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

FORM 10-Q

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

For the quarterly period ended March 31, 20152016, or

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

For the transition period from             to              

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

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

APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
Common Stock, $2.50 Par Value –176,691,000–173,466,000 shares outstanding as of April 30, 2015.29, 2016.

1



FULTON FINANCIAL CORPORATION
FORM 10-Q FOR THE THREE MONTHS ENDED MARCH 31, 20152016
INDEX
 
DescriptionPage
   
PART I. FINANCIAL INFORMATION 
   
 
   
(a)
   
(b)
   
(c)
   
(d)
   
(e)
   
(f)
   
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
   
   
   
 
   
   
   
   
   
Item 4. Mine Safety Disclosures
   
   
   
   
   

2






Item 1. Financial Statements
 

CONSOLIDATED BALANCE SHEETS 
 
(in thousands, except per-share data)
March 31,
2015
 December 31,
2014
March 31,
2016
 December 31,
2015
(unaudited) (unaudited) 
ASSETS      
Cash and due from banks$91,870
 $105,702
$83,479
 $101,120
Interest-bearing deposits with other banks637,973
 358,130
346,582
 230,300
Federal Reserve Bank and Federal Home Loan Bank stock65,694
 64,953
61,478
 62,216
Loans held for sale34,124
 17,522
19,719
 16,886
Available for sale investment securities2,259,802
 2,323,371
2,516,205
 2,484,773
Loans, net of unearned income13,115,505
 13,111,716
13,870,701
 13,838,602
Less: Allowance for loan losses(177,701) (184,144)(163,841) (169,054)
Net Loans12,937,804
 12,927,572
13,706,860
 13,669,548
Premises and equipment226,241
 226,027
228,057
 225,535
Accrued interest receivable42,216
 41,818
44,379
 42,767
Goodwill and intangible assets531,672
 531,803
531,556
 531,556
Other assets535,945
 527,869
583,939
 550,017
Total Assets$17,363,341
 $17,124,767
$18,122,254
 $17,914,718
LIABILITIES      
Deposits:      
Noninterest-bearing$3,765,677
 $3,640,623
$4,134,861
 $3,948,114
Interest-bearing9,748,820
 9,726,883
10,269,419
 10,184,203
Total Deposits13,514,497
 13,367,506
14,404,280
 14,132,317
Short-term borrowings:      
Federal funds purchased43
 6,219
32,645
 197,235
Other short-term borrowings410,062
 323,500
320,238
 300,428
Total Short-Term Borrowings410,105
 329,719
352,883
 497,663
Accrued interest payable18,357
 18,045
13,567
 10,724
Other liabilities294,352
 273,419
312,561
 282,578
Federal Home Loan Bank advances and long-term debt1,094,517
 1,139,413
965,654
 949,542
Total Liabilities15,331,828
 15,128,102
16,048,945
 15,872,824
SHAREHOLDERS’ EQUITY      
Common stock, $2.50 par value, 600 million shares authorized, 218.3 million shares issued in 2015 and 218.2 million shares issued in 2014545,734
 545,555
Common stock, $2.50 par value, 600 million shares authorized, 218.9 million shares issued in 2016 and 2015547,262
 547,141
Additional paid-in capital1,422,012
 1,420,523
1,452,471
 1,450,690
Retained earnings582,724
 558,810
664,236
 641,588
Accumulated other comprehensive loss(9,800) (17,722)(5,137) (22,017)
Treasury stock, at cost, 39.2 million shares in 2015 and 39.3 million shares in 2014(509,157) (510,501)
Treasury stock, at cost, 45.5 million shares in 2016 and 44.7 million shares in 2015(585,523) (575,508)
Total Shareholders’ Equity2,031,513
 1,996,665
2,073,309
 2,041,894
Total Liabilities and Shareholders’ Equity$17,363,341
 $17,124,767
$18,122,254
 $17,914,718
      
See Notes to Consolidated Financial Statements      
 

3




CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
 
(in thousands, except per-share data)Three months ended March 31Three months ended March 31
2015 20142016 2015
INTEREST INCOME      
Loans, including fees$129,777
 $131,830
$134,079
 $129,777
Investment securities:      
Taxable11,282
 13,266
12,003
 11,282
Tax-exempt2,087
 2,348
2,040
 2,087
Dividends348
 332
160
 348
Loans held for sale173
 134
131
 173
Other interest income2,105
 882
898
 2,105
Total Interest Income145,772
 148,792
149,311
 145,772
INTEREST EXPENSE      
Deposits9,823
 7,896
10,727
 9,823
Short-term borrowings77
 633
268
 77
Long-term debt12,291
 10,698
9,262
 12,291
Total Interest Expense22,191
 19,227
20,257
 22,191
Net Interest Income123,581
 129,565
129,054
 123,581
Provision for credit losses(3,700) 2,500
1,530
 (3,700)
Net Interest Income After Provision for Credit Losses127,281
 127,065
127,524
 127,281
NON-INTEREST INCOME      
Service charges on deposit accounts11,569
 11,711
12,558
 11,569
Investment management and trust services10,889
 10,958
10,988
 10,889
Other service charges and fees9,363
 8,927
10,750
 9,363
Mortgage banking income4,688
 3,605
4,030
 4,688
Net gains on sales of investment securities4,145
 
947
 4,145
Other4,083
 3,305
3,864
 4,083
Total Non-Interest Income44,737
 38,506
43,137
 44,737
NON-INTEREST EXPENSE      
Salaries and employee benefits64,990
 59,566
69,372
 64,990
Net occupancy expense13,692
 13,603
12,220
 13,692
Other outside services5,750
 3,812
6,056
 5,750
Data processing4,768
 3,796
5,400
 4,768
Software3,921
 3,318
Equipment expense3,958
 3,602
3,371
 3,958
Software3,318
 2,925
Professional fees2,871
 2,904
FDIC insurance expense2,822
 2,689
2,949
 2,822
Supplies and postage2,369
 2,326
2,579
 2,369
Professional fees2,333
 2,871
Marketing1,624
 1,233
Telecommunications1,716
 1,819
1,488
 1,716
Other real estate owned and repossession expense1,362
 983
638
 1,362
Marketing1,233
 1,584
Operating risk loss827
 1,828
540
 827
Intangible amortization130
 315

 130
Other8,672
 7,802
7,922
 8,672
Total Non-Interest Expense118,478
 109,554
120,413
 118,478
Income Before Income Taxes53,540
 56,017
50,248
 53,540
Income taxes13,504
 14,234
11,991
 13,504
Net Income$40,036
 $41,783
$38,257
 $40,036
      
PER SHARE:      
Net Income (Basic)$0.22
 $0.22
$0.22
 $0.22
Net Income (Diluted)0.22
 0.22
0.22
 0.22
Cash Dividends0.09
 0.08
0.09
 0.09
See Notes to Consolidated Financial Statements      

4




CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
 
(in thousands)
Three months ended March 31,Three months ended March 31
2015 20142016 2015
  
Net Income$40,036
 $41,783
$38,257
 $40,036
Other Comprehensive Income, net of tax:      
Unrealized gain on securities9,992
 13,933
17,026
 9,992
Reclassification adjustment for postretirement amendment gains included in net income
 (944)
Reclassification adjustment for securities gains included in net income(2,695) 
(616) (2,695)
Non-credit related unrealized gain on other-than-temporarily impaired debt securities125
 189

 125
Unrealized gain on derivative financial instruments34
 34
Unrecognized postretirement income arising due to plan amendment
 2,144
Amortization of unrealized loss on derivative financial instruments4
 34
Amortization of net unrecognized pension and postretirement items466
 96
466
 466
Other Comprehensive Income7,922
 15,452
16,880
 7,922
Total Comprehensive Income$47,958
 $57,235
$55,137
 $47,958
      
See Notes to Consolidated Financial Statements      


5




CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 20152016 AND 20142015
 
(in thousands, except per-share data)
Common Stock   
Retained
Earnings
   
Treasury
Stock
 TotalCommon Stock   
Retained
Earnings
   
Treasury
Stock
 Total
Shares
Outstanding
 Amount 
Additional Paid-in
Capital
 
Accumulated
Other Comprehensive
Income (Loss)
 
Shares
Outstanding
 Amount 
Additional Paid-in
Capital
 
Accumulated
Other Comprehensive
Income (Loss)
 
 
Balance at December 31, 2015174,176
 $547,141
 $1,450,690
 $641,588
 $(22,017) $(575,508) $2,041,894
Net income
 
 
 38,257
 
 
 38,257
Other comprehensive income
 
 
 
 16,880
 
 16,880
Stock issued, including related tax benefits134
 121
 345
 
 
 1,181
 1,647
Stock-based compensation awards
 
 1,436
 
 
 
 1,436
Acquisition of treasury stock(917)         (11,196) (11,196)
Common stock cash dividends - $0.09 per share
 
 
 (15,609) 
 
 (15,609)
Balance at March 31, 2016173,393
 $547,262
 $1,452,471
 $664,236
 $(5,137) $(585,523) $2,073,309
              
Balance at December 31, 2014178,924
 $545,555
 $1,420,523
 $558,810
 $(17,722) $(510,501) $1,996,665
178,924
 $545,555
 $1,420,523
 $558,810
 $(17,722) $(510,501) $1,996,665
Net income
 
 
 40,036
 
 
 40,036

 
 
 40,036
 
 
 40,036
Other comprehensive income
 
 
 
 7,922
 
 7,922

 
 
 
 7,922
 
 7,922
Stock issued, including related tax benefits174
 179
 418
 
 
 1,344
 1,941
174
 179
 418
 
 
 1,344
 1,941
Stock-based compensation awards
 
 1,071
 
 
 
 1,071

 
 1,071
 
 
 
 1,071
Common stock cash dividends - $0.09 per share
 
 
 (16,122) 
 
 (16,122)
 
 
 (16,122) 
 
 (16,122)
Balance at March 31, 2015179,098
 $545,734
 $1,422,012
 $582,724
 $(9,800) $(509,157) $2,031,513
179,098
 $545,734
 $1,422,012
 $582,724
 $(9,800) $(509,157) $2,031,513
                          
Balance at December 31, 2013192,652
 $544,568
 $1,432,974
 $463,843
 $(37,341) $(340,857) $2,063,187
Net income
 
 
 41,783
 
 
 41,783
Other comprehensive income
 
 
 
 15,452
 
 15,452
Stock issued, including related tax benefits198
 253
 539
 
 
 1,385
 2,177
Stock-based compensation awards
 
 1,033
 
 
 
 1,033
Acquisition of treasury stock(4,000)         (49,804) (49,804)
Common stock cash dividends - $0.08 per share
 
 
 (15,109) 
 
 (15,109)
Balance at March 31, 2014188,850
 $544,821
 $1,434,546
 $490,517
 $(21,889) $(389,276) $2,058,719
             
See Notes to Consolidated Financial Statements                          
 

6




CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
(in thousands)
Three months ended March 31Three months ended March 31
2015 20142016 2015
CASH FLOWS FROM OPERATING ACTIVITIES:      
Net Income$40,036
 $41,783
$38,257
 $40,036
Adjustments to reconcile net income to net cash provided by operating activities:      
Provision for credit losses(3,700) 2,500
1,530
 (3,700)
Depreciation and amortization of premises and equipment7,361
 6,629
6,949
 7,361
Net amortization of investment securities premiums1,431
 1,435
2,055
 1,431
Net gains on sales of investment securities(4,145) 
Net increase in loans held for sale(16,602) (3,066)
Investment securities gains, net(947) (4,145)
Gain on sales of mortgage loans held for sale(2,670) (3,533)
Proceeds from sales of mortgage loans held for sale114,255
 171,051
Originations of mortgage loans held for sale(114,418) (184,120)
Amortization of intangible assets130
 315

 130
Amortization of issuance costs on long-term debt154
 147
Stock-based compensation1,071
 1,033
1,436
 1,071
Excess tax benefits from stock-based compensation(15) (25)(10) (15)
(Increase) decrease in accrued interest receivable(398) 661
Increase in accrued interest receivable(1,612) (398)
(Increase) decrease in other assets(5,525) 7,271
(4,469) 3,794
Increase in accrued interest payable312
 1,754
2,843
 312
Increase in other liabilities10,553
 182
(Decrease) increase in other liabilities(9,245) 1,234
Total adjustments(9,527) 18,689
(4,149) (9,380)
Net cash provided by operating activities30,509
 60,472
34,108
 30,656
CASH FLOWS FROM INVESTING ACTIVITIES:      
Proceeds from sales of securities available for sale11,567
 12,548
46,541
 11,567
Proceeds from maturities of securities available for sale105,647
 79,045
117,221
 105,647
Purchase of securities available for sale(37,142) (11,700)(169,436) (37,142)
Increase in short-term investments(280,584) (58,901)(115,544) (280,584)
Net (increase) decrease in loans(6,362) 40,017
Net increase in loans(38,976) (6,362)
Net purchases of premises and equipment(7,575) (6,255)(9,471) (7,575)
Net cash (used in) provided by investing activities(214,449) 54,754
Net cash used in investing activities(169,665) (214,449)
CASH FLOWS FROM FINANCING ACTIVITIES:      
Net increase in demand and savings deposits171,022
 94,093
269,899
 171,022
Net (decrease) increase in time deposits(24,031) 84,638
Increase (decrease) in short-term borrowings80,386
 (188,945)
Net increase (decrease) in time deposits2,064
 (24,031)
(Decrease) increase in short-term borrowings(144,780) 80,386
Additions to long-term debt16,000
 
Repayments of long-term debt(44,896) (123)(42) (45,043)
Net proceeds from issuance of common stock1,926
 2,152
1,637
 1,926
Excess tax benefits from stock-based compensation15
 25
10
 15
Dividends paid(14,314) (15,413)(15,676) (14,314)
Acquisition of treasury stock
 (49,804)(11,196) 
Net cash provided by (used in) financing activities170,108
 (73,377)
Net (Decrease) Increase in Cash and Due From Banks(13,832) 41,849
Net cash provided by financing activities117,916
 169,961
Net Decrease in Cash and Due From Banks(17,641) (13,832)
Cash and Due From Banks at Beginning of Period105,702
 218,540
101,120
 105,702
Cash and Due From Banks at End of Period$91,870
 $260,389
$83,479
 $91,870
Supplemental Disclosures of Cash Flow Information:      
Cash paid during the period for:      
Interest$21,879
 $17,473
$17,414
 $21,879
Income taxes146
 631
3,972
 146
See Notes to Consolidated Financial Statements      
 
7



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

The accompanying unaudited consolidated financial statements of Fulton Financial Corporation (the "Corporation") have been prepared in conformity with U.S. generally accepted accounting principles ("U.S. GAAP") for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the amounts of assets and liabilities as of the date of the financial statements as well as revenues and expenses during the period. Actual results could differ from those estimates. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2014.2015. Operating results for the three months ended March 31, 20152016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015.2016. The Corporation evaluates subsequent events through the date of filing of this Form 10-Q with the Securities and Exchange Commission ("SEC").

RecentRecently Adopted Accounting Standards

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

In February 2015, the FASB issued ASC Update 2015-02, "Consolidation: Amendments to the Consolidation Analysis."Analysis" effective January 1, 2016. ASC Update 2015-02 changeschanged the way reporting enterprises evaluate whether: (a) they should consolidate limited partnerships and similar entities, (b) fees paid to a decision maker or service provider are variable interests in a variable interest entity ("VIE"), and (c) variable interests in a VIE held by related parties of the reporting enterprise require the reporting enterprise to consolidate the VIE. ASC Update 2015-02 iswas effective for public business entities' annual and interim reporting periods beginningthat began after December 15, 2015, with earlier adoption permitted.The Corporation intends to adopt this standards update effective with its March 31, 2016 quarterly report on Form 10-Q, and does not expect the adoption of ASC Update 2015-02 todid not have a material impact on itsthe Corporation's consolidated financial statements.

In April 2015,Effective January 1, 2016, the Corporation adopted FASB issued ASC Update 2015-03, "Interest - Imputation of Interest."Interest" and the updated ASC Update 2015-03 with the issuance of ASC Update 2015-15, “Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements.” ASC Update 2015-03 simplifies the presentation of debt issuances costs. Debt issuance costs related to a recognized debt liability will be presented on the balance sheet as a direct deduction from the debt liability, similar to the presentation of debt discounts. Under currentPreviously under U.S. GAAP, debt issuance costs arewere reported on the balance sheet as assets. The costs will continue to be amortized to interest expense using the effective interest method. ASC Update 2015-03 iswas effective for public business entities' annual and interim reporting periods beginning after December 15, 2015, with earlier adoption permitted. The Corporation intends to adopt this standards update effective with its March 31, 2016 quarterly report on Form 10-Q and does not expect the adoption of ASC Update 2015-03 todid not have a material impact on itsthe Corporation's consolidated financial statements.

In April 2015, theThe Corporation prospectively adopted FASB issued ASC Update 2015-05, "Customer's Accounting for Fees Paid in a Cloud Computing Arrangement."Arrangement" effective January 1, 2016. ASC Update 2015-05 provides explicit guidance to determine when a customer's fees paid in a cloud computing arrangement is for the acquisition of software licenses, services, or both. ASC Update 2015-05 iswas effective for public business entities' annual and interim reporting periods beginning after December 15, 2015, with earlier adoption permitted. The adoption of ASC Update 2015-05 did not have a material impact on the Corporation's consolidated financial statements.

Recently Issued Accounting Standards

In May 2014, the FASB issued ASC Update 2014-09, "Revenue from Contracts with Customers." This standards update establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle prescribed by this standards update is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard applies to all contracts with customers, except those that are within the scope of other topics in the FASB ASC. The standard also requires significantly expanded disclosures about revenue recognition. For public business entities, ASC Update 2014-09 is effective for interim and annual reporting periods beginning after December 15, 2017. Early application is not permitted. For the Corporation, this standards update is effective with its March 31, 2018 quarterly report on Form 10-Q. The Corporation is currently evaluating the impact of the adoption of ASC Update 2014-09 on its consolidated financial statements.



In January 2016, the FASB issued ASC Update 2016-01, "Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities." ASC Update 2016-01 provides guidance regarding the income statement impact of equity investments held by an entity and the recognition of changes in fair value of financial liabilities when the fair value option is elected. ASC Update 2016-01 is effective for public business entities' annual and interim reporting periods beginning after December 15, 2017, with earlier adoption permitted.The Corporation intends to adopt this standards update effective with its March 31, 20162018 quarterly report on Form 10-Q and does not expect the adoption of ASC Update 2015-052016-01 to have a material impact on its consolidated financial statements.

In February 2016, the FASB issued ASC Update 2016-02, "Leases." This standards update states that a lessee should recognize the assets and liabilities that arise from all leases with a term greater than 12 months. The core principle requires the lessee to recognize a liability to make lease payments and a "right-of-use" asset. The accounting applied by the lessor is relatively unchanged. The standards update also requires expanded qualitative and quantitative disclosures. For public business entities, ASC Update 2016-02 is effective for interim and annual reporting periods beginning after December 15, 2018. ASC Update 2016-02 mandates a modified retrospective transition for all entities. Early application is permitted. For the Corporation, this standards update is effective with its March 31, 2019 quarterly report on Form 10-Q. The Corporation is currently evaluating the impact of the adoption of ASC Update 2016-02 on its consolidated financial statements.
8
In March 2016, the FASB issued ASC Update 2016-09, "Stock Compensation: Improvements to Employee Share-Based Payment Accounting." The purpose of this standards update is to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liability, and classification on the statement of cash flows. ASC Update 2016-09 is effective for interim and annual reporting periods beginning after December 15, 2016. Early application is permitted. For the Corporation, this standards update is effective with its March 31, 2017 quarterly report on Form 10-Q. The Corporation is currently evaluating the impact of the adoption of ASC Update 2016-09 on its consolidated financial statements.


Reclassifications

Certain amounts in the 2015 consolidated financial statements and notes have been reclassified to conform to the 2016 presentation.


NOTE 2 – Net Income Per Share

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

Diluted net income per share is calculated as net income divided by the weighted average number of shares outstanding plus the incremental number of shares added as a result of converting common stock equivalents, calculated using the treasury stock method. The Corporation’s common stock equivalents consist of outstanding stock options, restricted stock, restricted stock units ("RSUs") and performance basedperformance-based restricted stock units ("PSUs"). PSUs are required to be included in weighted average shares outstanding if performance measures, as defined in each PSU award agreement, are met as of the end of the period.

A reconciliation of weighted average shares outstanding used to calculate basic net income per share and diluted net income per share follows:
Three months ended March 31Three months ended March 31
2015 20142016 2015
(in thousands)(in thousands)
Weighted average shares outstanding (basic)178,471
 189,467
173,331
 178,471
Impact of common stock equivalents986
 1,022
1,085
 986
Weighted average shares outstanding (diluted)179,457
 190,489
174,416
 179,457
For the three months ended March 31, 20152016 and 2014, 2015, 885,000 and 2.1 million and 3.1 million shares issuable under stock options, respectively, were excluded from the diluted net income per share computation as their effect would have been anti-dilutive.


NOTE 3 – Accumulated Other Comprehensive Income
The following table presents changes in other comprehensive income: 
Before-Tax Amount Tax Effect Net of Tax AmountBefore-Tax Amount Tax Effect Net of Tax Amount
(in thousands)(in thousands)
Three months ended March 31, 2016     
Unrealized gain on securities$26,193
 $(9,167) $17,026
Reclassification adjustment for securities gains included in net income (1)
(947) 331
 (616)
Amortization of unrealized loss on derivative financial instruments (2)
6
 (2) 4
Amortization of net unrecognized pension and postretirement items (3)
717
 (251) 466
Total Other Comprehensive Income$25,969
 $(9,089) $16,880
Three months ended March 31, 2015          
Unrealized gain on securities$15,371
 $(5,379) $9,992
$15,371
 $(5,379) $9,992
Reclassification adjustment for securities gains included in net income (1)(4,145) 1,450
 (2,695)(4,145) 1,450
 (2,695)
Non-credit related unrealized gains on other-than-temporarily impaired debt securities192
 (67) 125
192
 (67) 125
Unrealized gain on derivative financial instruments52
 (18) 34
Amortization of net unrecognized pension and postretirement items (2)717
 (251) 466
Amortization of unrealized loss on derivative financial instruments(2)
52
 (18) 34
Amortization of net unrecognized pension and postretirement items (3)
717
 (251) 466
Total Other Comprehensive Income$12,187
 $(4,265) $7,922
$12,187
 $(4,265) $7,922
Three months ended March 31, 2014     
Unrealized gain on securities$21,435
 $(7,502) $13,933
Reclassification adjustment for postretirement gains included in net income (2)(1,452) 508
 (944)
Non-credit related unrealized gains on other-than-temporarily impaired debt securities291
 (102) 189
Unrealized gain on derivative financial instruments52
 (18) 34
Unrecognized pension and postretirement income3,291
 (1,147) 2,144
Amortization of net unrecognized pension and postretirement items (2)149
 (53) 96
Total Other Comprehensive Income$23,766
 $(8,314) $15,452
     

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



9


The following table presents changes in each component of accumulated other comprehensive income, net of tax: 
Unrealized Gains (Losses) on Investment Securities Not Other-Than-Temporarily Impaired Unrealized Non-Credit Gains (Losses) on Other-Than-Temporarily Impaired Debt Securities Unrealized Effective Portions of Losses on Forward-Starting Interest Rate Swaps Unrecognized Pension and Postretirement Plan Income (Costs) TotalUnrealized Gains (Losses) on Investment Securities Not Other-Than-Temporarily Impaired Unrealized Non-Credit Gains (Losses) on Other-Than-Temporarily Impaired Debt Securities Unrealized Effective Portions of Losses on Forward-Starting Interest Rate Swaps Unrecognized Pension and Postretirement Plan Income (Costs) Total
(in thousands)(in thousands)
Three months ended March 31, 2016         
Balance at December 31, 2015$(6,499) $458
 $(15) $(15,961) $(22,017)
Other comprehensive income before reclassifications17,026
 
 
 
 17,026
Amounts reclassified from accumulated other comprehensive income (loss)(616) 
 4
 466
 (146)
Balance at March 31, 2016$9,911
 $458
 $(11) $(15,495) $(5,137)
Three months ended March 31, 2015         
 
   
 
Balance at December 31, 2014$5,980
 $1,349
 $(2,546) $(22,505) $(17,722)$5,980
 $1,349
 $(2,546) $(22,505) $(17,722)
Other comprehensive income before reclassifications9,992
 125
 
 
 10,117
9,992

125
 
 
 10,117
Amounts reclassified from accumulated other comprehensive income (loss)(1,661) (1,034) 34
 466
 (2,195)(1,661) (1,034) 34
 466
 (2,195)
Balance at March 31, 2015$14,311
 $440
 $(2,512) $(22,039) $(9,800)$14,311
 $440
 $(2,512) $(22,039) $(9,800)
Three months ended March 31, 2014
 
   
 
Balance at December 31, 2013$(27,510) $1,652
 $(2,682) $(8,801) $(37,341)
Other comprehensive income before reclassifications13,933

189
 
 2,144
 16,266
Amounts reclassified from accumulated other comprehensive income (loss)
 
 34
 (848) (814)
Balance at March 31, 2014$(13,577) $1,841
 $(2,648) $(7,505) $(21,889)


10



NOTE 4 – Investment Securities
The following table presents the amortized cost and estimated fair values of investment securities, which were all classified as available for sale:
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
(in thousands)(in thousands)
March 31, 2015       
Equity securities$29,224
 $11,397
 $(13) $40,608
March 31, 2016       
U.S. Government sponsored agency securities198
 5
 
 203
$25,149
 $24
 $
 $25,173
State and municipal securities216,877
 7,496
 (31) 224,342
307,038
 7,025
 (53) 314,010
Corporate debt securities99,120
 3,929
 (5,367) 97,682
95,389
 2,773
 (8,276) 89,886
Collateralized mortgage obligations874,853
 5,924
 (12,901) 867,876
782,018
 5,322
 (5,265) 782,075
Mortgage-backed securities910,418
 20,859
 (1,118) 930,159
1,169,552
 19,454
 (338) 1,188,668
Auction rate securities106,410
 
 (7,478) 98,932
106,871
 
 (9,545) 97,326
$2,237,100
 $49,610
 $(26,908) $2,259,802
Total debt securities2,486,017
 34,598
 (23,477) 2,497,138
Equity securities14,228
 4,852
 (13) 19,067
Total$2,500,245
 $39,450
 $(23,490) $2,516,205
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
(in thousands)(in thousands)
December 31, 2014       
Equity securities$33,469
 $14,167
 $(13) $47,623
U.S. Government securities200
 
 
 200
December 31, 2015       
U.S. Government sponsored agency securities209
 5
 
 214
$25,154
 $35
 $(53) $25,136
State and municipal securities238,250
 7,231
 (266) 245,215
256,746
 6,019
 
 262,765
Corporate debt securities99,016
 5,126
 (6,108) 98,034
100,336
 2,695
 (6,076) 96,955
Collateralized mortgage obligations917,395
 5,705
 (20,787) 902,313
835,439
 3,042
 (16,972) 821,509
Mortgage-backed securities914,797
 16,978
 (2,944) 928,831
1,154,935
 10,104
 (6,204) 1,158,835
Auction rate securities108,751
 
 (7,810) 100,941
106,772
 
 (8,713) 98,059
$2,312,087
 $49,212
 $(37,928) $2,323,371
Total debt securities2,479,382
 21,895
 (38,018) 2,463,259
Equity securities$14,677
 $6,845
 $(8) $21,514
Total2,494,059
 28,740
 (38,026) 2,484,773
Securities carried at $1.6 billion as of March 31, 20152016 and $1.7 billion as of December 31, 20142015 were pledged as collateral to secure public and trust deposits and customer repurchase agreements.
Equity securities include common stocks of financial institutions (estimated fair value of $34.7$18.2 million at March 31, 20152016 and $41.8$20.6 million at December 31, 2014)2015) and other equity investments (estimated fair value of $5.9 million$892,000 at March 31, 20152016 and $5.8 million$914,000 at December 31, 2014)2015).
As of March 31, 2015,2016, the financial institutions stock portfolio had a cost basis of $23.4$13.4 million and an estimated fair value of $34.7$18.2 million, including an investment in a single financial institution with a cost basis of $15.7$7.4 million and an estimated fair value of $23.2$9.1 million. The estimated fair value of this investment accounted for 66.7%50.3% of the estimated fair value of the Corporation's investments in the common stocks of publicly traded financial institutions. No other investment withinin a single financial institution in the financial institutions stock portfolio exceeded 5%10% of the portfolio's estimated fair value.

11


The amortized cost and estimated fair values of debt securities as of March 31, 2015,2016, by contractual maturity, are shown in the following table. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
 Amortized
Cost
 Estimated
Fair Value
 Amortized
Cost
 Estimated
Fair Value
(in thousands)(in thousands)
Due in one year or less $29,323
 $30,124
 $64,096
 $64,475
Due from one year to five years 74,801
 78,246
 89,237
 91,302
Due from five years to ten years 140,219
 144,978
 92,154
 95,021
Due after ten years 178,262
 167,811
 288,960
 275,597
 422,605
 421,159
 534,447
 526,395
Collateralized mortgage obligations 874,853
 867,876
 782,018
 782,075
Mortgage-backed securities 910,418
 930,159
 1,169,552
 1,188,668
 $2,207,876
 $2,219,194
Total debt securities $2,486,017
 $2,497,138
The following table presents information related to the gross realized gains and losses on the sales of equity and debt securities:
Gross
Realized
Gains
 Gross
Realized
Losses
 Net Gains (Losses)Gross
Realized
Gains
 Gross
Realized
Losses
 Net Gains (Losses)
Three months ended March 31, 2016(in thousands)
Equity securities$733
 $
 $733
Debt securities214
 
 214
Total$947
 $
 $947
Three months ended March 31, 2015(in thousands)     
Equity securities$1,970
 $
 $1,970
$1,970
 $
 $1,970
Debt securities2,175
 
 2,175
2,175
 
 2,175
Total$4,145
 $
 $4,145
$4,145
 $
 $4,145
Three months ended March 31, 2014     
Equity securities$1
 $
 $1
Debt securities322
 (323) (1)
Total$323
 $(323) $

The following table presents a summary of the cumulative credit related other-than-temporary impairment charges, recognized as components of earnings, for debt securities held by the Corporation at March 31, 20152016 and 2014:2015:
Three months ended March 31Three months ended March 31
2015 20142016 2015
(in thousands)(in thousands)
Balance of cumulative credit losses on debt securities, beginning of period$(16,242) $(20,691)$(11,510) $(16,242)
Reductions for securities sold during the period3,938
 

 3,938
Reductions for increases in cash flows expected to be collected that are recognized over the remaining life of the security2
 4

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






12


The following table presents the gross unrealized losses and estimated fair values of investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2015:2016:
Less than 12 months 12 months or longer TotalLess than 12 months 12 months or longer Total
Estimated
Fair Value
 
Unrealized
Losses
 
Estimated
Fair Value
 
Unrealized
Losses
 
Estimated
Fair Value
 
Unrealized
Losses
Estimated
Fair Value
 
Unrealized
Losses
 
Estimated
Fair Value
 
Unrealized
Losses
 
Estimated
Fair Value
 
Unrealized
Losses
(in thousands)(in thousands)
State and municipal securities$5,953
 $(31) $
 $
 $5,953
 $(31)$17,961
 $(53) $
 $
 $17,961
 $(53)
Corporate debt securities4,970
 (4) 34,600
 (5,363) 39,570
 (5,367)
 
 30,762
 (8,276) 30,762
 (8,276)
Collateralized mortgage obligations34,287
 (132) 547,418
 (12,769) 581,705
 (12,901)21,078
 (87) 461,807
 (5,178) 482,885
 (5,265)
Mortgage-backed securities116,136
 (327) 72,224
 (791) 188,360
 (1,118)98,180
 (175) 30,243
 (163) 128,423
 (338)
Auction rate securities
 
 98,932
 (7,478) 98,932
 (7,478)
 
 97,326
 (9,545) 97,326
 (9,545)
Total debt securities161,346
 (494) 753,174
 (26,401) 914,520
 (26,895)137,219
 (315) 620,138
 (23,162) 757,357
 (23,477)
Equity securities
 
 77
 (13) 77
 (13)50
 (3) 12
 (10) 62
 (13)
$161,346
 $(494) $753,251
 $(26,414) $914,597
 $(26,908)$137,269
 $(318) $620,150
 $(23,172) $757,419
 $(23,490)
The Corporation’s collateralized mortgage obligations and mortgage-backed securities have contractual terms that generally do not permit the issuer to settle the securities at a price less than the amortized cost of the investment. Because the decline in market value of these securities is attributable to changes in interest rates and not credit quality, and because the Corporation does not have the intent to sell and does not believe it will more likely than not be required to sell any of these securities prior to a recovery of their fair value to amortized cost, the Corporation does not consider these investments to be other-than-temporarily impaired as of March 31, 2015.2016.
The unrealized holding losses onAs of March 31, 2016, all of the auction rate securities (auction rate certificates, or "ARCs"), are attributable to liquidity issues resulting from the failure of periodic auctions. The Corporation had previously purchased ARCs for investment management and trust customers as short-term investments with fair values that could be derived based on periodic auctions under normal market conditions. During 2008 and 2009, the Corporation purchased ARCs from these customers due to the failure of these periodic auctions, which made these previously short-term investments illiquid.
As of March 31, 2015, all of the ARCs were rated above investment grade, with approximately $6$5.5 million, or 5%6%, "AAA" rated and $93$91.8 million, or 95%94%, "AA" rated. All of the loans underlying the ARCs have principal payments which are guaranteed by the federal government.
As of March 31, 2015,2016, all ARCs were current and making scheduled interest payments. Based on management’s evaluations, ARCs with an estimated fair value of $98.9$97.3 million were not subject to any other-than-temporary impairment charges as of March 31, 2015.2016. The Corporation does not have the intent to sell and does not believe it will more likely than not be required to sell any of these securities prior to a recovery of their fair value to amortized cost, which may be at maturity.
For its investments in equity securities, particularly its investments in stocks of financial institutions, management evaluates the near-term prospects of the issuers in relation to the severity and duration of the impairment. Based on that evaluation and the Corporation’s ability and intent to hold those investments for a reasonable period of time sufficient for a recovery of fair value, the Corporation does not consider those investments with unrealized holding losses as of March 31, 20152016 to be other-than-temporarily impaired.
The majority of the Corporation's available for sale corporate debt securities are issued by financial institutions. The following table presents the amortized cost and estimated fair value of corporate debt securities:
March 31, 2015 December 31, 2014March 31, 2016 December 31, 2015
Amortized
cost
 
Estimated
fair value
 
Amortized
cost
 
Estimated
fair value
Amortized
cost
 
Estimated
fair value
 
Amortized
cost
 
Estimated
fair value
(in thousands)(in thousands)
Single-issuer trust preferred securities$47,590
 $42,863
 $47,569
 $42,016
$43,673
 $35,851
 $44,648
 $39,106
Subordinated debt47,563
 50,173
 47,530
 50,023
47,681
 49,294
 51,653
 53,108
Pooled trust preferred securities405
 1,084
 2,010
 4,088

 706
 
 706
Corporate debt securities issued by financial institutions95,558
 94,120
 97,109
 96,127
91,354
 85,851
 96,301
 92,920
Other corporate debt securities3,562
 3,562
 1,907
 1,907
4,035
 4,035
 4,035
 4,035
Available for sale corporate debt securities$99,120
 $97,682
 $99,016
 $98,034
$95,389
 $89,886
 $100,336
 $96,955


13


The Corporation’s investments in single-issuerSingle-issuer trust preferred securities had an unrealized loss of $4.7$7.8 million at March 31, 2015.The Corporation did not record any other-than-temporary impairment charges for single-issuer trust preferred securities during the three months ended March 31, 2015 or 2014. Seven2016. Six of the Corporation's 2019 single-issuer trust preferred securities were rated below investment grade by at least one ratings agency, with an amortized cost of $14.5$11.5 million and an estimated fair value of $12.8$9.0 million at March 31, 2015.2016. All of the single-issuer trust preferred securities rated below investment grade were rated "BB" or "Ba". ThreeTwo single-issuer trust preferred securities with an amortized cost of $4.7$3.7 million and an estimated fair value of $3.8$2.4 million at March 31, 20152016 were not rated by any ratings agency.
During the three months ended March 31, 2015, the Corporation sold two pooled trust preferred securities with a total amortized cost of $1.5 million, for a gain of $2.2 million. As of March 31, 2015, all three of the Corporation's pooled trust preferred securities, with an amortized cost of $405,000 and an estimated fair value of $1.1 million, were rated below investment grade by at least one ratings agency, with ratings ranging from "C" to "Ca". The class of securities held by the Corporation was below the most senior tranche, with the Corporation’s interests being subordinate to other investors in the pool. The Corporation determines the fair value of pooled trust preferred securities based on quotes provided by third-party brokers.
The amortized cost of pooled trust preferred securities is the purchase price of the securities, net of cumulative credit related other-than-temporary impairment charges, determined using an expected cash flows model. The most significant input to the expected cash flows model is the expected payment deferral rate for each pooled trust preferred security. The Corporation evaluates the financial metrics, such as capital ratios and non-performing assets ratios, of the individual financial institution issuers that comprise each pooled trust preferred security to estimate its expected deferral rate.
Based on management’s evaluations, corporate debt securities with a fair value of $97.7$89.9 million were not subject to any additional other-than-temporary impairment charges as of March 31, 2015.2016. 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.

NOTE 5 – Loans and Allowance for Credit Losses

Loans, Net of Unearned Income
Loans, net of unearned income are summarized as follows:
March 31,
2015
 December 31, 2014March 31,
2016
 December 31, 2015
(in thousands)(in thousands)
Real-estate - commercial mortgage$5,227,101
 $5,197,155
$5,558,108
 $5,462,330
Commercial - industrial, financial and agricultural3,762,631
 3,725,567
4,035,333
 4,088,962
Real-estate - home equity1,701,623
 1,736,688
1,659,481
 1,684,439
Real-estate - residential mortgage1,364,788
 1,377,068
1,377,459
 1,376,160
Real-estate - construction677,806
 690,601
810,872
 799,988
Consumer257,301
 265,431
263,221
 268,588
Leasing and other135,552
 127,562
179,765
 170,914
Overdrafts1,721
 4,021
2,379
 2,737
Loans, gross of unearned income13,128,523
 13,124,093
13,886,618
 13,854,118
Unearned income(13,018) (12,377)(15,917) (15,516)
Loans, net of unearned income$13,115,505
 $13,111,716
$13,870,701
 $13,838,602

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

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

14



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

The following table presents the components of the allowance for credit losses:
March 31,
2015
 December 31,
2014
March 31,
2016
 December 31,
2015
(in thousands)(in thousands)
Allowance for loan losses$177,701
 $184,144
$163,841
 $169,054
Reserve for unfunded lending commitments1,957
 1,787
2,224
 2,358
Allowance for credit losses$179,658
 $185,931
$166,065
 $171,412




The following table presents the activity in the allowance for credit losses:
Three months ended March 31Three months ended March 31
2015 20142016 2015
(in thousands)(in thousands)
Balance at beginning of period$185,931
 $204,917
$171,412
 $185,931
Loans charged off(5,764) (10,268)(11,155) (5,764)
Recoveries of loans previously charged off3,191
 1,857
4,278
 3,191
Net loans charged off(2,573) (8,411)(6,877) (2,573)
Provision for credit losses(3,700) 2,500
1,530
 (3,700)
Balance at end of period$179,658
 $199,006
$166,065
 $179,658

The following table presents the activity in the allowance for loan losses by portfolio segment:
Real Estate -
Commercial
Mortgage
 
Commercial -
Industrial,
Financial and
Agricultural
 
Real Estate -
Home
Equity
 
Real Estate -
Residential
Mortgage
 
Real Estate -
Construction
 Consumer 
Leasing
and other
and
overdrafts
 Unallocated Total
Real Estate -
Commercial
Mortgage
 
Commercial -
Industrial,
Financial and
Agricultural
 
Real Estate -
Home
Equity
 
Real Estate -
Residential
Mortgage
 
Real Estate -
Construction
 Consumer 
Leasing, other
and
overdrafts
 Unallocated Total
(in thousands)(in thousands)
Three months ended March 31, 2016                 
Balance at December 31, 2015$47,866
 $57,098
 $22,405
 $21,375
 $6,529
 $2,585
 $2,468
 $8,728
 $169,054
Loans charged off(582) (6,188) (1,541) (1,068) (326) (1,007) (443) 
 (11,155)
Recoveries of loans previously charged off825
 2,319
 338
 136
 383
 196
 81
 
 4,278
Net loans charged off243
 (3,869) (1,203) (932) 57
 (811) (362) 
 (6,877)
Provision for loan losses (1)202
 1,104
 1,322
 (515) (304) 550
 868
 (1,563) 1,664
Balance at March 31, 2016$48,311
 $54,333
 $22,524
 $19,928
 $6,282
 $2,324
 $2,974
 $7,165
 $163,841
Three months ended March 31, 2015                                  
Balance at December 31, 2014$53,493
 $51,378
 $28,271
 $29,072
 $9,756
 $3,015
 $1,799
 $7,360
 $184,144
$53,493
 $51,378
 $28,271
 $29,072
 $9,756
 $3,015
 $1,799
 $7,360
 $184,144
Loans charged off(709) (1,863) (768) (1,281) 
 (780) (363) 
 (5,764)(709) (1,863) (768) (1,281) 
 (780) (363) 
 (5,764)
Recoveries of loans previously charged off436
 786
 251
 159
 1,147
 241
 171
 
 3,191
436
 786
 251
 159
 1,147
 241
 171
 
 3,191
Net loans charged off(273) (1,077) (517) (1,122) 1,147
 (539) (192) 
 (2,573)(273) (1,077) (517) (1,122) 1,147
 (539) (192) 
 (2,573)
Provision for loan losses (1)(360) 6,849
 (4,273) (4,715) (2,416) 51
 46
 948
 (3,870)(360) 6,849
 (4,273) (4,715) (2,416) 51
 46
 948
 (3,870)
Balance at March 31, 2015$52,860
 $57,150
 $23,481
 $23,235
 $8,487
 $2,527
 $1,653
 $8,308
 $177,701
$52,860
 $57,150
 $23,481
 $23,235
 $8,487
 $2,527
 $1,653
 $8,308
 $177,701
Three months ended March 31, 2014                 
Balance at December 31, 2013$55,659
 $50,330
 $28,222
 $33,082
 $12,649
 $3,260
 $3,370
 $16,208
 $202,780
Loans charged off(1,386) (5,125) (1,651) (846) (214) (751) (295) 
 (10,268)
Recoveries of loans previously charged off44
 744
 356
 116
 224
 209
 164
 
 1,857
Net loans charged off(1,342) (4,381) (1,295) (730) 10
 (542) (131) 
 (8,411)
Provision for loan losses (1)(560) 4,614
 5,533
 977
 (2,817) 606
 (1,228) (4,405) 2,720
Balance at March 31, 2014$53,757
 $50,563
 $32,460
 $33,329
 $9,842
 $3,324
 $2,011
 $11,803
 $197,089

(1)
The provision for loan losses excluded a $134,000 decrease and a $170,000 increase, and $220,000 decreaserespectively, in the reserve for unfunded lending commitments for the three months ended March 31, 20152016 and March 31, 2014, respectively.2015. The total provision for credit losses, comprised of allocations for both funded and unfunded loans, was a$1.5 million and negative $3.7 million for thethree months ended March 31, 2016 and 2015, and was $2.5 million for the three months ended March 31, 2014.respectively.

15


The following table presents loans, net of unearned income and their related allowance for loan losses, by portfolio segment:
Real Estate -
Commercial
Mortgage
 
Commercial -
Industrial,
Financial and
Agricultural
 
Real Estate -
Home
Equity
 
Real Estate -
Residential
Mortgage
 
Real Estate -
Construction
 Consumer 
Leasing, other
and
overdrafts
 
Unallocated
(1)
 Total
(in thousands)
Allowance for loan losses at March 31, 2016:Allowance for loan losses at March 31, 2016:              
Measured for impairment under FASB ASC Subtopic 450-20$35,914
 $40,969
 $13,541
 $7,599
 $4,004
 $2,302
 $1,756
 $7,165
 $113,250
Evaluated for impairment under FASB ASC Section 310-10-3512,397
 13,364
 8,983
 12,329
 2,278
 22
 1,218
 N/A
 50,591
$48,311
 $54,333
 $22,524
 $19,928
 $6,282
 $2,324
 $2,974
 $7,165
 $163,841
                 
Loans, net of unearned income at March 31, 2016:Loans, net of unearned income at March 31, 2016:              
Measured for impairment under FASB ASC Subtopic 450-20$5,499,820
 $3,992,567
 $1,641,457
 $1,329,114
 $797,282
 $263,189
 $164,806
 N/A
 $13,688,235
Evaluated for impairment under FASB ASC Section 310-10-3558,288
 42,766
 18,024
 48,345
 13,590
 32
 1,421
 N/A
 182,466
Real Estate -
Commercial
Mortgage
 
Commercial -
Industrial,
Financial and
Agricultural
 
Real Estate -
Home
Equity
 
Real Estate -
Residential
Mortgage
 
Real Estate -
Construction
 Consumer 
Leasing
and other
and
overdrafts
 
Unallocated
(1)
 Total$5,558,108
 $4,035,333
 $1,659,481
 $1,377,459
 $810,872
 $263,221
 $166,227
 N/A
 $13,870,701
(in thousands)                 
Allowance for loan losses at March 31, 2015:Allowance for loan losses at March 31, 2015:              Allowance for loan losses at March 31, 2015:              
Measured for impairment under FASB ASC Subtopic 450-20$38,916
 $40,027
 $16,937
 $9,162
 $6,037
 $2,504
 $1,653
 $8,308
 $123,544
$38,916
 $40,027
 $16,937
 $9,162
 $6,037
 $2,504
 $1,653
 $8,308
 $123,544
Evaluated for impairment under FASB ASC Section 310-10-3513,944
 17,123
 6,544
 14,073
 2,450
 23
 
 N/A
 54,157
13,944
 17,123
 6,544
 14,073
 2,450
 23
 
 N/A
 54,157
$52,860
 $57,150
 $23,481
 $23,235
 $8,487
 $2,527
 $1,653
 $8,308
 $177,701
$52,860
 $57,150
 $23,481
 $23,235
 $8,487
 $2,527
 $1,653
 $8,308
 $177,701
                                  
Loans, net of unearned income at March 31, 2015:Loans, net of unearned income at March 31, 2015:              Loans, net of unearned income at March 31, 2015:              
Measured for impairment under FASB ASC Subtopic 450-20$5,157,342
 $3,716,037
 $1,688,869
 $1,312,861
 $656,021
 $257,265
 $124,255
 N/A
 $12,912,650
$5,157,342
 $3,716,037
 $1,688,869
 $1,312,861
 $656,021
 $257,265
 $124,255
 N/A
 $12,912,650
Evaluated for impairment under FASB ASC Section 310-10-3569,759
 46,594
 12,754
 51,927
 21,785
 36
 
 N/A
 202,855
69,759
 46,594
 12,754
 51,927
 21,785
 36
 
 N/A
 202,855
$5,227,101
 $3,762,631
 $1,701,623
 $1,364,788
 $677,806
 $257,301
 $124,255
 N/A
 $13,115,505
$5,227,101
 $3,762,631
 $1,701,623
 $1,364,788
 $677,806
 $257,301
 $124,255
 N/A
 $13,115,505
                 
Allowance for loan losses at March 31, 2014:              
Measured for impairment under FASB ASC Subtopic 450-20$37,363
 $36,859
 $22,969
 $11,618
 $7,256
 $3,309
 $2,011
 $11,803
 $133,188
Evaluated for impairment under FASB ASC Section 310-10-3516,394
 13,704
 9,491
 21,711
 2,586
 15
 
 N/A
 63,901
$53,757
 $50,563
 $32,460
 $33,329
 $9,842
 $3,324
 $2,011
 $11,803
 $197,089
                 
Loans, net of unearned income at March 31, 2014:              
Measured for impairment under FASB ASC Subtopic 450-20$5,075,556
 $3,528,857
 $1,726,342
 $1,279,783
 $555,852
 $270,004
 $96,009
 N/A
 $12,532,403
Evaluated for impairment under FASB ASC Section 310-10-3561,898
 45,273
 14,154
 51,682
 28,365
 17
 
 N/A
 201,389
$5,137,454
 $3,574,130
 $1,740,496
 $1,331,465
 $584,217
 $270,021
 $96,009
 N/A
 $12,733,792
 
(1)The unallocated allowance, which was approximately 5%4% and 6%5% of the total allowance for credit losses, respectively, as of March 31, 20152016 and March 31, 2014, respectively,2015, was, in the opinion of management, reasonable and appropriate given that the estimates used in the allocation process are inherently imprecise.

N/A - Not applicable.

Impaired Loans
A loan is considered to be impaired if it is probable that all amounts will not be collected according to the contractual terms of the loan agreement. Impaired loans consist of all loans on non-accrual status and accruing troubled debt restructurings ("TDRs"). An allowance for loan losses is established for an impaired loan if its carrying value exceeds its estimated fair value. Impaired loans to borrowers with total outstanding commitments greater than or equal to $1.0 million are evaluated individually for impairment. Impaired loans to borrowers with total outstanding commitments less than $1.0 million are pooled and measured for impairment collectively.

Based on an evaluation of all relevant credit quality factors, the Corporation recorded a $3.7$1.5 million negative provision for credit losses during the three months ended March 31, 2015,2016, compared to a $2.5$3.7 million negative provision for credit losses for the same period in 2014. The $6.2 million improvement in the provision for credit losses was driven by an improvement in net charge-off levels, particularly a decrease in net charge-offs on pooled impaired loans across all loan portfolio segments. During the three months ended March 31, 2015, net charge-offs were $2.6 million, compared to $8.4 million for the three months ended March 31, 2014, and the allowance for loan loss allocations on impaired loans decreased $9.7 million, or 15.2%, compared to the three months ended March 31, 2014.2015.
All loans individually evaluated for impairment under FASB ASC Section 310-10-35 are measured for losses on a quarterly basis.
As of March 31, 20152016 and December 31, 2014,2015, substantially all of the Corporation’s individually evaluated impaired loans with total outstanding balances greater than or equal to $1.0 million were measured based on the estimated fair value of each loan’s collateral. Collateral could be in the form of real estate, in the case of impaired commercial mortgages and construction loans, or business assets, such as accounts receivable or inventory, in the case of commercial and industrial loans. Commercial and industrial loans may also be secured by real property.

As of March 31, 2016 and 2015, approximately 77% and 2014, approximately 78% and 79%, respectively, of impaired loans with principal balances greater than or equal to $1.0 million, whose primary collateral is real estate, were measured at estimated fair value using state certified third-party appraisals that had been updated withinin the preceding 12 months.


16


When updated appraisals are not obtained for loans evaluated for impairment under FASB ASC Section 310-10-35 that are secured by real estate, fair values are estimated based on the original appraisal values, as long as the original appraisal indicated a strong an acceptable


loan-to-value position and, in the opinion of the Corporation's internal loan evaluationcredit administration staff, there has not been a significant deterioration in the collateral value since the original appraisal was performed. Original appraisals are typically used only when the estimated collateral value, as adjusted appropriately for the age of the appraisal, results in a current loan-to-value ratio that is lower than the Corporation's loan-to-value requirements for new loans, generally less than 70%.
The following table presents total impaired loans by class segment:
March 31, 2015 December 31, 2014March 31, 2016 December 31, 2015
Unpaid
Principal
Balance
 
Recorded
Investment
 
Related
Allowance
 
Unpaid
Principal
Balance
 
Recorded
Investment
 
Related
Allowance
Unpaid
Principal
Balance
 
Recorded
Investment
 
Related
Allowance
 
Unpaid
Principal
Balance
 
Recorded
Investment
 
Related
Allowance
(in thousands)(in thousands)
With no related allowance recorded:With no related allowance recorded:          With no related allowance recorded:          
Real estate - commercial mortgage$35,586
 $30,462
 $
 $25,802
 $23,236
 $
$26,361
 $23,023
 $
 $27,872
 $22,596
 $
Commercial - secured17,832
 14,769
 
 17,599
 14,582
 
14,638
 12,227
 
 18,012
 13,702
 
Real estate - residential mortgage4,858
 4,858
 
 4,873
 4,873
 
6,395
 6,211
 
 4,790
 4,790
 
Construction - commercial residential16,448
 13,643
 
 18,041
 14,801
 
6,916
 6,298
 
 9,916
 8,865
 
Construction - commercial829
 694
 
 1,707
 1,581
 
75,553
 64,426
 
 68,022
 59,073
 
54,310
 47,759
 
 60,590
 49,953
 
With a related allowance recorded:With a related allowance recorded:          With a related allowance recorded:          
Real estate - commercial mortgage48,636
 39,297
 13,944
 49,619
 40,023
 16,715
44,849
 35,265
 12,397
 45,189
 35,698
 12,471
Commercial - secured35,825
 30,565
 16,315
 24,824
 19,335
 12,165
34,752
 29,655
 12,850
 39,659
 33,629
 14,085
Commercial - unsecured1,417
 1,260
 808
 1,241
 1,089
 865
1,039
 884
 514
 971
 821
 498
Real estate - home equity18,035
 12,754
 6,544
 19,392
 13,458
 9,224
23,115
 18,024
 8,983
 20,347
 15,766
 7,993
Real estate - residential mortgage56,684
 47,069
 14,073
 56,607
 46,478
 18,592
50,803
 42,134
 12,329
 55,242
 45,635
 13,422
Construction - commercial residential13,267
 6,590
 2,169
 14,007
 7,903
 2,675
9,774
 6,088
 1,851
 9,949
 6,290
 2,110
Construction - commercial867
 577
 178
 1,501
 1,023
 459
815
 594
 201
 820
 638
 217
Construction - other452
 281
 103
 452
 281
 137
747
 610
 226
 331
 193
 68
Consumer - direct17
 17
 11
 19
 19
 17
20
 20
 14
 19
 19
 14
Consumer - indirect41
 19
 12
 20
 19
 18
12
 12
 8
 14
 14
 8
Leasing, other and overdrafts1,421
 1,421
 1,218
 1,658
 1,425
 704
175,241
 138,429
 54,157
 167,682
 129,628
 60,867
167,347
 134,707
 50,591
 174,199
 140,128
 51,590
Total$250,794
 $202,855
 $54,157
 $235,704
 $188,701
 $60,867
$221,657
 $182,466
 $50,591
 $234,789
 $190,081
 $51,590
As of March 31, 20152016 and December 31, 2014,2015, there were $64.4$47.8 million and $59.1$50.0 million, respectively, of impaired loans that did not have a related allowance for loan loss. The estimated fair values of the collateral securing these loans exceeded their carrying amount, or they were previously charged down to realizable collateral values. Accordingly, no specific valuation allowance was considered to be necessary.

17


The following table presents average impaired loans by class segment:
Three months ended March 31Three months ended March 31
2015 20142016 2015
Average
Recorded
Investment
 Interest
Income
Recognized (1)
 Average
Recorded
Investment
 Interest
Income
Recognized (1)
Average
Recorded
Investment
 Interest
Income (1)
 Average
Recorded
Investment
 Interest
Income (1)
(in thousands)(in thousands)
With no related allowance recorded:              
Real estate - commercial mortgage$26,849
 $91
 $23,993
 $86
$22,810
 $69
 $26,849
 $91
Commercial - secured14,676
 21
 21,125
 35
12,964
 16
 14,676
 21
Real estate - home equity
 
 300
 
Real estate - residential mortgage4,866
 28
 159
 1
5,501
 30
 4,866
 28
Construction - commercial residential14,222
 55
 17,223
 60
7,582
 19
 14,222
 55
Construction - commercial1,138
 
 1,969
 

 
 1,138
 
61,751
 195
 64,769
 182
48,857
 134
 61,751
 195
With a related allowance recorded:              
Real estate - commercial mortgage39,660
 133
 37,119
 132
35,482
 108
 39,660
 133
Commercial - secured24,950
 36
 23,045
 38
31,642
 38
 24,950
 36
Commercial - unsecured1,175
 1
 845
 1
853
 1
 1,175
 1
Real estate - home equity13,106
 31
 14,096
 20
16,896
 57
 13,106
 31
Real estate - residential mortgage46,774
 273
 51,231
 294
43,885
 235
 46,774
 273
Construction - commercial residential7,247
 28
 9,771
 35
6,189
 15
 7,247
 28
Construction - commercial800
 
 193
 
616
 
 800
 
Construction - other281
 
 546
 
402
 
 281
 
Consumer - direct18
 
 13
 
17
 
 18
 
Consumer - indirect19
 
 2
 
16
 
 19
 
Leasing, other and overdrafts1,423
 
 
 
134,030
 502
 136,861
 520
137,421
 454
 134,030
 502
Total$195,781
 $697
 $201,630
 $702
$186,278
 $588
 $195,781
 $697
              
(1)All impaired loans, excluding accruing TDRs, were non-accrual loans. Interest income recognized for the three months ended March 31, 20152016 and 20142015 represents amounts earned on accruing TDRs.


18


Credit Quality Indicators and Non-performing Assets

The following table presents internal credit risk ratings for real estate - commercial mortgages, commercial - secured loans, commercial - unsecured loans, construction - commercial residential loans and construction - commercial loans:
Pass Special Mention Substandard or Lower TotalPass Special Mention Substandard or Lower Total
March 31, 2015 December 31, 2014 March 31, 2015 December 31, 2014 March 31, 2015 December 31, 2014 March 31, 2015 December 31, 2014March 31, 2016 December 31, 2015 March 31, 2016 December 31, 2015 March 31, 2016 December 31, 2015 March 31, 2016 December 31, 2015
(dollars in thousands)(dollars in thousands)
Real estate - commercial mortgage$4,919,760
 $4,899,016
 $123,644
 $127,302
 $183,697
 $170,837
 $5,227,101
 $5,197,155
$5,283,340
 $5,204,263
 $121,889
 $102,625
 $152,879
 $155,442
 $5,558,108
 $5,462,330
Commercial - secured3,344,506
 3,333,486
 151,724
 120,584
 112,156
 110,544
 3,608,386
 3,564,614
3,668,743
 3,696,692
 78,508
 92,711
 134,446
 136,710
 3,881,697
 3,926,113
Commercial - unsecured142,536
 146,680
 3,331
 7,463
 8,378
 6,810
 154,245
 160,953
147,630
 156,742
 2,634
 2,761
 3,372
 3,346
 153,636
 162,849
Total commercial - industrial, financial and agricultural3,487,042
 3,480,166
 155,055
 128,047
 120,534
 117,354
 3,762,631
 3,725,567
3,816,373
 3,853,434
 81,142
 95,472
 137,818
 140,056
 4,035,333
 4,088,962
Construction - commercial residential173,833
 136,109
 20,662
 27,495
 37,038
 40,066
 231,533
 203,670
146,590
 140,337
 17,068
 17,154
 18,621
 21,812
 182,279
 179,303
Construction - commercial378,131
 409,631
 11,802
 12,202
 3,475
 5,586
 393,408
 427,419
559,351
 552,710
 2,842
 3,684
 4,623
 3,597
 566,816
 559,991
Total construction (excluding Construction - other)551,964
 545,740
 32,464
 39,697
 40,513
 45,652
 624,941
 631,089
705,941
 693,047
 19,910
 20,838
 23,244
 25,409
 749,095
 739,294
$8,958,766
 $8,924,922
 $311,163
 $295,046
 $344,744
 $333,843
 $9,614,673
 $9,553,811
$9,805,654
 $9,750,744
 $222,941
 $218,935
 $313,941
 $320,907
 $10,342,536
 $10,290,586
% of Total93.2% 93.4% 3.2% 3.1% 3.6% 3.5% 100.0% 100.0%94.8% 94.8% 2.2% 2.1% 3.0% 3.1% 100.0% 100.0%

The following is a summary of the Corporation's internal risk rating categories:
Pass: These loans do not currently pose undue credit risk and can range from the highest to average quality, depending on the degree of potential risk.
Special Mention: These loans constitute an undue and unwarranted credit risk, but not to a point of justifying a classification of substandard. Loans in this category are currently acceptable, but are nevertheless potentially weak.
Substandard or Lower: These loans are inadequately protected by current sound worth and paying capacity of the borrower. There exists a well-defined weakness or weaknesses that jeopardize the normal repayment of the debt.

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

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

19


The following table presents a summary of delinquency and non-performing status for home equity, real estate - residential mortgages, construction loans to individuals and consumer, leasing and other loans by class segment:
Performing Delinquent (1) Non-performing (2) TotalPerforming Delinquent (1) Non-performing (2) Total
March 31, 2015 December 31, 2014 March 31, 2015 December 31, 2014 March 31, 2015 December 31, 2014 March 31, 2015 December 31, 2014March 31, 2016 December 31, 2015 March 31, 2016 December 31, 2015 March 31, 2016 December 31, 2015 March 31, 2016 December 31, 2015
(dollars in thousands)(dollars in thousands)
Real estate - home equity$1,674,544
 $1,711,017
 $12,624
 $10,931
 $14,455
 $14,740
 $1,701,623
 $1,736,688
$1,636,040
 $1,660,773
 $9,033
 $8,983
 $14,408
 $14,683
 $1,659,481
 $1,684,439
Real estate - residential mortgage1,312,299
 1,321,139
 23,894
 26,934
 28,595
 28,995
 1,364,788
 1,377,068
1,334,744
 1,329,371
 17,533
 18,305
 25,182
 28,484
 1,377,459
 1,376,160
Construction - other52,119
 59,180
 417
 
 329
 332
 52,865
 59,512
60,481
 59,997
 686
 88
 610
 609
 61,777
 60,694
Consumer - direct97,959
 104,018
 2,919
 2,891
 2,390
 2,414
 103,268
 109,323
90,204
 94,262
 1,662
 2,254
 1,597
 2,203
 93,463
 98,719
Consumer - indirect152,286
 153,358
 1,653
 2,574
 94
 176
 154,033
 156,108
167,863
 166,823
 1,690
 2,809
 205
 237
 169,758
 169,869
Total consumer250,245
 257,376
 4,572
 5,465
 2,484
 2,590
 257,301
 265,431
258,067
 261,085
 3,352
 5,063
 1,802
 2,440
 263,221
 268,588
Leasing and other and overdrafts122,255
 118,550
 1,976
 523
 24
 133
 124,255
 119,206
Leasing, overdrafts and other164,002
 155,870
 711
 759
 1,514
 1,506
 166,227
 158,135
$3,411,462
 $3,467,262
 $43,483
 $43,853
 $45,887
 $46,790
 $3,500,832
 $3,557,905
$3,453,334
 $3,467,096
 $31,315
 $33,198
 $43,516
 $47,722
 $3,528,165
 $3,548,016
% of Total97.5% 97.5% 1.2% 1.2% 1.3% 1.3% 100.0% 100.0%97.9% 97.7% 0.9% 1.0% 1.2% 1.3% 100.0% 100.0%

(1)Includes all accruing loans 3130 days to 89 days past due.
(2)Includes all accruing loans 90 days or more past due and all non-accrual loans.
The following table presents non-performing assets:
 March 31,
2015
 December 31,
2014
 (in thousands)
Non-accrual loans$129,929
 $121,080
Accruing loans greater than 90 days past due19,365
 17,402
Total non-performing loans149,294
 138,482
Other real estate owned (OREO)14,251
 12,022
Total non-performing assets$163,545
 $150,504
The following table presents TDRs, by class segment:
 March 31,
2015
 December 31,
2014
 (in thousands)
Real-estate - residential mortgage$31,574
 $31,308
Real-estate - commercial mortgage23,468
 18,822
Construction - commercial residential7,791
 9,241
Commercial - secured6,786
 5,170
Real estate - home equity3,084
 2,975
Commercial - unsecured189
 67
Consumer - indirect17
 19
Consumer - direct17
 19
Total accruing TDRs72,926
 67,621
Non-accrual TDRs (1)29,392
 24,616
Total TDRs$102,318
 $92,237
(1)Included within non-accrual loans in the preceding table detailing non-performing assets.

As of March 31, 2015 and December 31, 2014, there were $7.1 million and $3.9 million, respectively, of commitments to lend additional funds to borrowers whose loans were modified under TDRs.
 March 31,
2016
 December 31,
2015
 (in thousands)
Non-accrual loans$122,170
 $129,523
Loans 90 days or more past due and still accruing15,013
 15,291
Total non-performing loans137,183
 144,814
Other real estate owned (OREO)10,946
 11,099
Total non-performing assets$148,129
 $155,913


20


The following table presents TDRs, by class segment as of March 31, 2015 and 2014 that were modified during the three months ended March 31, 2015 and 2014:
 2015 2014
 Number of Loans Recorded Investment Number of Loans Recorded Investment
 (dollars in thousands)
Commercial - secured8 $6,776
  $
Real estate - commercial mortgage3 2,495
 7 7,470
Construction - commercial residential1 889
 1 548
Real estate - residential mortgage4 610
 6 706
Real estate - home equity10 492
 10 529
Commercial - unsecured1 42
  
Consumer - indirect1 13
 3 1
Consumer - direct 
 4 4
Total28 $11,317
 31 $9,258

The following table presents TDRs, by class segment as of March 31, 2015 and 2014 that were modified within the previous 12 months and had a post-modification payment default during the three months ended March 31, 2015 and 2014. The Corporation defines a payment default as a single missed payment.
 2015 2014
 Number of Loans Recorded Investment Number of Loans Recorded Investment
 (dollars in thousands)
Commercial - secured7 $7,888
 1 $11
Real estate - commercial mortgage2 1,659
 3 126
Construction - commercial residential1 1,366
 1 619
Real estate - home equity7 816
 14 1,432
Real estate - residential mortgage8 748
 12 2,522
Total25 $12,477
 31 $4,710

21


The following table presents past due status and non-accrual loans by portfolio segment and class segment:
March 31, 2015March 31, 2016
31-59
Days Past
Due
 
60-89
Days Past
Due
 
≥ 90 Days
Past Due
and
Accruing
 
Non-
accrual
 
Total ≥ 90
Days
 
Total Past
Due
 Current Total
30-59
Days Past
Due
 
60-89
Days Past
Due
 
≥ 90 Days
Past Due
and
Accruing
 
Non-
accrual
 
Total ≥ 90
Days
 
Total Past
Due
 Current Total
(in thousands)(in thousands)
Real estate - commercial mortgage$20,528
 $5,620
 $40
 $46,291
 $46,331
 $72,479
 $5,154,622
 $5,227,101
$6,604
 $1,824
 $2,271
 $40,861
 $43,132
 $51,560
 $5,506,548
 $5,558,108
Commercial - secured8,056
 1,002
 3,646
 38,548
 42,194
 51,252
 3,557,134
 3,608,386
16,053
 3,194
 2,024
 36,360
 38,384
 57,631
 3,824,066
 3,881,697
Commercial - unsecured832
 58
 
��1,071
 1,071
 1,961
 152,284
 154,245
415
 
 
 756
 756
 1,171
 152,465
 153,636
Total commercial - industrial, financial and agricultural8,888
 1,060
 3,646
 39,619
 43,265
 53,213
 3,709,418
 3,762,631
16,468
 3,194
 2,024
 37,116
 39,140
 58,802
 3,976,531
 4,035,333
Real estate - home equity10,347
 2,277
 4,785
 9,670
 14,455
 27,079
 1,674,544
 1,701,623
7,024
 2,009
 2,914
 11,494
 14,408
 23,441
 1,636,040
 1,659,481
Real estate - residential mortgage16,375
 7,519
 8,242
 20,353
 28,595
 52,489
 1,312,299
 1,364,788
12,136
 5,397
 4,402
 20,780
 25,182
 42,715
 1,334,744
 1,377,459
Construction - commercial residential1,559
 151
 98
 12,442
 12,540
 14,250
 217,283
 231,533
1,550
 1,967
 1,495
 9,294
 10,789
 14,306
 167,973
 182,279
Construction - commercial
 
 
 1,271
 1,271
 1,271
 392,137
 393,408

 
 12
 594
 606
 606
 566,210
 566,816
Construction - other417
 
 48
 281
 329
 746
 52,119
 52,865
686
 
 
 610
 610
 1,296
 60,481
 61,777
Total real estate - construction1,976
 151
 146
 13,994
 14,140
 16,267
 661,539
 677,806
2,236
 1,967
 1,507
 10,498
 12,005
 16,208
 794,664
 810,872
Consumer - direct1,978
 941
 2,390
 
 2,390
 5,309
 97,959
 103,268
1,068
 594
 1,597
 
 1,597
 3,259
 90,204
 93,463
Consumer - indirect1,422
 231
 92
 2
 94
 1,747
 152,286
 154,033
1,483
 207
 205
 
 205
 1,895
 167,863
 169,758
Total consumer3,400
 1,172
 2,482
 2
 2,484
 7,056
 250,245
 257,301
2,551
 801
 1,802
 
 1,802
 5,154
 258,067
 263,221
Leasing and other and overdrafts1,666
 310
 24
 
 24
 2,000
 122,255
 124,255
Leasing, overdrafts
and other
615
 96
 93
 1,421
 1,514
 2,225
 164,002
 166,227
Total$63,180
 $18,109
 $19,365
 $129,929
 $149,294
 $230,583
 $12,884,922
 $13,115,505
$47,634
 $15,288
 $15,013
 $122,170
 $137,183
 $200,105
 $13,670,596
 $13,870,701


December 31, 2014December 31, 2015
31-59
Days Past
Due
 
60-89
Days Past
Due
 
≥ 90 Days
Past Due
and
Accruing
 
Non-
accrual
 
Total ≥ 90
Days
 
Total Past
Due
 Current Total
30-59
Days Past
Due
 
60-89
Days Past
Due
 
≥ 90 Days
Past Due
and
Accruing
 
Non-
accrual
 
Total ≥ 90
Days
 
Total Past
Due
 Current Total
(in thousands)(in thousands)
Real estate - commercial mortgage$14,399
 $3,677
 $800
 $44,437
 $45,237
 $63,313
 $5,133,842
 $5,197,155
$6,469
 $1,312
 $439
 $40,731
 $41,170
 $48,951
 $5,413,379
 $5,462,330
Commercial - secured4,839
 958
 610
 28,747
 29,357
 35,154
 3,529,460
 3,564,614
5,654
 2,615
 1,853
 41,498
 43,351
 51,620
 3,874,493
 3,926,113
Commercial - unsecured395
 65
 9
 1,022
 1,031
 1,491
 159,462
 160,953
510
 83
 19
 701
 720
 1,313
 161,536
 162,849
Total commercial - industrial, financial and agricultural5,234
 1,023
 619
 29,769
 30,388
 36,645
 3,688,922
 3,725,567
6,164
 2,698
 1,872
 42,199
 44,071
 52,933
 4,036,029
 4,088,962
Real estate - home equity8,048
 2,883
 4,257
 10,483
 14,740
 25,671
 1,711,017
 1,736,688
6,438
 2,545
 3,473
 11,210
 14,683
 23,666
 1,660,773
 1,684,439
Real estate - residential mortgage18,789
 8,145
 8,952
 20,043
 28,995
 55,929
 1,321,139
 1,377,068
15,141
 3,164
 6,570
 21,914
 28,484
 46,789
 1,329,371
 1,376,160
Construction - commercial residential160
 
 
 13,463
 13,463
 13,623
 190,047
 203,670
1,366
 494
 
 11,213
 11,213
 13,073
 166,230
 179,303
Construction - commercial
 
 
 2,604
 2,604
 2,604
 424,815
 427,419
50
 176
 
 638
 638
 864
 559,127
 559,991
Construction - other
 
 51
 281
 332
 332
 59,180
 59,512
88
 
 416
 193
 609
 697
 59,997
 60,694
Total real estate - construction160
 
 51
 16,348
 16,399
 16,559
 674,042
 690,601
1,504
 670
 416
 12,044
 12,460
 14,634
 785,354
 799,988
Consumer - direct2,034
 857
 2,414
 
 2,414
 5,305
 104,018
 109,323
1,687
 567
 2,203
 
 2,203
 4,457
 94,262
 98,719
Consumer - indirect2,156
 418
 176
 
 176
 2,750
 153,358
 156,108
2,308
 501
 237
 
 237
 3,046
 166,823
 169,869
Total consumer4,190
 1,275
 2,590
 
 2,590
 8,055
 257,376
 265,431
3,995
 1,068
 2,440
 
 2,440
 7,503
 261,085
 268,588
Leasing and other and overdrafts357
 166
 133
 
 133
 656
 118,550
 119,206
Leasing, overdrafts
and other
483
 276
 81
 1,425
 1,506
 2,265
 155,870
 158,135
Total$51,177
 $17,169
 $17,402
 $121,080
 $138,482
 $206,828
 $12,904,888
 $13,111,716
$40,194
 $11,733
 $15,291
 $129,523
 $144,814
 $196,741
 $13,641,861
 $13,838,602


The following table presents TDRs:
22

 March 31,
2016
 December 31,
2015
 (in thousands)
Real-estate - residential mortgage$27,565
 $28,511
Real-estate - commercial mortgage17,427
 17,563
Commercial - secured5,522
 5,833
Construction - commercial residential3,092
 3,942
Real estate - home equity6,530
 4,556
Commercial - unsecured128
 120
Consumer - indirect12
 14
Consumer - direct20
 19
Total accruing TDRs60,296
 60,558
Non-accrual TDRs (1)27,277
 31,035
Total TDRs$87,573
 $91,593
(1)Included in non-accrual loans in the preceding table detailing non-performing assets.

As of March 31, 2016 and December 31, 2015, there were $3.8 million and $5.3 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 March 31, 2016 and 2015, that were modified during the three months ended March 31, 2016 and 2015:
 2016 2015
Number of Loans Post-Modification Recorded Investment Number of Loans Post-Modification Recorded Investment
 (dollars in thousands)
Commercial – secured:       
 Extend maturity without rate concession2
 $830
 8
 $6,776
Commercial – unsecured:       
 Extend maturity without rate concession2
 103
 1
 42
Real estate - commercial mortgage:       
 Extend maturity without rate concession
 
 3
 2,495
Real estate - home equity:       
 Extend maturity with rate concession1
 44
 
 
 Bankruptcy37
 2,698
 10
 492
Real estate – residential mortgage:       
 Extend maturity with rate concession
 
 1
 104
 Extend maturity without rate concession
 
 2
 225
 Bankruptcy
 
 1
 281
Construction - commercial residential:       
 Extend maturity without rate concession
 
 1
 889
Consumer - direct:       
 Bankruptcy1
 2
 
 
Consumer - indirect:       
 Bankruptcy
 
 1
 13
         
Total43
 $3,677
 28
 $11,317

The following table presents TDRs, by class segment, as of March 31, 2016 and 2015, that were modified in the previous 12 months and had a post-modification payment default during the three months ended March 31, 2016 and 2015. The Corporation defines a payment default as a single missed payment.
 2016 2015
 Number of Loans Recorded Investment Number of Loans Recorded Investment
 (dollars in thousands)
Real estate - home equity14 $1,039
 7 $816
Real estate - residential mortgage3 260
 8 748
Real estate - commercial mortgage3 235
 2 1,659
Commercial - secured1 47
 7 7,888
Construction - commercial residential 
 1 1,366
Total21 $1,581
 25 $12,477




NOTE 6 – Mortgage Servicing Rights
The following table summarizes the changes in mortgage servicing rights ("MSRs"), which are included in other assets on the consolidated balance sheets:
Three months ended March 31Three months ended March 31 
2015 20142016 2015 
(in thousands)(in thousands)
Amortized cost:       
Balance at beginning of period$42,148
 $42,452
$40,944
 $42,148
 
Originations of mortgage servicing rights1,557
 1,115
920
 1,557
 
Amortization(1,902) (1,899)(1,669) (1,902) 
Balance at end of period$41,803
 $41,668
$40,195
 $41,803
 

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 estimatesaccounts for MSRs at the lower of amortized cost or fair value.

The fair value of its MSRs is estimated by discounting the estimated cash flows from servicing income, net of expense, over the expected life of the underlying loans at a discount rate commensurate with the risk associated with these assets. Expected life is based on the contractual terms of the loans, as adjusted for prepayment projections. No valuation allowance was necessary as of March 31, 20152016 or 2014.2015.
The Corporation accounts for MSRs at the lower of amortized cost or fair value.
As of March 31, 2015,2016, the estimated fair value of MSRs was $43.6$40.8 million, which exceeded their book value.


NOTE 7 – Stock-Based Compensation

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

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

Equity awards issued under the Employee Equity Plan are generally granted annually and become fully vested over or after a three-year vesting period. The vesting period for non-performance basednon-performance-based awards represents the period during which employees are required to provide service in exchange for such awards. Equity awards under the Directors' Plan generally vest immediately upon grant. Certain events, as defined in the Employee Equity Plan and the Directors' Plan, result in the acceleration of the vesting of equity awards.

The following table presents compensation expense and the related tax benefits for equity awards recognized in the consolidated statements of income:
Three months ended March 31Three months ended March 31
2015 20142016 2015
(in thousands)(in thousands)
Stock-based compensation expense$1,071
 $1,033
$1,436
 $1,071
Tax benefit(292) (263)(433) (292)
Stock-based compensation expense, net of tax$779
 $770
$1,003
 $779



Stock option fair values are estimated through the use of the Black-Scholes valuation methodology as of the date of grant. Stock options carry terms of up to ten years. Fair values for restricted stock, RSUs and a majority of PSUs are based on the trading price of the Corporation’s stock on the date of grant and earn dividends during the vesting period, which are forfeitable if the awards

23


do not vest. The fair value of certain PSUs are estimated through the use of the Monte Carlo valuation methodology as of the date of grant.

As of March 31, 20152016, the Employee Equity Plan had 11.5 million shares reserved for future grants through 2023, and the Directors’ Plan had approximately 410,000396,000 shares reserved for future grants through 2021. On April 1, 2015, the Corporation granted approximately 403,000 PSUs and 139,500 RSUs under its Employee Equity Plan.

NOTE 8 – Employee Benefit Plans
The Corporation maintains a defined benefit pension plan ("Pension Plan") for certain employees, which was curtailed effectivein January 1, 2008. Contributions to the Pension Plan are actuarially determined and funded annually, if required. Pension Plan assets are invested in: money markets; fixed income securities, including corporate bonds, U.S. Treasury securities and common trust funds; and equity securities, including common stocks and common stock mutual funds.
The net periodic benefit cost for the Corporation’s Pension Plan consisted of the following components:
Three months ended March 31Three months ended March 31
2015 20142016 2015
(in thousands)(in thousands)
Service cost (1)$145
 $92
$150
 $145
Interest cost851
 853
881
 851
Expected return on plan assets(752) (811)(726) (752)
Net amortization and deferral782
 244
782
 782
Net periodic benefit cost$1,026
 $378
$1,087
 $1,026

(1)
The Pension Plan serviceService cost recorded for the three months ended March 31, 2015 and 2014 was related to administrative costs associated with the plan and was not due to the accrual of additional participant benefits.
The Corporation currently provides medical and life insurance benefits under a postretirement benefits plan ("Postretirement Plan") to certain retired full-time employeesretirees who were employees of the Corporation prior to January 1, 1998.
Effective and retired from employment with the Corporation prior to February 1, 2014, the Corporation amended the Postretirement Plan, making all active full-time employees ineligible for benefits under this plan. As a result of this amendment, the Corporation recorded a $1.5 million gain during the three months ended March 31, 2014, as a reduction to salaries and employee benefits on the consolidated statements of income. The gain resulted from the recognition of the remaining prior service cost prior to the amendment date as of December 31, 2013. In addition, this amendment resulted in a $3.4 million decrease in the accumulated postretirement benefit obligation and a corresponding increase in unrecognized prior service cost credits.2014.
The net periodic cost (benefit) of the Corporation’s Postretirement Plan consisted of the following components, excluding the $1.5 million plan amendment gain in 2014:components:
Three months ended March 31Three months ended March 31
2015 20142016 2015
(in thousands)(in thousands)
Service cost (1)$
 $15
Interest cost52
 61
38
 52
Net accretion and deferral(65) (95)(65) (65)
Net periodic benefit$(13) $(19)$(27) $(13)

(1)As a result of the plan amendment, additional participant benefits are not accrued under the Postretirement Plan after February 1, 2014.
The Corporation recognizes the funded status of its Pension Plan and Postretirement Plan on the consolidated balance sheets and recognizes the change in that funded status through other comprehensive income.

24


NOTE 9 – Derivative Financial Instruments

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

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



Mortgage Banking Derivatives

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

Interest Rate Swaps

The Corporation enters into interest rate swaps with certain qualifying commercial loan customers to meet their interest rate risk management needs. The Corporation simultaneously enters into interest rate swaps with dealer counterparties, with identical notional amounts and terms. The net result of these interest rate swaps is that the customer pays a fixed rate of interest and the Corporation receives a floating rate. These interest rate swaps are derivative financial instruments that are recorded at their fair value withinin other assets and other liabilities on the consolidated balance sheets. Changessheets, with changes in fair value during the period are recorded withinin 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.$500,000. Gross derivative assets and liabilities are recorded withinin other assets and other liabilities, respectively, on the consolidated balance sheets, with changes in fair values during the period recorded within other service charges and fees on the consolidated statements of income.

25


The following table presents a summary of the notional amounts and fair values of derivative financial instruments:
March 31, 2015 December 31, 2014March 31, 2016 December 31, 2015
Notional
Amount
 Asset
(Liability)
Fair Value
 Notional
Amount
 Asset
(Liability)
Fair Value
Notional
Amount
 Asset
(Liability)
Fair Value
 Notional
Amount
 Asset
(Liability)
Fair Value
(in thousands)(in thousands)
Interest Rate Locks with Customers              
Positive fair values$151,389
 $2,509
 $89,655
 $1,391
$130,306
 $2,507
 $87,781
 $1,291
Negative fair values187
 (2) 301
 (6)3
 
 267
 (16)
Net interest rate locks with customers
 2,507
 
 1,385

 2,507
 
 1,275
Forward Commitments              
Positive fair values
 
 69,045
 205
Negative fair values144,370
 (610) 93,802
 (1,164)120,830
 (925) 16,193
 (24)
Net forward commitments  (925)   181
Interest Rate Swaps with Customers              
Positive fair values535,786
 29,035
 468,080
 19,716
939,820
 62,323
 846,490
 32,915
Negative fair values8,000
 (113) 25,418
 (198)8,000
 (32) 8,757
 (55)
Net interest rate swaps with customers  28,922
   19,518
  62,291
   32,860
Interest Rate Swaps with Dealer Counterparties              
Positive fair values8,000
 113
 25,418
 198
8,000
 32
 8,757
 55
Negative fair values535,786
 (29,035) 468,080
 (19,716)939,820
 (62,323) 846,490
 (32,915)
Net interest rate swaps with dealer counterparties  (28,922)   (19,518)  (62,291)   (32,860)
Foreign Exchange Contracts with Customers              
Positive fair values12,642
 1,411
 11,616
 810
8,661
 565
 4,897
 114
Negative fair values7,033
 (475) 5,250
 (441)6,380
 (261) 8,050
 (184)
Net foreign exchange contracts with customers  936
   369
  304
   (70)
Foreign Exchange Contracts with Correspondent Banks              
Positive fair values8,053
 952
 5,287
 446
10,863
 463
 9,728
 428
Negative fair values14,825
 (1,706) 13,572
 (876)8,910
 (461) 6,899
 (147)
Net foreign exchange contracts with correspondent banks  (754)   (430)  2
   281
Net derivative fair value asset  $2,079
   $160
  $1,888
   $1,667

The following table presents a summary of the fair value gains and losses on derivative financial instruments:
Three months ended March 31Three months ended March 31
2015 20142016 2015
(in thousands)(in thousands)
Interest rate locks with customers$1,122
 $389
$1,232
 $1,122
Forward commitments554
 (1,498)(1,106) 554
Interest rate swaps with customers9,404
 4,205
29,431
 9,404
Interest rate swaps with dealer counterparties(9,404) (4,205)(29,431) (9,404)
Foreign exchange contracts with customers567
 192
374
 567
Foreign exchange contracts with correspondent banks(324) (268)(279) (324)
Net fair value gains (losses) on derivative financial instruments$1,919
 $(1,185)$221
 $1,919


26


NOTE 10 – Fair Value Option

U.S. GAAP permits entities to measure many financial instruments and certain other items at fair value and requires certain disclosures for amounts for which the fair value option is applied. The Corporation has elected to measure mortgage loans held for sale at fair value to more accurately reflect the financial results of its mortgage banking activities in its consolidated financial statements. Derivative financial instruments related to these activities are also recorded at fair value, as noted within Note 9, "Derivative Financial Instruments."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 values during the period are recorded as components of mortgage banking income on the consolidated statements of income. Interest income earned on mortgage loans held for sale is classified withinin interest income on the consolidated statements of income.

The following table presents a summary of the Corporation’s mortgage loans held for sale:
March 31,
2015
 December 31,
2014
March 31,
2016
 December 31,
2015
(in thousands)(in thousands)
Cost$33,421
 $17,080
$19,187
 $16,584
Fair value34,124
 17,522
19,719
 16,886

During the three months ended March 31, 20152016 and 2014,2015, the Corporation recorded gains related to changes in fair values of mortgage loans held for sale of $261,000$230,000 and $297,000,$261,000, respectively.

NOTE 11 – Balance Sheet Offsetting

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

The Corporation is a party to interest rate swap transactions with financial institution counterparties and customers, disclosed in detail within Note 9, "Derivative Financial Instruments."above. Under these agreements, the Corporation has the right to net settlenet-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 or the right to reclaim cash collateral exists in a net asset position in accordance with contract thresholds and can be used to settle the fair value of the interest rate swap agreements in the event of default.

The Corporation is also a party to foreign currency exchange contracts with financial institution counterparties, under which the Corporation has the right to net settlenet-settle multiple contracts with the same counterparty in the event of default on, or termination of, any one contract. As with interest rate swap contracts, cash collateral is posted by the party with a net liability position or the right to reclaim cash collateral exists in a net asset position in accordance with contract thresholds and can be used to settle the fair value of the foreign currency exchange contracts in the event of default. For additional details, see Note 9, "Derivative Financial Instruments."

The Corporation also enters into agreements with customers in which it sells securities subject to an obligation to repurchase the same or similar securities, referred to as repurchase agreements. Under these agreements, the Corporation may transfer legal control over the assets but still maintain effective control through agreements that both entitle and obligate the Corporation to repurchase the assets. Therefore, repurchase agreements are reported as secured borrowings, classified withinin 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,amounts. Therefore, these repurchase agreements are not eligible for offset.














27





The following table presents the Corporation's financial instruments that are eligible for offset, and the effects of offsetting, on the consolidated balance sheets:
Gross Amounts Gross Amounts Not Offset  Gross Amounts Gross Amounts Not Offset  
Recognized  on the Consolidated  Recognized  on the Consolidated  
on the Balance Sheets  on the Balance Sheets  
Consolidated Financial Cash NetConsolidated Financial Cash Net
Balance Sheets Instruments (1) Collateral (2) AmountBalance Sheets Instruments (1) Collateral (2) Amount
(in thousands)(in thousands)
March 31, 2015       
March 31, 2016       
Interest rate swap derivative assets$29,148
 $(113) $
 $29,035
$62,355
 $(32) $
 $62,323
Foreign exchange derivative assets with correspondent banks952
 (952) 
 
463
 (303) 
 160
Total$30,100
 $(1,065) $
 $29,035
$62,818
 $(335) $
 $62,483
              
Interest rate swap derivative liabilities$29,148
 $(113) $(28,070) $965
$62,355
 $(32) $(59,130) $3,193
Foreign exchange derivative liabilities with correspondent banks1,706
 (952) (940) (186)461
 (303) 300
 458
Total$30,854
 $(1,065) $(29,010) $779
$62,816
 $(335) $(58,830) $3,651
              
December 31, 2014       
December 31, 2015       
Interest rate swap derivative assets$19,914
 $(206) $
 $19,708
$32,970
 $(55) $
 $32,915
Foreign exchange derivative assets with correspondent banks446
 (446) 
 
428
 (147) 
 281
Total$20,360
 $(652) $
 $19,708
$33,398
 $(202) $
 $33,196
              
Interest rate swap derivative liabilities$19,914
 $(206) $(19,210) $498
$32,970
 $(55) $(31,130) $1,785
Foreign exchange derivative liabilities with correspondent banks876
 (446) (310) 120
147
 (147) 
 
Total$20,790
 $(652) $(19,520) $618
$33,117
 $(202) $(31,130) $1,785

(1)For interest rate swap and foreign exchange derivative assets, amounts represent any derivative liability fair values that could be offset in the event of counterparty or customer default. For interest rate swap and foreign exchange derivative liabilities, amounts represent any derivative asset fair values that could be offset in the event of counterparty or customer default.
(2)Amounts represent cash collateral posted or the right to reclaim cash collateral on interest rate swap transactions with financial institution counterparties. Interest rate swapscounterparties and on foreign exchange derivative transactions with customers are collateralized by the underlying loans to those borrowers.correspondent banks.

NOTE 1210 – Commitments and Contingencies

Commitments

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

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

The outstanding amounts of commitments to extend credit and letters of credit as of the dates indicated were as follows:
March 31,
2015
 December 31, 2014March 31,
2016
 December 31, 2015
(in thousands)(in thousands)
Commitments to extend credit$4,575,869
 $4,389,064
$5,932,144
 $5,784,138
Standby letters of credit379,947
 382,465
369,932
 374,729
Commercial letters of credit36,049
 32,304
37,596
 39,529

The Corporation records a reserve for unfunded lending commitments, which represents management’s estimate of losses associated with unused commitments to extend credit. See Note 5, "Loans and Allowance for Credit Losses," for additional details.







Residential Lending

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

28



The Corporation provides customary representations and warranties to government sponsored entities and investors that specify, among other things, that the loans have been underwritten to the standards established by the government sponsored entity or investor. The Corporation may be required to repurchase a loan, or reimburse the government sponsored entity or investor for a credit loss incurred on a loan, if it is determined that the representations and warranties have not been met. Such repurchases or reimbursements generally result from an underwriting or documentation deficiency. As of both March 31, 20152016 and December 31, 2014,2015, total outstanding repurchase requests totaled $803,000 and $917,000, respectively.approximately $543,000.

From 2000 to 2011, the Corporation sold loans to the Federal Home Loan Bank of Pittsburgh under its Mortgage Partnership Finance Program ("MPF Program"). No loans were sold under this program during the three months ended March 31, 2015 or 2014. The Corporation provided a "credit enhancement" for residential mortgage loans sold under the MPF Program whereby it would assume credit losses in excess of a defined "First Loss Account," or "FLA" balance, up to specified amounts. The FLA is funded by the Federal Home Loan Bank of Pittsburgh based on a percentage of the outstanding principal balance of loans sold. As of March 31, 2015,2016, the unpaid principal balance of loans sold under the MPF Program was approximately $148$120 million. As of March 31, 20152016 and December 31, 2014,2015, the reserve for estimated credit losses related to loans sold under the MPF Program was $2.2$2.0 million and $2.3$1.8 million, respectively. Required reserves are calculated based on delinquency status and estimated loss rates established through the Corporation's existing allowance for credit losses methodology for residential mortgage loans.

As of March 31, 20152016 and December 31, 2014,2015, the total reserve for losses on residential mortgage loans sold was $3.0$2.7 million and $3.2$2.6 million, respectively, including both reserves for credit losses under the MPF Program and reserves for representation and warranty exposures. Management believes that the reserves recorded as of March 31, 20152016 are adequate. However, declines in collateral values, the identification of additional loans to be repurchased, or a deterioration in the credit quality of loans sold under the MPF Program could necessitate additional reserves, established through charges to earnings, in the future.
Regulatory Matters
Legal Proceedings

As disclosed by the Corporation in Part II, Item 9B of its Annual Report on Form 10-K for the year ended December 31, 2014 filed with the SEC on February 25, 2015, in February 2015, Fulton Bank of New Jersey ("FBNJ"), a wholly owned banking subsidiary of the Corporation, entered into a Stipulation and Consent to the Issuance of a Consent Order with the FDIC consenting to the issuance by the FDIC of a Consent Order (the "FDIC Consent Order"). In addition, in February 2015, FBNJ entered into a Consent Order with the Commissioner of Banking and Insurance for the State of New Jersey (the "New Jersey Consent Order") and, together with the FDIC Consent Order, the "Consent Orders"). The Consent Orders impose substantially identical requirements and relate to identified deficiencies in a centralized Bank Secrecy Act and anti-money laundering compliance program (the "BSA/AML Compliance Program"), which was designed to comply with the requirements of the Bank Secrecy Act, the USA Patriot Act of 2001 and related anti-money laundering regulations (collectively, the "BSA/AML Requirements"). The Consent Orders generally require, among other things, that FBNJ review, assess and take actions to strengthen and enhance the BSA/AML Compliance Program, including increasing oversight of the BSA/AML Compliance Program by the Board of Directors of FBNJ; designating a qualified Bank Secrecy Act officer that is acceptable to the FDIC and the Commissioner of Banking and Insurance for the State of New Jersey, that reports monthly to the Board of Directors of FBNJ and is provided with sufficient authority and resources to implement and enforce the BSA/AML Compliance Program; enhancing the periodic risk assessment process relating to the BSA/AML Requirements; revising internal controls designed to ensure compliance with the BSA/AML Requirements, including enhancing customer due diligence procedures and establishing enhanced due diligence procedures for higher-risk customers; and reviewing and enhancing procedures for monitoring for, identifying, investigating and reporting suspicious activity, or known or suspected violations of law in accordance with the BSA/AML Requirements.

The Corporation and each of its other banking subsidiaries are subject to similar regulatory enforcement orders issued during 2014 by their respective bank regulatory agencies relating to identified deficiencies in the BSA/AML Compliance Program. Information relating to the regulatory enforcement orders issued during 2014 was disclosed by the Corporation in Current Reports on Form 8-K filed with the SEC on July 18, September 9, and December 29, 2014.

Other Contingencies
The Corporation and its subsidiaries are involved in various legal proceedings in the ordinary course of business of the Corporation. The Corporation periodically evaluates the possible impact of pending litigation matters based on, among other factors, the advice of counsel, available insurance coverage and recorded liabilities and reserves for probable legal liabilities and costs. In addition, from time to time, the Corporation is the subject of investigations or other forms of regulatory or governmental inquiry covering a range of possible issues and, in some cases, these may be part of similar reviews of the specified activities of other industry participants. These inquiries could lead to administrative, civil or criminal proceedings, and could possibly result in fines, penalties, restitution or the need to alter the Corporation’s business practices, and cause the Corporation to incur additional costs. The Corporation’s practice is to cooperate fully with regulatory and governmental investigations.

29



As of the date of this report, the Corporation believes that any liabilities, individually or in the aggregate, which may result from the final outcomes of pending proceedings will not have a material adverse effect on the financial condition the operating results and/or the liquidity of the Corporation. However, legal proceedings are often unpredictable, and it is possible that the actualultimate resolution of any such matters, if unfavorable, may be material to the Corporation’s results of such proceedings cannot be determined with certainty.operations for any particular period, depending, in part, upon the size of the loss or liability imposed and the operating results for the applicable period.

BSA/AML Enforcement Orders

The Corporation and each of its bank subsidiaries are subject to regulatory enforcement orders issued during 2014 and 2015 by their respective federal and state bank regulatory agencies relating to identified deficiencies in the Corporation’s centralized Bank Secrecy Act and anti-money laundering compliance program (the "BSA/AML Compliance Program"), which was designed to comply with the requirements of the Bank Secrecy Act, the USA Patriot Act of 2001 and related anti-money laundering regulations (collectively, the "BSA/AML Requirements"). The regulatory enforcement orders, which are in the form of consent orders or orders to cease and desist issued upon consent ("Consent Orders"), generally require, among other things, that the Corporation and its bank subsidiaries undertake a number of required actions to strengthen and enhance the BSA/AML Compliance Program, and, in some cases, conduct retrospective reviews of past account activity and transactions, as well as certain reports filed in accordance with the BSA/AML Requirements, to determine whether suspicious activity and certain transactions in currency were


properly identified and reported in accordance with the BSA/AML Requirements. In addition to requiring strengthening and enhancement of the BSA/AML Compliance Program, while the Consent Orders remain in effect, the Corporation is subject to certain restrictions on expansion activities of the Corporation and its bank subsidiaries. Further, any failure to comply with the requirements of any of the Consent Orders involving the Corporation or its bank subsidiaries could result in further enforcement actions, the imposition of material restrictions on the activities of the Corporation or its bank subsidiaries, or the assessment of fines or penalties.

Fair Lending Investigation

During the second quarter of 2015, Fulton Bank, N.A. (the "Bank"), the Corporation’s largest bank subsidiary, received a letter from the U.S. Department of Justice (the "Department") indicating that the Department had initiated an investigation regarding potential violations of fair lending laws by the Bank in certain of its geographies. The Bank is cooperating with the Department and responding to the Department’s requests for information. Although the Corporation is not able to predict the outcome of the Department’s investigation, it could result in legal proceedings the resolution of which could potentially involve a settlement, fines or other remedial actions.

Agostino, et al. Litigation

Fulton Bank, N.A. (the "Bank"), the Corporation’s largest bank subsidiary, and two unrelated, third-party defendants, Ameriprise Financial Services, Inc. and Riverview Bank, have been named as defendants in a lawsuit brought on behalf of a group of 58 plaintiffs filed on March 31, 2016 in the Court of Common Pleas for Dauphin County, Pennsylvania (Agostino, et al. v. Ameriprise Financial Services, Inc., et al., No. 2016-CV-2048-CV). The plaintiffs in this action, who are individuals, trustees of certain irrevocable trusts or the executors of the estates of deceased individuals, were clients of Jeffrey M. Mottern, a now deceased attorney, who is alleged to have operated a Ponzi scheme which defrauded the plaintiffs over a period of years through the sale of fictitious, high-yielding investments or by otherwise misappropriating funds entrusted to Mr. Mottern. Mr. Mottern is alleged to have used the proceeds of these activities to engage in speculative securities trading, which incurred significant losses, and for Mr. Mottern’s personal expenses. The allegations against the Bank relate to a commercial checking account at the Bank maintained by Mr. Mottern in connection with Mr. Mottern’s law practice. The lawsuit alleges that the Bank is liable to the plaintiffs for failing to properly monitor Mr. Mottern’s checking account and detect Mr. Mottern’s fraudulent activity, and specifically alleges that the Bank aided and abetted Mr. Mottern’s: (1) fraud; (2) breach of fiduciary duty; (3) violations of the Pennsylvania Unfair Trade Practices and Consumer Protection Law; and (4) conversion. Similar claims have been asserted against Ameriprise Financial Services, Inc. and Riverview Bank, which allegedly maintained a personal brokerage account and a trust account for client or other third-party funds, respectively, for Mr. Mottern. The lawsuit seeks damages from the defendants, including the Bank, alleged to be in excess of $11.3 million, treble damages and attorneys’ fees with respect to alleged violations of the Pennsylvania Unfair Trade Practices and Consumer Protection Law, punitive damages, plus interest and costs. On April 29, 2016, the Bank filed a Notice of Removal to remove this lawsuit to the United States District Court for the Middle District of Pennsylvania.

NOTE 1311 – Fair Value Measurements

FASB ASC Topic 820 establishes a fair value hierarchy for the inputs to valuation techniques used to measure assets and liabilities at fair value using the following three categories (from highest to lowest priority):
Level 1 – Inputs that represent quoted prices for identical instruments in active markets.
Level 2 – Inputs that represent quoted prices for similar instruments in active markets, or quoted prices for identical instruments in non-active markets. Also includes valuation techniques whose inputs are derived principally from observable market data other than quoted prices, such as interest rates or other market-corroborated means.
Level 3 – Inputs that are largely unobservable, as little or no market data exists for the instrument being valued.
The Corporation has categorized all assets and liabilities measured at fair value on both a recurring and nonrecurring basis into the above three levels.







The following tables present summaries of the Corporation’s assets and liabilities measured at fair value on a recurring basis and reported on the consolidated balance sheets:
 March 31, 2016
 Level 1 Level 2 Level 3 Total
 (in thousands)
Mortgage loans held for sale$
 $19,719
 $
 $19,719
Available for sale investment securities:       
Equity securities19,067
 
 
 19,067
U.S. Government sponsored agency securities
 25,173
 
 25,173
State and municipal securities
 314,010
 
 314,010
Corporate debt securities
 86,780
 3,106
 89,886
Collateralized mortgage obligations
 782,075
 
 782,075
Mortgage-backed securities
 1,188,668
 
 1,188,668
Auction rate securities
 
 97,326
 97,326
Total available for sale investment securities19,067
 2,396,706
 100,432
 2,516,205
Other assets16,674
 64,862
 
 81,536
Total assets$35,741
 $2,481,287
 $100,432
 $2,617,460
Other liabilities$16,373
 $63,280
 $
 $79,653
March 31, 2015December 31, 2015
Level 1 Level 2 Level 3 TotalLevel 1 Level 2 Level 3 Total
(in thousands)(in thousands)
Mortgage loans held for sale$
 $34,124
 $
 $34,124
$
 $16,886
 $
 $16,886
Available for sale investment securities:              
Equity securities40,608
 
 
 40,608
21,514
 
 
 21,514
U.S. Government sponsored agency securities
 203
 
 203

 25,136
 
 25,136
State and municipal securities
 224,342
 
 224,342

 262,765
 
 262,765
Corporate debt securities
 92,778
 4,904
 97,682

 93,619
 3,336
 96,955
Collateralized mortgage obligations
 867,876
 
 867,876

 821,509
 
 821,509
Mortgage-backed securities
 930,159
 
 930,159

 1,158,835
 
 1,158,835
Auction rate securities
 
 98,932
 98,932

 
 98,059
 98,059
Total available for sale investments40,608
 2,115,358
 103,836
 2,259,802
Total available for sale investment securities21,514
 2,361,864
 101,395
 2,484,773
Other assets19,198
 31,657
 
 50,855
16,129
 34,465
 
 50,594
Total assets$59,806
 $2,181,139
 $103,836
 $2,344,781
$37,643
 $2,413,215
 $101,395
 $2,552,253
Other liabilities$19,009
 $29,760
 $
 $48,769
$15,914
 $33,010
 $
 $48,924

30


 December 31, 2014
 Level 1 Level 2 Level 3 Total
 (in thousands)
Mortgage loans held for sale$
 $17,522
 $
 $17,522
Available for sale investment securities:       
Equity securities47,623
 
 
 47,623
U.S. Government securities
 200
 
 200
U.S. Government sponsored agency securities
 214
 
 214
State and municipal securities
 245,215
 
 245,215
Corporate debt securities
 90,126
 7,908
 98,034
Collateralized mortgage obligations
 902,313
 
 902,313
Mortgage-backed securities
 928,831
 
 928,831
Auction rate securities
 
 100,941
 100,941
Total available for sale investments47,623
 2,166,899
 108,849
 2,323,371
Other assets17,682
 21,305
 
 38,987
Total assets$65,305
 $2,205,726
 $108,849
 $2,379,880
Other liabilities$17,737
 $21,084
 $
 $38,821
The valuation techniques used to measure fair value for the items in the preceding tables are as follows:
Mortgage loans held for sale – This category consists of mortgage loans held for sale that the Corporation has elected to measure at fair value. Fair values as of March 31, 20152016 and December 31, 20142015 were measured based on the price that secondary market investors were offering for loans with similar characteristics. See Note 10, "Fair Value Option"9, "Derivative Financial Instruments" for details related to the Corporation’s election to measure assets and liabilities at fair value.
Available for sale investment securities – Included withinin this asset category are both equity and debt securities. Level 2 available for sale debt securities are valued by a third-party pricing service commonly used in the banking industry. The pricing service uses pricing models that vary based on asset class and incorporate available market information, including quoted prices of investment securities with similar characteristics. Because many fixed income securities do not trade on a daily basis, pricing models use available information, as applicable, through processes such as benchmark yield curves, benchmarking of like securities, sector groupings, and matrix pricing.
Standard market inputs include: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data, including market research publications. For certain security types, additional inputs may be used, or some of the standard market inputs may not be applicable.



Management tests the values provided by the pricing service by obtaining securities prices from an alternative third-party source and comparing the results. This test is done for approximately 80% of the securities valued by the pricing service. Generally, differences by security in excess of 5% are researched to reconcile the difference.
Equity securities – Equity securities consist of common stocks of financial institutions ($34.718.2 million at March 31, 20152016 and $41.8$20.6 million at December 31, 2014)2015) and other equity investments ($5.9 million892,000 at March 31, 20152016 and $5.8 million$914,000 at December 31, 2014)2015). These Level 1 investments are measured at fair value based on quoted prices for identical securities in active markets.
U.S. Government securities/U.S. Government sponsored agency securities/State and municipal securities/Collateralized mortgage obligations/Mortgage-backed securities – These debt securities are classified as Level 2 investments. Fair values are determined by a third-party pricing service, as detailed above.
Corporate debt securities – This category consists of subordinated debt issued by financial institutions ($50.249.3 million at March 31, 20152016 and $50.0$53.1 million at December 31, 2014)2015), single-issuer trust preferred securities issued by financial institutions ($42.935.9 million at March 31, 20152016 and $42.0$39.1 million at December 31, 2014)2015), pooled trust preferred securities issued by financial institutions ($1.1 million706,000 at both March 31, 20152016 and $4.1 million at December 31, 2014)2015) and other corporate debt issued by non-financial institutions ($3.64.0 million at both March 31, 20152016 and $1.9 million at December 31, 2014)2015).
Level 2 investments include the Corporation’s holdings of subordinated debt, other corporate debt issued by non-financial institutions and $39.0$33.5 million and $38.2$36.5 million of single-issuer trust preferred securities held at

31


March 31, 20152016 and December 31, 2014,2015, respectively. The fair values for these corporate debt securities are determined by a third-party pricing service, as detailed above.
Level 3 investments include the Corporation’s investments in pooled trust preferred securities ($706,000 at both March 31, 2016 and December 31, 2015) and certain single-issuer trust preferred securities ($3.82.4 million at March 31, 20152016 and $2.6 million at December 31, 2014)2015). 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 withinin 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 fair values are tested by management through the performance of a trend analysis of the market price and discount rate. Changes in the price and discount rates are compared to changes in market data, including bond ratings, parity ratios, balances and delinquency levels.
Other assets – Included withinin this category are the following:
Level 1 assets include mutual funds that are held in trust for employee deferred compensation plans ($16.815.7 million at March 31, 20152016 and $16.4$15.6 million at December 31, 2014)2015) and the fair value of foreign currency exchange contracts ($2.41.0 million at March 31, 20152016 and $1.3 million$547,000 at December 31, 2014)2015). The mutual funds and foreign exchange prices used to measure these items at fair value are based on quoted prices for identical instruments in active markets.
Level 2 assets include the fair value of mortgage banking derivatives in the form of interest rate locks and forward commitments with secondary market investors ($2.5 million at March 31, 20152016 and $1.4$1.5 million at December 31, 2014)2015) and the fair value of interest rate swaps ($29.162.4 million at March 31, 20152016 and $19.9$33.0 million at December 31, 2014)2015). The fair values of the Corporation’s interest rate locks, forward commitments and interest rate swaps represent the amounts that would be required to settle the derivative financial instruments at the balance sheet date. See Note 9, "Derivative Financial Instruments," for additional information.



Other liabilities – Included withinin this category are the following:

Level 1 liabilities include employee deferred compensation liabilities which represent amounts due to employees under deferred compensation plans ($16.815.7 million at March 31, 20152016 and $16.4$15.6 million at December 31, 2014)2015) and the fair value of foreign currency exchange contracts ($2.2 million722,000 at March 31, 20152016 and $1.3 million$331,000 at December 31, 2014)2015). The fair value of these liabilities are determined in the same manner as the related assets, as described under the heading "Other assets" above.

Level 2 liabilities include the fair value of mortgage banking derivatives in the form of interest rate locks and forward commitments with secondary market investors ($612,000925,000 at March 31, 20152016 and $1.2 million$40,000 at December 31, 2014)2015) and the fair value of interest rate swaps ($29.162.4 million at March 31, 20152016 and $19.9$33.0 million at December 31, 2014)2015). The fair values of these liabilities are determined in the same manner as the related assets, as described under the heading "Other assets" above.






32


The following table presents the changes in the Corporation’s available for sale investment securities measured at fair value on a recurring basis using unobservable inputs (Level 3):
Three months ended March 31, 2015Three months ended March 31, 2016
Pooled Trust
Preferred
Securities
 Single-issuer
Trust Preferred
Securities
 ARCs
(in thousands)
Balance at December 31, 2015$706
 $2,630
 $98,059
Unrealized adjustment to fair value (1)

 (233) (832)
Discount accretion (2)

 3
 99
Balance at March 31, 2016$706
 $2,400
 $97,326
Pooled Trust
Preferred
Securities
 Single-issuer
Trust Preferred
Securities
 ARCs     
(in thousands)Three months ended March 31, 2015
Balance at December 31, 2014$4,088
 $3,820
 $100,941
$4,088
 $3,820
 $100,941
Sales(3,079) 
 
(3,079) 
 
Unrealized adjustment to fair value (1)190
 (2) 332
190
 (2) 332
Settlements - calls(117) 
 (2,446)(117) 
 (2,446)
Discount accretion (2)2
 2
 105
2
 2
 105
Balance at March 31, 2015$1,084
 $3,820
 $98,932
$1,084
 $3,820
 $98,932
          
Three months ended March 31, 2014
Balance at December 31, 2013$5,306
 $3,781
 $159,274
Sales
 
 (11,912)
Unrealized adjustment to fair value (1)521
 38
 124
Settlements - calls(172) 
 
Discount accretion (2)4
 1
 227
Balance at March 31, 2014$5,659
 $3,820
 $147,713

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














Certain financial assets are not measured at fair value on an ongoing basis, but are subject to fair value measurement in certain circumstances, such as upon their acquisition or when there is evidence of impairment. The following table presents the Corporation’s financial assets measured at fair value on a nonrecurring basis and reported on the Corporation’s consolidated balance sheets:
March 31, 2015March 31, 2016
Level 1 Level 2 Level 3 TotalLevel 1 Level 2 Level 3 Total
(in thousands)(in thousands)
Net loans$
 $
 $148,698
 $148,698
$
 $
 $131,875
 $131,875
Other financial assets
 
 56,054
 56,054

 
 51,141
 51,141
Total assets$
 $
 $204,752
 $204,752
$
 $
 $183,016
 $183,016
December 31, 2014December 31, 2015
Level 1 Level 2 Level 3 TotalLevel 1 Level 2 Level 3 Total
(in thousands)(in thousands)
Net loans$
 $
 $127,834
 $127,834
$
 $
 $138,491
 $138,491
Other financial assets
 
 54,170
 54,170

 
 52,043
 52,043
Total assets$
 $
 $182,004
 $182,004
$
 $
 $190,534
 $190,534
The valuation techniques used to measure fair value for the items in the table above are as follows:
Net loans – This category consists of loans that were evaluated for impairment under FASB ASC Section 310-10-35 and have been classified as Level 3 assets. The amount shown is the balance of impaired loans, net of the related allowance for loan losses. See Note 5, "Loans and Allowance for Credit Losses," for additional details.
Other financial assets – This category includes OREO ($14.310.9 million at March 31, 20152016 and $12.0$11.1 million at December 31, 2014)2015) and MSRs ($41.840.2 million at March 31, 20152016 and $42.1$40.9 million at December 31, 2014)2015), both classified as Level 3 assets.

33


Fair values for OREO were based on estimated selling prices less estimated selling costs for similar assets in active markets.
MSRs are initially recorded at fair value upon the sale of residential mortgage loans to secondary market investors. MSRs are amortized as a reduction to servicing income over the estimated lives of the underlying loans. MSRs are stratified and evaluated for impairment by comparing each stratum's carrying amount to its estimated fair value. Fair values are determined at the end of each quarter through a discounted cash flows valuation performed by a third-party valuation expert. Significant inputs to the valuation included expected net servicing income, the discount rate and the expected life of the underlying loans. Expected life is based on the contractual terms of the loans, as adjusted for prepayment projections. The weighted average annual constant prepayment rate and the weighted average discount rate used in the March 31, 20152016 valuation were 12.6%12.5% and 9.6%, respectively. Management tests the reasonableness of the significant inputs to the third-party valuation in comparison to market data.











As required by FASB ASC Section 825-10-50, the following table details the book values and estimated fair values of the Corporation’s financial instruments as of March 31, 20152016 and December 31, 2014.2015. In addition, a general description of the methods and assumptions used to estimate such fair values is also provided.
March 31, 2015 December 31, 2014March 31, 2016 December 31, 2015
Book Value Estimated
Fair Value
 Book Value Estimated
Fair Value
Book Value Estimated
Fair Value
 Book Value Estimated
Fair Value
(in thousands)(in thousands)
FINANCIAL ASSETS              
Cash and due from banks$91,870
 $91,870
 $105,702
 $105,702
$83,479
 $83,479
 $101,120
 $101,120
Interest-bearing deposits with other banks637,973
 637,973
 358,130
 358,130
346,582
 346,582
 230,300
 230,300
Federal Reserve Bank and Federal Home Loan Bank stock65,694
 65,694
 64,953
 64,953
61,478
 61,478
 62,216
 62,216
Loans held for sale (1)34,124
 34,124
 17,522
 17,522
19,719
 19,719
 16,886
 16,886
Available for sale investment securities (1)2,259,802
 2,259,802
 2,323,371
 2,323,371
2,516,205
 2,516,205
 2,484,773
 2,484,773
Loans, net of unearned income (1)13,115,505
 13,078,115
 13,111,716
 13,030,543
Net Loans (1)
13,706,860
 13,615,387
 13,669,548
 13,540,903
Accrued interest receivable42,216
 42,216
 41,818
 41,818
44,379
 44,379
 42,767
 42,767
Other financial assets (1)178,496
 178,496
 169,764
 169,764
200,456
 200,456
 166,920
 166,920
FINANCIAL LIABILITIES              
Demand and savings deposits$10,467,077
 $10,467,077
 $10,296,055
 $10,296,055
$11,537,266
 $11,537,266
 $11,267,367
 $11,267,367
Time deposits3,047,420
 3,058,030
 3,071,451
 3,069,883
2,867,014
 2,961,225
 2,864,950
 2,862,868
Short-term borrowings410,105
 410,105
 329,719
 329,719
352,883
 352,883
 497,663
 497,663
Accrued interest payable18,357
 18,357
 18,045
 18,045
13,567
 13,567
 10,724
 10,724
Other financial liabilities (1)193,924
 193,924
 172,786
 172,786
220,267
 220,267
 190,927
 190,927
Federal Home Loan Bank advances and long-term debt1,094,517
 1,104,738
 1,139,413
 1,142,980
965,654
 990,222
 949,542
 959,315
 
(1)These financial instruments, or certain financial instruments withinin these categories, are measured at fair value on the Corporation’s consolidated balance sheets. Descriptions of the fair value determinations for these financial instruments are disclosed above.
Fair values of financial instruments are significantly affected by the assumptions used, principally the timing of future cash flows and discount rates. Because assumptions are inherently subjective in nature, the estimated fair values cannot be substantiated by comparison to independent market quotes and, in many cases, the estimated fair values could not necessarily be realized in an immediate sale or settlement of the instrument. The aggregate fair value amounts presented do not necessarily represent management’s estimate of the underlying value of the Corporation.
For short-term financial instruments, defined as those with remaining maturities of 90 days or less, and excluding those recorded at fair value on the Corporation’s consolidated balance sheets, book value was considered to be a reasonable estimate of fair value.

The following instruments are predominantly short-term:
Assets  Liabilities
Cash and due from banks  Demand and savings deposits
Interest bearingInterest-bearing deposits with other banks  Short-term borrowings
Accrued interest receivable  Accrued interest payable


34


Federal Reserve Bank and Federal Home Loan Bank ("FHLB") stock represent restricted investments and are carried at cost on the consolidated balance sheets. Each of the Corporation’s subsidiary banks is a member of the Federal Home Loan Bank for the region encompassing the headquarters of the subsidiary bank.  Memberships are maintained with the Atlanta, New York and Pittsburgh regional Federal Home Loan Banks (collectively referred to as the "FHLB").
Fair values for loans and time deposits were estimated by discounting future cash flows using the current rates at which similar loans would be made to borrowers and similar deposits would be issued to customers for the same remaining maturities. Fair values estimated in this manner do not fully incorporate an exit price approach to fair value, as defined in FASB ASC Topic 820.
The fair values of FHLB advances and long-term debt were estimated by discounting the remaining contractual cash flows using a rate at which the Corporation could issue debt with similar remaining maturities as of the balance sheet date. These borrowings would be categorized withinin Level 2 liabilities under FASB ASC Topic 820.

NOTE 14 – Subsequent Events

On April 1, 2015, $100.0 million of the Corporation's outstanding subordinated debt originally issued in March of 2005 with an effective interest rate of 5.49%, matured and was fully repaid with available liquidity.

In November 2014, the Corporation entered into an accelerated share repurchase agreement ("ASR") with a third party to repurchase $100.0 million of shares of its common stock. Under the terms of the ASR, the Corporation paid $100.0 million to the third party in November 2014 and received an initial delivery of 6.5 million shares, representing 80% of the shares expected to be delivered under the ASR, based on the closing price for the Corporation’s shares on November 13, 2014. In April 2015, the third party delivered an additional 1.8 million shares of common stock pursuant to the terms of the ASR, thereby completing the $100.0 million ASR. The Corporation repurchased a total of 8.3 million shares of common stock under the ASR at an average price of $12.05 per share.

In April 2015, the Corporation announced that its board of directors had approved a share repurchase program pursuant to which the Corporation is authorized to repurchase up to $50.0 million of its outstanding shares of common stock, or approximately 2.3% of its outstanding shares, through December 31, 2015. Repurchased shares may be added to treasury stock, at cost, and will be used for general corporate purposes. As permitted by securities laws and other legal requirements and subject to market conditions and other factors, purchases may be made from time to time in open market or privately negotiated transactions, including without limitation, through accelerated share repurchase transactions. The share repurchase program may be discontinued at any time.

35


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations ("Management’s Discussion") relates to Fulton Financial Corporation (the "Corporation"), a financial holding company registered under the Bank Holding Company Act of 1956 and incorporated under the laws of the Commonwealth of Pennsylvania in 1982, and its wholly owned subsidiaries. Management’s Discussion should be read in conjunction with the consolidated financial statements and notes presented in this report.

FORWARD-LOOKING STATEMENTS

The Corporation has made, and may continue to make, certain forward-looking statements with respect to its financial condition and results of operations. Do not unduly rely on forward-looking statements. Forward-looking statements can be identified by the use of words such as "may," "should," "will," "could," "estimates," "predicts," "potential," "continue," "anticipates," "believes," "plans," "expects," "future," "intends" and similar expressions which are intended to identify forward-looking statements.  Statements relating to the "outlook" or "outlook for 2015""2016 outlook" contained herein are forward-looking statements.

These forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties, some of which are beyond the Corporation's control and ability to predict, that could cause actual results to differ materially from those expressed in the forward-looking statements. The Corporation undertakes no obligation, other than as required by law, to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Many factors could affect future financial results including, without limitation:
the effects of market interest rates, and the relative balances of rate-sensitive assets to rate-sensitive liabilities, on net interest margin and net interest income;
the effects of changes in interest rates on demand for the Corporation’s products and services;
the effects of changes in interest rates or disruptions in liquidity markets on the Corporation’s sources of funding;
the Corporation’s ability to manage liquidity, both at the holding company level and at its subsidiary banks;
the impact of increased regulatory scrutiny of the banking industry;
the effects of the increasing amounts of time and expense associated with regulatory compliance and risk management;
the potential for negative consequences from regulatory violations, including potential supervisory actions and the assessment of fines and penalties;
the additional time, expense and investment required to comply with, and the restrictions on potential growth and investment activities resulting from, the existing enforcement orders applicable to the Corporation by federal and state bank regulatory agencies requiring improvement in compliance functions and other remedial actions, or any future enforcement orders;
the Corporation’s ability to manage the uncertainty associated with the delay in implementing many of the regulations mandated by the Dodd-Frank Act;
the effects of negative publicity on the Corporation’s reputation;
the Corporation’s ability to successfully transform its business model;
the Corporation’s ability to achieve its growth plans;
the effects of competition on deposit rates and growth, loan rates and growth and net interest margin;
the Corporation’s ability to manage the level of non-interest expenses, including salaries and employee benefits expenses, operating risk losses and goodwill impairment;
the impact of adverse conditions in the economy and capital markets on the performance of the Corporation’s loan portfolio and demand for the Corporation’s products and services;
increases in non-performing assets, which may require the Corporation to increase the allowance for credit losses, charge off loans and incur elevated collection and carrying costs related to such non-performing assets;
investment securities gains and losses, including other-than-temporary declines in the value of securities which may result in charges to earnings;
the effects of market interest rates, and the relative balances of rate-sensitive assets to rate-sensitive liabilities, on net interest margin and net interest income;
the effects of changes in interest rates on demand for the Corporation’s products and services;
the effects of changes in interest rates or disruptions in liquidity markets on the Corporation’s sources of funding;
the Corporation’s ability to manage liquidity, both at the holding company level and at its bank subsidiaries;
the impact of increased regulatory scrutiny of the banking industry;
the effects of the increasing amounts of time and expense associated with regulatory compliance and risk management;
the potential for negative consequences from regulatory violations, including potential supervisory actions and the assessment of fines and penalties;
the additional time, expense and investment required to comply with, and the restrictions on potential growth and investment activities resulting from, the existing enforcement orders applicable to the Corporation and its bank subsidiaries by federal and state bank regulatory agencies requiring improvement in compliance functions and other remedial actions, or any future enforcement orders;
the Corporation’s ability to manage the uncertainty associated with the delay in implementing many of the regulations mandated by the Dodd-Frank Act;
the effects of negative publicity on the Corporation’s reputation;
the effects of adverse outcomes in litigation and governmental or administrative proceedings;
the Corporation’s ability to successfully transform its business model;
the Corporation’s ability to achieve its growth plans;
the effects of competition on deposit rates and growth, loan rates and growth and net interest margin;
the Corporation’s ability to manage the level of non-interest expenses, including salaries and employee benefits expenses, operating risk losses and goodwill impairment;
the impact of operational risks, including the risk of human error, inadequate or failed internal processes and systems, computer and telecommunications systems failures, faulty or incomplete data and an inadequate risk management framework;
the impact of failures of third parties upon which the Corporation relies to perform in accordance with contractual arrangements;
the failure or circumvention of the Corporation’s system of internal controls;
the loss of, or failure to safeguard, confidential or proprietary information;
the Corporation’s failure to identify and to address cyber-security risks;


the Corporation’s ability to keep pace with technological changes;
the Corporation’s ability to attract and retain talented personnel;

36


capital and liquidity strategies, including the Corporation’s ability to comply with applicable capital and liquidity requirements, and the Corporation’s ability to generate capital internally or raise capital on favorable terms;
the Corporation’s reliance on its subsidiaries for substantially all of its revenues and its ability to pay dividends or other distributions; and
the effects of any downgrade in the Corporation’s credit ratings on its borrowing costs or access to capital markets.

RESULTS OF OPERATIONS

Overview and Outlook

Fulton Financial Corporation is a financial holding company comprised of six wholly owned banking subsidiaries which provide a full range of retail and commercial financial services in Pennsylvania, Delaware, Maryland, New Jersey and Virginia. The Corporation generates the majority of its revenue through net interest income, or the difference between interest earned on loans and investments and interest paid on deposits and borrowings. Growth in net interest income is dependent upon balance sheet growth and/or maintaining or increasing the net interest margin, which is net interest income (fully taxable-equivalent, or "FTE") as a percentage of average interest-earning assets. The Corporation also generates revenue through fees earned on the various services and products offered to its customers and through gains on sales of assets, such as loans, investments, lines of business or properties. Offsetting these revenue sources are provisions for credit losses on loans, non-interest expenses and income taxes.

The following table presents a summary of the Corporation’s earnings and selected performance ratios:
As of or for the
Three months ended
March 31
As of or for the
Three months ended
March 31
2015 20142016 2015
Income before income taxes (in thousands)$53,540
 $56,017
Net income (in thousands)$40,036
 $41,783
$38,257
 $40,036
Diluted net income per share$0.22
 $0.22
$0.22
 $0.22
Return on average assets0.95% 1.01%0.86% 0.95%
Return on average equity8.05% 8.21%7.47% 8.05%
Return on average tangible equity (1)
10.07% 10.96%
Net interest margin (1)(2)3.27% 3.47%3.23% 3.27%
Efficiency ratio (1)
68.33% 70.16%
Non-performing assets to total assets0.94% 1.01%0.82% 0.94%
Annualized net charge-offs to average loans0.08% 0.26%0.20% 0.08%
 
(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 comparable GAAP measure under the heading, "Supplemental Reporting of Non-GAAP Based Financial Measures" at the end of this "Overview and Outlook" section.
(2)Presented on an FTE basis, using a 35% Federalfederal tax rate and statutory interest expense disallowances. See also the “Net Interest Income” section of Management’s Discussion.
Income before
Net income taxes for the first quarter of 2015three months ended March 31, 2016 decreased $2.5$1.8 million, or 4.4%, compared to the first quarter of 2014. The Corporation's results for the three months ended March 31, 2015 in comparison to the same period of 2015, mainly due to an increase in 2014 were most significantly impacted bythe provision for credit losses, a a declinedecrease in net interest incomeinvestment securities gains and an increase in non-interest expense, partially offset by a decreasean increase in the provision for credit losses and higher non-interestnet interest income.

Following is a summary of financial highlights for the three months ended March 31, 2015:2016:

FTE Net Interest Income and Net Interest Margin - For the three months ended March 31, 2015,2016, FTE net interest income decreased $6.0increased $5.9 million, or 4.6%, in comparison to the same period in 2014. The decrease2015. This increase was driven by growth in net interest income resulted frominterest-earning assets, partially offset by a 204 basis point decrease in the net interest margin, as yields onmargin.

Average interest-earning assets declined 14 basis points whileincreased $825.2 million, or 5.2%, in the costfirst quarter of interest-bearing liabilities increased 11 basis points2016 in comparison to the same period in 2014.
Average interest-earning assets increased $247.8 million, or 1.6%, in the first quarter of 2015, in comparison to the same period of 2014, mainly due to a $333.2$757.9 million, or 2.6%5.8%, increase in average loans and a $215.2$187.5 million, or 83.2%8.3%, increase in other earnings assets,average investment securities, partially offset by a $304.1$115.5 million, or 11.8%24.4%, decrease in average investment securities.other interest-earning assets.



Average interest-bearing liabilities decreased $174.2increased $494.6 million, or 1.5%4.4%, in the first quarter of 2015 in comparison to the first quarter of 2014 primarily due to a $659.2$524.3 million, or 31.5%, decrease in borrowings, offset by a $485.0 million, or 5.3%5.4%, increase in interest-bearing deposits, and a $136.2 million, or 44.0%, increase in short-term borrowings, partially offset by $165.9 million, or 14.8%, decrease in FHLB advances and long-term debt. Additional funding to support the increase in interest-earning assets was provided by a $305.8 million, or 8.4%, increase in noninterest-bearing deposits.

Asset Quality - The Corporation recorded a $3.7$1.5 million negative provision for credit losses during the three months ended March 31, 2015,2016, compared to a $2.5$3.7 million negative provision for credit losses for the same period in 2014.2015. The $6.2 million improvementnegative provision in the

37


provision for credit losses2015 was driven by an improvement in net charge-off levels, particularly a decrease in net charge-offs onamong pooled impaired loans across all loan portfolio segments. During the first quarter of 2015, net charge-offs were $2.6 million, compared to $8.4 million for the same period in 2014, while the allowance for loan loss allocations on impaired loans decreased $9.7 million, or 15.2%.

Annualized net charge-offs to average loans outstanding were 0.20% for the first quarter of 2016, compared to 0.08% for the first quarter of 2015,2015. Non-performing assets decreased $15.4 million, or 9.4%, as of March 31, 2016 compared to 0.26% for the first quarter of 2014. Non-performing loans decreased $5.6 million, or 3.6%, since March 31, 2014.2015 and were 0.82% and 0.94% of total assets as of March 31, 2016 and March 31, 2015, respectively. The total delinquency rate was 1.44% as of March 31, 2016, compared to 1.76% as of March 31, 2015, compared to 1.78% as of March 31, 2014.2015.

Non-interest Income - For the three months ended March 31, 2015,2016, non-interest income, excluding investment securities gains, increased $2.1$1.6 million, or 5.4%3.9%, in comparison to the same periodperiods in 2014, due to increases across2015. The increase was primarily a numberresult of fee categories, includinghigher service charges on deposit accounts and other service charges and fees, partially offset by a $1.1 million, or 30.0%, increasedecrease in mortgage banking income.sales gains.

Gains on sales of investment securities for the first quarter of 2015three months ended March 31, 2016 were $947,000 as compared to $4.1 million due to gains on sales of debt and equity securities of $2.1 million and $2.0 million, respectively.for the three months ended March 31, 2015.

Non-interest Expense - For the three months ended March 31, 2015,2016, non-interest expense increased $8.9$1.9 million, or 8.1%1.6%, in comparison to the same period in 2014. During2015. The primary driver of the first quarter of 2014, certainincrease was a $4.4 million, or 6.7%, increase in salaries and employee benefits, partially offset by decreases in other expense categories, most notably incentive compensation, employee benefits and outside services expense, were significantly lower than quarterly expense levels experienced during the preceding two years. Total non-interest expenses for the first quarter of 2015 of $118.5 million were more consistent with those incurred during the first quarters of 2013 and 2012.
In the first quarters of 2015 and 2014, the Corporation implemented cost savings initiatives to mitigate the impact of elevated expense levels related to the continued build out of its risk, compliance and information technology infrastructures. In both periods, these initiatives included branch consolidations, changes in benefits and reductions in staffing.
In 2015, these initiatives included the consolidation of nine branches, modifications to retirement benefits and the elimination of certain positions. The Corporation also plans to consolidate an additional two branches in the third quarter of 2015. These actions resulted in implementation expenses of $1.5 million in the first quarter of 2015, with an additional $700,000 of such expenses expected in the second quarter of 2015. The annualized expense reductions from these initiatives, when completed, are approximately $6.5 million, with $5.3 million expected to be realized in 2015.
In 2014, cost savings initiatives resulted in implementation expenses, net of associated gains, of $980,000 during the first quarter and cost savings of approximately $7 million, or an annualized rate or $7.9 million.
The following table presents a summary of the 2015 and 2014 cost savings initiatives:
 Three months ended March 31, 2015    
 Implementation Expenses Expense Reductions Estimated Expense Reductions for the Year Ending December 31, 2015 Annualized Cost Savings
 (in thousands)
Branch consolidations$1,050
 $
 $(2,350) $(3,050)
Modification of retirement benefits and staffing reductions450
 (710) (2,950) (3,470)
2015 cost savings initiatives$1,500
 $(710) $(5,300) $(6,520)
        
 Three months ended March 31, 2014    
 Implementation Expenses (Gains) Expense Reductions Actual Expense Reductions for the Year Ending December 31, 2014 Annualized Cost Savings
 (in thousands)
Branch consolidations$2,080
 $
 $(2,400) $(3,200)
Subsidiary bank management reductions and other employee benefit reductions(1,100) (1,020) (4,550) (4,700)
2014 cost savings initiatives$980
 $(1,020) $(6,950) $(7,900)

38


Regulatory Enforcement Orders -During 2014 and 2015, the Corporation and each of its banking subsidiaries became subject to regulatory enforcement orders (the "Regulatory Orders") issued by banking regulatory agencies relating to identified deficiencies in a centralized Bank Secrecy Act and anti-money laundering compliance program (the "BSA/AML Compliance Program"), which was designed to comply with the requirements of the Bank Secrecy Act, the USA Patriot Act of 2001 and related anti-money laundering regulations (collectively, the "BSA/AML Requirements"). The Regulatory Orders are described in more detail in Part II. Other Information, Item 1. Legal Proceedings under the heading “Regulatory Matters.”occupancy.

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

In addition to requiring strengthening and enhancement of the BSA/AML Compliance Program, while the Regulatory Orders remain in effect, the Corporation is subject to certain restrictions on expansion activities of the Corporation and its subsidiary banks. Further, any failure to comply with the requirements of any of the Regulatory Orders involving the Corporation or its subsidiary banks could result in further enforcement actions, the imposition of material restrictions on the activities of the Corporation or its subsidiary banks, or the assessment of fines or penalties.

Additional expenses and investments have been incurred as the Corporation expanded its hiring of personnel and use of outside professionals, such as consulting and legal services, and capital investments in operating systems to strengthen and support the BSA/AML Compliance Program, as well as the Corporation’s broader compliance and risk management infrastructures. The expense and capital investment associated with all of these efforts, including in connection with the Regulatory Orders, have had an adverse effect on the Corporation’s results of operations in recent periods and could have a material adverse effect on the Corporation’s results of operations in future periods.

20152016 Outlook

The Corporation's outlook for 2015 includes the following:2016:

Anticipated annual mid- to high- single digit growth rate in average loanloans and deposit growth rates of 3% to 7%;deposits;
net interest margin compression at a rateexpected to be stable on an annual basis with modest quarterly volatility of plus or minus 0 to 43 basis points per quarter, on average, based on the current interest rate environment;points;
continued modest provision for credit losses although provisions could be impacteddriven primarily by the performance of individual credits;loan growth;
annual mid- to highhigh- single digit annual growth rate in non-interest income, excluding the impact of securities gains;
annual low- to mid- single digit growth rate in non-interest expense (excluding loss on redemption of Trust Preferred Securities (TruPS) incurred in the third quarter of 2015); and
annual non-interest expensefocus on utilizing capital to support growth and provide appropriate returns to shareholders.
























Supplemental Reporting of Non-GAAP Based Financial Measures
This Quarterly Report on Form 10-Q contains supplemental financial information, as detailed below, which has been derived by methods other than 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 low-single digit rate.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 quarter ended March 31:
 2016 2015
 (in thousands)
Return on average common shareholders' equity (tangible)
Net income$38,257
 $40,036
Plus: Intangible amortization, net of tax
 85
Numerator$38,257
 $40,121
    
Average common shareholders' equity$2,058,799
 $2,015,963
Less: Average goodwill and intangible assets(531,556) (531,732)
Average tangible shareholders' equity (denominator)$1,527,243
 $1,484,231
    
Return on average common shareholders' equity (tangible), annualized10.07% 10.96%
    
Efficiency ratio   
Non-interest expense$120,413
 $118,478
Less: Intangible amortization
 (130)
Numerator$120,413
 $118,348
    
Net interest income (fully taxable equivalent) (1)
$134,026
 $128,086
Plus: Total Non-interest income43,137
 44,737
Less: Investment securities gains, net(947) (4,145)
Denominator$176,216
 $168,678
    
Efficiency ratio68.33% 70.16%

(1)Presented on an FTE basis, using a 35% federal tax rate and statutory interest expense disallowances. See also the “Net Interest Income” section of Management’s Discussion.


39


Quarter Ended March 31, 20152016 compared to the Quarter Ended March 31, 20142015

Net Interest Income
Fully-taxable equivalent (FTE)
FTE net interest income decreased $5.8increased $5.9 million, to $134.0 million, in the first quarter of 2016, from $128.1 million in the first quarter of 2015, from $133.8 million in the first quarter of 2014.2015. This decreaseincrease was primarily due to an $825.2 million, or 5.2%, increase in interest earning assets, partially offset by the impact of a 204 basis point, or 5.8%1.2%, decrease in the net interest margin, to 3.23% for the first quarter of 2016 from 3.27% for the first quarter of 2015 from 3.47% for the first quarter of 2014.2015. The following table provides a comparative average balance sheet and net interest income analysis for the first quarter of 2015 as compared to the same period in 2014.those periods. Interest income and yields are presented on an FTE basis, using a 35% Federalfederal tax rate and statutory interest expense disallowances. The discussion following this table is based on these FTE amounts. All dollar amounts are in thousands.
Three months ended March 31
Three months ended March 312016 2015
2015 2014
Average
Balance
 Interest (1) 
Yield/
Rate
 
Average
Balance
 Interest (1) 
Yield/
Rate
ASSETS
Average
Balance
 Interest (1) 
Yield/
Rate
 
Average
Balance
 Interest (1) 
Yield/
Rate
(dollars in thousands)
Interest-earning assets:                      
Loans, net of unearned income (2)$13,095,528
 $133,055
 4.11% $12,762,357
 $134,749
 4.28%$13,853,420
 $137,895
 4.00% $13,095,528
 $133,055
 4.11%
Taxable investment securities (3)2,005,542
 11,282
 2.25
 2,257,773
 13,266
 2.35
2,180,593
 12,003
 2.20
 2,005,542
 11,282
 2.25
Tax-exempt investment securities (3)229,082
 3,212
 5.61
 279,278
 3,613
 5.17
259,396
 3,138
 4.84
 229,082
 3,212
 5.61
Equity securities (3)32,210
 450
 5.66
 33,922
 429
 5.11
14,386
 218
 6.10
 32,210
 450
 5.66
Total investment securities2,266,834
 14,944
 2.64
 2,570,973
 17,308
 2.70
2,454,375
 15,359
 2.50
 2,266,834
 14,944
 2.64
Loans held for sale17,002
 173
 4.07
 13,426
 134
 4.00
12,252
 131
 4.28
 17,002
 173
 4.07
Other interest-earning assets474,033
 2,105
 1.78
 258,803
 882
 1.36
358,562
 898
 1.00
 474,033
 2,105
 1.78
Total interest-earning assets15,853,397
 150,277
 3.83% 15,605,559
 153,073
 3.97%16,678,609
 154,283
 3.72% 15,853,397
 150,277
 3.83%
Noninterest-earning assets:                      
Cash and due from banks105,271
     199,641
    98,449
     105,271
    
Premises and equipment226,391
     226,295
    226,284
     226,391
    
Other assets1,114,078
     1,032,071
    1,137,292
     1,114,078
    
Less: Allowance for loan losses(183,927)     (203,201)    (167,372)     (183,927)    
Total Assets$17,115,210
     $16,860,365
    $17,973,262
     $17,115,210
    
LIABILITIES AND EQUITY                      
Interest-bearing liabilities:                      
Demand deposits$3,135,927
 $983
 0.13% $2,945,211
 $909
 0.13%$3,438,355
 $1,494
 0.17% $3,135,927
 $983
 0.13%
Savings deposits3,517,057
 1,119
 0.13
 3,351,871
 1,035
 0.13
3,932,824
 1,804
 0.18
 3,517,057
 1,119
 0.13
Time deposits3,061,593
 7,721
 1.02
 2,932,456
 5,952
 0.82
2,867,651
 7,429
 1.04
 3,061,593
 7,721
 1.02
Total interest-bearing deposits9,714,577
 9,823
 0.41
 9,229,538
 7,896
 0.35
10,238,830
 10,727
 0.42
 9,714,577
 9,823
 0.41
Short-term borrowings309,215
 77
 0.10
 1,208,953
 633
 0.21
445,402
 268
 0.24
 309,215
 77
 0.10
Federal Home Loan Bank advances and long-term debt1,124,074
 12,291
 4.40
 883,532
 10,698
 4.88
958,213
 9,262
 3.88
 1,124,074
 12,291
 4.40
Total interest-bearing liabilities11,147,866
 22,191
 0.80% 11,322,023
 19,227
 0.69%11,642,445
 20,257
 0.70% 11,147,866
 22,191
 0.80%
Noninterest-bearing liabilities:
          
          
Demand deposits3,662,040
     3,243,424
    3,967,887
     3,662,040
    
Other289,341
     232,004
    304,131
     289,341
    
Total Liabilities15,099,247
     14,797,451
    15,914,463
     15,099,247
    
Shareholders’ equity2,015,963
     2,062,914
    2,058,799
     2,015,963
    
Total Liabilities and Shareholders’ Equity$17,115,210
     $16,860,365
    $17,973,262
     $17,115,210
    
Net interest income/net interest margin (FTE)  128,086
 3.27%   133,846
 3.47%  134,026
 3.23%   128,086
 3.27%
Tax equivalent adjustment  (4,505)     (4,281)    (4,972)     (4,505)  
Net interest income  $123,581
     $129,565
    $129,054
     $123,581
  
(1)Includes dividends earned on equity securities.
(2)Includes non-performing loans.
(3)Balances include amortized historical cost for available for sale securities; the related unrealized holding gains (losses) are included in other assets.

40


The following table summarizes the changes in FTE interest income and interest expense resulting from changes in average balances (volume) and changes in rates for the three months ended March 31:
2015 vs. 2014
Increase (Decrease) due
to change in
2016 vs. 2015
Increase (Decrease) due
to change in
Volume Rate NetVolume Rate Net
(in thousands)(in thousands)
Interest income on:          
Loans, net of unearned income$3,572
 $(5,266) $(1,694)$8,168
 $(3,328) $4,840
Taxable investment securities(1,264) (720) (1,984)986
 (265) 721
Tax-exempt investment securities(1,292) 891
 (401)393
 (467) (74)
Equity securities(23) 44
 21
(265) 33
 (232)
Loans held for sale40
 (1) 39
(51) 9
 (42)
Other interest-earning assets916
 307
 1,223
(433) (774) (1,207)
Total interest income$1,949
 $(4,745) $(2,796)$8,798
 $(4,792) $4,006
Interest expense on:          
Demand deposits$74
 $
 $74
$103
 $408
 $511
Savings deposits87
 (3) 84
137
 548
 685
Time deposits270
 1,499
 1,769
(432) 140
 (292)
Short-term borrowings(326) (230) (556)46
 145
 191
Federal Home Loan Bank advances and long-term debt2,707
 (1,114) 1,593
(1,676) (1,353) (3,029)
Total interest expense$2,812
 $152
 $2,964
$(1,822) $(112) $(1,934)
Note: Changes which are partially attributable to both volume and rate are allocated to the volume and rate components presented above based on the percentage of direct changes that are attributable to each component.
As summarized above, the increase in average interest-earning assets, primarily loans, resulted in a 14$8.8 million increase in FTE interest income, which was partially offset by an 11 basis point, or 3.5%2.9%, decrease in yields on average interest-earningsinterest-earning assets which resulted in a $4.7$4.8 million decrease in FTE interest income, partially offset by a $1.9 million increase in FTE interest income as a result of an increase in average loans, partially offset by a decrease in investment securities.
Average investments decreased $304.1 million, or 11.8%, as portfolio cash flows were not fully reinvested. The yield on average investments decreased 6 basis points, or 2.2%, to 2.64% in the first quarter of 2015 from 2.70% in the first quarter of 2014. The decrease in average investments was partially offset by a $215.2 million, or 83.2%, increase in other interest-earning assets. During the fourth quarter of 2014, the Corporation changed providers for check clearing services to the Federal Reserve Bank of Philadelphia, resulting in the transfer of clearing account balances from non-interest earning assets to low-yielding interest-bearing Federal Reserve Bank accounts.
The average yield on other interest-earning assets increased 42 basis points, or 30.9%, due to an increase in dividends on Federal Home Loan Bank stock, as a special dividend of $1.2 million was paid during the first quarter of 2015. Each of the Corporation’s subsidiary banks is a member of the Federal Home Loan Bank for the region encompassing the headquarters of the subsidiary bank.  Memberships are maintained with the Atlanta, New York and Pittsburgh regional Federal Home Loan Banks (collectively referred to as the "FHLB"). As of March 31, 2015, the Corporation held $46.4 million of FHLB stock.

41



income.
Average loans and average FTE yields, by type, are summarized in the following table:
Three months ended March 31 Increase (Decrease) inThree months ended March 31 Increase (Decrease) in
2015 2014 Balance2016 2015 Balance
Balance Yield Balance Yield $ %Balance Yield Balance Yield $ %
(dollars in thousands)(dollars in thousands)
Real estate – commercial mortgage$5,163,845
 4.22% $5,085,128
 4.44% $78,717
 1.5%$5,487,421
 4.03% $5,163,845
 4.22% $323,576
 6.3%
Commercial – industrial, financial and agricultural3,770,187
 3.87
 3,637,075
 4.03
 133,112
 3.7
4,095,268
 3.79
 3,770,187
 3.87
 325,081
 8.6
Real estate – home equity1,721,300
 4.14
 1,755,346
 4.18
 (34,046) (1.9)1,674,032
 4.10
 1,721,300
 4.14
 (47,268) (2.7)
Real estate – residential mortgage1,370,376
 3.84
 1,336,323
 3.99
 34,053
 2.5
1,381,409
 3.78
 1,370,376
 3.84
 11,033
 0.8
Real estate – construction688,690
 3.93
 576,346
 4.08
 112,344
 19.5
792,014
 3.82
 688,690
 3.93
 103,324
 15.0
Consumer259,138
 5.26
 274,910
 4.82
 (15,772) (5.7)263,295
 5.53
 259,138
 5.26
 4,157
 1.6
Leasing and other121,992
 8.41
 97,229
 10.26
 24,763
 25.5
Leasing, overdrafts and other159,981
 7.46
 121,992
 8.41
 37,989
 31.1
Total$13,095,528
 4.11% $12,762,357
 4.28% $333,171
 2.6%$13,853,420
 4.00% $13,095,528
 4.11% $757,892
 5.8%
Average loans increased $333.2$757.9 million, or 2.6%5.8%, compared to the first quarter of 2014,2015, mainly in commercial loans, commercial mortgages,mortgage, construction and residential mortgages. The growth in commercial loans and commercial mortgages was driven by a combination of loans to new customersleasing and increased borrowings from existing customers, while the growth in construction loans was primarily due to an increase in loans secured by commercial properties.other. The average yield on loans decreased 1711 basis points, or 4.0%2.7%, to 4.00% in 2016 from 4.11% in 2015 from 4.28% in 2014.2015. The decrease in average yields on loans was attributable to repayments of higher-yielding loans, continued refinancing activity at lower rates, and new loan production at rates lower than the overall portfolio yield.
Interest expense



Average total interest-bearing liabilities increased $3.0$494.6 million, or 15.4%, to $22.2 million in the first quarter of 2015 from $19.2 million in the first quarter of 2014. Although average interest-bearing liabilities decreased $174.2 million, or 1.5%4.4%, compared to the first quarter of 2014,2015. Interest expense decreased $1.9 million, or 8.7%, to $20.3 million in the first quarter of 2016 as a result of a change in fundingthe mix from lower cost short-term Federal funds purchased and short-term FHLB advances to higher cost time deposits and long-term FHLB advances and subordinated debt resulted in a $2.8 million increase in interest expense.
to lower-cost deposits. Average deposits and average interest rates, by type, are summarized in the following table:
Three months ended March 31 Increase (Decrease) inThree months ended March 31 Increase (Decrease) in Balance
2015 2014 Balance2016 2015 
Balance Rate Balance Rate $ %Balance Rate Balance Rate $ %
(dollars in thousands)(dollars in thousands)
Noninterest-bearing demand$3,662,040
 % $3,243,424
 % $418,616
 12.9%$3,967,887
 % $3,662,040
 % $305,847
 8.4%
Interest-bearing demand3,135,927
 0.13
 2,945,211
 0.13
 190,716
 6.5
3,438,355
 0.17
 3,135,927
 0.13
 302,428
 9.6
Savings3,517,057
 0.13
 3,351,871
 0.13
 165,186
 4.9
3,932,824
 0.18
 3,517,057
 0.13
 415,767
 11.8
Total demand and savings10,315,024
 0.08
 9,540,506
 0.08
 774,518
 8.1
11,339,066
 0.12
 10,315,024
 0.08
 1,024,042
 9.9
Time deposits3,061,593
 1.02
 2,932,456
 0.82
 129,137
 4.4
2,867,651
 1.04
 3,061,593
 1.02
 (193,942) (6.3)
Total deposits$13,376,617
 0.30% $12,472,962
 0.26% $903,655
 7.2%$14,206,717
 0.30% $13,376,617
 0.30% $830,100
 6.2%
The $774.5 million,$1.0 billion, or 8.1%9.9%, increase in total demand and savings accounts was primarily due to a $422.1$465.7 million, or 13.1%9.7%, increase in personal account balances, a $363.6 million, or 10.0%, increase in business account balances and a $198.2$195.6 million, or 4.3%, increase in personal account balances and a $156.2 million, or 9.3%10.7%, increase in municipal account balances. The average cost of total deposits increased four basis points largely dueremained unchanged in the first quarter of 2016 compared to the first quarter of 2015 as a result of an increase in noninterest-bearing deposits, which offset the impact of higher average rates on average timeinterest-bearing deposits.






42


Average borrowings and interest rates, by type, are summarized in the following table:
 Three months ended March 31 Increase (Decrease) in
 2015 2014 Balance
 Balance Rate Balance Rate $ %
 (dollars in thousands)
Short-term borrowings:           
Customer repurchase agreements$173,625
 0.10% $187,362
 0.11% $(13,737) (7.3)%
Customer short-term promissory notes86,258
 0.03
 102,000
 0.06
 (15,742) (15.4)
Total short-term customer funding259,883
 0.08
 289,362
 0.09
 (29,479) (10.2)
Federal funds purchased25,054
 0.15
 416,230
 0.21
 (391,176) (94.0)
Short-term FHLB advances (1)24,278
 0.28
 503,361
 0.28
 (479,083) (95.2)
Total short-term borrowings309,215
 0.10
 1,208,953
 0.21
 (899,738) (74.4)
Long-term debt:
   
   
 
FHLB advances657,697
 3.49
 513,790
 4.14
 143,907
 28.0
Other long-term debt466,377
 5.69
 369,742
 5.90
 96,635
 26.1
Total long-term debt1,124,074
 4.40
 883,532
 4.88
 240,542
 27.2
Total borrowings$1,433,289
 3.47% $2,092,485
 2.20% $(659,196) (31.5)%
            
 Three months ended March 31 Increase (Decrease)
 2016 2015 in Balance
 Balance Rate Balance Rate $ %
 (dollars in thousands)
Short-term borrowings:           
Customer repurchase agreements$171,408
 0.11% $173,625
 0.10% $(2,217) (1.3)%
Customer short-term promissory notes74,013
 0.04
 86,258
 0.03
 (12,245) (14.2)
Total short-term customer funding245,421
 0.09
 259,883
 0.08
 (14,462) (5.6)
Federal funds purchased183,970
 0.42
 25,054
 0.15
 158,916
 N/M
Short-term FHLB advances (1)
16,011
 0.46
 24,278
 0.28
 (8,267) (34.1)
Total short-term borrowings445,402
 0.24
 309,215
 0.10
 136,187
 44.0
Long-term debt:
   
   
 
FHLB advances596,351
 3.19
 657,697
 3.49
 (61,346) (9.3)
Other long-term debt361,862
 5.00
 466,377
 5.69
 (104,515) (22.4)
Total long-term debt958,213
 3.88
 1,124,074
 4.40
 (165,861) (14.8)
Total borrowings$1,403,615
 2.72% $1,433,289
 3.47% $(29,674) (2.1)%
            
N/M - Not meaningful
(1) Represents FHLB advances with an original maturity term of less than one year.

Total short-term borrowings decreased $899.7increased $136.2 million, or 74.4%44.0%, primarily in Federal funds purchased and short-term FHLB advances. The decrease was driven by lower wholesale funding needs resulting from the decrease in average investment securities and an increase in average deposits exceeding the growth in average loans.
The $143.9 million increase in FHLB advances wasas a result of increases in federal funds purchased. The increase generally reflects a shift from long-term to short-term wholesale funding. Average other long-term debt decreased $165.9 million, or 14.8%. This decrease was primarily due to of the Corporation’smaturity of $100.0 million of subordinated debt in April 2015 and a $61.3 million decrease in FHLB advances. In addition, during 2015, the Corporation redeemed $150.0 million of TruPS with the proceeds from the issuance of $150.0 million of lower-cost subordinated debt. These transactions contributed to a 52 basis point decrease in the cost of other long-term debt. The average cost of total borrowings decreased 75 basis points, or 21.6%, primarily due to the Corporation's continuing efforts to lengthen maturities and lock in longer-term rates, while the $96.6 million increase in other long-term debt was a result of the issuance of $100.0 million of subordinated debt in November 2014.
The average cost of total borrowings increased 127 basis points, or 57.7%, to 3.47% in 2015 from 2.20% in 2014, primarily due to the weighted average cost impact of a decrease in lower-cost, short-term borrowings, which were 21.6% of total borrowings in the first quarter of 2015, compared to 57.8% for the same period in 2014.rates.

Provision for Credit Losses

The provision for credit losses was a negative $3.7$1.5 million for the first quarter of 2015, a decrease2016, an increase of $6.2$5.2 million from the negative provision in the first quarter of 2014. This resulted from2015. The negative provision for the three months ended March 31, 2015 was driven by an improvement in net charge-off levels, particularly onamong pooled impaired loans.loans across all portfolio segments.


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


43


Non-Interest Income

The following table presents the components of non-interest income:
Three months ended March 31 Increase (Decrease)Three months ended March 31 Increase (Decrease)
2015 2014 $ %2016 2015 $ %
(dollars in thousands)(dollars in thousands)
Service charges on deposit accounts:              
Overdraft fees$4,801
 $5,297
 $(496) (9.4)%$5,272
 $4,803
 $469
 9.8 %
Cash management fees3,217
 3,105
 112
 3.6
3,466
 3,217
 249
 7.7
Other3,551
 3,309
 242
 7.3
3,820
 3,549
 271
 7.6
Total service charges on deposit accounts11,569
 11,711
 (142) (1.2)12,558
 11,569
 989
 8.5
Investment management and trust services10,889
 10,958
 (69) (0.6)10,988
 10,889
 99
 0.9
Other service charges and fees:              
Merchant fees3,177
 2,723
 454
 16.7
3,682
 3,177
 505
 15.9
Debit card income2,389
 2,210
 179
 8.1
2,511
 2,389
 122
 5.1
Commercial interest rate swap fees1,442
 811
 631
 77.8
Letter of credit fees1,157
 1,101
 56
 5.1
1,146
 1,157
 (11) (1.0)
Commercial swap fees811
 1,013
 (202) (19.9)
Other1,829
 1,880
 (51) (2.7)1,969
 1,829
 140
 7.7
Total other service charges and fees9,363
 8,927
 436
 4.9
10,750
 9,363
 1,387
 14.8
Mortgage banking income:              
Gain on sales of mortgage loans3,533
 2,422
 1,111
 45.9
Gains on sales of mortgage loans2,670
 3,533
 (863) (24.4)
Mortgage servicing income1,155
 1,183
 (28) (2.4)1,360
 1,155
 205
 17.7
Total mortgage banking income4,688
 3,605
 1,083
 30.0
4,030
 4,688
 (658) (14.0)
Credit card income2,235
 2,171
 64
 2.9
2,424
 2,235
 189
 8.5
Other income1,848
 1,134
 714
 63.0
1,440
 1,848
 (408) (22.1)
Total, excluding gains on sales of investment securities40,592
 38,506
 2,086
 5.4
42,190
 40,592
 1,598
 3.9
Net gains on sales of investment securities4,145
 
 4,145
 N/M
947
 4,145
 (3,198) (77.2)
Total$44,737
 $38,506
 $6,231
 16.2 %$43,137
 $44,737
 $(1,600) (3.6)%

N/M - Not meaningful
The $496,000,Excluding gains on sales of investment securities, non-interest income increased $1.6 million, or 9.4%3.9%.Other service charges and fees grew $1.4 million, or 14.8%, decrease in overdraft fee income consisted ofdriven mainly by a $251,000 decrease in fees assessed on commercial accounts and a $245,000 decrease in fees assessed on personal accounts. The overall decline in these fees resulted from a reduction in the number of overdrafts, partially driven by changes in customer behavior. Partially offsetting the decrease in overdraft fee income was a $242,000, or 7.3%,$631,000 increase in other service charges on deposits.
The $454,000, or 16.7%, increase in merchant fee income and the $179,000, or 8.1%, increase in debit card income are due to an increase in the volumes of transactions, while $202,000, or 19.9%, decrease in commercial interest rate swap fees, was due to a decrease in the number ofas new swap transactionsloan volumes increased in comparison to the first quarter of 2014.2015, and by a $505,000 increase in merchant fee income related to higher transaction volumes in the first quarter of 2016.Service charges on deposits increased $989,000, or 8.5%, across all categories.
Gains on sales of mortgage loans increased $1.1 million,decreased $863,000, or 45.9%24.4%, due to a $128.1 million, or 66.8%, increase in new loan commitments, partially offset by a 12.6% decrease in pricing spreadswhen compared to the first quarter of 2014. The2015, the net effect of a 34.7% decrease in volumes and a 15.6% increase in new loan commitments was mainlyspreads. Mortgage servicing income increased $205,000, or 17.7%, due to a decrease in refinancing volumes, which totaled approximately $209.2amortization of MSRs, as prepayments were lower when compared to the first quarter of 2015.
Gains on sales of investment securities decreased $3.2 million or 65.4%, of new loan commitments, infrom the first quarter of 2015, compared to $63.5 million, or 33.1%, during the first quarter of 2014.
The $714,000, or 63.0%, increase in other income was due to increases in values of bank owned life insurance policies andwhich included gains on the sale of two branch properties.
Investment securities gains for the first quarter of 2015 were from the sales of financial institution stocks andtwo pooled trust preferred securities. There were nodebt securities gains in the first quarter of 2014. 2015. See Note 4, "Investment Securities," in the Notes to Consolidated Financial Statements for additional details.



44


Non-Interest Expense

The following table presents the components of non-interest expense:
Three months ended March 31 Increase (Decrease)Three months ended March 31 Increase (Decrease)
2015 2014 $ %2016 2015 $ %
(dollars in thousands)(dollars in thousands)
Salaries and employee benefits$64,990
 $59,566
 $5,424
 9.1%$69,372
 $64,990
 $4,382
 6.7%
Net occupancy expense13,692
 13,603
 89
 0.7
12,220
 13,692
 (1,472) (10.8)
Other outside services5,750
 3,812
 1,938
 50.8
6,056
 5,750
 306
 5.3
Data processing4,768
 3,796
 972
 25.6
5,400
 4,768
 632
 13.3
Software3,921
 3,318
 603
 18.2
Equipment expense3,958
 3,602
 356
 9.9
3,371
 3,958
 (587) (14.8)
Software3,318
 2,925
 393
 13.4
Professional fees2,871
 2,904
 (33) (1.1)
FDIC insurance expense2,822
 2,689
 133
 4.9
2,949
 2,822
 127
 4.5
Supplies and postage2,369
 2,326
 43
 1.8
2,579
 2,369
 210
 8.9
Professional fees2,333
 2,871
 (538) (18.7)
Marketing1,624
 1,233
 391
 31.7
Telecommunications1,716
 1,819
 (103) (5.7)1,488
 1,716
 (228) (13.3)
Other real estate owned and repossession expense1,362
 983
 379
 38.6
638
 1,362
 (724) (53.2)
Marketing1,233
 1,584
 (351) (22.2)
Operating risk loss827
 1,828
 (1,001) (54.8)540
 827
 (287) (34.7)
Intangible amortization130
 315
 (185) (58.7)
 130
 (130) (100.0)
Other8,672
 7,802
 870
 11.2
7,922
 8,672
 (750) (8.6)
Total$118,478
 $109,554
 $8,924
 8.1%$120,413
 $118,478
 $1,935
 1.6%
In comparison to the first quarter of 2014, non-interest expenses increased $8.9
The $4.4 million, or 8.1%, largely reflecting certain expenses in 2014 that were significantly lower than quarterly expense levels experienced during the preceding two years. The increase in 2015 largely reflects a return to levels more consistent with those in the prior two years. Contributing factors in the first quarter of 2014 included lower incentive compensation and benefits costs, and lower outside services expenses.
The $5.4 million, or 9.1%6.7%, increase in salaries and employee benefits primarily resulted from a $2.4$4.2 million, or 4.8%7.9%, increase in salaries, and a $3.0 million, or 34.8%, increase in employee benefits. The increase in salaries wasresulting primarily due tofrom higher average salaries per full-time equivalent (FTE) employee, andnormal merit increases, an increase in incentive compensation, partially offset by a decreaseand an additional day of expense in the numberfirst quarter of full-time equivalent employees to 3,480 as of March 31, 2015 from 3,540 as of March 31, 2014. The increase in employee benefits was primarily due to an increase in employee healthcare costs, defined benefit plan2016. Benefits expenses were largely unchanged.

Net occupancy expense and adecreased $1.5 million, gain realizedor 10.8%, as a result of milder winter conditions in 2016 driving down snow removal and utilities costs when compared to the first quarter of 2015. In addition, 2015 included $600,000 of accelerated depreciation related to consolidated branches.

Outside services include fees paid to consultants and expenses for contracted or outsourced services. Consulting expenses can fluctuate based on the post retirement plan amendment in 2014.
timing and need for such services. The $1.9 million,$306,000, or 50.8%5.3%, increase in other outside services resulted fromexpense in comparison to the first quarter of 2015 was largely due to the timing of engagementscertain expenses related to risk management and compliance efforts, including those in connection with the enhancement of the Corporation’s program for compliance with the BSA/AML Requirements.Compliance Program remediation efforts.

The $1.4$1.2 million, or 20.3%15.3%, combined increase in data processing and software resulted from increased expenseshigher transaction volumes and contractual increases related to the core processing systemsystems, and amortization of software. The $870,000,capitalized software investments.

Equipment expense decreased $587,000, or 11.1%14.8%, increases in other expenses resulted from an increase in appraisal fees as a result of increased loan volumes inprimarily due to lower depreciation expense when compared to the first quarter of 2015 compared to the same period in 2014.as certain assets became fully depreciated.
These increases were partially offset by a $1.0 million,
The $538,000, or 54.8%18.7%, decrease in operating risk lossdueprofessional fees was driven by lower costs for legal services resulting from both the timing and the need for such services.

Other real estate owned and repossession expense decreased $724,000, or 53.2%, when compared to a $1.5 million, or 85.1%, decrease in losses related to check fraud, partially offset by the impact of $600,000 of gains recorded in the first quarter of 2014 related2015. This decrease was due to a $473,000 decrease in net losses on the settlement withsales of other real estate properties due to fewer transactions, and a third-party investor of outstanding repurchase requests related$212,000 decrease in repossession expense due to certain previously sold residential mortgages.lower activity.

The $750,000 decrease in the other category was mainly due to lower state taxes as liabilities were adjusted to reflect current expectations regarding state tax exposures.
45




Income Taxes

Income tax expense for the first quarter of 20152016 was $13.5$12.0 million, a $730,000,$1.5 million, or 5.1%11.2%, decrease from $14.2$13.5 million for the first quarter of 2014.2015.

The Corporation’s effective tax rate was 23.9% in the first quarter of 2016, as compared to 25.2% in the first quarter of 2015, as compared to 25.4% in the first quarter of 2014.2015. The effective tax rate is generally lower than the Federalfederal statutory rate of 35% due to investments in tax-free municipal securities and credits earned from investments in partnerships that generate tax credits under various federal programs. The decrease in the effective rate from the first quarter of 2015 was driven by lower pre-tax earnings and higher low-income housing tax credits.
 
 
 
 
 
 
 

46


FINANCIAL CONDITION

The table below presents condensed consolidated ending balance sheets for the Corporation.sheets.
  Increase (Decrease)  Increase (Decrease)
March 31, 2015 December 31, 2014 $ %March 31, 2016 December 31, 2015 $ %
(dollars in thousands)(dollars in thousands)
Assets              
Cash and due from banks$91,870
 $105,702
 $(13,832) (13.1)%$83,479
 $101,120
 $(17,641) (17.4)%
Other interest-earning assets703,667
 423,083
 280,584
 66.3
408,060
 292,516
 115,544
 39.5
Loans held for sale34,124
 17,522
 16,602
 94.7
19,719
 16,886
 2,833
 16.8
Investment securities2,259,802
 2,323,371
 (63,569) (2.7)2,516,205
 2,484,773
 31,432
 1.3
Loans, net of allowance12,937,804
 12,927,572
 10,232
 0.1
13,706,860
 13,669,548
 37,312
 0.3
Premises and equipment226,241
 226,027
 214
 0.1
228,057
 225,535
 2,522
 1.1
Goodwill and intangible assets531,672
 531,803
 (131) 
531,556
 531,556
 
 
Other assets578,161
 569,687
 8,474
 1.5
628,318
 592,784
 35,534
 6.0
Total Assets$17,363,341
 $17,124,767
 $238,574
 1.4 %$18,122,254
 $17,914,718
 $207,536
 1.2 %
Liabilities and Shareholders’ Equity              
Deposits$13,514,497
 $13,367,506
 $146,991
 1.1 %$14,404,280
 $14,132,317
 $271,963
 1.9 %
Short-term borrowings410,105
 329,719
 80,386
 24.4
352,883
 497,663
 (144,780) (29.1)
Long-term debt1,094,517
 1,139,413
 (44,896) (3.9)965,654
 949,542
 16,112
 1.7
Other liabilities312,709
 291,464
 21,245
 7.3
326,128
 293,302
 32,826
 11.2
Total Liabilities15,331,828
 15,128,102
 203,726
 1.3
16,048,945
 15,872,824
 176,121
 1.1
Total Shareholders’ Equity2,031,513
 1,996,665
 34,848
 1.7
2,073,309
 2,041,894
 31,415
 1.5
Total Liabilities and Shareholders’ Equity$17,363,341
 $17,124,767
 $238,574
 1.4 %$18,122,254
 $17,914,718
 $207,536
 1.2 %
Other interest-earning assets
The $280.6$115.5 million, or 66.3%39.5%, increase in other interest-earning assets wasresulted from higher balances of excess cash on deposit with the Federal Reserve Bank due to ana higher net liquidity position, generally resulting from deposit growth exceeding loan growth.

The $35.5 million, or 6.0%, increase in interest-bearing deposits with other banks.assets and the $32.8 million, or 11.2%, increase in other liabilities were driven by higher fair values for derivative financial instruments. See Note 9, "Derivative Financial Instruments," in the Notes to Consolidated Financial Statements for additional details.












Investment Securities

The following table presents the carrying amount of investment securities:
  Increase (Decrease)  Increase (Decrease)
March 31, 2015 December 31, 2014 $ %March 31, 2016 December 31, 2015 $ %
(dollars in thousands)(dollars in thousands)
U.S. Government securities$
 $200
 $(200) (100.0)%
U.S. Government sponsored agency securities203
 214
 (11) (5.1)$25,173
 $25,136
 $37
 0.1 %
State and municipal securities224,342
 245,215
 (20,873) (8.5)314,010
 262,765
 51,245
 19.5
Corporate debt securities97,682
 98,034
 (352) (0.4)89,886
 96,955
 (7,069) (7.3)
Collateralized mortgage obligations867,876
 902,313
 (34,437) (3.8)782,075
 821,509
 (39,434) (4.8)
Mortgage-backed securities930,159
 928,831
 1,328
 0.1
1,188,668
 1,158,835
 29,833
 2.6
Auction rate securities98,932
 100,941
 (2,009) (2.0)97,326
 98,059
 (733) (0.7)
Total debt securities2,219,194
 2,275,748
 (56,554) (2.5)2,497,138
 2,463,259
 33,879
 1.4
Equity securities40,608
 47,623
 (7,015) (14.7)19,067
 21,514
 (2,447) (11.4)
Total$2,259,802
 $2,323,371
 $(63,569) (2.7)%$2,516,205
 $2,484,773
 $31,432
 1.3 %
Total investment securities decreased $63.6 million, or 2.7%, in comparison to December 31, 2014, mainly in collateralized mortgage obligations and state
State and municipal securities increased $51.2 million, or 19.5%, as portfolio cash flows were not fully reinvested duethe Corporation increased purchases of these securities to relatively lowtake advantage of higher after tax equivalent yields available on currentrelative to other investment options.

47


The net pre-tax unrealized gain on available for sale investment securities was $22.7 million as of March 31, 2015, compared to a $11.3 million pre-tax unrealized gain as of December 31, 2014.The $11.4 million increase in the net pre-tax unrealized gain was due to a decrease in market interest rates, which caused the fair values of collateralized mortgage obligations and mortgage-backed securities to increase. See additional details regarding investment security price risk within Item 3, "Quantitative and Qualitative Disclosures About Market Risk."
Loans, net of unearned income
The following table presents ending balances of loans outstanding, net of unearned income:
    Increase (Decrease)    Increase (Decrease)
March 31, 2015 December 31, 2014 $ %March 31, 2016 December 31, 2015 $ %
(in thousands)  (dollars in thousands)  
Real-estate – commercial mortgage$5,227,101
 $5,197,155
 $29,946
 0.6 %$5,558,108
 $5,462,330
 $95,778
 1.8 %
Commercial – industrial, financial and agricultural3,762,631
 3,725,567
 37,064
 1.0
4,035,333
 4,088,962
 (53,629) (1.3)
Real-estate – home equity1,701,623
 1,736,688
 (35,065) (2.0)1,659,481
 1,684,439
 (24,958) (1.5)
Real-estate – residential mortgage1,364,788
 1,377,068
 (12,280) (0.9)1,377,459
 1,376,160
 1,299
 0.1
Real-estate – construction677,806
 690,601
 (12,795) (1.9)810,872
 799,988
 10,884
 1.4
Consumer257,301
 265,431
 (8,130) (3.1)263,221
 268,588
 (5,367) (2.0)
Leasing and other124,255
 119,206
 5,049
 4.2
Leasing, overdrafts and other166,227
 158,135
 8,092
 5.1
Loans, net of unearned income$13,115,505
 $13,111,716
 $3,789
  %$13,870,701
 $13,838,602
 $32,099
 0.2 %

The Corporation does not have a significant concentration of credit risk with any single borrower, industry or geographical location. Approximately $5.9$6.4 billion, or 45.0%45.9%, of the loan portfolio was in commercial mortgage and construction loans as of March 31, 2015.2016. The Corporation's maximum total lending commitment to an individual borrower was $50.0 million as of March 31, 2015.2016. In addition to its policy of limiting the maximum total lending commitment to any individual borrower to $50.0 million, the Corporation has established lower total lending limits for certain types of lending commitments, and lower total lending limits based on the Corporation's internal risk rating of an individual borrower at the time the lending commitment is approved. As of March 31, 2015,2016, the Corporation had 73112 relationships with total borrowing commitments between $20.0 million and $50.0 million.
Construction
Commercial mortgage loans include loans to commercial borrowers secured by commercial real estate, loans to commercial borrowers secured by residential real estate, and other construction loans, which represent loans to individuals secured by residential real estate. The following table presents outstanding construction loans and their delinquency rates by these class segments:
 March 31, 2015 December 31, 2014
 Balance Delinquency Rate (1) % of Total Balance Delinquency Rate (1) % of Total
 (dollars in thousands)
Commercial$393,408
 0.3% 58.0% $427,419
 0.6% 61.9%
Commercial - residential231,533
 6.2
 34.2
 203,670
 6.6
 29.5
Other52,865
 1.4
 7.8
 59,512
 0.6
 8.6
Total Real estate - construction$677,806
 2.4% 100.0% $690,601
 2.4% 100.0%

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

Construction loans decreased $12.8increased $95.8 million, or 1.9%1.8%, in comparison to December 31, 2014 and comprised 5.2%2015 across all of the total loan portfolio at March 31, 2015 as compared to 5.3% at December 31, 2014. The decrease in constructionCorporation's geographical markets. Commercial loans was primarily in loans secured by commercial real estate, partially offset by an increase in loans to commercial borrowers secured by residential real estate. Geographically, the decrease in real estate construction loans wasdecreased $53.6 million, or 1.3%, primarily in the MarylandNew Jersey ($40.331.2 million, or 46.7%5.5%), Pennsylvania ($19.0 million, or 0.6%), Virginia ($8.8 million, or 6.3%) market,and Delaware ($4.2 million, or 3.3%) markets, partially offset by an increase in the PennsylvaniaMaryland market ($25.89.5 million, or 7.1%2.9%) market..
The $37.1 million, or 1.0%, increase in commercial loans was primarily in the Pennsylvania and Virginia markets offset by decreases in the Delaware and New Jersey markets. Commercial mortgage loans increased $29.9 million, or 0.6%, in comparison to December 31, 2014. Geographically, the increase in was in the Maryland ($38.1 million, or 6.7%), Delaware ($12.8 million, or 5.7 %) and Virginia ($3.7 million, or 0.9%) markets, partially offset by decreases in the Pennsylvania ($13.9 million, or 0.5%) and New Jersey ($10.7 million, or 0.8%) markets.


48





The following table summarizes the percentage ofindustry concentration within the commercial loans, by industry:loan portfolio:
March 31,
2015
 December 31, 2014March 31,
2016
 December 31, 2015
Services18.8% 19.2%22.3% 22.6%
Manufacturing13.1
 13.1
11.2
 11.3
Health care11.1
 10.6
Construction (1)10.7
 11.0
9.7
 9.7
Retail9.4
 9.6
8.5
 8.3
Wholesale9.1
 8.7
8.0
 8.0
Health care8.9
 9.0
Real estate (2)7.3
 7.6
7.7
 7.3
Agriculture5.0
 5.5
4.8
 5.1
Arts and entertainment3.1
 3.4
2.9
 2.8
Transportation2.5
 2.4
2.7
 2.7
Financial services1.9
 1.9
2.0
 1.7
Other10.2
 8.6
9.1
 9.9
100.0% 100.0%
Total100.0% 100.0%
(1)Includes commercial loans to borrowers engaged in the construction industry.
(2)Includes commercial loans to borrowers engaged in the business of: renting, leasing or managing real estate for others; selling and/or buying real estate for others; and appraising real estate.

Commercial loans and commercial mortgage loans also include shared national credits, which are participations in loans or loan commitments of at least $20$20.0 million that are shared by three or more banks. Below is a summary of the Corporation's outstanding purchased shared national credits:
March 31, 2015 December 31, 2014March 31, 2016 December 31, 2015
(dollars in thousands)(in thousands)
Commercial - industrial, financial and agricultural$123,647
 $116,705
$154,491
 $152,830
Real estate - commercial mortgage136,511
 137,952
99,463
 96,219
$260,158
 $254,657
Total$253,954
 $249,049
Total shared national credits increased $5.5$4.9 million, or 2.2%2.0%, in comparison to December 31, 2014.2015. The Corporation's shared national credits are to borrowers located in its geographical markets, and the increase was due to normal lending activities consistent with the Corporation's underwriting policies. As of March 31, 2015, two2016, none of the shared national credits were past due compared to one credit totaling $1.1 million, or 2.6%0.4%, of the total balance were past due. There were no shared national creditsthat was past due atas of December 31, 2014.2015.
Home equityConstruction loans decreased $35.1include loans to commercial borrowers secured by commercial real estate, loans to commercial borrowers secured by residential real estate, and other construction loans, which represent loans to individuals secured by residential real estate. The following table presents outstanding construction loans and their delinquency rates by these class segments:
 March 31, 2016 December 31, 2015
 Balance Delinquency Rate (1) % of Total Balance Delinquency Rate (1) % of Total
 (dollars in thousands)
Commercial$566,816
 0.1% 69.9% $559,991
 0.2% 70.0%
Commercial - residential182,279
 7.8
 22.5
 179,303
 7.3
 22.4
Other61,777
 2.1
 7.6
 60,694
 1.1
 7.6
Total Real estate - construction$810,872
 2.0% 100.0% $799,988
 1.8% 100.0%

(1)Represents all accruing loans 30 days or more past due and non-accrual loans as a percentage of total loans in each class segment.

Construction loans increased $10.9 million, or 2.0%1.4%, which was due, in part,comparison to anDecember 31, 2015 and comprised 5.8% of the total loan portfolio at March 31, 2016.The increase in residential refinance activity as customers rolled outstanding home equityconstruction loans into residential mortgages.was primarily in loans secured by commercial real estate. Geographically, the increase in real estate construction loans was primarily in the New Jersey ($12.1 million, or 7.7%) and Delaware



($11.0 million, or 24.9%) markets, with slight increases also in the Virginia market, partially offset by decreases in the Pennsylvania ($10.1 million, or 2.1%) and Maryland ($2.2 million, or 3.5%) markets.







49


Provision for Credit Losses and Allowance for Credit Losses

The following table presents the activity in the allowance for credit losses:
Three months ended March 31Three months ended March 31
2015 20142016 2015
(dollars in thousands)(dollars in thousands)
Average balance of loans, net of unearned income$13,095,528
 $12,762,357
$13,853,420
 $13,095,528
      
Balance of allowance for credit losses at beginning of period$185,931
 $204,917
$171,412
 $185,931
Loans charged off:
 
   
Commercial – industrial, financial and agricultural1,863
 5,125
6,188
 1,863
Real estate – residential mortgage1,281
 846
1,068
 1,281
Consumer780
 751
Real estate – home equity768
 1,651
1,541
 768
Real estate – commercial mortgage709
 1,386
582
 709
Consumer1,007
 780
Real estate – construction
 214
326
 
Leasing and other363
 295
Leasing, overdrafts and other443
 363
Total loans charged off5,764
 10,268
11,155
 5,764
Recoveries of loans previously charged off:      
Commercial – industrial, financial and agricultural786
 744
2,319
 786
Real estate – residential mortgage159
 116
136
 159
Consumer241
 209
Real estate – home equity251
 356
338
 251
Real estate – commercial mortgage436
 44
825
 436
Consumer196
 241
Real estate – construction1,147
 224
383
 1,147
Leasing and other171
 164
Leasing, overdrafts and other81
 171
Total recoveries3,191
 1,857
4,278
 3,191
Net loans charged off2,573
 8,411
6,877
 2,573
Provision for credit losses(3,700) 2,500
1,530
 (3,700)
Balance of allowance for credit losses at end of period$179,658
 $199,006
$166,065
 $179,658
      
Net charge-offs to average loans (annualized)0.08% 0.26%0.20% 0.08%
The following table presents the components of the allowance for credit losses:
March 31,
2015
 December 31,
2014
March 31,
2016
 December 31,
2015
(dollars in thousands)(dollars in thousands)
Allowance for loan losses$177,701
 $184,144
$163,841
 $169,054
Reserve for unfunded lending commitments1,957
 1,787
2,224
 2,358
Allowance for credit losses$179,658
 $185,931
$166,065
 $171,412
      
Allowance for credit losses to loans outstanding1.37% 1.42%1.20% 1.24%
The provision for credit losses for the three months ended March 31, 20152016 was a negative $3.7$1.5 million, a decreasean increase of $6.2$5.2 million in comparison to the same period in 2014.Based on an evaluation of all relevant credit quality factors,2015. The increase in the Corporation recorded a $3.7 million negative provision for credit losses duringwas due to a negative provision for the three months ended March 31, 2015 compared to a $2.5 million provision for credit losses for the same period in 2014. The $6.2 million improvement in the provision for credit losseswhich was driven by an improvement in net charge-off levels, particularly a decrease in net charge-offs onamong pooled impaired loans across all loan portfolio segments.


Net charge-offs decreased $5.8increased $4.3 million, or 69.4%167.3%, to $6.9 million for the first quarter of 2016, compared to $2.6 million for the first quarter of 2015, compared to $8.4 million for the first quarter of 2014.2015. The decreaseincrease in net charge-offs was primarily due to a $3.3$2.8 million or 75.4%, decreaseincrease in commercial loan

50


net charge-offs, a $1.1 million decrease in construction loan net charge-offs and a $1.1 million or 79.7%, decreaseincrease in commercial mortgagereal estate construction net charge-offs.charge-offs as a result of lower recoveries compared to the same period in the prior year. Of the $2.6$6.9 million of net charge-offs recorded in the first quarter of 2015,2016, the majority were for loans originated in Pennsylvania ($5.5 million, or 80.0%) and New Jersey partially offset by net recoveries for loans originated in Maryland.($1.2 million, or 17.2%).

The following table summarizes non-performing assets as of the indicated dates:
March 31, 2015 March 31, 2014 December 31, 2014March 31, 2016 March 31, 2015 December 31, 2015
(dollars in thousands)(dollars in thousands)
Non-accrual loans$129,929
 $133,705
 $121,080
$122,170
 $129,929
 $129,523
Loans 90 days past due and accruing19,365
 21,225
 17,402
Loans 90 days or more past due and still accruing15,013
 19,365
 15,291
Total non-performing loans149,294
 154,930
 138,482
137,183
 149,294
 144,814
Other real estate owned (OREO)14,251
 15,300
 12,022
10,946
 14,251
 11,099
Total non-performing assets$163,545
 $170,230
 $150,504
$148,129
 $163,545
 $155,913
Non-accrual loans to total loans0.99% 1.05% 0.92%0.88% 0.99% 0.94%
Non-performing assets to total assets0.94% 1.01% 0.88%0.82% 0.94% 0.87%
Allowance for credit losses to non-performing loans120.34% 128.45% 134.26%121.05% 120.34% 118.37%

The following table presents accruing loans whose terms have been modified under troubled debt restructurings ("TDRs"), by type, as of the indicated dates:
March 31, 2015 March 31, 2014 December 31, 2014March 31, 2016 March 31, 2015 December 31, 2015
(in thousands)(in thousands)
Real estate – residential mortgage$31,574
 $30,363
 $31,308
$27,565
 $31,574
 $28,511
Real estate – commercial mortgage23,468
 19,514
 18,822
17,427
 23,468
 17,563
Real estate – construction7,791
 8,430
 9,241
3,092
 7,791
 3,942
Commercial – industrial, financial and agricultural6,975
 6,755
 5,237
5,650
 6,975
 5,953
Real estate – home equity3,084
 2,606
 2,975
6,530
 3,084
 4,556
Consumer34
 16
 38
32
 34
 33
Total accruing TDRs72,926
 67,684
 67,621
60,296
 72,926
 60,558
Non-accrual TDRs (1)29,392
 27,487
 24,616
27,277
 29,392
 31,035
Total TDRs$102,318
 $95,171
 $92,237
$87,573
 $102,318
 $91,593
(1) Included with non-accrual loans in the preceding table.

TDRs modified during the first three months of 20152016 and still outstanding as of March 31, 20152016 totaled $11.3$3.7 million. During the first three months of 2015, $12.52016, $1.6 million of TDRs that were modified withinin the previous 12 months had a payment default, which the Corporation defines as a single missed scheduled payment, subsequent to modification.


The following table presents the changes in non-accrual loans for the three months ended March 31, 2015:2016:
Commercial -
Industrial,
Financial and
Agricultural
 Real Estate -
Commercial
Mortgage
 Real Estate -
Construction
 Real Estate -
Residential
Mortgage
 Real Estate -
Home
Equity
 Consumer Leasing TotalCommercial -
Industrial,
Financial and
Agricultural
 Real Estate -
Commercial
Mortgage
 Real Estate -
Construction
 Real Estate -
Residential
Mortgage
 Real Estate -
Home
Equity
 Consumer Leasing Total
(in thousands)(in thousands)
Balance of non-accrual loans at December 31, 2014$29,769
 $44,437
 $16,348
 $20,043
 $10,483
 $
 $
 $121,080
Three months ended March 31, 2016Three months ended March 31, 2016              
Balance of non-accrual loans at December 31, 2015$42,199
 $40,731
 $12,044
 $21,914
 $11,210
 $
 $1,425
 $129,523
Additions16,586
 6,934
 698
 3,609
 1,532
 782
 132
 30,273
6,436
 5,959
 752
 1,397
 2,987
 1,007
 85
 18,623
Payments(4,181) (4,123) (3,052) (933) (420) 
 
 (12,709)(5,331) (3,543) (1,972) (151) (366) 
 (4) (11,367)
Charge-offs(1,863) (709) 
 (1,281) (768) (780) (132) (5,533)(6,188) (582) (326) (1,068) (1,541) (1,007) (85) (10,797)
Transfers to accrual status
 (44) 
 (304) (213) 
 
 (561)
 
 
 (160) (675) 
 
 (835)
Transfers to OREO status(692) (204) 
 (781) (944) 
 
 (2,621)
Balance of non-accrual loans at March 31, 2015$39,619
 $46,291
 $13,994
 $20,353
 $9,670
 $2
 $
 $129,929
Transfers to OREO
 (1,704) 
 (1,152) (121) 
 
 (2,977)
Balance of non-accrual loans at March 31, 2016$37,116
 $40,861
 $10,498
 $20,780
 $11,494
 $
 $1,421
 $122,170


51


Non-accrual loans decreased $3.8$7.8 million, or 2.8%6.0%, and $7.4 million, or 5.7%, in comparison to March 31, 20142015 and increased $8.8 million, or 7.3% in comparison to December 31, 2014. The increase in non-accrual loans during the first quarter of 2015, was primarily attributable to the addition of two specific credits totaling approximately $15 million.respectively.

The following table summarizes non-performing loans, by type, as of the indicated dates:
March 31, 2015 March 31, 2014 December 31, 2014March 31, 2016 March 31, 2015 December 31, 2015
(in thousands)(in thousands)
Real estate – commercial mortgage$46,331
 $45,876
 $45,237
$43,132
 $46,331
 $41,170
Commercial – industrial, financial and agricultural43,265
 38,830
 30,388
39,140
 43,265
 44,071
Real estate – residential mortgage28,595
 29,305
 28,995
25,182
 28,595
 28,484
Real estate – home equity14,455
 17,088
 14,740
14,408
 14,455
 14,683
Real estate – construction14,140
 20,758
 16,399
12,005
 14,140
 12,460
Consumer2,484
 2,999
 2,590
1,802
 2,484
 2,440
Leasing24
 74
 133
1,514
 24
 1,506
Total non-performing loans$149,294
 $154,930
 $138,482
$137,183
 $149,294
 $144,814

Non-performing construction loans decreased $6.6$12.1 million, or 31.9%8.1%, and $7.6 million, or 5.3% in comparison to March 31, 2014 across all markets except Delaware, which showed a slight increase. Non-performing home equity loans decreased $2.6 million, or 15.4%, in comparison to March2015 and December 31, 2014, primarily in the Pennsylvania, New Jersey and Maryland markets. Partially offsetting these decreases was an increase of $4.4 million, or 11.4%,2015, respectively. The decrease in non-performing commercial loans in comparison to March 31, 2014, was realized across all markets except for New Jersey.most loan categories.

The following table summarizes the Corporation’s OREO, by property type, as of the indicated dates:
March 31, 2015 March 31, 2014 December 31, 2014March 31, 2016 March 31, 2015 December 31, 2015
(in thousands)(in thousands)
Residential properties$8,055
 $8,026
 $6,656
$6,235
 $8,055
 $7,303
Commercial properties3,254
 5,412
 3,453
3,101
 3,254
 2,167
Undeveloped land2,942
 1,862
 1,913
1,610
 2,942
 1,629
Total OREO$14,251
 $15,300
 $12,022
$10,946
 $14,251
 $11,099

The Corporation's ability to identify potential problem loans in a timely manner is important to maintaining an adequate allowance for credit losses. For commercial loans, commercial mortgages and construction loans to commercial borrowers, an internal risk rating process is used to monitor credit quality. The evaluation of credit risk for residential mortgages, home equity loans, construction loans to individuals, consumer loans and lease receivables is based on payment history, through the monitoring of delinquency levels and trends. For a description of the Corporation's risk ratings, see Note 5, "Loans and Allowance for Credit Losses," in the Notes to Consolidated Financial Statements.
















52


Total internally risk rated loans were $9.6$10.3 billion as of March 31, 20152016 and December 31, 2014.2015. The following table presents internal risk ratings for commercial loans, commercial mortgages and construction loans to commercial borrowers with internal risk ratings of Special Mention (considered criticized loans) or Substandard or lower (considered classified loans), by class segment:
 Special Mention Increase (decrease) Substandard or lower Increase (decrease) Total Criticized and Classified Loans
 March 31, 2015 December 31, 2014 $ % March 31, 2015 December 31, 2014 $ % March 31, 2015 December 31, 2014
 (dollars in thousands)
Real estate - commercial mortgage$123,644
 $127,302
 $(3,658) (2.9)% $183,697
 $170,837
 $12,860
 7.5 % $307,341
 $298,139
Commercial - secured151,724
 120,584
 31,140
 25.8
 112,156
 110,544
 1,612
 1.5
 263,880
 231,128
Commercial -unsecured3,331
 7,463
 (4,132) (55.4) 8,378
 6,810
 1,568
 23.0
 11,709
 14,273
Total Commercial - industrial, financial and agricultural155,055
 128,047
 27,008
 21.1
 120,534
 117,354
 3,180
 2.7
 275,589
 245,401
Construction - commercial residential20,662
 27,495
 (6,833) (24.9) 37,038
 40,066
 (3,028) (7.6) 57,700
 67,561
Construction - commercial11,802
 12,202
 (400) (3.3) 3,475
 5,586
 (2,111) (37.8) 15,277
 17,788
Total real estate - construction (excluding construction - other)32,464
 39,697
 (7,233) (18.2) 40,513
 45,652
 (5,139) (11.3) 72,977
 85,349
Total$311,163
 $295,046
 $16,117
 5.5 % $344,744
 $333,843
 $10,901
 3.3 % $655,907
 $628,889
                    
% of total risk rated loans3.2% 3.1%     3.6% 3.5%     6.8% 6.6%

As of March 31, 2015, total loans with risk ratings of Substandard or lower increased $10.9 million, or 3.3%, in comparison to December 31, 2014, primarily due to an increase in substandard commercial mortgages. Special mention loans increased $16.1 million, or 5.5%, in comparison to December 31, 2014 due to an increase in special mention commercial loans, partially offset by decreases in special mention construction loans to commercial borrowers and commercial mortgages.
 Special Mention Increase (decrease) Substandard or lower Increase (decrease) Total Criticized and Classified Loans
 March 31, 2016 December 31, 2015 $ % March 31, 2016 December 31, 2015 $ % March 31, 2016 December 31, 2015
 (dollars in thousands)
Real estate - commercial mortgage$121,889
 $102,625
 $19,264
 18.8 % $152,879
 $155,442
 $(2,563) (1.6)% $274,768
 $258,067
Commercial - secured78,508
 92,711
 (14,203) (15.3) 134,446
 136,710
 (2,264) (1.7) 212,954
 229,421
Commercial -unsecured2,634
 2,761
 (127) (4.6) 3,372
 3,346
 26
 0.8
 6,006
 6,107
Total Commercial - industrial, financial and agricultural81,142
 95,472
 (14,330) (15.0) 137,818
 140,056
 (2,238) (1.6) 218,960
 235,528
Construction - commercial residential17,068
 17,154
 (86) (0.5) 18,621
 21,812
 (3,191) (14.6) 35,689
 38,966
Construction - commercial2,842
 3,684
 (842) (22.9) 4,623
 3,597
 1,026
 28.5
 7,465
 7,281
Total real estate - construction (excluding construction - other)19,910
 20,838
 (928) (4.5) 23,244
 25,409
 (2,165) (8.5) 43,154
 46,247
Total$222,941
 $218,935
 $4,006
 1.8 % $313,941
 $320,907
 $(6,966) (2.2)% $536,882
 $539,842
                    
% of total risk rated loans2.2% 2.1%     3.0% 3.1%     5.2% 5.2%

The following table summarizes loan delinquency rates, by type, as of the dates indicated:
March 31, 2015 March 31, 2014 December 31, 2014March 31, 2016 March 31, 2015 December 31, 2015
31-89
Days
 ≥ 90 Days (1) Total 31-89
Days
 ≥ 90 Days (1) Total 31-89
Days
 ≥ 90 Days (1) Total30-89
Days
 ≥ 90 Days (1) Total 30-89
Days
 ≥ 90 Days (1) Total 30-89
Days
 ≥ 90 Days (1) Total
Real estate – commercial mortgage0.50% 0.89% 1.39% 0.35% 0.89% 1.24% 0.35% 0.87% 1.22%0.15% 0.78% 0.93% 0.50% 0.89% 1.39% 0.14% 0.77% 0.91%
Commercial – industrial, financial and agricultural0.26% 1.15% 1.41% 0.33% 1.09% 1.42% 0.17% 0.81% 0.98%0.49% 0.97% 1.46% 0.26% 1.15% 1.41% 0.21% 1.06% 1.27%
Real estate – construction0.31% 2.09% 2.40% 0.43% 3.55% 3.98% 0.02% 2.38% 2.40%0.52% 1.48% 2.00% 0.31% 2.09% 2.40% 0.28% 1.59% 1.87%
Real estate – residential mortgage1.75% 2.10% 3.85% 1.53% 2.20% 3.73% 1.96% 2.10% 4.06%1.27% 1.83% 3.10% 1.75% 2.10% 3.85% 1.33% 2.07% 3.40%
Real estate – home equity0.74% 0.85% 1.59% 0.69% 0.98% 1.67% 0.63% 0.85% 1.48%0.54% 0.87% 1.41% 0.74% 0.85% 1.59% 0.53% 0.87% 1.40%
Consumer, leasing and other1.72% 0.65% 2.37% 1.87% 0.84% 2.71% 1.56% 0.70% 2.26%0.95% 0.77% 1.72% 1.72% 0.65% 2.37% 1.36% 0.92% 2.28%
Total0.62% 1.14% 1.76% 0.56% 1.22% 1.78% 0.52% 1.06% 1.58%0.45% 0.99% 1.44% 0.62% 1.14% 1.76% 0.37% 1.04% 1.41%
Total dollars (in thousands)$81,289
 $149,294
 $230,583
 $71,410
 $154,930
 $226,340
 $68,346
 $138,482
 $206,828
$62,922
 $137,183
 $200,105
 $81,289
 $149,294
 $230,583
 $51,927
 $144,814
 $196,741
 
(1)Includes non-accrual loans.
Management believes that the allowance for credit losses of $179.7$166.1 million as of March 31, 20152016 is sufficient to cover incurred losses in both the loan portfolio and the unfunded lending commitments as of that date and is appropriate based on applicable accounting standards.





53





Deposits and Borrowings
The following table presents ending deposits, by type:
    Increase (Decrease)    Increase (Decrease)
March 31, 2015 December 31, 2014 $ %March 31, 2016 December 31, 2015 $ %
(dollars in thousands)(dollars in thousands)
Noninterest-bearing demand$3,765,677
 $3,640,623
 $125,054
 3.4 %$4,134,861
 $3,948,114
 $186,747
 4.7 %
Interest-bearing demand3,133,748
 3,150,612
 (16,864) (0.5)3,430,206
 3,451,207
 (21,001) (0.6)
Savings3,567,652
 3,504,820
 62,832
 1.8
3,972,199
 3,868,046
 104,153
 2.7
Total demand and savings10,467,077
 10,296,055
 171,022
 1.7
11,537,266
 11,267,367
 269,899
 2.4
Time deposits3,047,420
 3,071,451
 (24,031) (0.8)2,867,014
 2,864,950
 2,064
 0.1
Total deposits$13,514,497
 $13,367,506
 $146,991
 1.1 %$14,404,280
 $14,132,317
 $271,963
 1.9 %

Non-interest bearingNoninterest-bearing demand deposits increased $125.1$186.7 million, or 3.4%4.7%, primarily as a result of increases in business account balances of $77.0$161.9 million, or 2.8%, personal account balances of $33.9 million, or 4.6%5.4%, and municipal account balances of $10.2$20.8 million, or 10.2%22.7%.

Interest-bearing demand accounts decreased $16.9$21.0 million, or 0.5%0.6%, due to a $47.3 million, or 3.9%, seasonal decrease in municipal account balances, partially offset by a $29.6 million, or 1.6%, increase in personal account balances. The $62.8 million, or 1.8%, increase in savings account balances was primarily due to a $119.4$29.5 million, or 5.5%1.5%, increasedecrease in personal account balances and a $4.5$3.6 million, or 0.6%1.2%, increasedecrease in business account balances partially offset by a seasonal decrease of $61.0$12.1 million, or 10.6%1.0%, increase in municipal account balances. The $24.0$104.2 million, or 0.8%2.7%, increase in savings account balances was due to a $141.4 million, or 5.7%, increase in personal account balances partially offset by a decrease of $28.1 million, or 4.9%, in municipal account balances and a $9.2 million, or 1.2%, decrease in time deposits was primarily due to a decrease in time deposits with original maturities of less than two years.business account balances.

The following table summarizes the changes in ending borrowings, by type:
  Increase (Decrease)  Increase (Decrease)
March 31, 2015 December 31, 2014 $ %March 31, 2016 December 31, 2015 $ %
(dollars in thousands)(dollars in thousands)
Short-term borrowings:              
Customer repurchase agreements$161,886
 $158,394
 $3,492
 2.2%$162,431
 $111,496
 $50,935
 45.7 %
Customer short-term promissory notes93,176
 95,106
 (1,930) (2.0)76,807
 78,932
 (2,125) (2.7)
Total short-term customer funding255,062
 253,500
 1,562
 0.6
239,238
 190,428
 48,810
 25.6
Federal funds purchased43
 6,219
 (6,176) (99.3)32,645
 197,235
 (164,590) (83.4)
Short-term FHLB advances (1)155,000
 70,000
 85,000
 121.4
81,000
 110,000
 (29,000) (26.4)
Total short-term borrowings410,105
 329,719
 80,386
 24.4
352,883
 497,663
 (144,780) (29.1)
Long-term debt:              
FHLB advances628,070
 673,107
 (45,037) (6.7)603,720
 587,756
 15,964
 2.7
Other long-term debt466,447
 466,306
 141
 
361,934
 361,786
 148
 
Total long-term debt1,094,517
 1,139,413
 (44,896) (3.9)965,654
 949,542
 16,112
 1.7
Total borrowings$1,504,622
 $1,469,132
 $35,490
 2.4%$1,318,537
 $1,447,205
 $(128,668) (8.9)%
              
(1) Represents FHLB advances with an original maturity term of less than one year.

The $80.4$144.8 million, increaseor 29.1%, decrease in total short-term borrowings was largely due to an $85.0reflects the use of a portion of the $272.0 million or 121.4%, increase in deposits to repay short-term FHLB advances. The $44.9 million decrease in long-term debtborrowings, as loan growth was due to a $45.0 million decrease in FHLB advances as a result of maturities that were replaced with short-term advances.lower.


Shareholders' Equity




54


Shareholders' Equity
Total shareholders’ equity increased $34.8$31.4 million, or 1.7%1.5%, during the first three months of 2015.2016. The increase was due primarily to $40.0$38.3 million of net income and a $7.4$16.9 million increase in after-tax unrealized holding gains on available for sale investment securities,other comprehensive income, partially offset by $16.1$15.6 million of common stock cash dividends.dividends and $11.2 million in treasury stock purchases.



The Corporation and its subsidiary banks are subject to regulatory capital requirements administered by various banking regulators. Failure to meet minimum capital requirements could result in certain actions by regulators that could have a material effect on the Corporation’s financial statements. In July 2013, the Federal Reserve Board approved final rules (the "U.S. Basel III Capital Rules") establishing a new comprehensive capital framework for U.S. banking organizations and implementing the Basel Committee on Banking Supervision's December 2010 framework for strengthening international capital standards. The U.S. Basel III Capital Rules substantially revise the risk-based capital requirements applicable to bank holding companies and depository institutions.

The new minimum regulatory capital requirements established by the U.S. Basel III Capital Rules became effective for the Corporation on January 1, 2015, and will be fully phased in on January 1, 2019.

The U.S. Basel III Capital Rules require the Corporation and its bank subsidiaries to:
Meet a new minimum Common Equity Tier 1 capital ratio of 4.50% of risk-weighted assets and a Tier 1 capital ratio of 6.00% of risk-weighted assets;
Continue to require the current minimum Total capital ratio of 8.00% of risk-weighted assets and the minimum Tier 1 leverage capital ratio of 4.00% of average assets; and
Comply with a revised definition of capital to improve the ability of regulatory capital instruments to absorb losses. Certain non-qualifying capital instruments, including cumulative preferred stock and trust preferred securities,TruPS, are being phased out as a component of Tier 1 capital for institutions of the Corporation's size.
When fully phased in on January 1, 2019, the Corporation and its bank subsidiaries will also be required to maintain a "capital conservation buffer" of 2.50% above the minimum risk-based capital requirements, which must be maintained to avoid restrictions on capital distributions and certain discretionary bonus payments.

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

As of March 31, 2015,2016, the Corporation and each of its bank subsidiaries met the minimum requirements of the U.S. Basel III Capital Rules, and each of the Corporation’s bank subsidiaries’ capital ratios exceeded the amounts required to be considered "well capitalized" as defined in the regulations. As of March 31, 2015,2016, the Corporation's capital levels also met the fully-phased in minimum capital requirements, including the capital conservation buffers, as prescribed in the U.S. Basel III Capital Rules.

The following table summarizes the Corporation’s capital ratios in comparison to regulatory requirements:
March 31, 2015 December 31, 2014 Regulatory
Minimum
for Capital
Adequacy
March 31, 2016 December 31, 2015 Regulatory
Minimum
for Capital
Adequacy
 Fully Phased-in, with Capital Conservation Buffers
Common Equity Tier I (to Risk-Weighted Assets)11.2% N/A
 4.5%
Total Capital (to Risk-Weighted Assets)14.6% 14.7% 8.0%13.1% 13.2% 8.0% 10.5%
Tier I Capital (to Risk-Weighted Assets)11.4% 12.3% 6.0%10.1% 10.2% 6.0% 8.5%
Common Equity Tier I (to Risk-Weighted Assets)10.1% 10.2% 4.5% 7.0%
Tier I Capital (to Average Assets)9.4% 10.0% 4.0%8.9% 9.0% 4.0% 4.0%

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

55



The Corporation maintains liquidity sources in the form of demand and savings deposits, time deposits, repurchase agreements and short-term promissory notes. The Corporation can access additional liquidity from these sources, if necessary, by increasing interest rates. The positive impact to liquidity resulting from higher interest rates could have a detrimental impact on the net interest margin and net income if rates on interest-earning assets do not experience a proportionate increase. Borrowing availability with the FHLB and the Federal Reserve Bank, along with Federal funds lines at various correspondent banks, provides the Corporation with additional liquidity.

Each of the Corporation’s subsidiary banks is a member of the FHLB and has access to FHLB overnight and term credit facilities. As of March 31, 2015, the Corporation had $783.1 million of short and long-term advances outstanding from the FHLB with an additional borrowing capacity of approximately $2.6 billion under these facilities. Advances from the FHLB are secured by qualifying commercial real estate and residential mortgage loans, investments and other assets.

As of March 31, 2015, the Corporation had aggregate availability under Federal funds lines of $1.4 billion, with $43,000 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 March 31, 2015, the Corporation had $1.2 billion of collateralized borrowing availability at the Discount Window, and no outstanding borrowings.

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

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


56


Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk is the exposure to economic loss that arises from changes in the values of certain financial instruments. The types of market risk exposures generally faced by financial institutions include interest rate risk, equity market price risk, debt security market price risk, foreign currency price risk and commodity price risk. Due to the nature of its operations, only equity market price risk, debt security marketforeign currency price risk and interest ratecommodity price risk are not significant to the Corporation.
Equity Market Price Risk
Equity market price risk is the risk that changes in the values of equity investments could have a material impact on the financial position or results of operations of the Corporation. As of March 31, 2015, equity investments consisted of $34.7 million of common stocks of publicly traded financial institutions, and $5.9 million of other equity investments.
The equity investments most susceptible to equity market price risk are the financial institutions stocks, which had a cost basis of approximately $23.4 million and a fair value of $34.7 million at March 31, 2015, including an investment in a single financial institution with a cost basis of $15.7 million and a fair value of $23.2 million. The fair value of this investment accounted for 66.7% of the fair value of the common stocks of publicly traded financial institutions. No other investment within the financial institutions stock portfolio exceeded 5% of the portfolio's fair value. In total, the financial institutions stock portfolio had gross unrealized gains of $11.3 million and gross unrealized losses of $4,000 as of March 31, 2015.
Management continuously monitors the fair value of its equity investments and evaluates current market conditions and operating results of the issuers. Periodic sale and purchase decisions are made based on this monitoring process. None of the Corporation’s equity securities are classified as trading.
In addition to its equity portfolio, investment management and trust services income may be impacted by fluctuations in the equity markets. A portion of this revenue is based on the value of the underlying investment portfolios, many of which include equity investments. If the values of those investment portfolios decrease, whether due to factors influencing U.S. securities markets in general or otherwise, the Corporation’s revenue would be negatively impacted. In addition, the Corporation’s ability to sell its brokerage services in the future will be dependent, in part, upon consumers’ level of confidence in financial markets.

Debt Security Market Price Risk
Debt security market price risk is the risk that changes in the values of debt securities, unrelated to interest rate changes, could have a material impact on the financial position or results of operations of the Corporation. The Corporation’s debt security investments consist primarily of U.S. government sponsored agency issued mortgage-backed securities and collateralized mortgage obligations, state and municipal securities, U.S. government debt securities, auction rate securities and corporate debt securities. All of the Corporation's investments in mortgage-backed securities and collateralized mortgage obligations have principal payments that are guaranteed by U.S. government sponsored agencies.
Municipal Securities
As of March 31, 2015, the Corporation owned municipal securities issued by various municipalities with a total fair value of $224.3 million. Ongoing uncertainty with respect to the financial strength of municipal bond insurers places much greater emphasis on the underlying strength of issuers. Continued pressure on local tax revenues of issuers due to adverse economic conditions could have an adverse impact on the underlying credit quality of issuers. The Corporation evaluates existing and potential holdings primarily based on the creditworthiness of the issuing municipality and then, to a lesser extent, on any underlying credit enhancement. Municipal securities can be supported by the general obligation of the issuing municipality, allowing the securities to be repaid by any means available to the issuing municipality. As of March 31, 2015, approximately 95% of municipal securities were supported by the general obligation of corresponding municipalities. Approximately 88% of these securities were school district issuances, which are also supported by the states of the issuing municipalities.
Auction Rate Certificates
As of March 31, 2015, the Corporation’s investments in student loan auction rate certificates (ARCs), had a cost basis of $106.4 million and a fair value of $98.9 million.
ARCs are long-term securities that were structured to allow their sale in periodic auctions, resulting in both the treatment of ARCs as short-term instruments in normal market conditions and fair values that could be derived based on periodic auction prices. However, beginning in 2008, market auctions for these securities began to fail due to an insufficient number of buyers, resulting in an illiquid market. Therefore, as of March 31, 2015, the fair values of the ARCs currently in the portfolio were derived using

57


significant unobservable inputs based on an expected cash flows model which produced fair values which were materially different from those that would be expected from settlement of these investments in the current market. The expected cash flows model, prepared by a third-party valuation expert, produced fair values which assumed a return to market liquidity sometime within the next five years. The Corporation believes that the trusts underlying the ARCs will self-liquidate as student loans are repaid.
The credit quality of the underlying debt associated with ARCs is also a factor in the determination of their estimated fair value. As of March 31, 2015, all of the ARCs were rated above investment grade, with approximately $6 million, or 5%, "AAA" rated and $93 million, or 95%, "AA" rated. All of the loans underlying the ARCs have principal payments that are guaranteed by the federal government. As of March 31, 2015, all ARCs were current and making scheduled interest payments.

Corporate Debt Securities
The Corporation holds corporate debt securities in the form of pooled trust preferred securities, single-issuer trust preferred securities and subordinated debt issued by financial institutions, as presented in the following table as of March 31, 2015:
 
Amortized
cost
 
Estimated
fair value
 (in thousands)
Single-issuer trust preferred securities$47,590
 $42,863
Subordinated debt47,563
 50,173
Pooled trust preferred securities405
 1,084
Corporate debt securities issued by financial institutions$95,558
 $94,120

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

The Corporation’s investments in single-issuer trust preferred securities had an unrealized loss of $4.7 million at March 31, 2015. The Corporation did not record any other-than-temporary impairment charges for single-issuer trust preferred securities during the three months ended March 31, 2015 or 2014. Seven of the Corporation's 20 single-issuer trust preferred securities were rated below investment grade by at least one ratings agency, with an amortized cost of $14.5 million and an estimated fair value of $12.8 million as of March 31, 2015. All of the single-issuer trust preferred securities rated below investment grade were rated "BB" or "Ba". Single-issuer trust preferred securities with an amortized cost of $4.7 million and an estimated fair value of $3.8 million at March 31, 2015 were not rated by any ratings agency.
As of March 31, 2015, all three of the Corporation's pooled trust preferred securities with an amortized cost of $405,000 and an estimated fair value of $1.1 million, were rated below investment grade by at least one ratings agency, with ratings ranging from "C" to "Ca". The class of securities held by the Corporation was below the most senior tranche, with the Corporation’s interests being subordinate to other investors in the pool.
The amortized cost of pooled trust preferred securities is the purchase price of the securities, net of cumulative credit related other-than-temporary impairment charges, determined using an expected cash flows model. The most significant input to the expected cash flows model was the expected payment deferral rate for each pooled trust preferred security. The Corporation evaluates the financial metrics, such as capital ratios and non-performing asset ratios, of the individual financial institution issuers that comprise each pooled trust preferred security to estimate its expected deferral rate.
See Note 10, "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(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.

58


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

The following table provides information about the Corporation’s interest rate sensitive financial instruments as of March 31, 2015. The table presents expected cash flows and weighted average rates for each of the Corporation's significant interest rate sensitive financial instruments, by expected maturity period. None of the Corporation’s financial instruments are classified as trading. All dollar amounts are in thousands.
 Expected Maturity Period   Estimated
 Year 1 Year 2 Year 3 Year 4 Year 5 Beyond Total Fair Value
Fixed rate loans (1)$944,463
 $491,060
 $354,616
 $384,681
 $191,213
 $637,266
 $3,003,299
 $3,004,169
Average rate3.91% 4.35% 4.26% 4.51% 4.49% 3.82% 4.12% 
                
Floating rate loans (1) (2)2,309,708
 1,520,146
 1,232,654
 1,056,653
 1,353,835
 2,637,489
 10,110,485
 10,072,225
Average rate3.73% 3.88% 3.90% 3.90% 3.80% 3.86% 3.83% 
                
Fixed rate investments (3)334,511
 294,958
 251,396
 204,945
 182,151
 783,344
 2,051,305
 2,074,789
Average rate2.92% 2.89% 2.76% 2.65% 2.52% 2.60% 2.71% 
                
Floating rate investments (3)
 4,974
 111,401
 33
 
 40,509
 156,917
 144,751
Average rate% 0.97% 1.55% 1.87% % 1.46% 1.51% 
                
Other interest-earning assets672,097
 
 
 
 
 65,694
 737,791
 737,791
Average rate0.41% % % % % 4.45% 0.77% 
                
Total$4,260,779
 $2,311,138
 $1,950,067
 $1,646,312
 $1,727,199
 $4,164,302
 $16,059,797
 $16,033,725
Average rate3.18% 3.85% 3.68% 3.89% 3.74% 3.60% 3.58% 
                
Fixed rate deposits (4)$1,318,918
 $466,560
 $332,354
 $263,137
 $306,143
 $20,934
 $2,708,046
 $2,726,933
Average rate0.71% 1.05% 1.34% 1.99% 2.09% 1.93% 1.14% 
                
Floating rate deposits (5)4,921,235
 823,303
 466,474
 388,074
 322,837
 118,851
 7,040,774
 7,032,497
Average rate0.15% 0.11% 0.09% 0.08% 0.09% 0.15% 0.13% 
                
Fixed rate borrowings (6)141,389
 451,709
 100,596
 774
 125,046
 258,506
 1,078,020
 1,098,095
Average rate3.90% 4.21% 5.74% 4.64% 1.84% 5.59% 4.37% 
                
Floating rate borrowings (7)410,106
 
 
 
 
 16,496
 426,602
 416,748
Average rate0.19% % % % % 2.40% 0.28% 
                
Total$6,791,648
 $1,741,572
 $899,424
 $651,985
 $754,026
 $414,787
 $11,253,442
 $11,274,273
Average rate0.34% 1.42% 1.19% 0.86% 1.19% 3.72% 0.79% 
(1)Amounts are based on contractual payments and maturities, adjusted for expected prepayments. Excludes $1.7 million of overdraft deposit balances.
(2)Line of credit amounts are based on historical cash flows, with an average life of approximately 5 years.
(3)Amounts are based on contractual maturities; adjusted for expected prepayments on mortgage-backed securities and collateralized mortgage obligations and expected calls on agency and municipal securities. Excludes equity securities as such investments do not have maturity dates.
(4)Amounts are based on contractual maturities of time deposits.
(5)Estimated based on history of deposit flows.
(6)Amounts are based on contractual maturities of debt instruments, adjusted for possible calls. Amounts also include junior subordinated deferrable interest debentures.
(7)Amounts include Federal Funds purchased, short-term promissory notes and securities sold under agreements to repurchase, which mature in less than 90 days, in addition to junior subordinated deferrable interest debentures.
The preceding table and discussion addressed the liquidity implications of interest rate risk and focused on expected cash flows from financial instruments. Expected maturities, however, do not necessarily reflect the net interest income impact of interest rate changes. Certain financial instruments, such as adjustable rate loans, have repricing periods that differ from expected cash flows periods.
Included within the $10.1 billion of floating rate loans above are $3.4 billion of loans, or 34.3% of the total, that float with the prime interest rate, $2.1 billion, or 20.5%, of loans that float with other interest rates, primarily the London Interbank Offered Rate ("LIBOR"), and $4.6 billion, or 45.2%, of adjustable rate loans. The $4.6 billion of adjustable rate loans include loans that are fixed rate instruments for a certain period of time, and then convert to floating rates.

59


The following table presents the percentage of adjustable rate loans, at March 31, 2015, stratified by the period until their next repricing:
Percent of Total
Adjustable Rate
Loans
One year30.9%
Two years18.1
Three years17.1
Four years14.3
Five years10.6
Greater than five years9.0
The Corporation uses two complementary methods to measure and manage interest rate risk. They are simulation of net interest income and estimates of economic value of equity. Using these measurements in tandem provides a reasonably comprehensive summary of the magnitude of the Corporation's interest rate risk, level of risk as time evolves, and exposure to changes in interest rates.

Simulation of net interest income is performed for the next twelve-month12-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 take into account for competitivethe potential effects of competition on the pricing of deposits and loans over the forward 12-month period.

Contractual maturities and repricing opportunities of loans are incorporated in the simulation model as are prepayment assumptions, maturity data and call options in the investment portfolio. Assumptions based on past experience are incorporated into the model for non-maturity deposit accounts. The assumptions used are inherently uncertain and, as a result, the model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income. Actual results will differ from the model's simulated results due to timing, amount and frequency of interest rate changes as well as changes in market conditions and the application and timing of various management strategies.

The following table summarizes the expected impact of abrupt interest rate changes on net interest income as of March 31, 2016 (due to the current level of interest rates, the 200 and 300 basis point downward shock scenarios are not shown):
Rate Shock (1)
Annual change
in net interest income
 % Change in net interest income
+300 bp$ 83.7$82.7 million    +17.2%16.0%
+200 bp+ $ 54.2$55.4 million +11.110.7%
+100 bp+ $ 23.8$25.8 million +4.95.0%
–100 bp$ 19.5$14.2 million 4.0 2.7%

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

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


point shock. As of March 31, 2015,2016, the Corporation was within economic value of equity policy limits for every 100 basis point shock.

Interest Rate Swaps
60
The Corporation enters into interest rate swaps with certain qualifying commercial loan customers to meet their interest rate risk management needs. The Corporation simultaneously enters into interest rate swaps with dealer counterparties, with identical notional amounts and terms. The net result of these interest rate swaps is that the customer pays a fixed rate of interest and the Corporation receives a floating rate. These interest rate swaps are derivative financial instruments that are recorded at their fair value in other assets and liabilities on the consolidated balance sheets. Changes in fair value during the period are recorded in other non-interest expense on the consolidated statements of income.


Liquidity

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

The Corporation maintains liquidity sources in the form of demand and savings deposits, time deposits, repurchase agreements and short-term promissory notes. The Corporation can access additional liquidity from these sources, if necessary, by increasing the rates of interest paid on those accounts and borrowings. The positive impact to liquidity resulting from paying higher interest rates could have a detrimental impact on the net interest margin and net income if rates on interest-earning assets do not experience a proportionate increase. Borrowing availability with the FHLB and the Federal Reserve Bank, along with federal funds lines at various correspondent banks, provides the Corporation with additional liquidity.

Each of the Corporation’s subsidiary banks is a member of the FHLB and has access to FHLB overnight and term credit facilities.As of March 31, 2016, the Corporation had $684.7 million of short- and long-term advances outstanding from the FHLB with an additional borrowing capacity of approximately $2.7 billion under these facilities. Advances from the FHLB are secured by qualifying commercial real estate and residential mortgage loans, investments and other assets.

As of March 31, 2016, the Corporation had aggregate availability under federal funds lines of $1.2 billion with $32.6 million borrowed against that amount. 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 March 31, 2016, the Corporation had $1.2 billion of collateralized borrowing availability at the Discount Window, and no outstanding borrowings.

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

The Corporation’s sources and uses of funds were discussed in general terms in the net interest income section of Management’s Discussion and Analysis. The consolidated statements of cash flows provide additional information. The Corporation’s operatingactivities during 2016 generated $34.1 million of cash, mainly due to net income. Cash used in investing activities was $169.7 million, due to net increases in loans and investment securities, partially offset by a decrease in short-term investments. Net cash provided by financing activities was $117.9 million due to increases in deposits, short-term borrowings and additions to long-term debt, partially offset by repayments of long-term debt, common stock, cash dividends and purchases of treasury stock.

Equity Market Price Risk

Equity market price risk is the risk that changes in the values of equity investments could have a material impact on the financial position or results of operations of the Corporation. As of March 31, 2016, equity investments consisted of $18.2 million of common stocks of publicly traded financial institutions and $892,000 of other equity investments.

The equity investments most susceptible to equity market price risk are the financial institutions stocks, which had a cost basis of approximately $13.4 million and a fair value of $18.2 million at March 31, 2016, including an investment in a single financial


institution with a cost basis of $7.4 million and a fair value of $9.1 million. The fair value of this investment accounted for 50.3% of the fair value of the common stocks of publicly traded financial institutions. No other investment in a single financial institution in the financial institutions stock portfolio exceeded 10% of the portfolio's fair value. In total, net unrealized gains in this portfolio were approximately $4.8 million as of March 31, 2016.

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

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

Debt Security Market Price Risk

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

Municipal Securities

As of March 31, 2016, the Corporation owned $314.0 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 March 31, 2016, approximately 97% of municipal securities were supported by the general obligation of corresponding municipalities. Approximately 78% of these securities were school district issuances, which are also supported by the states of the issuing municipalities.

Auction Rate Certificates

As of March 31, 2016, the Corporation’s investments in student loan auction rate securities, also known as auction rate certificates (ARCs), had a cost basis of $106.9 million and a fair value of $97.3 million.

ARCs are long-term securities that were structured to allow their sale in periodic auctions, resulting in both the treatment of ARCs as short-term instruments in normal market conditions and fair values that could be derived based on periodic auction prices. However, beginning in 2008, market auctions for these securities began to fail due to an insufficient number of buyers, resulting in an illiquid market. Therefore, as of March 31, 2016, the fair values of the ARCs currently in the portfolio were derived using significant unobservable inputs based on an expected cash flows model which produced fair values that were materially different from those that would be expected from settlement of these investments in the current market. The expected cash flows model produced fair values which assumed a return to market liquidity sometime in 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 March 31, 2016, all of the ARCs were rated above investment grade, with approximately $6 million, or 6%, "AAA" rated and $92 million, or 94%, "AA" rated. All of the loans underlying the ARCs have principal payments that are guaranteed by the federal government. At March 31, 2016, 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 of March 31, 2016, these securities had an amortized cost of $95.4 million and an estimated fair value of $89.9 million.

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

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.

See "Note 4 - 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 11 - Fair Value Measurements," in the Notes to Consolidated Financial Statements for further discussion related to the fair values of debt securities.



Item 4. Controls and Procedures

The Corporation carried out an evaluation, under the supervision and with the participation of the Corporation’s management, including the Corporation’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures pursuant to Rule 13a-15, promulgated under the Securities Exchange Act of 1934 (the "Exchange Act"). Based upon that evaluation, the Corporation’s Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this quarterly report, the Corporation’s disclosure controls and procedures are effective. Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in Corporation reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

There have been no changes in the Corporation’s internal control over financial reporting during the fiscal quarter covered by this quarterly report that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.


61



PART II – OTHER INFORMATION

Item 1. Legal Proceedings

The Corporation and its subsidiaries are involved in various legal proceedingsinformation presented in the ordinary course"Legal Proceedings" section of businessNote 10 "Commitment and Contingencies" 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 timeNotes to time, the CorporationConsolidated Financial Statements 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.

incorporated herein by reference.
As of the date of this report, the Corporation believes that any liabilities, individually or in the aggregate, which may result from the final outcomes of pending proceedings will not have a material adverse effect on the financial condition the operating results and/or the liquidity of the Corporation. However, legal proceedings are often unpredictable, and it is possible that the actualultimate resolution of any such matters, if unfavorable, may be material to the Corporation’s results of such proceedings cannot be determined with certainty.operations for any particular period, depending, in part, upon the size of the loss or liability imposed and the operating results for the applicable period.

As disclosed by the Corporation in Part II, Item 9B of its Annual Report on Form 10-K for the year ended December 31, 2014 filed with the SEC on February 25, 2015, in February 2015, Fulton Bank of New Jersey ("FBNJ"), a wholly owned banking subsidiary of the Corporation, entered into a Stipulation and Consent to the Issuance of a Consent Order with the FDIC consenting to the issuance by the FDIC of a Consent Order (the "FDIC Consent Order"). In addition, in February 2015, FBNJ entered into a Consent Order with the Commissioner of Banking and Insurance for the State of New Jersey (the "New Jersey Consent Order") and, together with the FDIC Consent Order, the "Consent Orders"). The Consent Orders impose substantially identical requirements and relate to identified deficiencies in a centralized Bank Secrecy Act and anti-money laundering compliance program (the "BSA/AML Compliance Program"), which was designed to comply with the requirements of the Bank Secrecy Act, the USA Patriot Act of 2001 and related anti-money laundering regulations (collectively, the "BSA/AML Requirements"). The Consent Orders generally require, among other things, that FBNJ review, assess and take actions to strengthen and enhance the BSA/AML Compliance Program, including increasing oversight of the BSA/AML Compliance Program by the Board of Directors of FBNJ; designating a qualified Bank Secrecy Act officer that is acceptable to the FDIC and the Commissioner of Banking and Insurance for the State of New Jersey, that reports monthly to the Board of Directors of FBNJ and is provided with sufficient authority and resources to implement and enforce the BSA/AML Compliance Program; enhancing the periodic risk assessment process relating to the BSA/AML Requirements; revising internal controls designed to ensure compliance with the BSA/AML Requirements, including enhancing customer due diligence procedures and establishing enhanced due diligence procedures for higher-risk customers; and reviewing and enhancing procedures for monitoring for, identifying, investigating and reporting suspicious activity, or known or suspected violations of law in accordance with the BSA/AML Requirements.

The Corporation and each of its other banking subsidiaries are subject to similar regulatory enforcement orders issued during 2014 by their respective bank regulatory agencies relating to identified deficiencies in the BSA/AML Compliance Program. Information relating to the regulatory enforcement orders issued during 2014 was disclosed by the Corporation in Current Reports on Form 8-K filed with the SEC on July 18, September 9, and December 29, 2014.

Item 1A. Risk Factors

There have been no material changes to the risk factors as previously disclosed in Part I, Item 1A of the Corporation’s Annual Report on Form 10-K for the year ended December 31, 20142015.


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

Not Applicable.The following table presents the Corporation's monthly repurchases of its common stock during the first quarter of 2016:

Period Total Number of Shares Purchased Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Approximate Dollar Value that May Yet Be Purchased Under the Plans or Programs
         
January 1, 2016 to January 31, 2016 375,000
 $12.14
 375,000
 $45,446,078
February 1, 2016 to February 29, 2016 542,200
 $12.25
 542,200
 38,804,488
March 1, 2016 to March 31, 2016 
 $
 
 38,804,488

In October, 2015, the Corporation announced that its board of directors had approved a share repurchase program pursuant to which the Corporation is authorized to repurchase up to $50.0 million of its outstanding shares of common stock, or approximately 2.3% of its outstanding shares, through December 31, 2016. Repurchased shares may be added to treasury stock, at cost. As permitted by securities laws and other legal requirements and subject to market conditions and other factors, purchases may be made from time to time in open market or privately negotiated transactions, including without limitation, through accelerated share repurchase transactions. The share repurchase program may be discontinued at any time. During the first quarter of 2016, 917,200 shares had been repurchased under this program for a total cost of $11.2 million, or $12.21 per share.

No stock repurchases were made outside the program and all repurchases were made in accordance with the guidelines of Rule 10b-18 and in compliance with Regulation M.

Item 3. Defaults Upon Senior Securities
Not applicable.

Item 4. Mine Safety Disclosures
Not applicable.


62


Item 5. Other Information
Not applicable.

Item 6. Exhibits
See Exhibit Index for a list of the exhibits required by Item 601 of Regulation S-K and filed as part of this report.

63





FULTON FINANCIAL CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
FULTON FINANCIAL CORPORATION  
     
Date: May 11, 20155, 2016 /s/ E. Philip Wenger
    E. Philip Wenger
    Chairman, Chief Executive Officer and President
     
Date: May 11, 20155, 2016 /s/ Patrick S. Barrett
    Patrick S. Barrett
    Senior Executive Vice President and
    Chief Financial Officer


64



EXHIBIT INDEX
Exhibits Required Pursuant
to Item 601 of Regulation S-K
 
    
3.1  Articles of Incorporation, as amended and restated, of Fulton Financial Corporation– Incorporated by reference to Exhibit 3.1 of the Fulton Financial Corporation Current Report on Form 8-K dated June 24, 2011.
    
3.2  Bylaws of Fulton Financial Corporation as amended – Incorporated by reference to Exhibit 3.1 of the Fulton Financial Corporation Current Report on an Amended Form 8-K dated September 23, 2014.
  �� 
31.1  Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
    
31.2  Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
    
32.1  Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
    
32.2  Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
    
101 
Financial statements from the Quarterly Report on Form 10-Q of Fulton Financial Corporation for the period ended March 31, 2015,31,2016, filed on May 11, 2015,5, 2016, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income (iv) the Consolidated Statements of Shareholders' Equity, (v) the Consolidated StatementStatements of Cash Flows and (vi) the Notes to Consolidated Financial Statements - filed herewith.
    



6562