated by reference to Exhibit 10.1 of the Fulton Financial Corporation Current Report on Form 8-K dated December 22, 2006. 10.15 Amended and Restated Fulton Financial Corporation Employee Stock Purchase Plan – Incorporated by reference to Exhibit A to Fulton Financial Corporation’s definitive proxy statement, dated April 2, 2007. 10.16 Fulton Financial Corporation Deferred Compensation Plan, as amended and restated effective January 1, 2008 – Incorporated by reference to Exhibit 10.1 of the Fulton Financial Corporation Current Report on Form 8-K dated December 26, 2007. 10.17 Fulton Financial Corporation Deferred Compensation Plan, as amended and restated effective January 1, 2014 – Incorporated by reference to Exhibit 10.1 of the Fulton Financial Corporation Current Report on Form 8-K dated December 20, 2013. 10.18 Form of Supplemental Executive Retirement Plan – For Use with Executives with no Pre-2008 Accruals – Incorporated by reference to Exhibit 10.2 of the Fulton Financial Corporation Current Report on Form 8-K dated December 26, 2007. 10.19 Form of Amended and Restated Supplemental Executive Retirement Plan - For Use with Executives with Pre-409A Accruals – Incorporated by reference to Exhibit 10.3 of the Fulton Financial Corporation Current Report on Form 8-K dated December 26, 2007. 10.20 Form of Amended and Restated Supplemental Executive Retirement Plan – For Use with Executives First Covered After 2004 but Before 2008 – Incorporated by reference to Exhibit 10.4 of the Fulton Financial Corporation Current Report on Form 8-K dated December 26, 2007. 10.21 Agreement between Fulton Financial Corporation and Fiserv Solutions, Inc. dated June 23, 2011. Portions of this exhibit have been redacted and are subject to a confidential treatment request filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. The redacted material was filed separately with the Securities and Exchange Commission. – Incorporated by reference to Exhibit 10.1 of the Fulton Financial Corporation Quarterly Report on Form 10-Q dated August 8, 2011. 10.22 Fulton Financial Corporation Variable Compensation Plan Summary Description – Incorporated by reference to Exhibit 99.1 of the Fulton Financial Corporation Current Report on Form 8-K dated March 18, 2011. 10.23 Fulton Financial Corporation Directors' Equity Participation Plan – Incorporated by reference to Exhibit A to Fulton Financial Corporation’s definitive proxy statement, dated March 24, 2011. 10.24 Form of Restricted Stock Agreement between Fulton Financial Corporation and Directors of the Corporation as of July 1, 2011 – Incorporated by reference to Exhibit 10.1 of the Fulton Financial Corporation Quarterly Report on Form 10-Q dated August 8, 2011. Subsidiaries of the Registrant. 21 23 31.1 31.2 32.1 32.2 Consent of Independent Registered Public Accounting Firm. Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 123 101 Interactive data file containing the following financial statements formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets at December 31, 2013 and December 31, 2012; (ii) the Consolidated Statements of Income for the years ended December 31, 2013, 2012 and 2011; (iii) the Consolidated Statements of Comprehensive Income for the years ended December 31, 2013, 2012 and 2011;(iv) the Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2013, 2012 and 2011; (v) the Consolidated Statements of Cash Flows for the years ended December 31, 2013, 2012 and 2011; and, (iv) the Notes to Consolidated Financial Statements – filed herewith. 124 Pursuant to the requirements of Section 13 or 15(d) 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. SIGNATURES Dated: March 3, 2014 FULTON FINANCIAL CORPORATION (Registrant) By: /S/ E. PHILIP WENGER E. Philip Wenger, Chairman, Chief Executive Officer and President Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been executed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Capacity Date /S/ JOE N. BALLARD Joe N. Ballard /S/ PATRICK S. BARRETT Patrick S. Barrett /S/ JOHN M. BOND, JR. John M. Bond, Jr. /S/ CRAIG A. DALLY Craig A. Dally /S/ MICHAEL J. DEPORTER Michael J. DePorter /S/ DENISE L. DEVINE Denise L. Devine /S/ PATRICK J. FREER Patrick J. Freer /S/ GEORGE W. HODGES George W. Hodges /S/ ALBERT MORRISON Albert Morrison, III Director March 3, 2014 March 3, 2014 March 3, 2014 March 3, 2014 March 3, 2014 March 3, 2014 March 3, 2014 March 3, 2014 March 3, 2014 Senior Executive Vice President and Chief Financial Officer (Principal Financial Officer) Director Director Senior Vice President and Controller (Principal Accounting Officer) Director Director Director Director 125 Signature Capacity Date /S/ R SCOTT SMITH, JR. R. Scott Smith, Jr. /S/ GARY A. STEWART Gary A. Stewart /S/ ERNEST J. WATERS Ernest J. Waters /S/ E. PHILIP WENGER E. Philip Wenger Director Director Director Chairman, Chief Executive Officer and President (Principal Executive Officer) March 3, 2014 March 3, 2014 March 3, 2014 March 3, 2014 126 Exhibits Required Pursuant to Item 601 of Regulation S-K EXHIBIT INDEX 3.1 Articles of Incorporation, as amended and restated, of Fulton Financial Corporation as amended – Incorporated by reference to Exhibit 3.1 of the Fulton Financial Corporation 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. 4.1 An Indenture entered into on March 28, 2005 between Fulton Financial Corporation and Wilmington Trust Company as trustee, relating to the issuance by Fulton of $100 million aggregate principal amount of 5.35% subordinated notes due April 1, 2015 – Incorporated by reference to Exhibit 4.1 of the Fulton Financial Corporation Current Report on Form 8-K dated March 31, 2005. 4.2 Purchase Agreement entered into between Fulton Financial Corporation, Fulton Capital Trust I, FFC Management, Inc. and Sandler O’Neill & Partners, L.P. with respect to the Trust’s issuance and sale in a firm commitment public offering of $150 million aggregate liquidation amount of 6.29% Capital Securities – Incorporated by reference to Exhibit 1.1 of the Fulton Financial Corporation Current Report on Form 8-K dated January 20, 2006. 4.3 First Supplemental Indenture entered into on May 1, 2007 between Fulton Financial Corporation and Wilmington Trust Company as trustee, relating to the issuance by Fulton of $100 million aggregate principal amount of 5.75% subordinated notes due May 1, 2017 – Incorporated by reference to Exhibit 4.1 of the Fulton Financial Corporation Current Report on Form 8-K dated May 1, 2007. 10.1 Amended Employment Agreement between Fulton Financial Corporation and Craig H. Hill dated November 12, 2008 – Incorporated by reference to Exhibit 10.2 of the Fulton Financial Corporation Current Report on Form 8-K dated November 14, 2008. 10.2 Amended Employment Agreement between Fulton Financial Corporation and Charles J. Nugent dated November 12, 2008 – Incorporated by reference to Exhibit 10.3 of the Fulton Financial Corporation Current Report on Form 8-K dated November 14, 2008. 10.3 Amended Employment Agreement between Fulton Financial Corporation and James E. Shreiner dated November 12, 2008 – Incorporated by reference to Exhibit 10.4 of the Fulton Financial Corporation Current Report on Form 8-K dated November 14, 2008. 10.4 Amended Employment Agreement between Fulton Financial Corporation and E. Philip Wenger dated November 12, 2008 – Incorporated by reference to Exhibit 10.5 of the Fulton Financial Corporation Current Report on Form 8-K dated November 14, 2008. 10.5 Employment Agreement between Fulton Financial Corporation and Craig A. Roda dated August 1, 2011 – Incorporated by reference to Exhibit 10.1 of the Fulton Financial Corporation Current Report on Form 8-K dated August 5, 2011. 10.6 Employment Agreement between Fulton Financial Corporation and Philmer H. Rohrbaugh dated November 1, 2012 – Incorporated by reference to Exhibit 10.1 of the Fulton Financial Corporation Current Report on Form 8-K dated October 22, 2012. 10.7 Employment Agreement between Fulton Financial Corporation and Meg R. Mueller dated July 1, 2013 – Incorporated by reference to Exhibit 10.1 of the Fulton Financial Corporation Current Report on Form 8-K dated June 21, 2013. 10.8 Employment Agreement between Fulton Financial Corporation and Curtis J. Myers dated July 1, 2013 – Incorporated by reference to Exhibit 10.2 of the Fulton Financial Corporation Current Report on Form 8-K dated June 21, 2013. 10.9 Employment Agreement between Fulton Financial Corporation and Angela M. Sargent dated July 1, 2013 – Incorporated by reference to Exhibit 10.1 of the Fulton Financial Corporation Current Report on Form 8-K dated June 21, 2013. 10.10 Employment Agreement between Fulton Financial Corporation and Patrick S. Barrett dated November 4, 2013 – Incorporated by reference to Exhibit 10.1 of the Fulton Financial Corporation Current Report on Form 8-K dated October 24, 2013. 10.11 Form of Death Benefit Only Agreement to Senior Management – Incorporated by reference to Exhibit 10.9 of the Fulton Financial Corporation Annual Report on Form 10K dated March 1, 2007. 10.12 Fulton Financial Corporation Amended and Restated Equity and Cash Incentive Compensation Plan – Incorporated by reference to Exhibit 10.1 of the Fulton Financial Corporation Current Report on Form 8-K dated May 3, 2013. 10.13 Form of Option Award and Form of Restricted Stock Award under the Fulton Financial Corporation Amended and Restated Equity and Cash Incentive Compensation Plan between Fulton Financial Corporation and Officers of the Corporation – Incorporated by reference to Exhibits 10.1 and 10.2 of the Fulton Financial Corporation Current Report on Form 8-K dated June 19, 2013. 127 10.14 Form of Amendment to Stock Option Agreement for John M. Bond – Incorporated by reference to Exhibit 10.1 of the Fulton Financial Corporation Current Report on Form 8-K dated December 22, 2006. 10.15 Amended and Restated Fulton Financial Corporation Employee Stock Purchase Plan – Incorporated by reference to Exhibit A to Fulton Financial Corporation’s definitive proxy statement, dated April 2, 2007. 10.16 Fulton Financial Corporation Deferred Compensation Plan, as amended and restated effective January 1, 2008 – Incorporated by reference to Exhibit 10.1 of the Fulton Financial Corporation Current Report on Form 8-K dated December 26, 2007. 10.17 Fulton Financial Corporation Deferred Compensation Plan, as amended and restated effective January 1, 2014 – Incorporated by reference to Exhibit 10.1 of the Fulton Financial Corporation Current Report on Form 8-K dated December 20, 2013. 10.18 Form of Supplemental Executive Retirement Plan – For Use with Executives with no Pre-2008 Accruals – Incorporated by reference to Exhibit 10.2 of the Fulton Financial Corporation Current Report on Form 8-K dated December 26, 2007. 10.19 Form of Amended and Restated Supplemental Executive Retirement Plan – For Use with Executives with Pre-409A Accruals – Incorporated by reference to Exhibit 10.3 of the Fulton Financial Corporation Current Report on Form 8- K dated December 26, 2007. 10.20 Form of Amended and Restated Supplemental Executive Retirement Plan - For Use with Executives First Covered After 2004 but Before 2008 – Incorporated by reference to Exhibit 10.4 of the Fulton Financial Corporation Current Report on Form 8-K dated December 26, 2007. 10.21 Agreement between Fulton Financial Corporation and Fiserv Solutions, Inc. dated June 23, 2011. Portions of this exhibit have been redacted and are subject to a confidential treatment request filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. The redacted material was filed separately with the Securities and Exchange Commission. – Incorporated by reference to Exhibit 10.1 of the Fulton Financial Corporation Quarterly Report on Form 10-Q dated August 8, 2011. 10.22 Fulton Financial Corporation Variable Compensation Plan Summary Description – Incorporated by reference to Exhibit 99.1 of the Fulton Financial Corporation Current Report on Form 8-K dated March 18, 2011. 10.23 Fulton Financial Corporation Directors' Equity Participation Plan – Incorporated by reference to Exhibit A to Fulton Financial Corporation’s definitive proxy statement, March 24, 2011. 10.24 Form of Restricted Stock Agreement between Fulton Financial Corporation and Directors of the Corporation as of July 1, 2011 – Incorporated by reference to Exhibit 10.1 of the Fulton Financial Corporation Quarterly Report on Form 10-Q dated August 8, 2011. 21 Subsidiaries of the Registrant. 23 Consent of Independent Registered Public Accounting Firm. 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 Interactive data file containing the following financial statements formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets at December 31, 2013 and December 31, 2012; (ii) the Consolidated Statements of Income for the years ended December 31, 2013, 2012 and 2011; (iii) the Consolidated Statements of Comprehensive Income for the years ended December 31, 2013, 2012 and 2011; (iv) the Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2013, 2012 and 2011; (v) the Consolidated Statements of Cash Flows for the years ended December 31, 2013, 2012 and 2011; and, (iv) the Notes to Consolidated Financial Statements – filed herewith. 128 Exhibit 21 - Subsidiaries of the Registrant The following are the subsidiaries of Fulton Financial Corporation: Subsidiary State of Incorporation or Organization Name Under Which Business is Conducted Fulton Bank, N.A. One Penn Square P.O. Box 4887 Lancaster, Pennsylvania 17604 Swineford National Bank 1255 North Susquehanna Trail P.O Box 241 Hummels Wharf, Pennsylvania 17831 United States of America Fulton Bank United States of America Swineford National Bank Lafayette Ambassador Bank Pennsylvania Lafayette Ambassador Bank 2005 City Line Road Bethlehem, Pennsylvania 18017 Fulton Financial Realty Company Pennsylvania Fulton Financial Realty Company One Penn Square P.O. Box 4887 Lancaster, Pennsylvania 17604 Fulton Reinsurance Company, LTD Turks & Caicos Islands Fulton Reinsurance Company, LTD One Beatrice Butterfield Building Butterfield Square, Providenciales Turks & Caicos Islands, BWI Delaware National Insurance Agency, Inc. Delaware Delaware National Insurance Agency, Inc. 9 South DuPont Highway P.O. Box 520 Georgetown, DE 19947 FNB Bank, N.A. 354 Mill Street P.O. Box 279 Danville, Pennsylvania 17821 United States of America FNB Bank, N.A. Central Pennsylvania Financial Corp. Pennsylvania Central Pennsylvania Financial Corp. 100 W. Independence Street Shamokin, PA 17872 Fulton Bank of New Jersey New Jersey The Bank 533 Fellowship Road Mt. Laurel, NJ 08054 Exhibit 21 - Subsidiaries of the Registrant (Continued) Subsidiary FFC Management, Inc. P.O. Box 609 Georgetown, DE 19947 State of Incorporation or Organization Name Under Which Business is Conducted Delaware FFC Management, Inc. Fulton Insurance Services Group, Inc. Pennsylvania Fulton Insurance Services Group, Inc. One Penn Square P.O. Box 7989 Lancaster, Pennsylvania 17604 FFC Penn Square, Inc. P.O. Box 609 Georgetown, DE 19947 Virginia Financial Services, LLC One Commercial Place #2000 Norfolk, VA 23510 The Columbia Bank 7168 Gateway Drive Columbia, MD 21046 Delaware FFC Penn Square, Inc. Virginia Virginia Financial Services, LLC Maryland The Columbia Bank Columbia Bancorp Statutory Trust Delaware Columbia Bancorp Statutory Trust 7168 Gateway Drive Columbia, MD 21046 Columbia Bancorp Statutory Trust II 7168 Gateway Drive Columbia, MD 21046 Delaware Columbia Bancorp Statutory Trust II Columbia Bancorp Statutory Trust III Delaware Columbia Bancorp Statutory Trust III 7168 Gateway Drive Columbia, MD 21046 Fulton Capital Trust I One Penn Square P.O. Box 4887 Lancaster, PA 17604 Pennsylvania Fulton Capital Trust I Exhibit 23 - Consent of Independent Registered Public Accounting Firm The Board of Directors and Shareholders Fulton Financial Corporation: We consent to the incorporation by reference in the registration statement (No. 333-05471, No. 333-05481, No. 333-44788, No. 333-81377, No. 333-64744, No. 333-76594, No. 333-76600, No. 333-76596, No. 333-107625, No. 333-114206, No. 333-116625, No. 333-121896, No. 333-126281, No. 333-131706, No. 333-135839, No. 333-145542, No. 333-168237, No. 333-175065, No. 333-189457 and No. 333-128894) on Forms S-8 and on the registration statement (No. 333-37835, No. 333-61268, No. 333-123532, No. 333-130718, No. 333-156339, No. 333-156396, No. 333-189459 and No. 333-189488) on Forms S-3 of Fulton Financial Corporation of our report dated March 3, 2014, with respect to the consolidated balance sheets of Fulton Financial Corporation and subsidiaries as of December 31, 2013 and 2012, and the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2013, and the effectiveness of internal control over financial reporting as of December 31, 2013, which report appears in the December 31, 2013 annual report on Form of Fulton Financial Corporation. /s/ KPMG LLP Philadelphia, Pennsylvania March 3, 2014 Exhibit 31.1 – Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, E. Philip Wenger certify that: 1. I have reviewed this annual report on Form 10-K of Fulton Financial Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and; 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. Date: March 3, 2014 /s/ E. Philip Wenger E. Philip Wenger Chairman, Chief Executive Officer and President Exhibit 31.2 – Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Patrick S. Barrett, certify that: 1. I have reviewed this annual report on Form 10-K of Fulton Financial Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and; 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. Date: March 3, 2014 /s/ Patrick S. Barrett Partrick S. Barrett Senior Executive Vice President and Chief Financial Officer Exhibit 32.1 – Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 I, E. Philip Wenger, Chief Executive Officer of Fulton Financial Corporation, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, certify that: The Form 10-K of Fulton Financial Corporation, containing the consolidated financial statements for the year ended December 31, 2013, fully complies with the requirements of Sections 13(a) or 15(d) of the Securities Exchange Act of 1934. The information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results of operations of Fulton Financial Corporation. Dated: March 3, 2014 /s/ E. Philip Wenger E. Philip Wenger Chairman, Chief Executive Officer and President Exhibit 32.2 – Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 I, Patrick S. Barrett, Chief Financial Officer of Fulton Financial Corporation, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, certify that: The Form 10-K of Fulton Financial Corporation, containing the consolidated financial statements for the year ended December 31, 2013, fully complies with the requirements of Sections 13(a) or 15(d) of the Securities Exchange Act of 1934. The information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results of operations of Fulton Financial Corporation. Dated: March 3, 2014 /s/ Patrick S. Barrett Patrick S. Barrett Senior Executive Vice President and Chief Financial Officer JOB TITLE Fulton Financial Combo REVISION 5 JOB NUMBER 263922 TYPE SERIAL PAGE NO. ii DATE Wednesday, March 19, 2014 OPERATOR JioMerD [This Page Intentionally Left Blank]<12345678>F u l t o n F i n a n c i a l C o r p o r a t i o n A n n u a l R e p o r t 2 0 1 3 INVEStoR INfoRmAtIoN Investor InformatIon stock LIstIng go green! Would you like to help your company manage expenses? Vote your Common shares of Fulton Financial Corporation are shares online or by phone as outlined on the voter instruction form traded under the symbol “FULT” and are listed in the enclosed in this proxy packet. NASDAQ Global Select Market. cash DIvIDenDs The Fulton Financial Corporation Board of Directors decides whether to declare a quarterly cash dividend in the third month of each quarter (i.e., March, June, September and December). DIvIDenD reInvestment PLan anD DIrect DePosIt of cash DIvIDenDs Fulton Financial Corporation offers its shareholders the convenience of a Dividend Reinvestment and Stock Would you like to receive your proxy materials sooner? Sign up to receive your materials electronically when you vote your shares online at www.proxyvote.com. Investor InformatIon anD Documents Purchase Plan and direct deposit of cash dividends. A copy of the Corporation’s Annual Report, Form 10-K, Proxy Holders of stock may have their quarterly dividends automatically reinvested in additional shares of the Statement and other documents filed with the Securities and Exchange Commision can be viewed on the Corporation’s website at www.fult.com. In addition, copies of the Form 10-K and Proxy Statement Corporation’s common stock by utilizing the Dividend may be obtained without charge to shareholders by writing to: Reinvestment Plan. Shareholders participating in the Plan may also make Corporate Secretary Fulton Financial Corporation voluntary cash contributions not to exceed $5,000 per P.O. Box 4887 month. Lancaster, PA 17604-4887 In addition, shareholders have the option of having their cash dividends sent directly to their financial News, stock information, Corporate presentations and other information can be found on the Corporation’s website at institution for deposit into their checking or savings www.fult.com. account. Shareholders may receive information on either the Dividend Reinvestment Plan and Stock Purchase Plan, including a plan prospectus, or direct deposit of cash dividends by writing to: Stock Transfer Department Fulton Financial Advisors P.O. Box 3215 Lancaster, PA 17604-3215 or by calling: 717-291-2546 or toll-free: 1-800-626-0255. The Annual Meeting of Shareholders of Fulton Financial Corporation will be held on Thursday, May 8, 2014 at 10:00 a.m. at the Lancaster Marriott at Penn Square in downtown Lancaster, PA. To make a reservation, please return the Annual Meeting Response Card you received with your proxy statement. Your reservation will help ensure that we have adequate seating for all shareholders who plan to join us that day. 263922_FFC_Nar.indd 7 3/11/14 6:34 PM SENIoR mANAGEmENt, DIRECtoRS & ADVISoRY BoARD mEmBERS fuLton fInancIaL corPoratIon BoarD of DIrectors Joe N. Ballard, LTG, US Army (Ret.) John M. Bond, Jr. Craig A. Dally Denise L. Devine Patrick J. Freer George W. Hodges Albert Morrison III R. Scott Smith, Jr. Gary A. Stewart Ernest J. Waters E. Philip Wenger suBsIDIary Bank BoarDs of DIrectors fuLton Bank, n.a. Richard J. Ashby, Jr. Larry D. Bashore Jennifer Craighead Steven S. Etter Carlos E. Graupera George W. Hodges Christ G. Kraras Ronald T. Moore Curtis J. Myers Craig A. Roda Ivy E. Silver Elizabeth Addington Twohy Ernest J. Waters fuLton Bank, n.a DIvIsIonaL BoarDs BranDywIne DIvIsIon Carolyn J. Beam, Chairman Robert F. Adams, Esq. Denise L. Day Dallas Krapf James D. McLeod, Jr. Michael J. O’Rourke caPItaL DIvIsIon LeBanon vaLLey DIvIsIon Robert S. Jones, Chairman Barry E. Ansel, Chairman James C. Byerly Samuel T. Cooper III, Esq. Charles J. DeHart III, Esq. Dolores Liptak Barry E. Musser, C.P.A. Beth A. Peiffer Steven C. Wilds Donald H. Dreibelbis Randall I. Ebersole Robert J. Funk Robert P. Hoffman Wendie DiMatteo Holsinger Robert J. Longo PremIer DIvIsIon DeLaware natIonaL DIvIsIon Joseph R. Feilmeier, Chairman P. Randolph Taylor, Chairman Jeffrey M. Fried Heidi Gilmore Amy A. Higgins Greg N. Johnson Terry A. Megee Ralph W. Simpers David T. Wilgus york DIvIsIon Joseph E. Rilatt, Chairman Vernon L. Bracey Robert S. Freed Jevon L. Holland William S. Shipley III Gary A. Stewart, Jr. Christine R. Wardrop Constance L. Wolf great vaLLey DIvIsIon Jeffrey R. Rush, Chairman Eric G. Burkey Marcelino Colon Michael D. Fromm William P. Gage Kathryn G. Goodman William G. Koch, Sr., C.P.A. Barry R. Angely Anthony D. Cino Rosemary Espanol Richard Gastineau Pamela Northrop Gundlach Robert Walton centraL vIrgInIa DIvIsIon Oliver Way, Chairman Gail W. Johnson Robert H. Keiter, C.P.A. George Keith Martin Jacques J. Moore, Jr. Lloyd M. Poe Robert E. Porter, Jr. hamPton roaDs DIvIsIon T. A. Grell, Jr., Chairman Joanna Brumsey, C.P.A. Thomas E. Fraim, Jr. T. Richard Litton, Jr. Linda McKee Timothy J. Stiffler Joseph D. Taylor northern vIrgInIa DIvIsIon Oliver Way, Chairman Thomas M. Crutchfield, C.P.A. Ambrish K. Gupta, M.D. Manuel A. Ojeda Mark D. Wolfe fuLton fInancIaL corPoratIon senIor management E. Philip Wenger Chairman, President and Chief Executive Officer Patrick S. Barrett Senior Executive Vice President/ Chief Financial Officer James E. Shreiner Senior Executive Vice President/ Operations and Credit Craig H. Hill Senior Executive Vice President/ Human Resources, Corporate Communications and Administrative Services Craig A. Roda Senior Executive Vice President/ Community Banking Philmer H. Rohrbaugh Senior Executive Vice President/ Chief Risk Officer Meg R. Mueller Senior Executive Vice President/ Chief Credit Officer Curtis J. Myers Senior Executive Vice President/ President and Chief Operating Officer of Fulton Bank Angela M. Sargent Senior Executive Vice President/ Chief Information Officer 3 1 0 2 t r o p e R l a u n n A n o i t a r o p r o C l a i c n a n i F n o t l u F 263922_FFC_Nar.indd 8 3/11/14 6:34 PM OUR MISSION: By caring, listening, understanding and delivering a consistently superior customer experience, we will increase shareholder value and enrich the communities we serve while creating opportunities for financial success for our customers and for career success for our employees. We will conduct all of our business with honesty and integrity, effectively manage risk and be in full compliance with all legal and regulatory requirements. OUR VISION: We will be a high-performing, Mid-Atlantic regional financial services company whose team members deliver compliant products and services through relationship-based banking more effectively than our competitors, enabling us to sustain a long-term competitive advantage. OUR VALUES: • Integrity • Respect for the individual • Focus on employee and customer relationships • Passion for creating value through successful execution • Inclusion • Corporate citizenship • Teamwork/collaboration • Caring and compassionate • Open communication • Dedication to career success • Individual and team accountability with a competitive spirit STRATEGIC SERVICE DIFFERENTIATION: Fulfilling our Customer Promise to: Care, Listen, Understand and Deliver we will care, listen, understand and deliver. 3 1 0 2 t r o p e R l a u n n A n o i t a r o p r o C l a i c n a n i F n o t l u F F u l t o n F i n a n c i a l C o r p o r a t i o n A n n u a l R e p o r t 2 0 1 3 the ColumBia Bank DiviSional BoarDS hagerStown truSt DiviSion Paul N. Crampton, Jr. Louis J. Giustini Donald R. Harsh, Jr. Doris E. Lehman Paul C. Mellott, Jr. John A. Scaldara, Jr. Gregory Snook Michael S. Zampelli PeoPleS Bank oF elkton DiviSion Harry C. Brown Donald S. Hicks John A. Scaldara, Jr. Nancy R. Simpers David K. Williams, Jr. State College DiviSion weSt Fulton Bank oF new JerSey Dennis N. DeSimone Lawrence M. DiVietro, Jr. James R. Johnson, Jr. Warner A. Knobe Joel A. Kobert Stephen R. Miller Antoinette Pergolin Anthony J. Santye, Jr. Leslie E. Smith, Jr. Angela M. Snyder Mark F. Strauss, Esq. Norman Worth Fulton Bank oF new JerSey DiviSional BoarD Central region James R. Johnson, Jr. Timothy J. Losch Priscilla Luppke Leonard Smith Allen Weiss the ColumBia Bank Joe N. Ballard, LTG, US Army (Ret.) John M. Bond, Jr. Robert R. Bowie, Jr. Garnett Y. Clark, Jr. Donald R. Harsh James R. Moxley III Mark A. Mullican John A. Scaldara, Jr. Gregory Snook David K. Williams, Jr. Elizabeth M. Wright John A. Rodgers, Chairman Elizabeth A. Dupuis Thomas J. Kearney Jeffrey M. Krauss Thomas F. Songer Fulton Bank, n.a. aDviSory BoarDS Central Ronald L. Miller, C.P.A. Wilbur G. Rohrer Paul W. Stauffer eaSt Galen Eby R. Douglas Good, Esq. Richard M. Hurst Aldus R. King John D. Yoder lanCaSter City Clarence (Ted) E. Darcus Ron Ford Jessica H. May north Dean A. Hoover Louis G. Hurst Kent M. Martin northweSt P. Larry Groff, Sr. Peter J. Hondru Kenneth L. Kreider Robert W. Obetz, Jr. David W. Sweigart III J. David Young, Jr., Esq. Dennis M. Zubler South Frank M. Abel, V.M.D. John E. Chase James W. Hostetter, Sr., C.P.A. Dwight E. Wagner Tony Legenstein Lynette Trout agriCultural aDviSory BoarD Harry H. Bachman Robert Barley Phoebe R. Bitler Dennis L. Grumbine William Hostetter Amos M. Hursh Aldus R. King Jay H. Kopp Rodney L. Metzler William D. Robinson Scott I. Sechler Kyle Wagner SwineForD national Bank Arthur F. Bowen Thomas C. Clark, Esq. Michael N. O’Keefe William D. Robinson Gene D. Zartman laFayette amBaSSaDor Bank Gary A. Clewell John Crampsie Craig A. Dally Thomas Daub Rocco A. Del Vecchio Robert E. Gadomski Sara (Sally) Jane Gammon Dolores Laputka Jamie P. Musselman Gerald A. Nau John J. Simon FnB Bank, n.a. Robert O. Booth Kenneth A. Holdren Bryan L. Holmes James D. Hawkins Gerald A. Nau Wendy S. Tripoli 263922_FFC_Cover_r1.indd 2 3/18/14 5:26 AM 2013 AnnuAl RepoRt Fulton Financial Corporation Banking SuBSidiarieS: Fulton Bank, N.A. Fulton Bank of New Jersey Swineford National Bank Lafayette Ambassador Bank FNB Bank, N.A. The Columbia Bank Residential mortgage lending offered through: Fulton Mortgage Company Investment management and planning services offered through: Fulton Financial Advisors & Clermont Wealth Strategies 263922_FFC_Cover_r1.indd 1 3/18/14 5:26 AM The Columbia Bank (cid:127) FNB Bank, N.A. (cid:127) Fulton Bank, N.A. Fulton Bank of New Jersey (cid:127) Lafayette Ambassador Bank (cid:127) Swineford National Bank The Columbia Bank (cid:127) FNB Bank, N.A. (cid:127) Fulton Bank, N.A. Fulton Bank of New Jersey (cid:127) Lafayette Ambassador Bank (cid:127) Swineford National Bank The Columbia Bank (cid:127) FNB Bank, N.A. (cid:127) Fulton Bank, N.A. Fulton Bank of New Jersey (cid:127) Lafayette Ambassador Bank (cid:127) Swineford National Bank 

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