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 SeptemberJune 30, 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 –174,031,000–173,060,000 shares outstanding as of October 30, 2015.July 29, 2016.

1





FULTON FINANCIAL CORPORATION
FORM 10-Q FOR THE THREE AND NINESIX MONTHS ENDED SEPTEMBERJUNE 30, 20152016
INDEX
 
DescriptionPage
   
PART I. FINANCIAL INFORMATION 
   
Item 1. Financial Statements (Unaudited):
 
   
(a)
Consolidated Balance Sheets - SeptemberJune 30, 20152016 and December 31, 20142015
3
   
(b)
Consolidated Statements of Income - Three and ninesix months ended SeptemberJune 30, 20152016 and 20142015
4
   
(c)
Consolidated Statements of Comprehensive Income - Three and ninesix months ended SeptemberJune 30, 20152016 and 20142015
5
   
(d)
Consolidated Statements of Shareholders’ Equity - NineSix months ended SeptemberJune 30, 20152016 and 20142015
6
   
(e)
Consolidated Statements of Cash Flows - NineSix months ended SeptemberJune 30, 20152016 and 20142015
7
   
(f)
Notes to Consolidated Financial Statements
8
   
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
3938
   
Item 3. Quantitative and Qualitative Disclosures about Market Risk
6762
   
Item 4. Controls and Procedures
7166
   
PART II. OTHER INFORMATION
 
   
Item 1. Legal Proceedings
7267
   
Item 1A. Risk Factors
7267
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
7368
   
Item 3. Defaults Upon Senior Securities
7368
   
Item 4. Mine Safety Disclosures
7368
   
Item 5. Other Information
7368
   
Item 6. Exhibits
7368
   
Signatures
7469
   
Exhibit Index
7570
   

2







Item 1. Financial Statements
 

CONSOLIDATED BALANCE SHEETS 
 
(in thousands, except per-share data)
September 30,
2015		 December 31,
2014		June 30,
2016		 December 31,
2015
(unaudited) (unaudited) 
ASSETS      
Cash and due from banks$93,803
 $105,702
$84,647
 $101,120
Interest-bearing deposits with other banks510,943
 358,130
348,232
 230,300
Federal Reserve Bank and Federal Home Loan Bank stock68,977
 64,953
59,854
 62,216
Loans held for sale26,937
 17,522
34,330
 16,886
Available for sale investment securities2,436,337
 2,323,371
2,529,724
 2,484,773
Loans, net of unearned income13,536,361
 13,111,716
14,155,159
 13,838,602
Less: Allowance for loan losses(167,136) (184,144)(162,546) (169,054)
Net Loans13,369,225
 12,927,572
13,992,613
 13,669,548
Premises and equipment225,705
 226,027
228,861
 225,535
Accrued interest receivable42,846
 41,818
43,316
 42,767
Goodwill and intangible assets531,562
 531,803
531,556
 531,556
Other assets531,724
 527,869
626,902
 550,017
Total Assets$17,838,059
 $17,124,767
$18,480,035
 $17,914,718
LIABILITIES      
Deposits:      
Noninterest-bearing$3,906,228
 $3,640,623
$4,125,375
 $3,948,114
Interest-bearing10,178,166
 9,726,883
10,167,189
 10,184,203
Total Deposits14,084,394
 13,367,506
14,292,564
 14,132,317
Short-term borrowings:      
Federal funds purchased5,527
 6,219
449,184
 197,235
Other short-term borrowings426,104
 323,500
273,030
 300,428
Total Short-Term Borrowings431,631
 329,719
722,214
 497,663
Accrued interest payable14,727
 18,045
8,336
 10,724
Other liabilities301,970
 273,419
384,372
 282,578
Federal Home Loan Bank advances and long-term debt979,433
 1,139,413
965,552
 949,542
Total Liabilities15,812,155
 15,128,102
16,373,038
 15,872,824
SHAREHOLDERS’ EQUITY      
Common stock, $2.50 par value, 600 million shares authorized, 218.6 million shares issued in 2015 and 218.2 million shares issued in 2014546,444
 545,555
Common stock, $2.50 par value, 600 million shares authorized, 219.0 million shares issued in 2016 and 218.9 million shares issued in 2015547,530
 547,141
Additional paid-in capital1,447,569
 1,420,523
1,455,351
 1,450,690
Retained earnings622,237
 558,810
686,635
 641,588
Accumulated other comprehensive loss(13,219) (17,722)
Treasury stock, at cost, 44.8 million shares in 2015 and 39.3 million shares in 2014(577,127) (510,501)
Accumulated other comprehensive income (loss)7,689
 (22,017)
Treasury stock, at cost, 45.9 million shares in 2016 and 44.7 million shares in 2015(590,208) (575,508)
Total Shareholders’ Equity2,025,904
 1,996,665
2,106,997
 2,041,894
Total Liabilities and Shareholders’ Equity$17,838,059
 $17,124,767
$18,480,035
 $17,914,718
      
See Notes to Consolidated Financial Statements      
 

3





CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
 
(in thousands, except per-share data)Three months ended September 30 Nine months ended September 30Three months ended June 30 Six months ended June 30
2015 2014 2015 20142016 2015 2016 2015
INTEREST INCOME              
Loans, including fees$131,804
 $133,741
 $391,491
 $397,011
$134,643
 $129,910
 $268,722
 $259,687
Investment securities:              
Taxable11,252
 12,278
 33,478
 37,962
11,159
 10,944
 23,162
 22,226
Tax-exempt1,904
 2,219
 5,872
 6,865
2,320
 1,881
 4,360
 3,968
Dividends190
 339
 834
 996
135
 296
 295
 644
Loans held for sale194
 237
 632
 585
188
 265
 319
 438
Other interest income884
 976
 3,922
 3,065
864
 933
 1,762
 3,038
Total Interest Income146,228
 149,790
 436,229
 446,484
149,309
 144,229
 298,620
 290,001
INTEREST EXPENSE              
Deposits10,217
 8,998
 30,093
 25,579
10,887
 10,053
 21,614
 19,876
Short-term borrowings92
 297
 272
 1,470
217
 103
 485
 180
Long-term debt10,225
 11,129
 33,669
 32,606
9,289
 11,153
 18,551
 23,444
Total Interest Expense20,534
 20,424
 64,034
 59,655
20,393
 21,309
 40,650
 43,500
Net Interest Income125,694
 129,366
 372,195
 386,829
128,916
 122,920
 257,970
 246,501
Provision for credit losses1,000
 3,500
 (500) 9,500
2,511
 2,200
 4,041
 (1,500)
Net Interest Income After Provision for Credit Losses124,694
 125,866
 372,695
 377,329
126,405
 120,720
 253,929
 248,001
NON-INTEREST INCOME              
Other service charges and fees12,983
 10,988
 23,733
 20,351
Service charges on deposit accounts12,982
 12,801
 37,188
 37,064
12,896
 12,637
 25,454
 24,206
Investment management and trust services11,237
 11,120
 33,137
 33,417
11,247
 11,011
 22,235
 21,900
Other service charges and fees10,965
 9,954
 31,316
 29,407
Mortgage banking income3,864
 4,038
 13,891
 13,384
3,897
 5,339
 7,927
 10,027
Investment securities gains, net:       
Net gains on sales of investment securities1,730
 99
 8,290
 1,223
Net other-than-temporary impairment losses—
 (18) —
 (30)
Investment securities gains, net1,730
 81
 8,290
 1,193
76
 2,415
 1,023
 6,560
Other3,996
 3,906
 12,178
 10,813
5,038
 4,099
 8,902
 8,182
Total Non-Interest Income44,774
 41,900
 136,000
 125,278
46,137
 46,489
 89,274
 91,226
NON-INTEREST EXPENSE              
Salaries and employee benefits65,308
 62,434
 195,365
 185,623
70,029
 65,067
 139,401
 130,057
Net occupancy expense10,710
 11,582
 36,211
 36,649
11,811
 11,809
 24,031
 25,501
Other outside services7,373
 8,632
 21,248
 19,684
5,508
 8,125
 11,564
 13,875
Loss on redemption of trust preferred securities5,626
 —
 5,626
 —
Data processing5,105
 4,689
 14,767
 12,816
5,476
 4,894
 10,876
 9,662
Software3,984
 3,353
 10,678
 9,487
3,953
 3,376
 7,874
 6,694
Professional fees3,353
 2,731
 5,686
 5,602
FDIC insurance expense2,960
 2,885
 5,909
 5,707
Equipment expense3,595
 3,307
 10,888
 10,269
2,872
 3,335
 6,243
 7,293
FDIC insurance expense2,867
 2,882
 8,574
 8,186
Professional fees2,828
 3,252
 8,430
 9,715
Supplies and postage2,708
 2,560
 7,803
 7,337
2,706
 2,726
 5,285
 5,095
Marketing2,102
 1,798
 5,570
 5,719
1,916
 2,235
 3,540
 3,468
Telecommunications1,587
 1,587
 4,920
 5,193
1,459
 1,617
 2,947
 3,333
Operating risk loss1,136
 1,242
 2,637
 3,786
986
 674
 1,526
 1,501
Other real estate owned and repossession expense1,016
 1,303
 2,507
 3,034
365
 129
 1,003
 1,491
Intangible amortization5
 314
 241
 944
—
 106
 —
 236
Other8,939
 6,863
 26,256
 23,084
8,243
 8,645
 16,165
 17,317
Total Non-Interest Expense124,889
 115,798
 361,721
 341,526
121,637
 118,354
 242,050
 236,832
Income Before Income Taxes44,579
 51,968
 146,974
 161,081
50,905
 48,855
 101,153
 102,395
Income taxes10,328
 13,402
 36,007
 41,136
11,155
 12,175
 23,146
 25,679
Net Income$34,251
 $38,566
 $110,967
 $119,945
$39,750
 $36,680
 $78,007
 $76,716
              
PER SHARE:              
Net Income (Basic)$0.20
 $0.21
 $0.63
 $0.64
$0.23
 $0.21
 $0.45
 $0.43
Net Income (Diluted)0.20
 0.21
 0.63
 0.64
0.23
 0.21
 0.45
 0.43
Cash Dividends0.09
 0.08
 0.27
 0.24
0.10
 0.09
 0.19
 0.18
See Notes to Consolidated Financial Statements              

4






CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
 
(in thousands)
Three months ended September 30 Nine months ended September 30Three months ended June 30 Six months ended June 30
2015 2014 2015 20142016 2015 2016 2015
  
Net Income$34,251
 $38,566
 $110,967
 $119,945
$39,750
 $36,680
 $78,007
 $76,716
Other Comprehensive Income (Loss), net of tax:              
Unrealized gain (loss) on securities7,857
 (3,011) 5,841
 23,912
12,839
 (12,008) 29,865
 (2,016)
Reclassification adjustment for postretirement amendment gains included in net income—
 —
 —
 (944)
Reclassification adjustment for securities gains included in net income(1,124) (52) (5,388) (775)(49) (1,569) (665) (4,264)
Reclassification adjustment for loss on derivative financial instruments included in net income2,456
 —
 2,456
 —
Non-credit related unrealized gain on other-than-temporarily impaired debt securities—
 138
 125
 650
—
 —
 —
 125
Amortization of unrealized loss on derivative financial instruments3
 34
 71
 102
4
 34
 8
 68
Unrecognized postretirement income arising due to plan amendment—
 —
 —
 2,144
Amortization of net unrecognized pension and postretirement items466
 104
 1,398
 304
32
 466
 498
 932
Other Comprehensive Income (Loss)9,658
 (2,787) 4,503
 25,393
12,826
 (13,077) 29,706
 (5,155)
Total Comprehensive Income$43,909
 $35,779
 $115,470
 $145,338
$52,576
 $23,603
 $107,713
 $71,561
              
See Notes to Consolidated Financial Statements              


5






CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)
NINESIX MONTHS ENDED SEPTEMBERJUNE 30, 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, 2014178,924
 $545,555
 $1,420,523
 $558,810
 $(17,722) $(510,501) $1,996,665
Balance at December 31, 2015174,176
 $547,141
 $1,450,690
 $641,588
 $(22,017) $(575,508) $2,041,894
Net income
 
 
 110,967
 
 
 110,967

 
 
 78,007
 
 
 78,007
Other comprehensive income
 
 
 
 4,503
 
 4,503

 
 
 
 29,706
 
 29,706
Stock issued, including related tax benefits613
 889
 2,675
 
 
 3,374
 6,938
273
 389
 1,405
 
 
 1,554
 3,348
Stock-based compensation awards
 
 4,371
 
 
 
 4,371

 
 3,256
 
 
 
 3,256
Acquisition of treasury stock(3,976)         (50,000) (50,000)(1,310)         (16,254) (16,254)
Settlement of accelerated stock repurchase agreement(1,790)   20,000
     (20,000) —
Common stock cash dividends - $0.27 per share
 
 
 (47,540) 
 
 (47,540)
Balance at September 30, 2015173,771
 $546,444
 $1,447,569
 $622,237
 $(13,219) $(577,127) $2,025,904
Common stock cash dividends - $0.19 per share
 
 
 (32,960) 
 
 (32,960)
Balance at June 30, 2016173,139
 $547,530
 $1,455,351
 $686,635
 $7,689
 $(590,208) $2,106,997
                          
Balance at December 31, 2013192,652
 $544,568
 $1,432,974
 $463,843
 $(37,341) $(340,857) $2,063,187
Balance at December 31, 2014178,924
 $545,555
 $1,420,523
 $558,810
 $(17,722) $(510,501) $1,996,665
Net income
 
 
 119,945
 
 
 119,945

 
 
 76,716
 
 
 76,716
Other comprehensive income
 
 
 
 25,393
 
 25,393
Other comprehensive loss
 
 
 
 (5,155) 
 (5,155)
Stock issued, including related tax benefits506
 639
 1,059
 
 
 3,767
 5,465
423
 664
 1,954
 
 
 2,077
 4,695
Stock-based compensation awards
 
 4,310
 
 
 
 4,310

 
 2,838
 
 
 
 2,838
Acquisition of treasury stock(8,000)         (95,255) (95,255)(1,538)         (19,013) (19,013)
Common stock cash dividends - $0.24 per share
 
 
 (45,039) 
 
 (45,039)
Balance at September 30, 2014185,158
 $545,207
 $1,438,343
 $538,749
 $(11,948) $(432,345) $2,078,006
Settlement of accelerated stock repurchase agreement(1,790)   20,000
    —
(20,000) —
Common stock cash dividends - $0.18 per share
 
 
 (31,929) 
 
 (31,929)
Balance at June 30, 2015176,019
 $546,219
 $1,445,315
 $603,597
 $(22,877) $(547,437) $2,024,817
                          
See Notes to Consolidated Financial Statements                          
 

6






CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
(in thousands)
Nine months ended September 30Six months ended June 30
2015 20142016 2015
CASH FLOWS FROM OPERATING ACTIVITIES:      
Net Income$110,967
 $119,945
$78,007
 $76,716
Adjustments to reconcile net income to net cash provided by operating activities:      
Provision for credit losses(500) 9,500
4,041
 (1,500)
Depreciation and amortization of premises and equipment20,302
 18,412
13,804
 13,920
Net amortization of investment securities premiums5,369
 4,399
4,647
 3,288
Net gains on sales of investment securities(8,290) (1,193)
Net increase in loans held for sale(9,415) (3,861)
Investment securities gains, net(1,023) (6,560)
Gain on sales of mortgage loans held for sale(7,110) (7,961)
Proceeds from sales of mortgage loans held for sale304,516
 406,703
Originations of mortgage loans held for sale(314,850) (415,200)
Amortization of intangible assets241
 944
—
 236
Amortization of issuance costs on long-term debt193
 279
Stock-based compensation4,371
 4,310
3,256
 2,838
Excess tax benefits from stock-based compensation(86) (54)(28) (63)
Loss on redemption of trust preferred securities5,626
 —
(Increase) decrease in accrued interest receivable(1,028) 493
(549) 625
Decrease (increase) in other assets6,683
 (1,909)
(Decrease) increase in accrued interest payable(3,318) 2,207
(Increase) decrease in other assets(18,268) 10,181
Decrease in accrued interest payable(2,388) (2,873)
Increase (decrease) in other liabilities3,995
 (5,315)9,866
 (3,322)
Total adjustments23,950
 27,933
(3,893) 591
Net cash provided by operating activities134,917
 147,878
74,114
 77,307
CASH FLOWS FROM INVESTING ACTIVITIES:      
Proceeds from sales of securities available for sale29,309
 15,219
84,972
 18,815
Proceeds from maturities of securities available for sale317,813
 273,688
282,832
 205,620
Purchase of securities available for sale(444,111) (164,676)(355,220) (346,322)
Increase in short-term investments(156,837) (129,418)
(Increase) decrease in short-term investments(115,570) 35,759
Net increase in loans(440,681) (271,494)(326,902) (147,492)
Net purchases of premises and equipment(19,980) (16,832)(17,130) (14,687)
Net cash used in investing activities(714,487) (293,513)(447,018) (248,307)
CASH FLOWS FROM FINANCING ACTIVITIES:      
Net increase in demand and savings deposits852,611
 768,979
202,552
 205,901
Net (decrease) increase in time deposits(135,723) 73,462
Increase (decrease) in short-term borrowings101,912
 (693,677)
Net decrease in time deposits(42,305) (67,698)
Increase in short-term borrowings224,551
 79,316
Additions to long-term debt347,778
 140,000
16,000
 148,099
Repayments of long-term debt(509,606) (5,295)(183) (155,150)
Net proceeds from issuance of common stock6,852
 5,411
3,320
 4,632
Excess tax benefits from stock-based compensation86
 54
28
 63
Dividends paid(46,239) (45,638)(31,278) (30,397)
Acquisition of treasury stock(50,000) (95,255)(16,254) (19,013)
Net cash provided by financing activities567,671
 148,041
356,431
 165,753
Net (Decrease) Increase in Cash and Due From Banks(11,899) 2,406
Net Decrease in Cash and Due From Banks(16,473) (5,247)
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$93,803
 $220,946
$84,647
 $100,455
Supplemental Disclosures of Cash Flow Information:      
Cash paid during the period for:      
Interest$67,352
 $57,448
$43,038
 $46,373
Income taxes9,168
 16,632
9,087
 11,051
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 and ninesix months ended SeptemberJune 30, 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 Issued Accounting Standards

Effective January 1, 2015, the Corporation adoptedIn May 2014, the Financial Accounting Standards Board'sBoard ("FASB") Accounting Standards Codification ("ASC") Update 2014-01, "Accounting for Investments in Qualified Affordable Housing Projects."issued ASC Update 2014-01 provides guidance on2014-09, "Revenue from Contracts with Customers." This standards update establishes a single comprehensive model for entities to use in accounting for investments maderevenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle prescribed by athis 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. During the first half of 2016, the FASB issued amendments to this standard (ASC Updates 2016-08, 2016-10, 2016-11 and 2016-12). These amendments provide further clarification to the standard. For public business entities, ASC Update 2014-09 is effective for interim and annual reporting entity in flow-through limited liability entities that manage or invest in affordable housing projects that qualify forperiods beginning after December 15, 2017. Early application is not permitted. For the low income housing tax credit.Corporation, this standards update is effective with its March 31, 2018 quarterly report on Form 10-Q. 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 consistsis currently evaluating the impact of the amortization of the investments net of tax benefit, and the income tax credits earned on the investments recorded in income taxes on the consolidated income statements was $2.3 million and $2.1 million for the three months ended September 30, 2015 and 2014, respectively, and $7.1 million and $7.4 million for the nine months ended September 30, 2015 and 2014, respectively. As of September 30, 2015 and December 31, 2014, the Corporation’s tax credit investments, included in other assets on the consolidated balance sheets, totaled $164.0 million and $155.6 million, respectively. The adoption of this ASC update did not have a material impactUpdate 2014-09 on the Corporation'sits consolidated financial statements for the three or nine months ended September 30, 2015 or 2014.statements.

In February 2015,January 2016, the FASB issued ASC Update 2015-02, "Consolidation: Amendments to the Consolidation Analysis.2016-01, "Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities." ASC Update 2015-02 changes2016-01 provides guidance regarding 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 VIEincome statement impact of equity investments held by related partiesan entity and the recognition of changes in fair value of financial liabilities when the reporting enterprise require the reporting enterprise to consolidate the VIE.fair value option is elected. ASC Update 2015-022016-01 is effective for public business entities' annual and interim reporting periods beginning after December 15, 2015,2017, 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 2015-022016-01 to have a material impact on its consolidated financial statements.

In April 2015,February 2016, the FASB issued ASC Update 2015-03, "Interest - Imputation of Interest"2016-02, "Leases." This standards update states that a lessee should recognize the assets and updatedliabilities 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 2015-03 with the issuance of ASC Update 2015-15, “Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements,” in August of 2015. 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 current U.S. GAAP, debt issuance costs are reported on the balance sheet as assets. The costs will continue to be amortized to interest expense using the effective interest method. ASC Update 2015-032016-02 is effective for public business entities'interim and annual and interim reporting periods beginning after December 15, 2015, with earlier adoption2018. ASC Update 2016-02 mandates a modified retrospective transition for all entities. Early application is permitted.The For the Corporation, intends to adopt this standards update is effective with its March 31, 20162019 quarterly report on Form 10-Q and does not expect10-Q. The Corporation is currently evaluating the impact of the adoption of ASC Update 2015-03 to have a material impact2016-02 on its consolidated financial statements.

In April 2015,March 2016, the FASB issued ASC Update 2015-05, "Customer's Accounting2016-09, "Stock Compensation: Improvements to Employee Share-Based Payment Accounting." The purpose of this standards update is to simplify several aspects of the accounting for Fees Paid in a Cloud Computing Arrangement."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 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 2015-052016-09 is effective for public business entities'interim and annual and interim reporting periods beginning after December 15, 2015, with earlier adoption2016. Early application is permitted.The For the Corporation, intends to adopt

8





this standards update is effective with its March 31, 20162017 quarterly report on Form 10-Q and does not expect10-Q. The Corporation is currently evaluating the impact of the adoption of ASC Update 2015-05 to have a material impact2016-09 on its consolidated financial statements.



In June 2016, the FASB issued ASC Update 2016-13, "Financial Instruments - Credit Losses." The new impairment model prescribed by this standards update is a single impairment model for all financial assets (i.e., loans and investments). The recognition of credit losses would be based on an entity’s current estimate of expected losses (referred to as the Current Expected Credit Loss model, or "CECL"), as opposed to recognition of losses only when they are probable (current practice). ASC Update 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019. Early adoption is permitted. For the Corporation, this standards update is effective with its March 31, 2020 quarterly report on Form 10-Q. The Corporation is currently evaluating the impact of the adoption of ASC Update 2016-13 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 September 30 Nine months ended September 30Three months ended June 30 Six months ended June 30
2015 2014 2015 20142016 2015 2016 2015
(in thousands)(in thousands)
Weighted average shares outstanding (basic)174,338
 186,109
 176,399
 187,893
173,394
 176,433
 173,363
 177,446
Impact of common stock equivalents1,004
 846
 1,029
 970
924
 1,098
 1,004
 1,042
Weighted average shares outstanding (diluted)175,342
 186,955
 177,428
 188,863
174,318
 177,531
 174,367
 178,488
For the three and ninesix months ended SeptemberJune 30, 2015, 1.5 million2016, 802,000 and 1.8 million844,000 stock options, respectively, were excluded from the diluted net income per share computation as their effect would have been anti-dilutive. For the three and ninesix months ended SeptemberJune 30, 2014, 2.52015, 1.8 million and 2.92.0 million stock options, respectively, were excluded from the diluted net income per share computation as their effect would have been anti-dilutive.


9





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 September 30, 2015     
Three months ended June 30, 2016     
Unrealized gain on securities$12,088
 $(4,231) $7,857
$19,753
 $(6,914) $12,839
Reclassification adjustment for securities gains included in net income (1)(1,730) 606
 (1,124)(76) 27
 (49)
Reclassification adjustment for loss on derivative financial instruments included in net income (2)3,778
 (1,322) 2,456
Amortization of unrealized loss on derivative financial instruments5
 (2) 3
Amortization of unrealized loss on derivative financial instruments (2)
6
 (2) 4
Amortization of net unrecognized pension and postretirement items (3)717
 (251) 466
49
 (17) 32
Total Other Comprehensive Income$14,858
 $(5,200) $9,658
$19,732
 $(6,906) $12,826
Three months ended September 30, 2014     
Three months ended June 30, 2015     
Unrealized loss on securities$(18,474) $6,466
 $(12,008)
Reclassification adjustment for securities gains included in net income (1)
(2,413) 844
 (1,569)
Amortization of unrealized loss on derivative financial instruments(2)
52
 (18) 34
Amortization of net unrecognized pension and postretirement items (3)
717
 (251) 466
Total Other Comprehensive Loss$(20,118) $7,041
 $(13,077)
     
Six months ended June 30, 2016     
Unrealized gain on securities$45,946
 $(16,081) $29,865
Reclassification adjustment for securities gains included in net income (1)
(1,023) 358
 (665)
Amortization of unrealized loss on derivative financial instruments (2)
12
 (4) 8
Amortization of net unrecognized pension and postretirement items (3)
766
 (268) 498
Total Other Comprehensive Income$45,701
 $(15,995) $29,706
     
Six months ended June 30, 2015     
Unrealized loss on securities$(4,629) $1,618
 $(3,011)$(3,103) $1,087
 $(2,016)
Reclassification adjustment for securities gains included in net income (1)(81) 29
 (52)(6,558) 2,294
 (4,264)
Non-credit related unrealized gains on other-than-temporarily impaired debt securities212
 (74) 138
192
 (67) 125
Amortization of unrealized loss on derivative financial instruments52
 (18) 34
Amortization of unrealized loss on derivative financial instruments (2)
104
 (36) 68
Amortization of net unrecognized pension and postretirement items (3)160
 (56) 104
1,434
 (502) 932
Total Other Comprehensive Loss$(4,286) $1,499
 $(2,787)$(7,931) $2,776
 $(5,155)
     
Nine months ended September 30, 2015     
Unrealized gain on securities$8,987
 $(3,146) $5,841
Reclassification adjustment for securities gains included in net income (1)(8,290) 2,902
 (5,388)
Reclassification adjustment for loss on derivative financial instruments included in net income (2)3,778
 (1,322) 2,456
Non-credit related unrealized gains (losses) on other-than-temporarily impaired debt securities192
 (67) 125
Amortization of unrealized loss on derivative financial instruments110
 (39) 71
Amortization of net unrecognized pension and postretirement items (3)2,151
 (753) 1,398
Total Other Comprehensive Income$6,928
 $(2,425) $4,503
Nine months ended September 30, 2014     
Unrealized gain on securities$36,790
 $(12,878) $23,912
Reclassification adjustment for securities gains included in net income (1)(1,193) 418
 (775)
Reclassification adjustment for postretirement gains included in net income (3)(1,452) 508
 (944)
Non-credit related unrealized gains (losses) on other-than-temporarily impaired debt securities1,000
 (350) 650
Amortization of unrealized loss on derivative financial instruments157
 (55) 102
Unrecognized pension and postretirement income3,291
 (1,147) 2,144
Amortization of net unrecognized pension and postretirement items (3)469
 (165) 304
Total Other Comprehensive Income$39,062
 $(13,669) $25,393

(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)AmountAmounts reclassified out of accumulated other comprehensive income. Before-tax amountamounts included within "Loss on Redemption of Trust Preferred Securities"in "Interest expense" on the consolidated statements of income. See Note 15, "Long-Term Debt," for additional details.
(3)Amounts reclassified out of accumulated other comprehensive income. Before-tax amounts included withinin "Salaries and employee benefits" on the consolidated statements of income. See Note 8, "Employee Benefit Plans," for additional details.





10






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) Total
 (in thousands)
Three months ended September 30, 2015         
Balance at June 30, 2015$830
 $344
 $(2,478) $(21,573) $(22,877)
Other comprehensive loss before reclassifications7,857
 —
 —
 —
 7,857
Amounts reclassified from accumulated other comprehensive income (loss)(1,124) —
 3
 466
 (655)
Reclassification adjustment for loss on derivative financial instruments included in net income—
—
—
 2,456
—
—
 2,456
Balance at September 30, 2015$7,563
 $344
 $(19) $(21,107) $(13,219)
Three months ended September 30, 2014
 
   
 
Balance at June 30, 2014$(580) $1,434
 $(2,614) $(7,401) $(9,161)
Other comprehensive income before reclassifications(3,011)

138
 —
 —
 (2,873)
Amounts reclassified from accumulated other comprehensive income (loss)(63) 11
 34
 104
 86
Balance at September 30, 2014$(3,654) $1,583
 $(2,580) $(7,297) $(11,948)
          
Nine months ended September 30, 2015         
Balance at December 31, 2014$5,980
 $1,349
 $(2,546) $(22,505) $(17,722)
Other comprehensive income before reclassifications5,841
 125
 —
 —
 5,966
Amounts reclassified from accumulated other comprehensive income (loss)(4,258) (1,130) 71
 1,398
 (3,919)
Reclassification adjustment for loss on derivative financial instruments included in net income—
 —
 2,456
 —
 2,456
Balance at September 30, 2015$7,563
 $344
 $(19) $(21,107) $(13,219)
Nine months ended September 30, 2014         
Balance at December 31, 2013$(27,510) $1,652
 $(2,682) $(8,801) $(37,341)
Other comprehensive income before reclassifications23,912
 650
 —
 2,144
 26,706
Amounts reclassified from accumulated other comprehensive income (loss)(56) (719) 102
 (640) (1,313)
Balance at September 30, 2014$(3,654) $1,583
 $(2,580) $(7,297) $(11,948)
 Unrealized Gains (Losses) on Investment Securities Not Other-Than-Temporarily Impaired Unrealized Non-Credit Gains (Losses) on Other-Than-Temporarily Impaired Debt Securities Unrealized Effective Portions of Losses on Forward-Starting Interest Rate Swaps Unrecognized Pension and Postretirement Plan Income (Costs) Total
 (in thousands)
Three months ended June 30, 2016         
Balance at March 31, 2016$9,911
 $458
 $(11) $(15,495) $(5,137)
Other comprehensive income before reclassifications12,839
 —
 —
 —
 12,839
Amounts reclassified from accumulated other comprehensive income (loss)(49) —
 4
 32
 (13)
Balance at June 30, 2016$22,701
 $458
 $(7) $(15,463) $7,689
Three months ended June 30, 2015
 
   
 
Balance at March 31, 2015$14,311
 $440
 $(2,512) $(22,039) $(9,800)
Other comprehensive income before reclassifications(12,008)
—
 —
 —
 (12,008)
Amounts reclassified from accumulated other comprehensive income (loss)(1,473) (96) 34
 466
 (1,069)
Balance at June 30, 2015$830
 $344
 $(2,478) $(21,573) $(22,877)
          
Six months ended June 30, 2016         
Balance at December 31, 2015$(6,499) $458
 $(15) $(15,961) $(22,017)
Other comprehensive income before reclassifications29,865
 —
 —
 —
 29,865
Amounts reclassified from accumulated other comprehensive income (loss)(665) —
 8
 498
 (159)
Balance at June 30, 2016$22,701
 $458
 $(7) $(15,463) $7,689
Six months ended June 30, 2015         
Balance at December 31, 2014$5,980
 $1,349
 $(2,546) $(22,505) $(17,722)
Other comprehensive income before reclassifications(2,016) 125
 —
 —
 (1,891)
Amounts reclassified from accumulated other comprehensive income (loss)(3,134) (1,130) 68
 932
 (3,264)
Balance at June 30, 2015$830
 $344
 $(2,478) $(21,573) $(22,877)


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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)
September 30, 2015       
Equity securities$16,087
 $7,453
 $(8) $23,532
June 30, 2016       
U.S. Government sponsored agency securities48,320
 231
 —
 48,551
$143
 $3
 $—
 $146
State and municipal securities234,868
 5,430
 (62) 240,236
333,246
 12,101
 —
 345,347
Corporate debt securities102,297
 2,935
 (5,291) 99,941
95,419
 3,001
 (6,873) 91,547
Collateralized mortgage obligations879,738
 5,638
 (11,077) 874,299
701,853
 5,951
 (1,458) 706,346
Mortgage-backed securities1,036,193
 16,845
 (1,133) 1,051,905
1,242,267
 25,501
 (5) 1,267,763
Auction rate securities106,661
 —
 (8,788) 97,873
106,949
 —
 (9,063) 97,886
$2,424,164
 $38,532
 $(26,359) $2,436,337
Total debt securities2,479,877
 46,557
 (17,399) 2,509,035
Equity securities14,210
 6,493
 (14) 20,689
Total$2,494,087
 $53,050
 $(17,413) $2,529,724
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 securities14,677
 6,845
 (8) 21,514
Total$2,494,059
 $28,740
 $(38,026) $2,484,773
Securities carried at $1.8 billion as of September 30, 2015 and $1.7 billion as of June 30, 2016 and 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 $22.4$19.8 million at SeptemberJune 30, 20152016 and $41.8$20.6 million at December 31, 2014)2015) and other equity investments (estimated fair value of $1.1 million$895,000 at SeptemberJune 30, 20152016 and $5.8 million$914,000 at December 31, 2014)2015).
As of SeptemberJune 30, 2015,2016, the financial institutions stock portfolio had a cost basis of $15.1$13.4 million and an estimated fair value of $22.4$19.8 million, including an investment in a single financial institution with a cost basis of $8.5$7.4 million and an estimated fair value of $12.8$10.4 million. The estimated fair value of this investment accounted for 57.1%52.5% 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.

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The amortized cost and estimated fair values of debt securities as of SeptemberJune 30, 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 $62,247
 $63,023
 $55,965
 $56,628
Due from one year to five years 104,989
 107,283
 44,833
 46,408
Due from five years to ten years 132,930
 136,571
 94,787
 97,933
Due after ten years 191,980
 179,724
 340,172
 333,957
 492,146
 486,601
 535,757
 534,926
Collateralized mortgage obligations 879,738
 874,299
 701,853
 706,346
Mortgage-backed securities 1,036,193
 1,051,905
 1,242,267
 1,267,763
 $2,408,077
 $2,412,805
Total debt securities $2,479,877
 $2,509,035
The following table presents information related to the gross realized gains and losses on the sales of equity and debt securities:
Gross
Realized
Gains		 Gross
Realized
Losses		 Other-than-
temporary
Impairment
Losses		 Net Gains (Losses)Gross
Realized
Gains		 Gross
Realized
Losses		 Net Gains (Losses)
Three months ended September 30, 2015(in thousands)
Three months ended June 30, 2016(in thousands)
Equity securities$1,730
 $—
 $—
 $1,730
$4
 $(10) $(6)
Debt securities—
 —
 —
 —
108
 (26) 82
Total$1,730
 $—
 $—
 $1,730
$112
 $(36) $76
Three months ended September 30, 2014       
Three months ended June 30, 2015     
Equity securities$99
 $—
 $—
 $99
$2,290
 $—
 $2,290
Debt securities—
 —
 (18) (18)125
 —
 125
Total$99
 $—
 $(18) $81
$2,415
 $—
 $2,415
            
Nine months ended September 30, 2015       
Six months ended June 30, 2016     
Equity securities$5,990
 $—
 $—
 $5,990
$737
 $(10) $727
Debt securities2,300
 —
 —
 2,300
322
 (26) 296
Total$8,290
 $—
 $—
 $8,290
$1,059
 $(36) $1,023
Nine months ended September 30, 2014       
Six months ended June 30, 2015     
Equity securities$100
 $—
 $(12) $88
$4,260
 $—
 $4,260
Debt securities1,446
 (323) (18) 1,105
2,300
 —
 2,300
Total$1,546
 $(323) $(30) $1,193
$6,560
 $—
 $6,560









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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 SeptemberJune 30, 20152016 and 2014:2015:
Three months ended September 30 Nine months ended September 30Three months ended June 30 Six months ended June 30
2015 2014 2015 20142016 2015 2016 2015
(in thousands)(in thousands)
Balance of cumulative credit losses on debt securities, beginning of period$(11,510) $(17,214) $(16,242) $(20,691)$(11,510) $(12,302) $(11,510) $(16,242)
Additions for credit losses recorded which were not previously recognized as components of earnings—
 (18) —
 (18)
Reductions for securities sold during the period—
 —
 4,730
 3,472
—
 792
 —
 4,730
Reductions for increases in cash flows expected to be collected that are recognized over the remaining life of the security—
 —
 2
 5
—
 —
 —
 2
Balance of cumulative credit losses on debt securities, end of period$(11,510) $(17,232) $(11,510) $(17,232)$(11,510) $(11,510) $(11,510) $(11,510)


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 SeptemberJune 30, 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)
U.S. Government sponsored agency securities$—
 $—
 $—
 $—
 $—
 $—
State and municipal securities11,892
 (62) —
 —
 11,892
 (62)
Corporate debt securities7,968
 (15) 33,718
 (5,276) 41,686
 (5,291)$—
 $—
 $32,186
 $(6,873) $32,186
 $(6,873)
Collateralized mortgage obligations30,723
 (62) 493,703
 (11,015) 524,426
 (11,077)21,695
 (17) 292,954
 (1,441) 314,649
 (1,458)
Mortgage-backed securities161,097
 (443) 67,071
 (690) 228,168
 (1,133)—
 —
 11,569
 (5) 11,569
 (5)
Auction rate securities—
 —
 97,873
 (8,788) 97,873
 (8,788)—
 —
 97,886
 (9,063) 97,886
 (9,063)
Total debt securities211,680
 (582) 692,365
 (25,769) 904,045
 (26,351)21,695
 (17) 434,595
 (17,382) 456,290
 (17,399)
Equity securities—
 —
 13
 (8) 13
 (8)681
 (14) —
 —
 681
 (14)
$211,680
 $(582) $692,378
 $(25,777) $904,058
 $(26,359)$22,376
 $(31) $434,595
 $(17,382) $456,971
 $(17,413)
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 SeptemberJune 30, 2015.2016.
The unrealized holding losses onAs of June 30, 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 September 30, 2015, all of the ARCs were rated above investment grade, with approximately $5.4 million, or 6%, "AAA" rated and $92.4 million, or 94%, "AA" rated.grade. All of the loans underlying the ARCs have principal payments which are guaranteed by the federal government.
As of SeptemberJune 30, 2015,2016, all ARCs were current and making scheduled interest payments. Based on management’s evaluations, ARCs with an estimated fair value of $97.9 million were not subject to any other-than-temporary impairment charges as of SeptemberJune 30, 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,

14





the Corporation does not consider those investments with unrealized holding losses as of SeptemberJune 30, 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:
September 30, 2015 December 31, 2014June 30, 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$46,624
 $41,787
 $47,569
 $42,016
$43,697
 $37,461
 $44,648
 $39,106
Subordinated debt51,625
 53,576
 47,530
 50,023
29,662
 30,708
 39,610
 40,779
Senior debt18,040
 18,652
 12,043
 12,329
Pooled trust preferred securities—
 530
 2,010
 4,088
—
 706
 —
 706
Corporate debt securities issued by financial institutions98,249
 95,893
 97,109
 96,127
91,399
 87,527
 96,301
 92,920
Other corporate debt securities4,048
 4,048
 1,907
 1,907
4,020
 4,020
 4,035
 4,035
Available for sale corporate debt securities$102,297
 $99,941
 $99,016
 $98,034
$95,419
 $91,547
 $100,336
 $96,955

The Corporation’s investments in single-issuerSingle-issuer trust preferred securities had an unrealized loss of $4.8$6.2 million at SeptemberJune 30, 2015. The Corporation did not record any other-than-temporary impairment charges for single-issuer trust preferred securities during the three or nine months ended September 30, 2015 or 2014.Seven2016. Six of the Corporation's 19 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 $13.2$9.5 million at SeptemberJune 30, 2015.2016. All of the single-issuer trust preferred securities rated below investment grade were rated "BB" or "Ba". Two single-issuer trust preferred securities with an amortized cost of $3.7 million and an estimated fair value of $2.7$2.4 million at SeptemberJune 30, 20152016 were not rated by any ratings agency.
During the nine months ended September 30, 2015, the Corporation sold three pooled trust preferred securities with a total amortized cost of $1.9 million, for a gain of $2.3 million. As of September 30, 2015, both of the Corporation's remaining pooled trust preferred securities, with an amortized cost of $0 and an estimated fair value of $530,000, 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 $99.9$91.5 million were not subject to any other-than-temporary impairment charges as of SeptemberJune 30, 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.


15





NOTE 5 – Loans and Allowance for Credit Losses

Loans, Net of Unearned Income
Loans, net of unearned income are summarized as follows:
September 30,
2015		 December 31, 2014June 30,
2016		 December 31, 2015
(in thousands)(in thousands)
Real-estate - commercial mortgage$5,339,928
 $5,197,155
$5,635,347
 $5,462,330
Commercial - industrial, financial and agricultural3,929,908
 3,725,567
4,099,177
 4,088,962
Real-estate - home equity1,693,649
 1,736,688
1,647,319
 1,684,439
Real-estate - residential mortgage1,382,085
 1,377,068
1,447,292
 1,376,160
Real-estate - construction769,565
 690,601
853,699
 799,988
Consumer271,696
 265,431
278,071
 268,588
Leasing and other161,911
 127,562
208,602
 170,914
Overdrafts2,614
 4,021
3,214
 2,737
Loans, gross of unearned income13,551,356
 13,124,093
14,172,721
 13,854,118
Unearned income(14,995) (12,377)(17,562) (15,516)
Loans, net of unearned income$13,536,361
 $13,111,716
$14,155,159
 $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.

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:
September 30,
2015		 December 31,
2014		June 30,
2016		 December 31,
2015
(in thousands)(in thousands)
Allowance for loan losses$167,136
 $184,144
$162,546
 $169,054
Reserve for unfunded lending commitments2,259
 1,787
2,562
 2,358
Allowance for credit losses$169,395
 $185,931
$165,108
 $171,412






16





The following table presents the activity in the allowance for credit losses:
Three months ended September 30 Nine months ended September 30Three months ended June 30 Six months ended June 30
2015 2014 2015 20142016 2015 2016 2015
(in thousands)(in thousands)
Balance at beginning of period$169,453
 $193,442
 $185,931
 $204,917
$166,065
 $179,658
 $171,412
 $185,931
Loans charged off(5,561) (9,604) (26,697) (31,348)(10,746) (15,372) (21,901) (21,136)
Recoveries of loans previously charged off4,503
 3,770
 10,661
 8,039
7,278
 2,967
 11,556
 6,158
Net loans charged off(1,058) (5,834) (16,036) (23,309)(3,468) (12,405) (10,345) (14,978)
Provision for credit losses1,000
 3,500
 (500) 9,500
2,511
 2,200
 4,041
 (1,500)
Balance at end of period$169,395
 $191,108
 $169,395
 $191,108
$165,108
 $169,453
 $165,108
 $169,453

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 September 30, 2015                 
Balance at June 30, 2015$50,680
 $49,170
 $22,506
 $22,787
 $7,749
 $2,608
 $1,615
 $10,370
 $167,485
Three months ended June 30, 2016                 
Balance at March 31, 2016$48,311
 $54,333
 $22,524
 $19,928
 $6,282
 $2,324
 $2,974
 $7,165
 $163,841
Loans charged off(660) (1,640) (940) (1,035) (114) (650) (522) —
 (5,561)(1,474) (4,625) (1,045) (340) (742) (569) (1,951) —
 (10,746)
Recoveries of loans previously charged off842
 1,598
 304
 201
 898
 314
 346
 —
 4,503
1,367
 2,931
 350
 420
 1,563
 539
 108
 —
 7,278
Net loans charged off182
 (42) (636) (834) 784
 (336) (176) —
 (1,058)(107) (1,694) (695) 80
 821
 (30) (1,843) —
 (3,468)
Provision for loan losses (1)825
 (405) 180
 (609) (964) 282
 223
 1,177
 709
(4,464) (884) 4,341
 1,218
 (1,331) 690
 1,387
 1,216
 2,173
Balance at September 30, 2015$51,687
 $48,723
 $22,050
 $21,344
 $7,569
 $2,554
 $1,662
 $11,547
 $167,136
Three months ended September 30, 2014                 
Balance at June 30, 2014$49,842
 $49,084
 $32,041
 $32,744
 $11,331
 $3,306
 $1,851
 $11,486
 $191,685
Balance at June 30, 2016$43,740
 $51,755
 $26,170
 $21,226
 $5,772
 $2,984
 $2,518
 $8,381
 $162,546
Three months ended June 30, 2015                 
Balance at March 31, 2015$52,860
 $57,150
 $23,481
 $23,235
 $8,487
 $2,527
 $1,653
 $8,308
 $177,701
Loans charged off(1,557) (5,167) (1,492) (231) (313) (538) (306) —
 (9,604)(1,642) (11,166) (870) (783) (87) (357) (467) —
 (15,372)
Recoveries of loans previously charged off1,167
 1,013
 336
 95
 470
 448
 241
 —
 3,770
451
 1,471
 189
 187
 231
 368
 70
 —
 2,967
Net loans charged off(390) (4,154) (1,156) (136) 157
 (90) (65) —
 (5,834)(1,191) (9,695) (681) (596) 144
 11
 (397) —
 (12,405)
Provision for loan losses (1)(278) 6,110
 406
 397
 (312) 244
 180
 (3,121) 3,626
(989) 1,715
 (294) 148
 (882) 70
 359
 2,062
 2,189
Balance at September 30, 2014$49,174
 $51,040
 $31,291
 $33,005
 $11,176
 $3,460
 $1,966
 $8,365
 $189,477
Nine months ended September 30, 2015                 
Balance at June 30, 2015$50,680
 $49,170
 $22,506
 $22,787
 $7,749
 $2,608
 $1,615
 $10,370
 $167,485
Six months ended June 30, 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(2,056) (10,813) (2,586) (1,408) (1,068) (1,576) (2,394) —
 (21,901)
Recoveries of loans previously charged off2,192
 5,250
 688
 556
 1,946
 735
 189
 —
 11,556
Net loans charged off136
 (5,563) (1,898) (852) 878
 (841) (2,205) —
 (10,345)
Provision for loan losses (1)(4,262) 220
 5,663
 703
 (1,635) 1,240
 2,255
 (347) 3,837
Balance at June 30, 2016$43,740
 $51,755
 $26,170
 $21,226
 $5,772
 $2,984
 $2,518
 $8,381
 $162,546
Six months ended June 30, 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(3,011) (14,669) (2,578) (3,099) (201) (1,787) (1,352) —
 (26,697)(2,351) (13,029) (1,638) (2,064) (87) (1,137) (830) —
 (21,136)
Recoveries of loans previously charged off1,729
 3,855
 744
 547
 2,276
 923
 587
 —
 10,661
887
 2,257
 440
 346
 1,378
 609
 241
 —
 6,158
Net loans charged off(1,282) (10,814) (1,834) (2,552) 2,075
 (864) (765) —
 (16,036)(1,464) (10,772) (1,198) (1,718) 1,291
 (528) (589) —
 (14,978)
Provision for loan losses (1)(524) 8,159
 (4,387) (5,176) (4,262) 403
 628
 4,187
 (972)(1,349) 8,564
 (4,567) (4,567) (3,298) 121
 405
 3,010
 (1,681)
Balance at September 30, 2015$51,687
 $48,723
 $22,050
 $21,344
 $7,569
 $2,554
 $1,662
 $11,547
 $167,136
Nine months ended September 30, 2014                 
Balance at December 31, 2013$55,659
 $50,330
 $28,222
 $33,082
 $12,649
 $3,260
 $3,370
 $16,208
 $202,780
Loans charged off(5,084) (15,804) (4,377) (2,166) (745) (1,738) (1,434) —
 (31,348)
Recoveries of loans previously charged off1,641
 2,532
 869
 319
 852
 1,059
 767
 —
 8,039
Net loans charged off(3,443) (13,272) (3,508) (1,847) 107
 (679) (667) —
 (23,309)
Provision for loan losses (1)(3,042) 13,982
 6,577
 1,770
 (1,580) 879
 (737) (7,843) 10,006
Balance at September 30, 2014$49,174
 $51,040
 $31,291
 $33,005
 $11,176
 $3,460
 $1,966
 $8,365
 $189,477
Balance at June 30, 2015$50,680
 $49,170
 $22,506
 $22,787
 $7,749
 $2,608
 $1,615
 $10,370
 $167,485

(1)
The provision for loan losses excluded a $291,000$338,000 and $472,000$204,000 increase, respectively, in the reserve for unfunded lending commitments for the three and ninesix months ended SeptemberJune 30, 20152016 and a $126,000an $11,000 and $506,000 decrease,$181,000 increase, respectively, in the reserve for unfunded lending commitments for the three and ninesix months ended SeptemberJune 30, 2014.2015. The total provision for credit losses, comprised of allocations for both funded and unfunded loans, was $1.0$2.5 million and negative $500,000, respectively,$4.0 million for the three and ninesix months ended SeptemberJune 30, 20152016, respectively, and $3.5$2.2 million and $9.5a negative $1.5 million respectively, for thethree and ninesix months ended SeptemberJune 30, 2014.2015.

17





The following table presents loans, net of unearned income and their related allowance for loan losses, by portfolio segment:
Real Estate -
Commercial
Mortgage
 
Commercial -
Industrial,
Financial and
Agricultural
 
Real Estate -
Home
Equity
 
Real Estate -
Residential
Mortgage
 
Real Estate -
Construction
 Consumer 
Leasing
and other
and
overdrafts
 
Unallocated
(1)
 Total
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)(in thousands)
Allowance for loan losses at September 30, 2015:              
Allowance for loan losses at June 30, 2016:Allowance for loan losses at June 30, 2016:              
Measured for impairment under FASB ASC Subtopic 450-20$38,490
 $36,002
 $14,867
 $7,921
 $5,119
 $2,535
 $1,662
 $11,547
 $118,143
$32,861
 $40,945
 $17,089
 $9,044
 $4,004
 $2,971
 $2,518
 $8,381
 $117,813
Evaluated for impairment under FASB ASC Section 310-10-3513,197
 12,721
 7,183
 13,423
 2,450
 19
 —
 N/A
 48,993
10,879
 10,810
 9,081
 12,182
 1,768
 13
 —
 N/A
 44,733
$51,687
 $48,723
 $22,050
 $21,344
 $7,569
 $2,554
 $1,662
 $11,547
 $167,136
$43,740
 $51,755
 $26,170
 $21,226
 $5,772
 $2,984
 $2,518
 $8,381
 $162,546
                                  
Loans, net of unearned income at September 30, 2015:              
Loans, net of unearned income at June 30, 2016:Loans, net of unearned income at June 30, 2016:              
Measured for impairment under FASB ASC Subtopic 450-20$5,273,819
 $3,885,956
 $1,679,471
 $1,330,778
 $750,629
 $271,667
 $149,530
 N/A
 $13,341,850
$5,582,027
 $4,057,883
 $1,629,443
 $1,399,399
 $841,193
 $278,053
 $194,254
 N/A
 $13,982,252
Evaluated for impairment under FASB ASC Section 310-10-3566,109
 43,952
 14,178
 51,307
 18,936
 29
 —
 N/A
 194,511
53,320
 41,294
 17,876
 47,893
 12,506
 18
 —
 N/A
 172,907
$5,339,928
 $3,929,908
 $1,693,649
 $1,382,085
 $769,565
 $271,696
 $149,530
 N/A
 $13,536,361
$5,635,347
 $4,099,177
 $1,647,319
 $1,447,292
 $853,699
 $278,071
 $194,254
 N/A
 $14,155,159
                                  
Allowance for loan losses at September 30, 2014:              
Allowance for loan losses at June 30, 2015:Allowance for loan losses at June 30, 2015:              
Measured for impairment under FASB ASC Subtopic 450-20$32,951
 $39,098
 $21,666
 $11,503
 $6,009
 $3,439
 $1,966
 $8,365
 $124,997
$37,228
 $38,090
 $15,838
 $8,763
 $5,430
 $2,588
 $1,615
 $10,370
 $119,922
Evaluated for impairment under FASB ASC Section 310-10-3516,223
 11,942
 9,625
 21,502
 5,167
 21
 —
 N/A
 64,480
13,452
 11,080
 6,668
 14,024
 2,319
 20
 —
 N/A
 47,563
$49,174
 $51,040
 $31,291
 $33,005
 $11,176
 $3,460
 $1,966
 $8,365
 $189,477
$50,680
 $49,170
 $22,506
 $22,787
 $7,749
 $2,608
 $1,615
 $10,370
 $167,485
                                  
Loans, net of unearned income at September 30, 2014:              
Loans, net of unearned income at June 30, 2015:Loans, net of unearned income at June 30, 2015:              
Measured for impairment under FASB ASC Subtopic 450-20$5,095,263
 $3,655,162
 $1,719,049
 $1,319,333
 $658,822
 $278,196
 $111,148
 N/A
 $12,836,973
$5,172,333
 $3,764,999
 $1,676,410
 $1,315,908
 $712,975
 $272,463
 $136,521
 N/A
 $13,051,609
Evaluated for impairment under FASB ASC Section 310-10-3561,716
 36,100
 13,987
 52,700
 28,906
 23
 —
 N/A
 193,432
65,467
 41,700
 13,278
 53,195
 18,950
 31
 —
 N/A
 192,621
$5,156,979
 $3,691,262
 $1,733,036
 $1,372,033
 $687,728
 $278,219
 $111,148
 N/A
 $13,030,405
$5,237,800
 $3,806,699
 $1,689,688
 $1,369,103
 $731,925
 $272,494
 $136,521
 N/A
 $13,244,230
 
(1)The unallocated allowance, which was approximately 7%5% and 4%6% of the total allowance for credit losses, respectively, as of both SeptemberJune 30, 20152016 and September 30, 2014,2015, 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 $500,000 negative$2.5 million provision for credit losses during the ninethree months ended SeptemberJune 30, 2015,2016, compared to a $9.5$2.2 million provision for credit losses for the same period in 2014. The $10.0 million decrease in the provision for credit losses was driven by improvement in all credit quality measures, particularly net charge-off levels, across all loan portfolio segments.2015.
All loans individually evaluated for impairment under FASB ASC Section 310-10-35 are measured for losses on a quarterly basis.
As of SeptemberJune 30, 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 SeptemberJune 30, 2016 and 2015, approximately 89% and 2014, approximately 77%72%, 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.

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 an acceptable

18





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 for the age of the appraisal, results in a current loan-to-value ratio that is lower than the Corporation's loan-to-value requirements for new loans, generally less than 70%.
The following table presents total impaired loans by class segment:
September 30, 2015 December 31, 2014June 30, 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$31,961
 $26,075
 $—
 $25,802
 $23,236
 $—
$25,452
 $22,501
 $—
 $27,872
 $22,596
 $—
Commercial - secured22,097
 17,661
 —
 17,599
 14,582
 —
21,458
 18,137
 —
 18,012
 13,702
 —
Commercial - unsecured86
 86
 —
 —
 —
 —
Real estate - home equity—
 —
 —
 —
 —
 —
Real estate - residential mortgage6,607
 6,201
 —
 4,873
 4,873
 —
6,353
 6,171
 —
 4,790
 4,790
 —
Construction - commercial residential13,353
 10,417
 —
 18,041
 14,801
 —
7,743
 6,543
 —
 9,916
 8,865
 —
Construction - commercial1,295
 1,143
 —
 1,707
 1,581
 —
75,399
 61,583
 
 68,022
 59,073
 
61,006
 53,352
 
 60,590
 49,953
 
With a related allowance recorded:With a related allowance recorded:          With a related allowance recorded:          
Real estate - commercial mortgage48,734
 40,034
 13,197
 49,619
 40,023
 16,715
41,420
 30,819
 10,879
 45,189
 35,698
 12,471
Commercial - secured29,415
 23,533
 11,789
 24,824
 19,335
 12,165
27,349
 22,183
 10,230
 39,659
 33,629
 14,085
Commercial - unsecured2,832
 2,672
 932
 1,241
 1,089
 865
1,182
 974
 580
 971
 821
 498
Real estate - home equity18,854
 14,178
 7,183
 19,392
 13,458
 9,224
22,944
 17,876
 9,081
 20,347
 15,766
 7,993
Real estate - residential mortgage54,604
 45,106
 13,423
 56,607
 46,478
 18,592
49,976
 41,722
 12,182
 55,242
 45,635
 13,422
Construction - commercial residential9,613
 6,019
 1,985
 14,007
 7,903
 2,675
8,610
 5,043
 1,447
 9,949
 6,290
 2,110
Construction - commercial1,223
 1,077
 363
 1,501
 1,023
 459
731
 504
 166
 820
 638
 217
Construction - other452
 280
 102
 452
 281
 137
416
 416
 155
 331
 193
 68
Consumer - direct14
 14
 10
 19
 19
 17
18
 18
 13
 19
 19
 14
Consumer - indirect15
 15
 9
 20
 19
 18
—
��—
 —
 14
 14
 8
Leasing, other and overdrafts—
 —
 —
 1,658
 1,425
 704
165,756
 132,928
 48,993
 167,682
 129,628
 60,867
152,646
 119,555
 44,733
 174,199
 140,128
 51,590
Total$241,155
 $194,511
 $48,993
 $235,704
 $188,701
 $60,867
$213,652
 $172,907
 $44,733
 $234,789
 $190,081
 $51,590
As of SeptemberJune 30, 20152016 and December 31, 2014,2015, there were $61.6$53.4 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.

19





The following table presents average impaired loans by class segment:
Three months ended September 30 Nine months ended September 30Three months ended June 30 Six months ended June 30
2015 2014 2015 20142016 2015 2016 2015
Average
Recorded
Investment		 Interest
Income (1)		 Average
Recorded
Investment		 Interest
Income (1)		 Average
Recorded
Investment		 Interest
Income (1)		 Average
Recorded
Investment		 Interest
Income (1)		Average
Recorded
Investment		 Interest
Income (1)		 Average
Recorded
Investment		 Interest
Income (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$25,216
 $68
 $23,056
 $78
 $26,033
 $246
 $23,524
 244
$22,762
 $72
 $27,410
 $87
 $22,707
 $141
 $26,018
 178
Commercial - secured17,609
 28
 18,903
 29
 16,142
 74
 20,014
 98
15,182
 20
 16,163
 24
 14,688
 36
 15,636
 45
Commercial - unsecured43
 —
 —
 —
 22
 —
 —
 —
Real estate - home equity—
 —
 150
 —
 —
 —
 225
 1
Real estate - residential mortgage6,212
 34
 1,236
 7
 5,539
 94
 697
 13
6,191
 33
 5,541
 32
 5,724
 63
 5,318
 60
Construction - commercial residential10,558
 28
 14,881
 51
 12,390
 124
 16,052
 173
6,421
 16
 12,171
 40
 7,236
 35
 13,048
 95
Construction - commercial1,150
 —
 1,060
 —
 1,144
 —
 1,514
 —
—
 —
 925
 —
 —
 —
 1,144
 —
60,788
 158
 59,286
 165
 61,270
 538
 62,026
 529
50,556
 141
 62,210
 183
 50,355
 275
 61,164
 378
With a related allowance recorded:                              
Real estate - commercial mortgage40,572
 110
 38,469
 130
 40,116
 368
 37,794
 394
33,042
 104
 40,204
 126
 33,927
 212
 40,143
 259
Commercial - secured22,386
 36
 19,764
 30
 23,668
 111
 21,404
 101
25,919
 33
 25,902
 38
 28,489
 71
 23,713
 74
Commercial - unsecured2,788
 1
 850
 1
 1,981
 4
 847
 3
929
 1
 2,082
 2
 893
 2
 1,751
 3
Real estate - home equity13,728
 37
 14,116
 30
 13,417
 101
 14,106
 78
17,950
 70
 13,016
 33
 17,222
 127
 13,163
 64
Real estate - residential mortgage46,039
 254
 51,283
 298
 46,406
 797
 51,257
 894
41,928
 226
 47,020
 270
 43,164
 461
 46,839
 543
Construction - commercial residential5,746
 15
 11,189
 38
 6,496
 64
 10,480
 100
5,566
 14
 6,031
 21
 5,807
 29
 6,655
 49
Construction - commercial1,210
 —
 942
 —
 1,005
 —
 567
 —
548
 —
 960
 —
 578
 —
 981
 —
Construction - other281
 —
 281
 —
 281
 —
 414
 —
513
 —
 281
 —
 406
 —
 281
 —
Consumer - direct15
 —
 18
 —
 18
 —
 15
 —
10
 —
 17
 —
 16
 —
 18
 —
Consumer - indirect15
 —
 6
 —
 17
 —
 4
 —
15
 —
 17
 —
 11
 —
 17
 —
Leasing, other and overdrafts711
 —
 —
 —
 949
 —
 —
 —
132,780
 453
 136,918
 527
 133,405
 1,445
 136,888
 1,570
127,131
 448
 135,530
 490
 131,462
 902
 133,561
 992
Total$193,568
 $611
 $196,204
 $692
 $194,675
 $1,983
 $198,914
 2,099
$177,687
 $589
 $197,740
 $673
 $181,817
 $1,177
 $194,725
 1,370
                              
(1)All impaired loans, excluding accruing TDRs, were non-accrual loans. Interest income recognized for the three and ninesix months ended SeptemberJune 30, 20152016 and 20142015 represents amounts earned on accruing TDRs.


20





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
September 30, 2015 December 31, 2014 September 30, 2015 December 31, 2014 September 30, 2015 December 31, 2014 September 30, 2015 December 31, 2014June 30, 2016 December 31, 2015 June 30, 2016 December 31, 2015 June 30, 2016 December 31, 2015 June 30, 2016 December 31, 2015
(dollars in thousands)(dollars in thousands)
Real estate - commercial mortgage$5,028,655
 $4,899,016
 $132,823
 $127,302
 $178,450
 $170,837
 $5,339,928
 $5,197,155
$5,371,366
 $5,204,263
 $141,417
 $102,625
 $122,564
 $155,442
 $5,635,347
 $5,462,330
Commercial - secured3,579,389
 3,333,486
 97,617
 120,584
 105,820
 110,544
 3,782,826
 3,564,614
3,718,231
 3,696,692
 95,330
 92,711
 130,180
 136,710
 3,943,741
 3,926,113
Commercial - unsecured138,709
 146,680
 3,568
 7,463
 4,805
 6,810
 147,082
 160,953
149,548
 156,742
 2,467
 2,761
 3,421
 3,346
 155,436
 162,849
Total commercial - industrial, financial and agricultural3,718,098
 3,480,166
 101,185
 128,047
 110,625
 117,354
 3,929,908
 3,725,567
3,867,779
 3,853,434
 97,797
 95,472
 133,601
 140,056
 4,099,177
 4,088,962
Construction - commercial residential144,329
 136,109
 16,763
 27,495
 29,429
 40,066
 190,521
 203,670
151,817
 140,337
 17,012
 17,154
 14,838
 21,812
 183,667
 179,303
Construction - commercial514,969
 409,631
 1,693
 12,202
 5,204
 5,586
 521,866
 427,419
596,971
 552,710
 2,548
 3,684
 4,594
 3,597
 604,113
 559,991
Total construction (excluding Construction - other)659,298
 545,740
 18,456
 39,697
 34,633
 45,652
 712,387
 631,089
748,788
 693,047
 19,560
 20,838
 19,432
 25,409
 787,780
 739,294
$9,406,051
 $8,924,922
 $252,464
 $295,046
 $323,708
 $333,843
 $9,982,223
 $9,553,811
$9,987,933
 $9,750,744
 $258,774
 $218,935
 $275,597
 $320,907
 $10,522,304
 $10,290,586
% of Total94.2% 93.4% 2.5% 3.1% 3.3% 3.5% 100.0% 100.0%94.9% 94.8% 2.5% 2.1% 2.6% 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. 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 separatean independent assessment of risk rating accuracy. Ratings may be changed based on the ongoing monitoring procedures performed by loan officers or credit administration staff, or if specific loan review activities identify a deterioration or an improvement in the loan.

The Corporation does not assign internal risk ratings to smaller balance, homogeneous loans, such as home equity, residential mortgage, consumer, lease receivables and construction loans to individuals secured by residential real estate.estate, consumer and lease receivables. 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.

21





The following table presents a summary of performing, 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
September 30, 2015 December 31, 2014 September 30, 2015 December 31, 2014 September 30, 2015 December 31, 2014 September 30, 2015 December 31, 2014June 30, 2016 December 31, 2015 June 30, 2016 December 31, 2015 June 30, 2016 December 31, 2015 June 30, 2016 December 31, 2015
(dollars in thousands)(dollars in thousands)
Real estate - home equity$1,671,473
 $1,711,017
 $9,069
 $10,931
 $13,107
 $14,740
 $1,693,649
 $1,736,688
$1,623,095
 $1,660,773
 $10,051
 $8,983
 $14,173
 $14,683
 $1,647,319
 $1,684,439
Real estate - residential mortgage1,336,877
 1,321,139
 17,501
 26,934
 27,707
 28,995
 1,382,085
 1,377,068
1,408,244
 1,329,371
 14,018
 18,305
 25,030
 28,484
 1,447,292
 1,376,160
Construction - other56,482
 59,180
 —
 —
 696
 332
 57,178
 59,512
63,404
 59,997
 1,416
 88
 1,099
 609
 65,919
 60,694
Consumer - direct98,576
 104,018
 2,697
 2,891
 1,961
 2,414
 103,234
 109,323
92,906
 94,262
 1,860
 2,254
 1,695
 2,203
 96,461
 98,719
Consumer - indirect166,040
 153,358
 2,304
 2,574
 118
 176
 168,462
 156,108
179,293
 166,823
 2,124
 2,809
 193
 237
 181,610
 169,869
Total consumer264,616
 257,376
 5,001
 5,465
 2,079
 2,590
 271,696
 265,431
272,199
 261,085
 3,984
 5,063
 1,888
 2,440
 278,071
 268,588
Leasing and other and overdrafts148,980
 118,550
 464
 523
 86
 133
 149,530
 119,206
Leasing, other and overdrafts193,233
 155,870
 863
 759
 158
 1,506
 194,254
 158,135
$3,478,428
 $3,467,262
 $32,035
 $43,853
 $43,675
 $46,790
 $3,554,138
 $3,557,905
$3,560,175
 $3,467,096
 $30,332
 $33,198
 $42,348
 $47,722
 $3,632,855
 $3,548,016
% of Total97.9% 97.5% 0.9% 1.2% 1.2% 1.3% 100.0% 100.0%98.0% 97.7% 0.8% 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:
 September 30,
2015		 December 31,
2014
 (in thousands)
Non-accrual loans$132,154
 $121,080
Accruing loans 90 days or more past due12,867
 17,402
Total non-performing loans145,021
 138,482
Other real estate owned (OREO)10,561
 12,022
Total non-performing assets$155,582
 $150,504
The following table presents TDRs, by class segment:
 September 30,
2015		 December 31,
2014
 (in thousands)
Real-estate - residential mortgage$29,330
 $31,308
Real-estate - commercial mortgage17,282
 18,822
Commercial - secured7,259
 5,170
Construction - commercial residential4,363
 9,241
Real estate - home equity3,954
 2,975
Commercial - unsecured140
 67
Consumer - indirect15
 19
Consumer - direct14
 19
Total accruing TDRs62,357
 67,621
Non-accrual TDRs (1)27,618
 24,616
Total TDRs$89,975
 $92,237
(1)Included within non-accrual loans in the preceding table detailing non-performing assets.

As of September 30, 2015 and December 31, 2014, there were $5.3 million and $3.9 million, respectively, of commitments to lend additional funds to borrowers whose loans were modified under TDRs.


22

 June 30,
2016		 December 31,
2015
 (in thousands)
Non-accrual loans$111,742
 $129,523
Loans 90 days or more past due and still accruing15,992
 15,291
Total non-performing loans127,734
 144,814
Other real estate owned (OREO)11,918
 11,099
Total non-performing assets$139,652
 $155,913




The following table presents TDRs, by class segment as of September 30, 2015 and 2014, that were modified during the three and nine months ended September 30, 2015 and 2014:
 Three months ended September 30 Nine months ended September 30
 2015 2014 2015 2014
 Number of Loans Recorded Investment Number of Loans Recorded Investment Number of Loans Recorded Investment Number of Loans Recorded Investment
 (dollars in thousands)
Commercial - secured3 $1,380
 3 $1,214
 14 $9,203
 4 $1,357
Real estate - home equity14 562
 6 764
 39 1,793
 26 1,627
Real estate - residential mortgage2 229
 3 256
 10 1,295
 18 2,092
Real estate - commercial mortgage2 188
 1 391
 6 2,815
 10 10,195
Construction - commercial residential— —
 — —
 1 889
 2 1,914
Commercial - unsecured— —
 — —
 1 42
 — —
Consumer - indirect— —
 — —
 1 13
 4 7
Consumer - direct— —
 — —
 — —
 6 8
Total21 $2,359
 13 $2,625
 72 $16,050
 70 $17,200

The following table presents TDRs, by class segment, as of September 30, 2015 and 2014, that were modified within the previous 12 months and had a post-modification payment default during the nine months ended September 30, 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 - secured6 $3,855
 3 $415
Real estate - residential mortgage4 500
 8 1,147
Real estate - home equity9 459
 5 724
Real estate - commercial mortgage2 233
 1 35
Construction - commercial residential— —
 3 2,509
Total21 $5,047
 20 $4,830

23





The following table presents past due status and non-accrual loans by portfolio segment and class segment:
September 30, 2015June 30, 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$7,322
 $1,169
 $194
 $48,827
 $49,021
 $57,512
 $5,282,416
 $5,339,928
$7,813
 $2,288
 $192
 $35,512
 $35,704
 $45,805
 $5,589,542
 $5,635,347
Commercial - secured6,909
 4,536
 1,414
 33,935
 35,349
 46,794
 3,736,032
 3,782,826
4,532
 7,207
 2,997
 34,675
 37,672
 49,411
 3,894,330
 3,943,741
Commercial - unsecured2,380
 15
 65
 2,618
 2,683
 5,078
 142,004
 147,082
372
 43
 367
 863
 1,230
 1,645
 153,791
 155,436
Total commercial - industrial, financial and agricultural9,289
 4,551
 1,479
 36,553
 38,032
 51,872
 3,878,036
 3,929,908
4,904
 7,250
 3,364
 35,538
 38,902
 51,056
 4,048,121
 4,099,177
Real estate - home equity6,312
 2,757
 2,883
 10,224
 13,107
 22,176
 1,671,473
 1,693,649
7,600
 2,451
 3,470
 10,703
 14,173
 24,224
 1,623,095
 1,647,319
Real estate - residential mortgage11,499
 6,002
 5,730
 21,977
 27,707
 45,208
 1,336,877
 1,382,085
10,356
 3,662
 4,461
 20,569
 25,030
 39,048
 1,408,244
 1,447,292
Construction - commercial residential1,832
 231
 —
 12,073
 12,073
 14,136
 176,385
 190,521
—
 541
 —
 8,499
 8,499
 9,040
 174,627
 183,667
Construction - commercial265
 —
 —
 2,220
 2,220
 2,485
 519,381
 521,866
1,482
 1,134
 1,777
 504
 2,281
 4,897
 599,216
 604,113
Construction - other—
 —
 416
 280
 696
 696
 56,482
 57,178
1,416
 —
 682
 417
 1,099
 2,515
 63,404
 65,919
Total real estate - construction2,097
 231
 416
 14,573
 14,989
 17,317
 752,248
 769,565
2,898
 1,675
 2,459
 9,420
 11,879
 16,452
 837,247
 853,699
Consumer - direct1,398
 1,299
 1,961
 —
 1,961
 4,658
 98,576
 103,234
1,169
 691
 1,695
 —
 1,695
 3,555
 92,906
 96,461
Consumer - indirect1,962
 342
 118
 —
 118
 2,422
 166,040
 168,462
1,734
 390
 193
 —
 193
 2,317
 179,293
 181,610
Total consumer3,360
 1,641
 2,079
 —
 2,079
 7,080
 264,616
 271,696
2,903
 1,081
 1,888
 —
 1,888
 5,872
 272,199
 278,071
Leasing and other and overdrafts449
 15
 86
 —
 86
 550
 148,980
 149,530
Leasing, other and overdrafts400
 463
 158
 —
 158
 1,021
 193,233
 194,254
Total$40,328
 $16,366
 $12,867
 $132,154
 $145,021
 $201,715
 $13,334,646
 $13,536,361
$36,874
 $18,870
 $15,992
 $111,742
 $127,734
 $183,478
 $13,971,681
 $14,155,159
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, other and overdrafts483
 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, by class segment:
24
 June 30,
2016		 December 31,
2015
 (in thousands)
Real-estate - residential mortgage$27,324
 $28,511
Real-estate - commercial mortgage17,808
 17,563
Commercial - secured5,645
 5,833
Construction - commercial residential3,086
 3,942
Real estate - home equity7,173
 4,556
Commercial - unsecured111
 120
Consumer - indirect—
 14
Consumer - direct18
 19
Total accruing TDRs61,165
 60,558
Non-accrual TDRs (1)
24,887
 31,035
Total TDRs$86,052
 $91,593
(1)Included in non-accrual loans in the preceding table detailing non-performing assets.

As of June 30, 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 June 30, 2016 and 2015, that were modified during the three and six months ended June 30, 2016 and 2015:
  Three months ended June 30 Six months ended June 30
 2016 2015 2016 2015
Number of Loans Post-Modification Recorded Investment Number of Loans Post-Modification Recorded Investment Number of Loans Post-Modification Recorded Investment Number of Loans Post-Modification Recorded Investment
 (dollars in thousands)
Commercial – secured:               
 Extend maturity without rate concession4
 $1,146
 3
 $1,047
 6
 $1,976
 11
 $7,823
Commercial – unsecured:               
 Extend maturity without rate concession—
 —
 —
 —
 2
 103
 1
 42
Real estate - commercial mortgage:               
 Extend maturity without rate concession—
 —
 1
 132
 —
 —
 4
 2,627
Real estate - home equity:               
 Extend maturity with rate concession—
 —
 —
 —
 1
 44
 —
 —
 Bankruptcy23
 969
 15
 739
 60
 3,667
 25
 1,231
Real estate – residential mortgage:               
 Extend maturity with rate concession—
 —
 —
 —
 —
 —
 1
 104
 Extend maturity without rate concession2
 315
 —
 —
 2
 315
 2
 225
 Bankruptcy1
 373
 4
 456
 1
 373
 5
 737
Construction - commercial residential:               
 Extend maturity without rate concession—
 —
 —
 —
 —
 —
 1
 889
Consumer - direct:               
 Bankruptcy—
 —
 —
 —
 1
 2
 —
 —
Consumer - indirect:               
 Bankruptcy—
 —
 —
 —
 —
 —
 1
 13
                 
Total30
 $2,803
 23
 $2,374
 73
 $6,480
 51
 $13,691
                 

The following table presents TDRs, by class segment, as of June 30, 2016 and 2015, that were modified in the previous 12 months and had a post-modification payment default during the six months ended June 30, 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 equity22 $1,448
 7 $614
Real estate - residential mortgage5 972
 6 652
Commercial - secured4 1,096
 8 4,779
Real estate - commercial mortgage2 132
 2 191
Commercial - unsecured1 27
 — —
Total34 $3,675
 23 $6,236




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 September 30 Nine months ended September 30Three months ended June 30 Six months ended June 30
2015 2014 2015 20142016 2015 2016 2015
(in thousands)(in thousands)
Amortized cost:              
Balance at beginning of period$41,598
 $42,586
 $42,148
 $42,452
$40,195
 $41,803
 $40,944
 $42,148
Originations of mortgage servicing rights1,463
 1,456
 4,976
 3,807
1,508
 1,956
 2,428
 3,513
Amortization(1,829) (1,664) (5,892) (3,881)(1,829) (2,161) (3,498) (4,063)
Balance at end of period$41,232
 $42,378
 $41,232
 $42,378
$39,874
 $41,598
 $39,874
 $41,598
       
Valuation allowance:       
Balance at beginning of period$—
 $—
 $—
 $—
Additions(1,721) —
 (1,721) —
Balance at end of period$(1,721) $—
 $(1,721) $—
       
Net MSRs at end of period$38,153
 $41,598
 $38,153
 $41,598

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

The fair value of 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. Based on its fair value analysis, the Corporation determined that an addition to the valuation allowance of $1.7 million was necessary as of June 30, 2016. No valuation allowance was necessary as of SeptemberJune 30, 2015 or 2014. As of September 30, 2015, the estimated fair value of MSRs was $43.8 million, which exceeded their book value.2015.


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 September 30 Nine months ended September 30Three months ended June 30 Six months ended June 30
2015 2014 2015 20142016 2015 2016 2015
(in thousands)(in thousands)
Stock-based compensation expense$1,533
 $1,288
 $4,371
 $4,310
$1,820
 $1,767
 $3,256
 $2,838
Tax benefit(489) (358) (1,403) (1,067)(642) (622) (1,075) (914)
Stock-based compensation expense, net of tax$1,044
 $930
 $2,968
 $3,243
$1,178
 $1,145
 $2,181
 $1,924

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

25





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 SeptemberJune 30, 20152016, the Employee Equity Plan had 11.611.5 million shares reserved for future grants through 2023, and the Directors’ Plan had approximately 396,000384,000 shares reserved for future grants through 2021. On May 1, 2016, the Corporation granted approximately 356,000 PSUs and 163,000 RSUs under the Employee Equity Plan. On June 1, 2016, the Corporation granted approximately 12,000 shares of common stock to its directors. Total expense of $175,000 was recognized in other expense for this grant.

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 September 30 Nine months ended September 30Three months ended June 30 Six months ended June 30
2015 2014 2015 20142016 2015 2016 2015
(in thousands)(in thousands)
Service cost (1)$145
 $92
 $435
 $276
$194
 $145
 $344
 $290
Interest cost851
 853
 2,553
 2,559
879
 851
 1,760
 1,702
Expected return on plan assets(752) (811) (2,256) (2,432)(433) (752) (1,159) (1,504)
Net amortization and deferral782
 244
 2,346
 732
428
 782
 1,210
 1,564
Net periodic benefit cost$1,026
 $378
 $3,078
 $1,135
$1,068
 $1,026
 $2,155
 $2,052

(1)
The Pension Plan serviceService cost recorded for the nine months ended September 30, 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 nine months ended September 30, 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 $1.5 million plan amendment gain in 2014:components:
Three months ended September 30 Nine months ended September 30Three months ended June 30 Six months ended June 30
2015 2014 2015 20142016 2015 2016 2015
(in thousands)(in thousands)
Service cost (1)$—
 $—
 $—
 $15
Interest cost52
 48
 156
 157
5
 52
 43
 104
Expected return on plan assets(1) —
 (1) —
Net accretion and deferral(65) (84) (195) (263)(210) (65) (275) (130)
Net periodic benefit$(13) $(36) $(39) $(91)$(206) $(13) $(233) $(26)

(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.

26





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, and 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, with changes in fair value during the period 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.

27





The following table presents a summary of the notional amounts and fair values of derivative financial instruments:
September 30, 2015 December 31, 2014June 30, 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$121,546
 $2,263
 $89,655
 $1,391
$159,646
 $3,023
 $87,781
 $1,291
Negative fair values172
 (2) 301
 (6)414
 (4) 267
 (16)
Net interest rate locks with customers
 2,261
 
 1,385

 3,019
 
 1,275
Forward Commitments              
Positive fair values110
 —
 —
 —
—
 —
 69,045
 205
Negative fair values117,389
 (1,502) 93,802
 (1,164)137,811
 (1,831) 16,193
 (24)
Net forward commitments  (1,502)   (1,164)  (1,831)   181
Interest Rate Swaps with Customers              
Positive fair values681,647
 37,436
 468,080
 19,716
1,098,942
 82,874
 846,490
 32,915
Negative fair values8,000
 (87) 25,418
 (198)8,000
 (14) 8,757
 (55)
Net interest rate swaps with customers  37,349
   19,518
  82,860
   32,860
Interest Rate Swaps with Dealer Counterparties              
Positive fair values8,000
 87
 25,418
 198
8,000
 14
 8,757
 55
Negative fair values681,647
 (37,436) 468,080
 (19,716)1,098,942
 (82,874) 846,490
 (32,915)
Net interest rate swaps with dealer counterparties  (37,349)   (19,518)  (82,860)   (32,860)
Foreign Exchange Contracts with Customers              
Positive fair values7,183
 260
 11,616
 810
11,577
 479
 4,897
 114
Negative fair values7,091
 (269) 5,250
 (441)6,268
 (94) 8,050
 (184)
Net foreign exchange contracts with customers  (9)   369
  385
   (70)
Foreign Exchange Contracts with Correspondent Banks              
Positive fair values10,308
 614
 5,287
 446
9,595
 377
 9,728
 428
Negative fair values8,630
 (334) 13,572
 (876)15,231
 (443) 6,899
 (147)
Net foreign exchange contracts with correspondent banks  280
   (430)  (66)   281
Net derivative fair value asset  $1,030
   $160
  $1,507
   $1,667

The following table presents a summary of the fair value gains and losses on derivative financial instruments:
 Three months ended September 30 Nine months ended September 30
 2015 2014 2015 2014
 (in thousands)
Interest rate locks with customers$1,041
 $(1,092) $876
 $500
Forward commitments(3,183) 1,374
 (338) (1,627)
Interest rate swaps with customers18,266
 (40) 17,831
 10,300
Interest rate swaps with dealer counterparties(18,266) 40
 (17,831) (10,300)
Foreign exchange contracts with customers(197) 557
 (378) 854
Foreign exchange contracts with correspondent banks323
 (527) 710
 (893)
Net fair value gains (losses) on derivative financial instruments$(2,016) $312
 $870
 $(1,166)


28

 Three months ended June 30 Six months ended June 30
 2016 2015 2016 2015
 (in thousands)
Interest rate locks with customers$512
 $(1,287) $1,744
 $(165)
Forward commitments(906) 2,291
 (2,012) 2,845
Interest rate swaps with customers20,569
 (9,839) 50,000
 (435)
Interest rate swaps with dealer counterparties(20,569) 9,839
 (50,000) 435
Foreign exchange contracts with customers81
 (748) 455
 (181)
Foreign exchange contracts with correspondent banks(68) 711
 (347) 387
Net fair value gains (losses) on derivative financial instruments$(381) $967
 $(160) $2,886




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:
September 30,
2015		 December 31,
2014		June 30,
2016		 December 31,
2015
(in thousands)(in thousands)
Cost$26,186
 $17,080
$33,164
 $16,584
Fair value26,937
 17,522
34,330
 16,886

During the three and six months ended SeptemberJune 30, 2015,2016, the Corporation recorded gains related to changes in fair values of mortgage loans held for sale of $531,000 compared to losses of $472,000 for$634,000 and $864,000, respectively. During the three and six months ended SeptemberJune 30, 2014. For the nine months ended September 30, 2015, and 2014, the Corporation recorded gainslosses related to changes in fair values of mortgage loans held for sale of $309,000$483,000 and $343,000,$222,000, respectively.

NOTE 11 – Balance Sheet Offsetting

Certain financial assets and liabilities may be eligible for offset on the consolidated balance sheets because 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-settle multiple contracts with the same counterparty in the event of default on, or termination of, any one contract. Cash collateral is posted by the party with a net liability position in accordance with contract thresholds and can be used to settle the fair value of the interest rate swap agreements in the event of default.

The Corporation is also a party to foreign currency exchange contracts with financial institution counterparties, under which the Corporation has the right to net-settle multiple contracts with the same counterparty in the event of default on, or termination of, any one contract. As with interest rate swap contracts, cash collateral is posted by the party with a net liability position in accordance with contract thresholds and can be used to settle the fair value of the 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, these repurchase agreements are not eligible for offset.












29








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)
September 30, 2015       
June 30, 2016       
Interest rate swap derivative assets$37,523
 $(87) $—
 $37,436
$82,888
 $(14) $—
 $82,874
Foreign exchange derivative assets with correspondent banks614
 (334) —
 280
377
 (359) (18) —
Total$38,137
 $(421) $—
 $37,716
$83,265
 $(373) $(18) $82,874
              
Interest rate swap derivative liabilities$37,523
 $(87) $(37,436) $—
$82,888
 $(14) $(82,510) $364
Foreign exchange derivative liabilities with correspondent banks334
 (334) 310
 310
443
 (359) —
 84
Total$37,857
 $(421) $(37,126) $310
$83,331
 $(373) $(82,510) $448
              
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 received from the counterparty or posted on interest rate swap transactions with financial institution counterparties. Interest rate swaps with customers are collateralized by the underlying loans to those borrowers.Corporation.

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:
September 30,
2015		 December 31, 2014June 30,
2016		 December 31, 2015
(in thousands)(in thousands)
Commitments to extend credit$5,635,629
 $4,389,064
$5,898,623
 $5,784,138
Standby letters of credit390,501
 382,465
362,506
 374,729
Commercial letters of credit36,365
 32,304
37,836
 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.



30






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.

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 Septemberboth June 30, 20152016 and December 31, 2014,2015, total outstanding repurchase requests were $851,000 and $543,000, respectively.totaled 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 nine months ended September 30, 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 SeptemberJune 30, 2015,2016, the unpaid principal balance of loans sold under the MPF Program was approximately $132$114 million. As of SeptemberJune 30, 20152016 and December 31, 2014,2015, the reserve for estimated credit losses related to loans sold under the MPF Program was $1.8$2.1 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 SeptemberJune 30, 20152016 and December 31, 2014,2015, the total reserve for losses on residential mortgage loans sold was $2.5$2.8 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 SeptemberJune 30, 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.

Other ContingenciesLegal Proceedings

The Corporation and its subsidiaries are involved in various legal proceedings in the ordinary course of business of the Corporation. The Corporation periodically evaluates the possible impact of pending litigation matters based on, among other factors, the advice of counsel, available insurance coverage and recorded liabilities and reserves for probable legal liabilities and costs. In addition, from time to time, the Corporation is the subject of investigations or other forms of regulatory or governmental inquiry covering a range of possible issues and, in some cases, these may be part of similar reviews of the specified activities of other industry participants. These inquiries could lead to administrative, civil or criminal proceedings, and could possibly result in fines, penalties, restitution or the need to alter the Corporation’s business practices, and cause the Corporation to incur additional costs. The Corporation’s practice is to cooperate fully with regulatory and governmental investigations. Refer also to Part II. Other Information, Item 1. Legal Proceedings.

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 of the Corporation. However, legal proceedings are often unpredictable, and it is possible that the ultimate resolution of any such matters, if unfavorable, may be material to the Corporation’s results of 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. On May 25, 2016, the Bank filed a motion to dismiss the lawsuit for failure to state a claim. On May 31, 2016, the plaintiffs filed a motion to remand the lawsuit to the Court of Common Pleas for Dauphin County, Pennsylvania. On June 17, 2016, the Bank filed a brief opposing the motion to remand. The motion to remand is pending before the District Court and further briefing on the motion to dismiss has been stayed pending resolution of the motion to remand.

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.





31







The following tables present summaries of the Corporation’s assets and liabilities measured at fair value on a recurring basis and reported on the consolidated balance sheets:
September 30, 2015June 30, 2016
Level 1 Level 2 Level 3 TotalLevel 1 Level 2 Level 3 Total
(in thousands)(in thousands)
Mortgage loans held for sale$—
 $26,937
 $—
 $26,937
$—
 $34,330
 $—
 $34,330
Available for sale investment securities:              
Equity securities23,532
 —
 —
 23,532
20,689
 —
 —
 20,689
U.S. Government sponsored agency securities—
 48,551
 —
 48,551
—
 146
 —
 146
State and municipal securities—
 240,236
 —
 240,236
—
 345,347
 —
 345,347
Corporate debt securities—
 96,761
 3,180
 99,941
—
 88,416
 3,131
 91,547
Collateralized mortgage obligations—
 874,299
 —
 874,299
—
 706,346
 —
 706,346
Mortgage-backed securities—
 1,051,905
 —
 1,051,905
—
 1,267,763
 —
 1,267,763
Auction rate securities—
 —
 97,873
 97,873
—
 —
 97,886
 97,886
Total available for sale investments23,532
 2,311,752
 101,053
 2,436,337
Total available for sale investment securities20,689
 2,408,018
 101,017
 2,529,724
Other assets16,253
 39,787
 —
 56,040
16,873
 85,911
 —
 102,784
Total assets$39,785
 $2,378,476
 $101,053
 $2,519,314
$37,562
 $2,528,259
 $101,017
 $2,666,838
Other liabilities$15,982
 $39,027
 $—
 $55,009
$16,541
 $84,722
 $—
 $101,263
December 31, 2014December 31, 2015
Level 1 Level 2 Level 3 TotalLevel 1 Level 2 Level 3 Total
(in thousands)(in thousands)
Mortgage loans held for sale$—
 $17,522
 $—
 $17,522
$—
 $16,886
 $—
 $16,886
Available for sale investment securities:              
Equity securities47,623
 —
 —
 47,623
21,514
 —
 —
 21,514
U.S. Government securities—
 200
 —
 200
U.S. Government sponsored agency securities—
 214
 —
 214
—
 25,136
 —
 25,136
State and municipal securities—
 245,215
 —
 245,215
—
 262,765
 —
 262,765
Corporate debt securities—
 90,126
 7,908
 98,034
—
 93,619
 3,336
 96,955
Collateralized mortgage obligations—
 902,313
 —
 902,313
—
 821,509
 —
 821,509
Mortgage-backed securities—
 928,831
 —
 928,831
—
 1,158,835
 —
 1,158,835
Auction rate securities—
 —
 100,941
 100,941
—
 —
 98,059
 98,059
Total available for sale investments47,623
 2,166,899
 108,849
 2,323,371
Total available for sale investment securities21,514
 2,361,864
 101,395
 2,484,773
Other assets17,682
 21,305
 —
 38,987
16,129
 34,465
 —
 50,594
Total assets$65,305
 $2,205,726
 $108,849
 $2,379,880
$37,643
 $2,413,215
 $101,395
 $2,552,253
Other liabilities$17,737
 $21,084
 $—
 $38,821
$15,914
 $33,010
 $—
 $48,924
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 SeptemberJune 30, 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.

32





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 ($22.419.8 million at SeptemberJune 30, 20152016 and $41.8$20.6 million at December 31, 2014)2015) and other equity investments ($1.1 million895,000 at SeptemberJune 30, 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 ($53.630.7 million at SeptemberJune 30, 20152016 and $50.0$40.8 million at December 31, 2014)2015), senior debt ($18.7 million at June 30, 2016 and $12.3 million at December 31, 2015), single-issuer trust preferred securities issued by financial institutions ($41.837.4 million at SeptemberJune 30, 20152016 and $42.0$39.1 million at December 31, 2014)2015), pooled trust preferred securities issued by financial institutions ($530,000706,000 at Septemberboth June 30, 20152016 and $4.1 million at December 31, 2014)2015) and other corporate debt issued by non-financial institutions ($4.0 million at Septemberboth June 30, 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 $39.2$35.0 million and $38.2$36.5 million of single-issuer trust preferred securities held at SeptemberJune 30, 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 ($530,000706,000 at Septemberboth June 30, 20152016 and $4.1 million at December 31, 2014)2015) and certain single-issuer trust preferred securities ($2.72.4 million at SeptemberJune 30, 20152016 and $3.8$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 ($15.416.0 million at SeptemberJune 30, 20152016 and $16.4$15.6 million at December 31, 2014)2015) and the fair value of foreign currency exchange contracts ($874,000868,000 at SeptemberJune 30, 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 ($2.33.0 million at SeptemberJune 30, 20152016 and $1.4$1.5 million at December 31, 2014)2015) and the fair value of interest rate swaps ($37.582.9 million at SeptemberJune 30, 20152016 and $19.9

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$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 ($15.416.0 million at SeptemberJune 30, 20152016 and $16.4$15.6 million at December 31, 2014)2015) and the fair value of foreign currency exchange contracts ($603,000537,000 at SeptemberJune 30, 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 ($1.51.8 million at SeptemberJune 30, 20152016 and $1.2 million$40,000 at December 31, 2014)2015) and the fair value of interest rate swaps ($37.582.9 million at SeptemberJune 30, 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.

























34





The following table presents the changes in the Corporation’s available for sale investment securities measured at fair value on a recurring basis using unobservable inputs (Level 3):
Three months ended September 30, 2015Three months ended June 30, 2016
Pooled Trust
Preferred
Securities		 Single-issuer
Trust Preferred
Securities		 ARCsPooled Trust
Preferred
Securities		 Single-issuer
Trust Preferred
Securities		 ARCs
(in thousands)(in thousands)
Balance at June 30, 2015$530
 $3,820
 $98,606
Balance at March 31, 2016$706
 $2,400
 $97,326
Unrealized adjustment to fair value (1)—
 (203) (890)—
 22
 482
Settlements - calls—
 (970) —
Discount accretion (2)—
 3
 157
—
 3
 78
Balance at September 30, 2015$530
 $2,650
 $97,873
Balance at June 30, 2016$706
 $2,425
 $97,886
          
Three months ended September 30, 2014Three months ended June 30, 2015
Balance at June 30, 2014$4,275
 $3,820
 $146,931
Realized adjustment to fair value (3)(18) —
 —
Balance at March 31, 2015$1,084
 $3,820
 $98,932
Sales(554) —
 —
Unrealized adjustment to fair value (1)230
 47
 1,280
—
 (2) (420)
Discount accretion (2)—
 2
 262
—
 2
 94
Balance at September 30, 2014$4,487
 $3,869
 $148,473
Balance at June 30, 2015$530
 $3,820
 $98,606
          
Nine months ended September 30, 2015Six months ended June 30, 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)
—
 (211) (350)
Discount accretion (2)
—
 6
 177
Balance at June 30, 2016$706
 $2,425
 $97,886
Pooled Trust
Preferred
Securities		 Single-issuer
Trust Preferred
Securities		 ARCs     
(in thousands)Six months ended June 30, 2015
Balance at December 31, 2014$4,088
 $3,820
 $100,941
$4,088
 $3,820
 $100,941
Sales(3,633) —
 —
(3,633) —
 —
Unrealized adjustment to fair value (1)190
 (207) (978)190
 (4) (88)
Settlements - calls(117) (970) (2,446)(117) —
 (2,446)
Discount accretion (2)2
 7
 356
2
 4
 199
Balance at September 30, 2015$530
 $2,650
 $97,873
Balance at June 30, 2015$530
 $3,820
 $98,606
          
Nine months ended September 30, 2014
Balance at December 31, 2013$5,306
 $3,781
 $159,274
Sales(1,394) —
 (11,912)
Realized adjustment to fair value (3)(18) —
 —
Unrealized adjustment to fair value (1)789
 83
 1,528
Settlements - calls(200) —
 (1,081)
Discount accretion (2)4
 5
 664
Balance at September 30, 2014$4,487
 $3,869
 $148,473
     

(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.
(3)Realized adjustments to fair value represent credit related other-than-temporary impairment charges and gains on sales of investment securities, both included as components of investment securities gains on the consolidated statements of income.





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Certain financial assets are not measured at fair value on an ongoing basis, but are subject to fair value measurement in certain circumstances, such as upon their acquisition or when there is evidence of impairment. The following table presents the Corporation’s financial assets measured at fair value on a nonrecurring basis and reported on the Corporation’s consolidated balance sheets:
September 30, 2015June 30, 2016
Level 1 Level 2 Level 3 TotalLevel 1 Level 2 Level 3 Total
(in thousands)(in thousands)
Net loans$—
 $—
 $145,518
 $145,518
$—
 $—
 $128,174
 $128,174
Other financial assets—
 —
 51,794
 51,794
—
 —
 50,071
 50,071
Total assets$—
 $—
 $197,312
 $197,312
$—
 $—
 $178,245
 $178,245
December 31, 2014December 31, 2015
Level 1 Level 2 Level 3 TotalLevel 1 Level 2 Level 3 Total
(in thousands)(in thousands)
Net loans$—
 $—
 $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 ($10.611.9 million at SeptemberJune 30, 20152016 and $12.0$11.1 million at December 31, 2014)2015) and MSRs ($41.238.2 million at SeptemberJune 30, 20152016 and $42.1$40.9 million at December 31, 2014)2015), both classified as Level 3 assets.
Fair values for OREO were based on estimated selling prices less estimated selling costs for similar assets in active markets.
MSRs are initially recorded at fair value upon the sale of residential mortgage loans to secondary market investors. MSRs are amortized as a reduction to servicing income over the estimated lives of the underlying loans. MSRs are stratified and evaluated for impairment by comparing each stratum's carrying amount to its estimated fair value. Fair values are determined at the end of each quarter through a discounted cash flows valuation performed by a third-party valuation expert. Significant inputs to the valuation included expected net servicing income, the discount rate and the expected life of the underlying loans. Expected life is based on the contractual terms of the loans, as adjusted for prepayment projections. The weighted average annual constant prepayment rate and the weighted average discount rate used in the SeptemberJune 30, 20152016 valuation were 11.6%13.7% and 9.6%10.1%, respectively. Management tests the reasonableness of the significant inputs to the third-party valuation in comparison to market data.










36





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 SeptemberJune 30, 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.
September 30, 2015 December 31, 2014June 30, 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$93,803
 $93,803
 $105,702
 $105,702
$84,647
 $84,647
 $101,120
 $101,120
Interest-bearing deposits with other banks510,943
 510,943
 358,130
 358,130
348,232
 348,232
 230,300
 230,300
Federal Reserve Bank and Federal Home Loan Bank stock68,977
 68,977
 64,953
 64,953
59,854
 59,854
 62,216
 62,216
Loans held for sale (1)26,937
 26,937
 17,522
 17,522
34,330
 34,330
 16,886
 16,886
Available for sale investment securities (1)2,436,337
 2,436,337
 2,323,371
 2,323,371
2,529,724
 2,529,724
 2,484,773
 2,484,773
Loans, net of unearned income (1)13,536,361
 13,428,016
 13,111,716
 13,030,543
Net Loans (1)
13,992,613
 13,950,868
 13,669,548
 13,540,903
Accrued interest receivable42,846
 42,846
 41,818
 41,818
43,316
 43,316
 42,767
 42,767
Other financial assets (1)174,835
 174,835
 169,764
 169,764
226,808
 226,808
 166,920
 166,920
FINANCIAL LIABILITIES              
Demand and savings deposits$11,148,667
 $11,148,667
 $10,296,055
 $10,296,055
$11,469,919
 $11,469,919
 $11,267,367
 $11,267,367
Time deposits2,935,727
 2,944,618
 3,071,451
 3,069,883
2,822,645
 2,973,640
 2,864,950
 2,862,868
Short-term borrowings431,631
 431,631
 329,719
 329,719
722,214
 722,214
 497,663
 497,663
Accrued interest payable14,727
 14,727
 18,045
 18,045
8,336
 8,336
 10,724
 10,724
Other financial liabilities (1)192,281
 192,281
 172,786
 172,786
274,104
 274,104
 190,927
 190,927
Federal Home Loan Bank advances and long-term debt979,433
 1,002,761
 1,139,413
 1,142,980
965,552
 993,194
 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

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.

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NOTE 14 – Common Stock Repurchase Plans

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 was 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. Through September 30, 2015, approximately 4.0 million shares had been repurchased under this program for a total cost of $50.0 million, or $12.57 per share, completing this program.

NOTE 15 – Long-Term Debt

In June 2015, the Corporation issued $150.0 million of ten-year subordinated notes, which mature on November 15, 2024 and carry a fixed rate of 4.50% and an effective rate of approximately 4.69% as a result of discounts and issuance costs. Interest is paid semi-annually in May and November.

The proceeds from the issuance of the subordinated notes were used to redeem $150.0 million of trust preferred securities in July 2015. The redeemed securities carried a fixed interest rate of 6.29% and an effective rate of 6.52%, and had a scheduled maturity of February 1, 2036. As a result of this transaction, the Corporation recorded a $5.6 million loss on redemption, included as a component of non-interest expense, in July 2015. The loss on redemption included $2.5 million, net of $1.3 million tax effect, that had been recorded as an other comprehensive loss at the time the trust preferred securities were issued related to a cash flow hedge. See Note 3, "Accumulated Other Comprehensive Income," for additional details.

NOTE 16 – Subsequent Event

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 will 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.


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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;

39





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.markets; and
the effects of changes in accounting policies, standards, and interpretations on the Corporation’s financial condition and results of operations.

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, investments and investmentsother interest-earning assets. and interest paid on deposits and borrowings. Growth in net interest income is dependent upon balance sheet growth and/orand 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, or properties. Offsetting these revenue sources are provisions for credit losses on loans, non-interest expenses and income taxes.

The following table presents a summary of the Corporation’s earnings and selected performance ratios:
As of or for the
Three months ended
September 30		 As of or for the
Nine months ended
September 30		As of or for the
Three months ended
June 30		 As of or for the
Six months ended
June 30
2015 2014 2015 20142016 2015 2016 2015
Income before income taxes (in thousands)$44,579
 $51,968
 $146,974
 $161,081
Net income (in thousands)$34,251
 $38,566
 $110,967
 $119,945
$39,750
 $36,680
 $78,007
 $76,716
Diluted net income per share$0.20
 $0.21
 $0.63
 $0.64
$0.23
 $0.21
 $0.45
 $0.43
Return on average assets0.78% 0.90% 0.86% 0.95%0.88% 0.86% 0.87% 0.90%
Return on average equity6.72% 7.32% 7.33% 7.72%7.65% 7.24% 7.56% 7.64%
Return on average tangible equity (1)
10.26% 9.83% 10.17%0.1039
10.39%
Net interest margin (1)(2)3.18% 3.39% 3.22% 3.42%3.20% 3.20% 3.22% 3.24%
Efficiency ratio (1)
67.59% 68.94% 67.96% 69.55%
Non-performing assets to total assets0.87% 0.91% 0.87% 0.91%0.76% 0.93% 0.76% 0.93%
Annualized net charge-offs to average loans0.03% 0.18% 0.16% 0.24%0.10% 0.38% 0.15% 0.23%
 
(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 three months and ninesix months ended SeptemberJune 30, 2015 decreased $7.42016 increased $3.1 million, or 14.2%8.4%, and $14.1$1.3 million, or 8.8%1.7%, respectively compared to the same periods of 2014. The Corporation's results for the three and nine months ended September 30,in 2015, in comparisonmainly due to the same periods in 2014 were most significantly impacted by declinesincreases in net interest income and increases in non-interest expense,income, excluding investment securities gains, partially offset by decreasesincreases in the provision for credit losses, decreases in investment securities gains and higherincreases in non-interest income.expense.
Following








The following is a summary of financial highlights for the three and ninesix months ended SeptemberJune 30, 2015:2016:

FTE Net Interest Income and Net Interest Margin - For the three and ninesix months ended SeptemberJune 30, 2015,2016, FTE net interest income decreased $3.7increased $6.4 million, or 2.8%5.1%, and $14.6$12.4 million, or 3.8%4.8%, respectively, in comparison to the same periods in 2014.
For both the three and nine month periods, the decrease in net interest income resulted from the impact of lower net interest margins, partially offset2015. These increases were driven by the impact of growth in interest-earning assets. In the third quarter of 2015,assets, as net interest margin decreased 21 basis pointswas generally stable.

Average interest-earning assets increased $848.6 million, or 5.3%, in the second quarter of 2016 in comparison to the same period in 2014,2015, mainly due to a 22 basis point decrease in yields on interest-earning assets. For the first nine months of 2015, the net interest margin decreased 20 basis points in comparison to the same period in 2014 as yields on interest-earning assets decreased 18 basis points and the cost of interest-bearing liabilities increased 5 basis points.
Average interest-earning assets increased $553.4$773.4 million, or 3.5%, in the third quarter of 2015 in comparison to the same period of 2014, mainly due to a $447.1 million, or 3.5%5.9%, increase in average loans and a $183.9$164.3 million, or 62.7%7.2%, increase in other interest-earning assets,average investment securities, partially offset by a $74.5$82.2 million, or 3.0%18.7%, decrease in average investment securities.

40





other interest-earning assets. Average interest-earning assetsinterest-bearing liabilities increased $395.9$501.9 million, or 2.5%4.5%, in the first nine months of 2015 in comparisonprimarily due to the same period of 2014, primarily as a result of a $392.8$539.7 million, or 3.1%5.5%, increase in average loansinterest-bearing deposits and a $199.7$23.7 million, or 75.7%6.2%, increase in other interest-earning assets,average short-term borrowings, partially offset by a $199.7$61.5 million, or 7.9%6.0%, decrease in average investment securities.
Average interest-bearing liabilities increased $127.3 million, or 1.1%, in the third quarter of 2015 in comparison to the third quarter of 2014, primarily due to a $469.2 million, or 4.9%, increase in interest-bearing deposits, partially offset by a $342.7 million, or 51.4%, decrease in short-term borrowings. Additional funding to support the increase in interest-earning assets was provided by a $390.1 million, or 11.1%, increase in noninterest-bearing deposits.
During the first nine months of 2015, average interest-bearing liabilities decreased $37.6 million, or 0.3%, in comparison to the first nine months of 2014 primarily due to a $634.7 million, or 65.2%, decrease in average short-term borrowings, offset by a $473.3 million, or 5.1%, increase in interest-bearing deposits and a $123.7 million, or 13.4%, increase in FHLB advances and average long-term debt. Additional funding to support the increase in average interest-earning assets was provided by a $407.0$342.8 million, or 12.1%9.2%, increase in average noninterest-bearing deposits.

During the first half of 2016, average interest-earning assets increased $836.7 million, or 5.3%, compared to the same period in 2015, mainly due to a $765.4 million, or 5.8%, increase in average loans and a $175.9 million, or 7.7%, increase in average investment securities, partially offset by a $98.7 million, or 21.6%, decrease in average other interest-earning assets. Average interest-bearing liabilities increased $498.2 million, or 4.5%, the net result of $531.9 million, or 5.5%, increase in average interest-bearing deposits, and a $79.7 million, or 23.1%, increase in average short-term borrowings, partially offset by $113.4 million, or 10.5%, decrease in average FHLB advances and average long-term debt. Additional funding to support the increase in average interest-earning assets was provided by a $324.1 million, or 8.8%, increase in average noninterest-bearing deposits.

Asset Quality - The Corporation recorded a $1.0$2.5 million provision for credit losses duringfor the three months ended SeptemberJune 30, 2015,2016, compared to a $3.5$2.2 million provision for the same period in 2014. During2015. For the ninesix months ended SeptemberJune 30, 2015,2016, the Corporation recorded a $500,000 negative$4.0 million provision for credit losses compared to a $9.5$1.5 million negative provision forin the same period of 2015. The negative provision in 2014.2015 was driven by an improvement in net charge-off levels, particularly among pooled impaired loans across all portfolio segments.

Annualized net charge-offs to average loans outstanding were 0.03%0.10% for the thirdsecond quarter of 2015,2016, compared to 0.18%0.38% for the thirdsecond quarter of 2014. For the first nine months of 2015, annualized2015. Annualized net charge-offcharge-offs to average loans outstanding were 0.16%0.15% for the first half of 2016, compared to 0.24%0.23% for the same periodfirst half of 2014.2015. Non-performing assets decreased $22.6 million, or 13.9%, as of June 30, 2016 compared to June 30, 2015 and were 0.76% and 0.93% of total assets as of June 30, 2016 and June 30, 2015, respectively. The total delinquency rate was 1.30% as of June 30, 2016, compared to 1.60% as of June 30, 2015.

Non-interest Income - For the three and ninesix months ended SeptemberJune 30, 2015,2016, non-interest income, excluding investment securities gains, increased $1.2$2.0 million, or 2.9%4.5%, and $3.6 million, or 2.9%4.2%, respectively, in comparison to the same periods in 2014.2015. The increaseincreases in the third quarter of 2015 compared to the third quarter of 2014 wasboth periods were primarily athe result of an increaseincreases in othercommercial interest rate swap fees and higher service charges and fees,on deposit accounts, partially offset by lower mortgage banking income. The increase realized during the first nine months of 2015 compared to the first nine months of 2014 resulted from increasesdecreases in other service charges and fees, mortgage banking income and other income.resulting primarily from of a $1.7 million impairment charge on MSRs during the second quarter of 2016. See Note 6, "Mortgage Servicing Rights," in the Notes to Consolidated Financial Statements for additional details regarding the impairment charge.
Gains on sales of investment
Investment securities gains for the three and ninesix months ended SeptemberJune 30, 20152016 were $1.7 million$76,000 and $8.3$1.0 million, respectively, as compared to $81,000$2.4 million and $1.2$6.6 million respectively, for the three and nine months ended September 30, 2014.same periods in 2015.

Non-interest Expense - For the three and ninesix months ended SeptemberJune 30, 2015,2016, non-interest expense increased $9.1$3.3 million, or 7.9%2.8%, and $20.2$5.2 million, or 5.9%2.2%, respectively, in comparison to the same periods in 2014.Included in non-interest expense for2015. The primary drivers of the threenet increases were higher salaries and nine months ended September 30, 2015 was a $5.6 million loss incurred on the redemption of trust preferred securities ("TruPS"). Excluding this loss, non-interest expense increased $3.5 million, or 3.0%, and $14.6 million, or 4.3%, respectively, for the three and nine months ended September 30, 2015 compared to the same periods in 2014.
In both 2015 and 2014, the Corporation implemented cost savings initiatives that mitigated the impact of elevated expenses related to the continued build out of its risk, compliance and information technology infrastructures. In both periods, these initiatives included branch consolidations, changes in employee benefits, and reductionspartially offset by decreases in staffing.
During the first nine months of 2015, these initiatives included the consolidation of 11 branches, modifications to retirement benefits and the elimination of certain positions. These actions resulted in implementation expenses of $2.1 million for the first nine months of 2015. The annualizedother expense reductions from all of these 2015 initiatives, when completed, are projected to be approximately $6.5 million, with $4.8 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 nine months. Cost savings from these initiatives are estimated to be approximately $7.9 million annually.

41





The following table presents a summary of the 2015 and 2014 cost savings initiatives:
 Three months ended September 30, 2015 Nine months ended September 30, 2015 Estimated Expense Reductions for the Year Ending December 31, 2015 Estimated Annualized Cost Savings
 Implementation Expenses Expense Reductions Implementation Expenses Expense Reductions  
 (in thousands)
Branch consolidations$70
 $(660) $1,640
 $(825) $(1,590) $(3,050)
Modification of retirement benefits and staffing reductions—
 (870) 450
 (2,365) (3,235) (3,470)
2015 cost savings initiatives$70
 $(1,530) $2,090
 $(3,190) $(4,825) $(6,520)
            
 Three months ended September 30, 2014 Nine months ended September 30, 2014 Actual Expense Reductions for the Year Ended December 31, 2014 Estimated Annualized Cost Savings
 Implementation Expenses Expense Reductions Implementation Expenses (Gains) Expense Reductions  
 (in thousands)
Branch consolidations$—
 $(800) $2,080
 $(1,600) $(2,400) $(3,200)
Subsidiary bank management reductions and other employee benefit reductions—
 (1,175) (1,100) (3,370) (4,550) (4,700)
2014 cost savings initiatives$—
 $(1,975) $980
 $(4,970) $(6,950) $(7,900)
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.categories, most notably other outside services.

The Regulatory Orders require, among other things, that2016 Outlook

Originally the Corporation andprovided its banking subsidiaries review, assess and take actions to strengthen and enhanceoutlook for 2016 results in its Annual Report on Form 10-K for 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.year ended December 31, 2015. The following outlook for 2016 remains unchanged:

In additionannual mid- to requiring strengtheninghigh- single digit growth rate in average loans 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.deposits;

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.

2015 Outlook
The Corporation's original outlook for 2015 included the following:

anticipated annual average loan and deposit growth rates of 3% to 7%;
net interest margin compression at a rate of 0 to 4 basis points per quarter, on average, based on the current interest rate environment;
continued modest provision for credit losses although provisions could be impacteddriven primarily by the performance of individual credits;loan growth;
annual mid- to high-singlehigh- 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, for comparison purposes, the impact of the loss on redemption of Trust Preferred Securities (TruPS) incurred in the third quarter of 2015); and

42focus on utilizing capital to support growth and provide appropriate returns to shareholders.





The Corporation's original outlook expected net interest margin to be stable on an annual non-interest expense growth in the low-single digit rate.

Based on results for the first nine monthsbasis with modest quarterly volatility of 2015 and expectations for the remainder of 2015, the Corporationplus or minus 0 to 3 basis points. This outlook has been updated its 2015 outlook. The updated outlook for 2015 is as follows:

anticipated annual average loan and deposit growth rates of 3% to 7%, with loan growth likely to be at the lower end of the range;
absent further market interest rate increases, low-single digit quarterly compression in net interest margin compression at a rate of 0 to 3 basis points during the fourth quarter of 2015;
continued modest provision for credit losses, although provisions could be impacted by the performance of individual credits;
non-interest income growth is expected to be at, or just below, the lower end of the mid- to high-single digit range; and
Excluding the loss on the redemption of TruPS, non-interest expense growth is expected to be at, or slightly above, the low single digit range.margin.


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 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 and year to date ended June 30:
43
 As of or for the
Three months ended
June 30		 As of or for the
Six months ended
June 30
 2016 2015 2016 2015
 (in thousands)
Return on average tangible equity
Net income$39,750
 $36,680
 $78,007
 $76,716
Plus: Intangible amortization, net of tax—
 69
 —
 153
Numerator$39,750
 $36,749
 $78,007
 $76,869
        
Average common shareholders' equity$2,089,915
 $2,031,788
 $2,074,357
 $2,023,919
Less: Average goodwill and intangible assets(531,556) (531,618) (561,556) (531,675)
Average tangible shareholders' equity (denominator)$1,558,359
 $1,500,170
 $1,512,801
 $1,492,244
        
Return on average tangible equity, annualized10.26% 9.83% 10.17% 10.39%
        
Efficiency ratio       
Non-interest expense$121,637
 $118,354
 $242,050
 $236,832
Less: Intangible amortization—
 (106) —
 (236)
Numerator$121,637
 $118,248
 $242,050
 $236,596
        
Net interest income (fully taxable equivalent) (1)
$133,890
 $127,445
 $267,916
 $255,531
Plus: Total Non-interest income46,137
 46,489
 89,274
 91,226
Less: Investment securities gains, net(76) (2,415) (1,023) (6,560)
Denominator$179,951
 $171,519
 $356,167
 $340,197
        
Efficiency ratio67.59% 68.94% 67.96% 69.55%

(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.






Quarter Ended SeptemberJune 30, 20152016 compared to the Quarter Ended SeptemberJune 30, 20142015

Net Interest Income
Fully-taxable equivalent (FTE)
FTE net interest income decreased $3.4increased $6.4 million, to $130.3$133.9 million, in the thirdsecond quarter of 2015,2016, from $133.7$127.4 million in the thirdsecond quarter of 2014.2015. This decreaseincrease was primarily due to a 21 basis point,an $848.6 million, or 6.2%5.3%, decreaseincrease in theinterest-earning assets. The net interest margin to 3.18%of 3.20% for the thirdsecond quarter of 2015 from 3.39% for2016 was flat compared to the thirdsecond quarter of 2014, partially offset by the impact of an increase in average interest-earning assets.2015. The following table provides a comparative average balance sheet and net interest income analysis for the third 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 September 30Three months ended June 30
2015 20142016 2015
Average
Balance
 Interest (1) 
Yield/
Rate
 
Average
Balance
 Interest (1) 
Yield/
Rate
Average
Balance
 Interest (1) 
Yield/
Rate
 
Average
Balance
 Interest (1) 
Yield/
Rate
ASSETS(dollars in thousands)(dollars in thousands)
Interest-earning assets:                      
Loans, net of unearned income (2)$13,369,874
 $135,268
 4.02% $12,922,821
 $136,773
 4.20%$13,966,024
 $138,317
 3.98% $13,192,600
 $133,339
 4.05%
Taxable investment securities (3)2,148,403
 11,252
 2.09
 2,181,099
 12,278
 2.25
2,127,780
 11,159
 2.10
 2,048,558
 10,944
 2.14
Tax-exempt investment securities (3)230,178
 2,929
 5.09
 256,303
 3,414
 5.33
314,851
 3,570
 4.54
 216,355
 2,894
 5.35
Equity securities (3)18,280
 257
 5.58
 34,002
 438
 5.12
14,220
 185
 5.23
 27,618
 379
 5.50
Total investment securities2,396,861
 14,438
 2.41
 2,471,404
 16,130
 2.61
2,456,851
 14,914
 2.43
 2,292,531
 14,217
 2.48
Loans held for sale20,704
 194
 3.74
 23,699
 237
 4.01
19,449
 188
 3.87
 26,335
 265
 4.03
Other interest-earning assets477,145
 884
 0.74
 293,286
 976
 1.33
357,211
 864
 0.96
 439,425
 933
 0.85
Total interest-earning assets16,264,584
 150,784
 3.68% 15,711,210
 154,116
 3.90%16,799,535
 154,283
 3.69% 15,950,891
 148,754
 3.74%
Noninterest-earning assets:                      
Cash and due from banks104,622
     203,134
    100,860
     104,723
    
Premises and equipment226,446
     224,241
    227,517
     226,569
    
Other assets1,097,600
     1,055,521
    1,189,226
     1,094,071
    
Less: Allowance for loan losses(168,770)     (192,163)    (164,573)     (176,085)    
Total Assets$17,524,482
     $17,001,943
    $18,152,565
     $17,200,169
    
LIABILITIES AND EQUITY                      
Interest-bearing liabilities:                      
Demand deposits$3,316,532
 $1,122
 0.13% $3,047,191
 $953
 0.12%$3,454,031
 $1,527
 0.18% $3,152,697
 $987
 0.13%
Savings deposits3,714,282
 1,436
 0.15
 3,468,958
 1,061
 0.12
3,989,988
 1,886
 0.19
 3,568,579
 1,247
 0.14
Time deposits2,963,774
 7,659
 1.03
 3,009,225
 6,984
 0.92
2,844,434
 7,474
 1.06
 3,027,520
 7,819
 1.04
Total interest-bearing deposits9,994,588
 10,217
 0.41
 9,525,374
 8,998
 0.37
10,288,453
 10,887
 0.43
 9,748,796
 10,053
 0.41
Short-term borrowings324,685
 92
 0.11
 667,397
 297
 0.18
403,669
 217
 0.21
 379,988
 103
 0.11
Federal Home Loan Bank advances and long-term debt996,247
 10,225
 4.09
 995,486
 11,129
 4.45
965,526
 9,289
 3.86
 1,026,987
 11,153
 4.35
Total interest-bearing liabilities11,315,520
 20,534
 0.72% 11,188,257
 20,424
 0.73%11,657,648
 20,393
 0.70% 11,155,771
 21,309
 0.77%
Noninterest-bearing liabilities:
          
          
Demand deposits3,904,176
     3,514,033
    4,077,642
     3,734,880
    
Other281,957
     210,194
    327,360
     277,730
    
Total Liabilities15,501,653
     14,912,484
    16,062,650
     15,168,381
    
Shareholders’ equity2,022,829
     2,089,459
    2,089,915
     2,031,788
    
Total Liabilities and Shareholders’ Equity$17,524,482
     $17,001,943
    $18,152,565
     $17,200,169
    
Net interest income/net interest margin (FTE)  130,250
 3.18%   133,692
 3.39%  133,890
 3.20%   127,445
 3.20%
Tax equivalent adjustment  (4,556)     (4,326)    (4,974)     (4,525)  
Net interest income  $125,694
     $129,366
    $128,916
     $122,920
  
(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.

44





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 SeptemberJune 30:
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$4,565
 $(6,070) $(1,505)$7,400
 $(2,422) $4,978
Taxable investment securities(178) (848) (1,026)420
 (205) 215
Tax-exempt investment securities(336) (149) (485)1,163
 (487) 676
Equity securities(217) 36
 (181)(176) (18) (194)
Loans held for sale(28) (15) (43)(66) (11) (77)
Other interest-earning assets457
 (549) (92)(183) 114
 (69)
Total interest income$4,263
 $(7,595) $(3,332)$8,558
 $(3,029) $5,529
Interest expense on:          
Demand deposits$87
 $82
 $169
$108
 $432
 $540
Savings deposits83
 292
 375
159
 480
 639
Time deposits(111) 786
 675
(491) 146
 (345)
Short-term borrowings(116) (89) (205)7
 107
 114
Federal Home Loan Bank advances and long-term debt9
 (913) (904)(647) (1,217) (1,864)
Total interest expense$(48) $158
 $110
$(864) $(52) $(916)
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 an $8.6 million increase in FTE interest income. This was partially offset by the impact of a 225 basis point, or 5.6%1.3%, decrease in yields on average interest-earning assets, primarily loans,which resulted in a $7.6$3.0 million decrease in FTE interest income, partially offset by a $4.3 million increase in FTE interest income as a result of an increase in interest-earning assets, the net effect of increases in loans and other interest-earning assets, and a decrease in investment securities.
Average investment securities decreased $74.5 million, or 3.0%, as portfolio cash flows were not fully reinvested. The yield on average investment securities decreased 20 basis points, or 7.7%, to 2.41% in the third quarter of 2015 from 2.61% in the third quarter of 2014. The decrease in average investment securities was partially offset by a $183.9 million, or 62.7%, 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. As a result, the average yield on other interest-earning assets decreased 59 basis points, or 44.4%, despite the increase in average other interest-earning assets.income.
Average loans and average FTE yields, by type, are summarized in the following table:
Three months ended September 30 Increase (Decrease) inThree months ended June 30 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$5,242,021
 4.09% $5,114,221
 4.35% $127,800
 2.5%$5,557,680
 4.00% $5,210,540
 4.15% $347,140
 6.7%
Commercial – industrial, financial and agricultural3,887,161
 3.78
 3,657,047
 3.97
 230,114
 6.3
4,080,524
 3.81
 3,836,397
 3.79
 244,127
 6.4
Real estate – home equity1,692,860
 4.08
 1,727,253
 4.18
 (34,393) (2.0)1,656,140
 4.10
 1,695,171
 4.11
 (39,031) (2.3)
Real estate – residential mortgage1,381,141
 3.78
 1,369,087
 3.93
 12,054
 0.9
1,399,851
 3.78
 1,356,464
 3.82
 43,387
 3.2
Real estate – construction753,584
 3.88
 663,922
 3.98
 89,662
 13.5
820,881
 3.81
 698,685
 3.97
 122,196
 17.5
Consumer270,391
 5.81
 284,630
 5.39
 (14,239) (5.0)272,293
 5.37
 265,354
 5.48
 6,939
 2.6
Leasing and other142,716
 6.79
 106,661
 7.32
 36,055
 33.8
Leasing, other and overdrafts178,655
 6.22
 129,989
 6.94
 48,666
 37.4
Total$13,369,874
 4.02% $12,922,821
 4.20% $447,053
 3.5%$13,966,024
 3.98% $13,192,600
 4.05% $773,424
 5.9%

45





Average loans increased $447.1$773.4 million, or 3.5%5.9%, compared to the thirdsecond quarter of 2014,2015, the increase was mainly in commercial mortgage, commercial loans, construction loans and leasing, other and other. The growth in commercial loans and leasing and other was driven by a combination of loans and leases to new customers and increased borrowings from existing customers, while the growth in construction loans was primarily due to an increase in loans secured by commercial properties.overdrafts. The average yield on loans decreased 187 basis points, or 4.3%1.7%, to 4.02%3.98% in 20152016 from 4.20%4.05% in 2014.2015. The growth in the loan portfolio was spread across a broad range of industries, largely in Pennsylvania markets and, to a lesser extent, the New Jersey market. 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.




Average total interest-bearing liabilities increased $127.3$501.9 million, or 1.1%4.5%, compared to the thirdsecond quarter of 2014.2015. Interest expense increased $110,000,decreased $916,000, or 0.5%4.3%, to $20.5$20.4 million in the thirdsecond quarter of 2015.2016 primarily as a result of a change in the mix from higher cost time deposits and long-term debt to lower-cost deposits, as well as the refinancing of certain long-term debt. Average deposits and average interest rates, by type, are summarized in the following table:
Three months ended September 30 Increase (Decrease) in BalanceThree months ended June 30 Increase (Decrease) in Balance
2015 2014 2016 2015 
Balance Rate Balance Rate $ %Balance Rate Balance Rate $ %
(dollars in thousands)(dollars in thousands)
Noninterest-bearing demand$3,904,176
 —% $3,514,033
 —% $390,143
 11.1%$4,077,642
 —% $3,734,880
 —% $342,762
 9.2%
Interest-bearing demand3,316,532
 0.13
 3,047,191
 0.12
 269,341
 8.8
3,454,031
 0.18
 3,152,697
 0.13
 301,334
 9.6
Savings3,714,282
 0.15
 3,468,958
 0.12
 245,324
 7.1
3,989,988
 0.19
 3,568,579
 0.14
 421,409
 11.8
Total demand and savings10,934,990
 0.09
 10,030,182
 0.08
 904,808
 9.0
11,521,661
 0.12
 10,456,156
 0.09
 1,065,505
 10.2
Time deposits2,963,774
 1.03
 3,009,225
 0.92
 (45,451) (1.5)2,844,434
 1.06
 3,027,520
 1.04
 (183,086) (6.0)
Total deposits$13,898,764
 0.29% $13,039,407
 0.27% $859,357
 6.6%$14,366,095
 0.30% $13,483,676
 0.30% $882,419
 6.5%

The $904.8 million,$1.1 billion, or 9.0%10.2%, increase in total demand and savings accounts was primarily due to a $427.4$505.3 million, or 12.3%10.2%, increase in personal account balances, a $375.5 million, or 10.2%, increase in business account balances and a $352.3$189.2 million, or 7.6%, increase in personal account balances and a $124.7 million, or 6.7%10.6%, increase in municipal account balances. The average cost of totalboth demand and savings deposits and time deposits increased, two basis points largelyhowever, due to an increasea shift to lower-cost demand and savings deposits, the total cost of interest-bearing deposits remained unchanged at 0.30% in rates on average time deposits.the second quarter of 2016 compared to the second quarter of 2015.

Average borrowings and interest rates, by type, are summarized in the following table:
 Three months ended September 30 Increase (Decrease)
 2015 2014 in Balance
 Balance Rate Balance Rate $ %
 (dollars in thousands)
Short-term borrowings:           
Customer repurchase agreements$149,415
 0.10% $202,809
 0.11% $(53,394) (26.3)%
Customer short-term promissory notes79,308
 0.02
 83,734
 0.05
 (4,426) (5.3)
Total short-term customer funding228,723
 0.07
 286,543
 0.09
 (57,820) (20.2)
Federal funds purchased85,092
 0.19
 224,930
 0.19
 (139,838) (62.2)
Short-term FHLB advances (1)10,870
 0.34
 155,924
 0.32
 (145,054) (93.0)
Total short-term borrowings324,685
 0.11
 667,397
 0.18
 (342,712) (51.4)
Long-term debt:
   
   
 
FHLB advances618,010
 3.49
 625,712
 3.60
 (7,702) (1.2)
Other long-term debt378,237
 5.06
 369,774
 5.89
 8,463
 2.3
Total long-term debt996,247
 4.09
 995,486
 4.45
 761
 0.1
            
 Three months ended June 30 Increase (Decrease)
 2016 2015 in Balance
 Balance Rate Balance Rate $ %
 (dollars in thousands)
Short-term borrowings:           
Customer repurchase agreements$180,595
 0.11% $179,804
 0.10% $791
 0.4 %
Customer short-term promissory notes77,535
 0.04
 80,073
 —
 (2,538) (3.2)
Total short-term customer funding258,130
 0.09
 259,877
 0.07
 (1,747) (0.7)
Federal funds purchased138,012
 0.43
 108,078
 0.17
 29,934
 27.7
Short-term FHLB advances (1)
7,527
 0.45
 12,033
 0.34
 (4,506) (37.4)
Total short-term borrowings403,669
 0.21
 379,988
 0.11
 23,681
 6.2
Long-term debt:
   
   
 
FHLB advances603,700
 3.17
 627,939
 3.51
 (24,239) (3.9)
Other long-term debt361,826
 5.01
 399,048
 5.67
 (37,222) (9.3)
Total long-term debt965,526
 3.86
 1,026,987
 4.35
 (61,461) (6.0)
Total borrowings$1,369,195
 2.78% $1,406,975
 3.20% $(37,780) (2.7)%
            

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

Total short-term borrowings decreased $342.7increased $23.7 million, or 51.4%6.2%, primarilyas a result of increases in Federalfederal funds purchased and short-term FHLB advances. The decrease was driven by lower wholesale funding needs resulting from the increase in average deposits exceeding the growth in average interest-earning assets.
purchased. Average other long-term debt increased $8.5decreased $61.5 million, or 2.3%. This increase was6.0%, partially due to FHLB advance maturities. In addition, in June 2015, the net impact of the maturity of $100.0Corporation issued $150 million of subordinated debt in April 2015 and the redemptionat an effective rate of $150.04.69%. The proceeds of this issuance were used to redeem $150 million of TruPStrust preferred securities, with an effective rate of 6.52%, in July 2015, and the issuances of $100.0 million and $150.0 million of subordinated debt in November 2014 and June 2015, respectively. As a result2015. The net effect of these transactions was a $37.2 million decrease in average balances and a 0.66% decrease in the cost ofaverage rate on other long-term debt decreased 83 basis points.

46

debt.




In the third quarter of 2015, the Corporation executed two transactions to restructure its long-term FHLB advances. First, $200 million of FHLB advances, with a weighted average rate of 4.45% and maturinga maturity date in the first quarter of 2017, were refinanced with new advances maturing from September 2019 to December 2020, at a weighted average rate of 2.95%. This transaction will reducereduced interest expense on a quarterly basis by approximately $750,000, beginning in the fourth quarter of 2015. Second, forward agreements were executed to refinance an additional $200 million of FHLB advances when theythe advances mature in December


2016. These forward agreements have maturity dates from March 2021 to December 2021 and the refinancing will reduce the weighted average rate on these advances from 4.03% to 2.40% and decrease interest expense on a quarterly basis by approximately $800,000, beginning in the first quarter of 2017.

Provision for Credit Losses

The provision for credit losses was $1.0$2.5 million for the thirdsecond quarter of 2015, a decrease2016, an increase of $2.5 million$311,000 from the thirdsecond quarter of 2014. This decrease resulted from lower allowance for credit losses allocation needs as asset quality improved.2015.

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.


47





Non-Interest Income

The following table presents the components of non-interest income:
 Three months ended September 30 Increase (Decrease)
 2015 2014 $ %
 (dollars in thousands)
Service charges on deposit accounts:       
Overdraft fees$5,652
 $5,806
 $(154) (2.7)%
Cash management fees3,418
 3,191
 227
 7.1
Other3,912
 3,804
 108
 2.8
         Total service charges on deposit accounts12,982
 12,801
 181
 1.4
Investment management and trust services11,237
 11,120
 117
 1.1
Other service charges and fees:       
Merchant fees4,000
 3,774
 226
 6.0
Debit card income2,572
 2,407
 165
 6.9
Letter of credit fees1,143
 1,163
 (20) (1.7)
Commercial swap fees1,251
 537
 714
 133.0
Other1,999
 2,073
 (74) (3.6)
        Total other service charges and fees10,965
 9,954
 1,011
 10.2
Mortgage banking income:       
Gain on sales of mortgage loans2,627
 2,613
 14
 0.5
Mortgage servicing income1,237
 1,425
 (188) (13.2)
        Total mortgage banking income3,864
 4,038
 (174) (4.3)
Credit card income2,548
 2,331
 217
 9.3
Other income1,448
 1,575
 (127) (8.1)
        Total, excluding gains on sales of investment securities43,044
 41,819
 1,225
 2.9
Net gains on sales of investment securities1,730
 81
 1,649
 N/M
              Total$44,774
 $41,900
 $2,874
 6.9 %

N/M - Not meaningful
 Three months ended June 30 Increase (Decrease)
 2016 2015 $ %
 (dollars in thousands)
Service charges on deposit accounts:       
Overdraft fees$5,384
 $5,353
 $31
 0.6 %
Cash management fees3,580
 3,369
 211
 6.3
Other3,932
 3,915
 17
 0.4
         Total service charges on deposit accounts12,896
 12,637
 259
 2.0
Investment management and trust services11,247
 11,011
 236
 2.1
Other service charges and fees:       
Merchant fees4,252
 4,088
 164
 4.0
Commercial interest rate swap fees2,751
 1,026
 1,725
 168.1
Debit card income2,719
 2,626
 93
 3.5
Letter of credit fees1,162
 1,174
 (12) (1.0)
Other2,099
 2,074
 25
 1.2
        Total other service charges and fees12,983
 10,988
 1,995
 18.2
Mortgage banking income:       
Gains on sales of mortgage loans4,440
 4,428
 12
 0.3
Mortgage servicing income(543) 911
 (1,454) (159.6)
        Total mortgage banking income3,897
 5,339
 (1,442) (27.0)
Credit card income2,596
 2,474
 122
 4.9
Other income2,442
 1,625
 817
 50.3
        Total, excluding investment securities gains, net46,061
 44,074
 1,987
 4.5
Investment securities gains, net76
 2,415
 (2,339) (96.9)
              Total$46,137
 $46,489
 $(352) (0.8)%

Excluding gains on sales of investment securities gains, non-interest income increased $1.2$2.0 million, or 2.9%, the net effect of modest increases in certain income categories being partially offset by modest decreases in others.4.5%. Other service charges and fees grew $1.0increased $2.0 million, or 10.2%18.2%, driven mainly by a $714,000$1.7 million increase in commercial interest rate swap fees, as a larger portion of new loan volumes increasedoriginations were in comparisonloan types that were conducive to interest rate swaps during the thirdsecond quarter of 2014.2016, and by a $164,000 increase in merchant fee income resulting from higher transaction volumes in the second quarter of 2016. Service charges on deposits increased a moderate $181,000,$259,000, or 1.4%2.0%, as a $227,000,primarily due to higher cash management fees.


Investment management and trust services increased $236,000, or 7.1%2.1%, due to an increase in cash management fees resulting from changes in fee structures weretrust income partially offset by lower overdraft fees.a decrease in brokerage revenue.
Gains on sales of mortgage loans remainedwere flat when compared to the third quarter of 2014, the net effect of a 13.7% increasesame period in volumes2015, as both new loan commitments and a 11.6% decrease in spreads.pricing spreads were fairly stable. Mortgage servicing income, decreased $188,000,excluding a $1.7 million impairment charge on MSRs recognized in the second quarter of 2016, increased $265,000, or 13.2%29.1%, due to an increase in amortization of mortgage servicing rights (MSRs), as prepayments were higher due to higher refinancing volumes when compared to the thirdsecond quarter of 2014.2015. See Note 6, "Mortgage Servicing Rights," in the Notes to Consolidated Financial Statements for additional details regarding the impairment charge.
Investment securities gains fordecreased $2.3 million from the thirdsecond quarter of 2015 resulted from sales of financial institution stocks. Investment securities gains in the third quarter of 2014 resulted from sales of financial institution stocks, partially offset by other-than-temporary impairment losses.2015. See Note 4, "Investment Securities," in the Notes to Consolidated Financial Statements for additional details.

48





Non-Interest Expense

The following table presents the components of non-interest expense:
Three months ended September 30 Increase (Decrease)Three months ended June 30 Increase (Decrease)
2015 2014 $ %2016 2015 $ %
(dollars in thousands)(dollars in thousands)
Salaries and employee benefits$65,308
 $62,434
 $2,874
 4.6%$70,029
 $65,067
 $4,962
 7.6%
Net occupancy expense10,710
 11,582
 (872) (7.5)11,811
 11,809
 2
 —
Other outside services7,373
 8,632
 (1,259) (14.6)5,508
 8,125
 (2,617) (32.2)
Loss on redemption of trust preferred securities5,626
 —
 5,626
 N/M
Data processing5,105
 4,689
 416
 8.9
5,476
 4,894
 582
 11.9
Software3,984
 3,353
 631
 18.8
3,953
 3,376
 577
 17.1
Professional fees3,353
 2,731
 622
 22.8
FDIC insurance expense2,960
 2,885
 75
 2.6
Equipment expense3,595
 3,307
 288
 8.7
2,872
 3,335
 (463) (13.9)
FDIC insurance expense2,867
 2,882
 (15) (0.5)
Professional fees2,828
 3,252
 (424) (13.0)
Supplies and postage2,708
 2,560
 148
 5.8
2,706
 2,726
 (20) (0.7)
Marketing2,102
 1,798
 304
 16.9
1,916
 2,235
 (319) (14.3)
Telecommunications1,587
 1,587
 —
 —
1,459
 1,617
 (158) (9.8)
Operating risk loss1,136
 1,242
 (106) (8.5)986
 674
 312
 46.3
Other real estate owned and repossession expense1,016
 1,303
 (287) (22.0)365
 129
 236
 182.9
Intangible amortization5
 314
 (309) (98.4)—
 106
 (106) (100.0)
Other8,939
 6,863
 2,076
 30.2
8,243
 8,645
 (402) (4.7)
Total$124,889
 $115,798
 $9,091
 7.9%$121,637
 $118,354
 $3,283
 2.8%

N/M - Not meaningful
The $2.9$5.0 million, or 4.6%7.6%, increase in salaries and employee benefits primarily resulted from a $2.3$4.2 million, or 4.2%7.6%, increase in salaries, and a $625,000, or 6.7%, increase in employee benefits. The increase in salaries was primarily due toresulting from higher average salaries per full-time equivalent (FTE) employee, normal merit increases and an increase in incentive compensation, partially offset bycompensation.

Outside services include fees paid to consultants and expenses for contracted or outsourced services. Consulting expenses can fluctuate based on the impact of a decrease in the average number of FTE employees, to 3,450 as of September 30, 2015 from 3,530 as of September 30, 2014.timing and need for such services. The decrease in FTE employees reflects the cost savings initiatives, primarily branch consolidations. The increase in employee benefits was primarily due to increases in defined benefit plan expense and other employee benefits, partially offset by a decrease in profit sharing expense.
The $1.3$2.6 million, or 14.6%32.2%, decrease in other outside servicesexpense in comparison to the second quarter of 2015 was primarily in costslargely due to the timing of expenses related to the Corporation’s BSA/AML compliance program remediation efforts. efforts and certain information technology and human resources initiatives.

The $1.0$1.2 million, or 13.1%14.0%, combined increase in data processing and software resulted from increasedhigher transaction volumevolumes and contractual increases for expenses related to core processing systems, and the amortization of capitalized software investments.

Equipment expense decreased $463,000, or 13.9%, primarily due to lower depreciation expense when compared to the second quarter of 2015 as certain assets became fully depreciated. The $2.1 million$622,000, or 22.8%, increase in professional fees was driven by higher costs for legal services resulting from the other expensestiming of the need for such services. Marketing expense decreased $319,000, or 14.3%, compared to the second quarter of 2015 due to the timing of various marketing promotions.

The $312,000, or 46.3%, increase in operating risk loss was largely impacted by costsdue to a $425,000 increase in losses associated with branch consolidations.previously sold mortgages, partially offset by a $152,000 decrease in check card fraud losses.
In July 2015,


Other real estate owned and repossession expense increased $236,000, or 182.9%, when compared to the Corporation redeemed $150.0 millionsecond quarter of TruPS. In connection with this redemption,2015. This increase was due to a loss$445,000 decrease in net gains on the sales of $5.6 million was recognizedother real estate properties. This expense category can experience fluctuations from period to period based on the timing of sales of properties and payments of expenses, such as a component of non-interest expense.real estate taxes.

Income Taxes

Income tax expense for the thirdsecond quarter of 20152016 was $10.3$11.2 million, a $3.1$1.0 million, or 22.9%8.4%, decrease from $13.4$12.2 million for the thirdsecond quarter of 2014.2015.

The Corporation’s effective tax rate was 23.2%21.9% in the thirdsecond quarter of 2015,2016, as compared to 25.8%24.9% in the thirdsecond quarter of 2014.2015. The effective tax rate is generally lower than the Federalfederal statutory rate of 35% due to tax-exempt interest income earned on loans, 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 thirdsecond quarter of 20142015 was driven by lower income before income taxes, mainly resulting from the loss on redemption of TruPS, and higher net low-income housing tax credits.

49





NineSix Months Ended SeptemberJune 30, 20152016 compared to the NineSix Months Ended SeptemberJune 30, 20142015

Net Interest Income

FTE net interest income decreased $13.9increased $12.4 million, or 3.5%4.8%, to $385.8$267.9 million in the first ninesix months of 20152016 from $399.7$255.5 million in the same period of 2014.2015. Net interest margin decreased 202 basis points or 5.8%, to 3.22% for the first ninesix months of 20152016 from 3.42%3.24% for the first ninesix months of 2014.2015. The decreaseincrease in FTE net interest marginincome was the result ofdue to an 18 basis point,$836.7 million, or 4.6%, decrease in yields on interest-earning assets, and a 5 basis point, or 7.0%5.3%, increase in funding costs.interest earning assets. The following table provides a comparative average balance sheet and net interest income analysis for those periods. Interest income and yields are presented on an FTE basis, using a 35% federal tax rate and statutory interest expense disallowances. The discussion following this table is based on these FTE amounts.

Nine months ended September 30Six months ended June 30
2015 20142016 2015
Average
Balance		 Interest  (1) Yield/
Rate		 Average
Balance		 Interest  (1) Yield/
Rate		Average
Balance		 Interest  (1) Yield/
Rate		 Average
Balance		 Interest  (1) Yield/
Rate
ASSETS(dollars in thousands)(dollars in thousands)
Interest-earning assets:                      
Loans, net of unearned income (2)$13,220,339
 $401,662
 4.06% $12,827,563
 $405,904
 4.23%$13,909,722
 $276,212
 3.99% $13,144,332
 $266,394
 4.08%
Taxable investment securities (3)2,068,025
 33,478
 2.16
 2,216,344
 37,962
 2.28
2,154,187
 23,162
 2.15
 2,027,170
 22,226
 2.19
Tax-exempt investment securities (3)225,209
 9,035
 5.35
 268,604
 10,561
 5.24
287,123
 6,708
 4.67
 222,684
 6,106
 5.48
Equity securities (3)25,985
 1,086
 5.59
 33,949
 1,286
 5.06
14,303
 403
 5.67
 29,901
 829
 5.58
Total investment securities2,319,219
 43,599
 2.51
 2,518,897
 49,809
 2.64
2,455,613
 30,273
 2.47
 2,279,755
 29,161
 2.56
Loans held for sale21,360
 632
 3.94
 18,259
 585
 4.27
15,850
 319
 4.03
 21,694
 438
 4.04
Other interest-earning assets463,545
 3,922
 1.13
 263,797
 3,065
 1.55
357,887
 1,762
 0.98
 456,633
 3,038
 1.33
Total interest-earning assets16,024,463
 449,815
 3.75% 15,628,516
 459,363
 3.93%16,739,072
 308,566
 3.70% 15,902,414
 299,031
 3.79%
Noninterest-earning assets:                      
Cash and due from banks104,870
     200,368
    99,654
     104,996
    
Premises and equipment226,469
     225,033
    226,901
     226,480
    
Other assets1,101,856
     1,041,834
    1,163,259
     1,104,019
    
Less: Allowance for loan losses(176,205)     (197,235)    (165,972)     (179,985)    
Total Assets$17,281,453
     $16,898,516
    $18,062,914
     $17,157,924
    
LIABILITIES AND EQUITY                      
Interest-bearing liabilities:                      
Demand deposits$3,202,380
 $3,092
 0.13% $2,969,470
 $2,766
 0.12%$3,446,193
 $3,021
 0.18% $3,144,358
 $1,970
 0.13%
Savings deposits3,600,695
 3,802
 0.14
 3,392,681
 3,127
 0.12
3,961,405
 3,690
 0.19
 3,542,960
 2,366
 0.13
Time deposits3,017,271
 23,199
 1.03
 2,984,861
 19,686
 0.88
2,856,044
 14,903
 1.05
 3,044,463
 15,540
 1.03
Total interest-bearing deposits9,820,346
 30,093
 0.41
 9,347,012
 25,579
 0.37
10,263,642
 21,614
 0.42
 9,731,781
 19,876
 0.41
Short-term borrowings338,019
 272
 0.11
 972,694
 1,470
 0.20
424,535
 485
 0.23
 344,797
 180
 0.10
FHLB advances and long-term debt1,048,634
 33,669
 4.29
 924,920
 32,606
 4.71
961,870
 18,551
 3.87
 1,075,262
 23,444
 4.38
Total interest-bearing liabilities11,206,999
 64,034
 0.76% 11,244,626
 59,655
 0.71%11,650,047
 40,650
 0.70% 11,151,840
 43,500
 0.78%
Noninterest-bearing liabilities:                      
Demand deposits3,767,919
     3,360,876
    4,022,764
     3,698,661
    
Other282,983
     214,826
    315,746
     283,504
    
Total Liabilities15,257,901
     14,820,328
    15,988,557
     15,134,005
    
Shareholders’ equity2,023,552
     2,078,188
    2,074,357
     2,023,919
    
Total Liabilities and Shareholders’ Equity$17,281,453
     $16,898,516
    $18,062,914
     $17,157,924
    
Net interest income/net interest margin (FTE)  385,781
 3.22%   399,708
 3.42%  267,916
 3.22%   255,531
 3.24%
Tax equivalent adjustment  (13,586)     (12,879)    (9,946)     (9,030)  
Net interest income  $372,195
     $386,829
    $257,970
     $246,501
  
(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.





50






The following table summarizes the changes in FTE interest income and expense for the first ninesix months of 20152016 as compared to the same period in 20142015 due to changes in average balances (volume) and changes in rates:
 2016 vs. 2015
Increase (Decrease) due
to change in
 Volume Rate Net
 (in thousands)
Interest income on:     
Loans, net of unearned income$15,654
 $(5,836) $9,818
Taxable investment securities1,349
 (413) 936
Tax-exempt investment securities1,586
 (984) 602
Equity securities(439) 13
 (426)
Loans held for sale(118) (1) (119)
Other interest-earning assets(575) (701) (1,276)
Total interest income$17,457
 $(7,922) $9,535
Interest expense on:     
Demand deposits$194
 $857
 $1,051
Savings deposits295
 1,029
 1,324
Time deposits(953) 316
 (637)
Short-term borrowings46
 259
 305
FHLB advances and long-term debt(2,326) (2,567) (4,893)
Total interest expense$(2,744) $(106) $(2,850)
 2015 vs. 2014
Increase (Decrease) due
to change in
 Volume Rate Net
 (in thousands)
Interest income on:     
Loans, net of unearned income$12,249
 $(16,491) $(4,242)
Taxable investment securities(1,984) (2,500) (4,484)
Tax-exempt investment securities(1,299) (227) (1,526)
Equity securities(322) 122
 (200)
Loans held for sale111
 (64) 47
Other interest-earning assets2,403
 (1,546) 857
Total interest income$11,158
 $(20,706) $(9,548)
Interest expense on:     
Demand deposits$222
 $104
 $326
Savings deposits200
 475
 675
Time deposits216
 3,297
 3,513
Short-term borrowings(698) (500) (1,198)
FHLB advances and long-term debt4,115
 (3,052) 1,063
Total interest expense$4,055
 $324
 $4,379
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.

An 18 basis point, or 4.6%, decreaseAs summarized above, the increase in yields onFTE interest income was the result of an increase in average interest-earning assets, primarily loans, which resulted in a $20.7 million decrease in FTE interest income. This decrease was partially offset by an $11.2$17.5 million increase in FTE interest income, resulting from a $395.9 million, or 2.5%, increase in average interest-earning assets. Increases in loans and other interest-earning assets were partially offset by a $7.9 million decrease in average investment securities.

Average investment securities decreased $199.7 million, or 7.9%, as portfolio cash flows were not fully reinvested. The yielddue to lower yields on average investments decreased 13 basis points, or 4.9%, to 2.51% in 2015 from 2.64% in 2014. The decrease in average investment securities was offset by a $199.7 million, or 75.7%, 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, which contributed to a decrease in the yield on other interest-earning assets.
Average loans, by type, are summarized in the following table:

 Nine months ended September 30 Increase (Decrease)
 2015 2014 in Balance
 Balance Yield Balance Yield $ %
 (dollars in thousands)
Real estate – commercial mortgage$5,205,755
 4.15% $5,112,735
 4.38% $93,020
 1.8%
Commercial – industrial, financial and agricultural3,831,678
 3.81
 3,637,440
 3.98
 194,238
 5.3
Real estate – home equity1,703,006
 4.11
 1,739,352
 4.18
 (36,346) (2.1)
Real estate – residential mortgage1,369,367
 3.81
 1,348,269
 3.96
 21,098
 1.6
Real estate – construction713,893
 3.93
 609,803
 4.08
 104,090
 17.1
Consumer265,002
 5.52
 278,697
 4.93
 (13,695) (4.9)
Leasing and other131,638
 7.33
 101,267
 8.88
 30,371
 30.0
Total$13,220,339
 4.06% $12,827,563
 4.23% $392,776
 3.1%


51

 Six months ended June 30 Increase (Decrease)
 2016 2015 in Balance
 Balance Yield Balance Yield $ %
 (dollars in thousands)
Real estate – commercial mortgage$5,522,550
 4.02% $5,187,322
 4.19% $335,228
 6.5%
Commercial – industrial, financial and agricultural4,087,897
 3.80
 3,803,475
 3.83
 284,422
 7.5
Real estate – home equity1,665,086
 4.10
 1,708,163
 4.13
 (43,077) (2.5)
Real estate – residential mortgage1,390,631
 3.78
 1,363,382
 3.83
 27,249
 2.0
Real estate – construction806,448
 3.81
 693,715
 3.95
 112,733
 16.3
Consumer267,794
 5.44
 262,265
 5.37
 5,529
 2.1
Leasing, other and overdrafts169,316
 6.81
 126,010
 7.64
 43,306
 34.4
Total$13,909,722
 3.99% $13,144,332
 4.08% $765,390
 5.8%




Average loans increased $765.4 million, or 5.8%, which contributed $15.7 million to the increase in FTE interest income. The average yield on loans decreased 179 basis points, or 4.0%2.2%, to 4.06%3.99% in 20152016 from 4.23%4.08% in 2014.2015. The growth in the loan portfolio was primarily driven by the commercial mortgage and commercial portfolios, and was spread across a broad range of industries, largely in Pennsylvania markets and, to a lesser extent, the New Jersey market. 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 rates. than the overall portfolio yield.



Average loan balancesinvestment securities increased $392.8$175.9 million, or 3.1%7.7%.The $194.2yield on average investments decreased 9 basis points, or 3.5%, to 2.47% in 2016 from 2.56% in 2015. The increase in average investment securities was partially offset by a $98.7 million, or 5.3%21.6%, increasedecrease in commercial loans, the $104.1 million, or 17.1%, increase in real estate construction loans and the $93.0 million, or 1.8%, increase in commercial mortgages were from both new and existing customers.other interest-earning assets.
Interest expense increased $4.4decreased $2.9 million, or 7.3%6.6%, to $64.0$40.7 million in the first ninesix months of 20152016 from $59.7$43.5 million in the first ninesix months of 2014.2015. Although total average interest-bearing liabilities decreased $37.6increased $498.2 million, or 0.3%4.5%, compared to the first ninesix months of 2014, a change in2015, the funding mix frombecame more concentrated in lower cost short-term Federal funds purchased and short-term FHLB advances to higher cost deposits and long-termshort-term borrowings. This shift and the impact of certain refinancing activities for FHLB advances and subordinatedlong-term debt drove the $4.1 million increasedecrease in interest expense attributable to volume.expense.
Average deposits, by type, are summarized in the following table:
Nine months ended September 30 Increase in BalanceSix months ended June 30 Increase (Decrease) in Balance
2015 2014 2016 2015 
Balance Rate Balance Rate $ %Balance Rate Balance Rate $ %
(dollars in thousands)(dollars in thousands)
Noninterest-bearing demand$3,767,919
 —% $3,360,876
 —% $407,043
 12.1%$4,022,764
 —% $3,698,661
 —% $324,103
 8.8%
Interest-bearing demand3,202,380
 0.13
 2,969,470
 0.12
 232,910
 7.8
3,446,193
 0.18
 3,144,358
 0.13
 301,835
 9.6
Savings3,600,695
 0.14
 3,392,681
 0.12
 208,014
 6.1
3,961,405
 0.19
 3,542,960
 0.13
 418,445
 11.8
Total demand and savings10,570,994
 0.09
 9,723,027
 0.08
 847,967
 8.7
11,430,362
 0.12
 10,385,979
 0.08
 1,044,383
 10.1
Time deposits3,017,271
 1.03
 2,984,861
 0.88
 32,410
 1.1
2,856,044
 1.05
 3,044,463
 1.03
 (188,419) (6.2)
Total deposits$13,588,265
 0.30% $12,707,888
 0.27% $880,377
 6.9%$14,286,406
 0.30% $13,430,442
 0.30% $855,964
 6.4%

The $848.0 million,$1.0 billion, or 8.7%10.1%, increase in total demand and savings account balances was primarily due to a $416.3$485.1 million, or 12.5%10.0%, increase in personal account balances, a $385.3 million, or 10.3%, increase in business account balances and a $277.9$176.7 million, or 6.0%, increase in personal account balances and a $153.8 million, or 8.9%10.2%, increase in municipal account balances. The averageWhile the cost of both demand and savings deposits and time deposits increased, 3 basis points, or 11.1%,the shift to a higher concentration of lower-cost demand and savings deposits resulted in a total cost of interest-bearing deposits of 0.30% in 2015 from 0.27% in 2014, primarily due to an increase in higher-cost time deposits.for both the first six months of 2016 and 2015.
The following table summarizes changes in average short-term borrowings and long-term debt, by type:
 Six months ended June 30 Increase (Decrease)
 2016 2015 in Balance
 Balance Rate Balance Rate $ %
 (dollars in thousands)
Short-term borrowings:           
Customer repurchase agreements$176,001
 0.11% $176,732
 0.10% $(731) (0.4)%
Customer short-term promissory notes75,774
 0.04
 83,148
 0.02
 (7,374) (8.9)
Total short-term customer funding251,775
 0.09
 259,880
 0.07
 (8,105) (3.1)
Federal funds purchased160,991
 0.42
 66,795
 0.17
 94,196
 141.0
Short-term FHLB advances (1)
11,769
 0.46
 18,122
 0.30
 (6,353) (35.1)
Total short-term borrowings424,535
 0.23
 344,797
 0.10
 79,738
 23.1
Long-term debt:           
FHLB advances600,026
 3.18
 642,736
 3.50
 (42,710) (6.6)
Other long-term debt361,844
 5.00
 432,526
 5.68
 (70,682) (16.3)
Total long-term debt961,870
 3.87
 1,075,262
 4.38
 (113,392) (10.5)
Total borrowings$1,386,405
 2.75% $1,420,059
 3.34% $(33,654) (2.4)%
 Nine months ended September 30 Increase (Decrease)
 2015 2014 in Balance
 Balance Rate Balance Rate $ %
 (dollars in thousands)
Short-term borrowings:           
Customer repurchase agreements$167,526
 0.10% $202,184
 0.11% $(34,658) (17.1)%
Customer short-term promissory notes81,854
 0.02
 89,119
 0.05
 (7,265) (8.2)
Total short-term customer funding249,380
 0.07
 291,303
 0.09
 (41,923) (14.4)
Federal funds purchased72,961
 0.17
 361,162
 0.21
 (288,201) (79.8)
Short-term FHLB advances (1)15,678
 0.31
 320,229
 0.29
 (304,551) (95.1)
Total short-term borrowings338,019
 0.11
 972,694
 0.20
 (634,675) (65.2)
Long-term debt:           
FHLB advances634,403
 3.50
 555,172
 3.92
 79,231
 14.3
Other long-term debt414,231
 5.50
 369,748
 5.90
 44,483
 12.0
Total long-term debt1,048,634
 4.29
 924,920
 4.71
 123,714
 13.4
(1) Represents FHLB advances with an original maturity term of less than one year.

Total short-term borrowings decreased $634.7$33.7 million, or 65.2%, primarily in federal funds purchased and in short-term FHLB advances.2.4%. The repaymentcost of short-term borrowings was funded mainly by the increase in average deposits. Total long-term borrowings increased $123.7 million,decreased 59 basis points, or 13.4%17.7%, as a result of the Corporation's efforts to lengthen maturities and lock in longer-term rates.lower-cost, short-term borrowings comprising a larger percentage of total borrowings.


Total long-term debt decreased $113.4 million, or 10.5%, as the result of maturing FHLB advances and the maturity of $100.0 million of subordinated debt in April 2015. In addition, in June 2015, the Corporation issued $150 million of subordinated debt at an effective rate of 4.69%. The proceeds of this issuance were used to redeem $150 million of trust preferred securities, with an effective rate of 6.52%, in July 2015.

52




In the third quarter of 2015, the Corporation executed two transactions to restructure its long-term FHLB advances. First, $200 million of FHLB advances, with a weighted average rate of 4.45% and a maturity date in the first quarter of 2017, were refinanced with new advances maturing from September 2019 to December 2020, at a weighted average rate of 2.95%. This transaction reduced interest expense on a quarterly basis by approximately $750,000, beginning in the fourth quarter of 2015. Second, forward agreements were executed to refinance an additional $200 million of FHLB advances when the advances mature in December 2016. These forward agreements have maturity dates from March 2021 to December 2021 and the refinancing will reduce the weighted average rate on these advances from 4.03% to 2.40% and decrease interest expense on a quarterly basis by approximately $800,000, beginning in the first quarter of 2017.


Provision for Credit Losses

The provision for credit losses was a negative $500,000$4.0 million for the first ninesix months of 2015, a decrease2016, an increase of $10.0$5.5 million or 105.3%, in comparison to the first ninesix months of 2014, reflecting improvements in asset quality.2015. In the first quartersix months of 2015, a negative provision of $3.7$1.5 million was recorded, primarily due to an improvement in all credit quality measures, particularly net charge-off levels, across all loan portfolio segments.particularly among pooled impaired loans. For details related to the Corporation's allowance and provision for credit losses, see the "Financial Condition" section of Management's Discussion under the heading "Provision for Credit Losses and Allowance for Credit Losses."

Non-Interest Income

The following table presents the components of non-interest income:
 Nine months ended September 30 Increase (Decrease)
 2015 2014 $ %
 (dollars in thousands)
Service charges on deposit accounts:       
Overdraft fees$15,806
 $16,645
 $(839) (5.0)%
Cash management fees10,004
 9,589
 415
 4.3
Other11,378
 10,830
 548
 5.1
         Total service charges on deposit accounts37,188
 37,064
 124
 0.3
Investment management and trust services33,137
 33,417
 (280) (0.8)
Other service charges and fees:       
Merchant fees11,265
 10,340
 925
 8.9
Debit card income7,587
 7,052
 535
 7.6
Letter of credit fees3,474
 3,448
 26
 0.8
Commercial swap fees3,088
 2,544
 544
 21.4
Other5,902
 6,023
 (121) (2.0)
        Total other service charges and fees31,316
 29,407
 1,909
 6.5
Mortgage banking income:       
Gain on sales of mortgage loans10,588
 8,009
 2,579
 32.2
Mortgage servicing income3,303
 5,375
 (2,072) (38.5)
        Total mortgage banking income13,891
 13,384
 507
 3.8
Credit card income7,257
 6,855
 402
 5.9
Other income4,921
 3,958
 963
 24.3
        Total, excluding gains on sales of investment securities127,710
 124,085
 3,625
 2.9
Net gains on sales of investment securities8,290
 1,193
 7,097
 N/M
              Total$136,000
 $125,278
 $10,722
 8.6 %

N/M - Not meaningful

Total service charges on deposits increased a modest $124,000, or 0.3%. Improvements were seen in other service charges on deposits ($548,000, or 5.1%, increase) due to growth in balances, and cash management fees ($415,000, or 4.3%, increase) due to changes in fee structures. These increases were largely offset by an $839,000, or 5.0%, decrease in overdraft fees due to lower volumes partially driven by changes in customer behavior.
 Six months ended June 30 Increase (Decrease)
 2016 2015 $ %
 (dollars in thousands)
Service charges on deposit accounts:       
Overdraft fees$10,656
 $10,154
 $502
 4.9 %
Cash management fees7,046
 6,586
 460
 7.0
Other7,752
 7,466
 286
 3.8
         Total service charges on deposit accounts25,454
 24,206
 1,248
 5.2
Investment management and trust services22,235
 21,900
 335
 1.5
Other service charges and fees:       
Merchant fees7,935
 7,265
 670
 9.2
Debit card income5,230
 5,015
 215
 4.3
Commercial swap fees4,193
 1,837
 2,356
 128.3
Letter of credit fees2,308
 2,331
 (23) (1.0)
Other4,067
 3,903
 164
 4.2
        Total other service charges and fees23,733
 20,351
 3,382
 16.6
Mortgage banking income:       
Gains on sales of mortgage loans7,110
 7,961
 (851) (10.7)
Mortgage servicing income817
 2,066
 (1,249) (60.5)
        Total mortgage banking income7,927
 10,027
 (2,100) (20.9)
Credit card income5,020
 4,709
 311
 6.6
Other income3,882
 3,473
 409
 11.8
        Total, excluding investment securities gains, net88,251
 84,666
 3,585
 4.2
Investment securities gains, net1,023
 6,560
 (5,537) (84.4)
              Total$89,274
 $91,226
 $(1,952) (2.1)%

The $925,000,$502,000, or 8.9%4.9%, increase in overdraft fee income during the six months ended June 30, 2016 in comparison to the same period during 2015 consisted of a $310,000 increase in fees assessed on commercial accounts and a $192,000 increase in fees assessed on personal accounts, due to higher volumes. Cash management fees increased $460,000, or 7.0%, compared to 2015 due to increased transaction volumes and fee increases in 2016.
The $670,000, or 9.2%, increase in merchant fee income and the $535,000,$215,000, or 7.6%4.3%, increase in debit card income and the $402,000, or 5.9%,were due to an increase in credit card income were largely driven by higher transaction volumes. Commercialthe volumes of transactions in comparison to 2015. The $2.4 million increase in commercial interest rate swap fees increased $544,000, or 21.4%,were due to higheran increase in new loan volumes.volumes in comparison to 2015.


Gains on sales of mortgage loans increased $2.6 million,decreased $851,000, or 32.2%10.7%, due to a $168.6$124.1 million, or 26.0%20.9%, increasedecrease in new loan commitments, andpartially offset by a 4.9%12.9% increase in pricing spreads compared to 2014. The increase in new loan commitments was largely in refinancing volumes, which were $408.0 million, or 49.9%, of new loan commitments in 2015 compared to $186.5 million, or

53





28.8%, during 2014.the prior year. Mortgage servicing income, decreased $2.1excluding a $1.7 million impairment charge on MSRs recognized in the second quarter of 2016, increased $470,000, or 38.5%, due22.7%. See Note 6, "Mortgage Servicing Rights," in the Notes to an increase in amortization of mortgage servicing rights (MSRs), as prepayments increased when compared to 2014.Consolidated Financial Statements for additional details regarding the impairment charge.
The $963,000, or 24.3%, increase in other income was due to higher gainsGains on sales of fixed assets, primarily branch properties, in 2015.

Investmentinvestment securities gains of $8.3decreased $5.5 million forcompared to the first ninesix months of 2015 were a result of $6.0 million of net realized gains on2015. See Note 4, "Investment Securities," in the sales of financial institution stocks and $2.3 million of net realized gains on the sales of debt securities. The $1.2 million of investment securities gainsNotes to Consolidated Financial Statements for first nine months of 2014 included $1.1 million of net realized gains on debt securities and $88,000 of net realized gains on the sales of financial institution stocks.additional details.
Non-Interest Expense

The following table presents the components of non-interest expense:
Nine months ended September 30 Increase (Decrease)Six months ended June 30 Increase (Decrease)
2015 2014 $ %2016 2015 $ %
(dollars in thousands)(dollars in thousands)
Salaries and employee benefits$195,365
 $185,623
 $9,742
 5.2 %$139,401
 $130,057
 $9,344
 7.2 %
Net occupancy expense36,211
 36,649
 (438) (1.2)24,031
 25,501
 (1,470) (5.8)
Other outside services21,248
 19,684
 1,564
 7.9
11,564
 13,875
 (2,311) (16.7)
Data processing14,767
 12,816
 1,951
 15.2
10,876
 9,662
 1,214
 12.6
Software7,874
 6,694
 1,180
 17.6
Equipment expense10,888
 10,269
 619
 6.0
6,243
 7,293
 (1,050) (14.4)
Software10,678
 9,487
 1,191
 12.6
FDIC insurance expense8,574
 8,186
 388
 4.7
5,909
 5,707
 202
 3.5
Professional fees8,430
 9,715
 (1,285) (13.2)5,686
 5,602
 84
 1.5
Supplies and postage7,803
 7,337
 466
 6.4
5,285
 5,095
 190
 3.7
Loss on redemption of trust preferred securities5,626
 —
 5,626
 N/M
Marketing5,570
 5,719
 (149) (2.6)3,540
 3,468
 72
 2.1
Telecommunications4,920
 5,193
 (273) (5.3)2,947
 3,333
 (386) (11.6)
Operating risk loss1,526
 1,501
 25
 1.7
Other real estate owned and repossession expense2,507
 3,034
 (527) (17.4)1,003
 1,491
 (488) (32.7)
Operating risk loss2,637
 3,786
 (1,149) (30.3)
Intangible amortization241
 944
 (703) (74.5)—
 236
 (236) (100.0)
Other26,256
 23,084
 3,172
 13.7
16,165
 17,317
 (1,152) (6.7)
Total$361,721
 $341,526
 $20,195
 5.9 %$242,050
 $236,832
 $5,218
 2.2 %
N/M - Not meaningful
SalariesThe $9.3 million, or 7.2%, increase in salaries and employee benefits increased $9.7during the six months ended June 30, 2016 in comparison to the same period during 2015 primarily resulted from an $8.4 million, or 5.2%7.8%, with salaries increasing $6.9 million, or 4.4%, and employee benefits increasing $2.8 million, or 9.9%. The increase in salaries, was primarily due toresulting from higher average salaries per full-time equivalent (FTE) employee, normal merit increases and an increase in incentive compensation, and higher temporary employeecompensation. Benefits expenses partially offset by a decrease in the average number of full-time equivalent employees to 3,470 for the nine months ended September 30, 2015, compared to 3,540 for the nine months ended September 30, 2014. The increase in employee benefits was primarily due to an increase in defined benefit plan expense in 2015, while 2014 included a $1.5 million gain realized on the post-retirement plan amendment in 2014.
Other outside services increased $1.6 million,$930,000, or 7.9%4.3%, due to an increase in consulting401(k) matching expense, defined benefit plan expense, employee education and other employee benefits.

The $1.5 million, or 5.8%, decrease in occupancy expense was due to decreases in snow removal and utilities expenses when compared to the first six months of 2015. The $2.3 million, or 16.7%, decrease in other outside services in comparison to the first six months of 2015 was largely due to the timing of certain expenses related to the Corporation’s risk management andBSA/AML compliance efforts, including those in connection with the enhancement of the Corporation's program for compliance with the BSA/AML Requirements. While BSA/AML remediation costs decreased for the third quarter of 2015 as compared to the third quarter of 2014, the year to date costs were higher due to significant expenditures incurred earlier in the year.efforts.

The $3.1$2.4 million, or 14.1%14.6%, combined increase in data processing and software resulted from increased expenses related to the core processing system used to maintain customer account records as a result of contractual increases and higher transaction volumes and contractual increases related to core processing systems, and amortization of software.
The $1.3 million, or 13.2%, decrease in professional fees was due to a decrease in legal fees primarily resulting from the timing of engagements with outside counsel.

54

capitalized software investments.




In JulyEquipment expense decreased $1.1 million, or 14.4%, primarily due to lower depreciation expense when compared to the first six months of 2015 the Corporation redeemed $150.0 million of TruPS. In connection with this redemption, a loss of $5.6 million was recognized as a component of non-interest expense.

The $527,000, or 17.4%, decrease in othercertain assets became fully depreciated.Other real estate owned and repossession expense was primarilydecreased $488,000, or 32.7%, when compared to the first six months of 2015 due to lowerdecreases in repossession expense, in 2015.maintenance expense and insurance expense on other real estate properties. This expense category can experience volatility from period to period based on the timing of foreclosures and sales of properties and payments of expenses, such as real estate taxes.
The $1.1
Other expense decreased $1.2 million, or 30.3%6.7%, decrease in operating risk loss was due to a $1.3 million decrease in check card fraud losses, partially offset by a $215,000 increase in losses associated with previously sold residential mortgages. See Note 12 "Commitmentslower state taxes and Contingencies," in the Notestiming of certain expense items, which can fluctuate from period to Consolidated Financial Statements for additional details related to repurchases of previously sold residential mortgages.period.



Income Taxes

Income tax expense for the first ninesix months of 20152016 was $36.0$23.1 million, a $5.1$2.5 million, or 12.5%9.9%, decrease from $41.1$25.7 million in 2014.2015.

The Corporation’s effective tax rate was 24.5%22.9% in 2015,the first six months of 2016, as compared to 25.5%25.1% in 2014.the first six months of 2015. The effective tax rate is generally lower than the Federalfederal statutory rate of 35% due to tax-exempt interest income earned on loans, investments in tax-free municipal securities taxand credits earned from investments in partnerships that generate suchtax credits under various federal programs andprograms. The decrease in the effect of state income taxes. The lower effective tax rate infrom 2015 was driven by lower pre-tax income.


55

higher low-income housing tax credits.




FINANCIAL CONDITION

The table below presents condensed consolidated ending balance sheets.
  Increase (Decrease)  Increase (Decrease)
September 30, 2015 December 31, 2014 $ %June 30, 2016 December 31, 2015 $ %
(dollars in thousands)(dollars in thousands)
Assets              
Cash and due from banks$93,803
 $105,702
 $(11,899) (11.3)%$84,647
 $101,120
 $(16,473) (16.3)%
Other interest-earning assets579,920
 423,083
 156,837
 37.1
408,086
 292,516
 115,570
 39.5
Loans held for sale26,937
 17,522
 9,415
 53.7
34,330
 16,886
 17,444
 103.3
Investment securities2,436,337
 2,323,371
 112,966
 4.9
2,529,724
 2,484,773
 44,951
 1.8
Loans, net of allowance13,369,225
 12,927,572
 441,653
 3.4
13,992,613
 13,669,548
 323,065
 2.4
Premises and equipment225,705
 226,027
 (322) (0.1)228,861
 225,535
 3,326
 1.5
Goodwill and intangible assets531,562
 531,803
 (241) —
531,556
 531,556
 —
 —
Other assets574,570
 569,687
 4,883
 0.9
670,218
 592,784
 77,434
 13.1
Total Assets$17,838,059
 $17,124,767
 $713,292
 4.2 %$18,480,035
 $17,914,718
 $565,317
 3.2 %
Liabilities and Shareholders’ Equity              
Deposits$14,084,394
 $13,367,506
 $716,888
 5.4 %$14,292,564
 $14,132,317
 $160,247
 1.1 %
Short-term borrowings431,631
 329,719
 101,912
 30.9
722,214
 497,663
 224,551
 45.1
Long-term debt979,433
 1,139,413
 (159,980) (14.0)965,552
 949,542
 16,010
 1.7
Other liabilities316,697
 291,464
 25,233
 8.7
392,708
 293,302
 99,406
 33.9
Total Liabilities15,812,155
 15,128,102
 684,053
 4.5
16,373,038
 15,872,824
 500,214
 3.2
Total Shareholders’ Equity2,025,904
 1,996,665
 29,239
 1.5
2,106,997
 2,041,894
 65,103
 3.2
Total Liabilities and Shareholders’ Equity$17,838,059
 $17,124,767
 $713,292
 4.2 %$18,480,035
 $17,914,718
 $565,317
 3.2 %

Other Interest-earning Assets

The $156.8$115.6 million, or 37.1%39.5%, increase in other interest-earning assets during the first six months of 2016 resulted from higher balances on deposit with the Federal Reserve Bank due to a higher net liquidity position.as funding provided by deposit and borrowings increases outpaced the growth in loans and investments.












Investment Securities

The following table presents the carrying amount of investment securities:
  Increase (Decrease)  Increase (Decrease)
September 30, 2015 December 31, 2014 $ %June 30, 2016 December 31, 2015 $ %
(dollars in thousands)(dollars in thousands)
U.S. Government securities$—
 $200
 $(200) (100.0)%
U.S. Government sponsored agency securities48,551
 214
 48,337
 N/M
$146
 $25,136
 $(24,990) (99.4)%
State and municipal securities240,236
 245,215
 (4,979) (2.0)345,347
 262,765
 82,582
 31.4
Corporate debt securities99,941
 98,034
 1,907
 1.9
91,547
 96,955
 (5,408) (5.6)
Collateralized mortgage obligations874,299
 902,313
 (28,014) (3.1)706,346
 821,509
 (115,163) (14.0)
Mortgage-backed securities1,051,905
 928,831
 123,074
 13.3
1,267,763
 1,158,835
 108,928
 9.4
Auction rate securities97,873
 100,941
 (3,068) (3.0)97,886
 98,059
 (173) (0.2)
Total debt securities2,412,805
 2,275,748
 137,057
 6.0
2,509,035
 2,463,259
 45,776
 1.9
Equity securities23,532
 47,623
 (24,091) (50.6)20,689
 21,514
 (825) (3.8)
Total$2,436,337
 $2,323,371
 $112,966
 4.9 %$2,529,724
 $2,484,773
 $44,951
 1.8 %

N/M - Not meaningful
Total investmentU.S. Government sponsored agency securities increased $113.0decreased $25.0 million, or 4.9%99.4%, as the result of maturities. The proceeds were reinvested in comparisonmunicipal securities, which increased $82.6 million, or 31.4%.
Collateralized mortgage obligations decreased $115.2 million, or 14.0%, as the Corporation reduced its holdings in lower coupon investments due to December 31, 2014, as prior period portfolio cash flowsvolatility in market pricing. The proceeds were reinvested in mortgage-backed securities, and U.S. Government sponsored agency securities. The $24.1which increased $108.9 million, or 50.6%9.4%, decrease in equity securities reflectsan effort to improve the sales of certain financial institutions stocks during the first nine months of 2015.

56

portfolio yield.




Loans, net of unearned incomeUnearned Income

The following table presents ending balances of loans outstanding, net of unearned income:
     Increase (Decrease)
 September 30, 2015 December 31, 2014 $ %
 (dollars in thousands)  
Real-estate – commercial mortgage$5,339,928
 $5,197,155
 $142,773
 2.7 %
Commercial – industrial, financial and agricultural3,929,908
 3,725,567
 204,341
 5.5
Real-estate – home equity1,693,649
 1,736,688
 (43,039) (2.5)
Real-estate – residential mortgage1,382,085
 1,377,068
 5,017
 0.4
Real-estate – construction769,565
 690,601
 78,964
 11.4
Consumer271,696
 265,431
 6,265
 2.4
Leasing and other149,530
 119,206
 30,324
 25.4
Loans, net of unearned income$13,536,361
 $13,111,716
 $424,645
 3.2 %
     Increase (Decrease)
 June 30, 2016 December 31, 2015 $ %
 (dollars in thousands)  
Real estate – commercial mortgage$5,635,347
 $5,462,330
 $173,017
 3.2 %
Commercial – industrial, financial and agricultural4,099,177
 4,088,962
 10,215
 0.2
Real estate – home equity1,647,319
 1,684,439
 (37,120) (2.2)
Real estate – residential mortgage1,447,292
 1,376,160
 71,132
 5.2
Real estate – construction853,699
 799,988
 53,711
 6.7
Consumer278,071
 268,588
 9,483
 3.5
Leasing, other and overdrafts194,254
 158,135
 36,119
 22.8
Loans, net of unearned income$14,155,159
 $13,838,602
 $316,557
 2.3 %

Loans, net of unearned income increased $316.6 million, or 2.3%, in comparison to December 31, 2015, with the increases spread all across the Corporation's geographic markets. Commercial mortgage loans increased $173.0 million, or 3.2%, in comparison to December 31, 2015, with the growth occurring primarily in the Pennsylvania ($135.0 million, or 4.9%), New Jersey ($24.0 million, or 1.7%) and Virginia ($11.0 million, or 2.4%) markets. Real-estate residential mortgage loans increased $71.1 million, or 5.2%, compared to December 31, 2015, with the growth occurring primarily in the Maryland ($41.0 million, or 22.3%) and Virginia ($33.0 million, or 14.7%) markets as the result of new portfolio product offerings that were introduced in 2015. Real-estate construction loans increased $53.7 million, or 6.7%, in comparison to December 31, 2015, with the growth occurring primarily in the New Jersey ($27.0 million, or 17.1%), Delaware ($16.0 million, or 35.4%) and Pennsylvania ($11.0 million, or 2.4%) markets. Leasing, other and overdrafts increased compared to December 31, 2015 as a result of a $36.1 million increase in the leasing portfolio.



Construction loans include loans to commercial borrowers secured by commercial real estate, loans to commercial borrowers secured by residential real estate, and other construction loans, which represent loans to individuals secured by residential real estate. The following table presents outstanding construction loans and their delinquency rates by these class segments:
 June 30, 2016 December 31, 2015
 Balance Delinquency Rate (1) % of Total Balance Delinquency Rate (1) % of Total
 (dollars in thousands)
Commercial$604,113
 0.8% 70.8% $559,991
 0.2% 70.0%
Commercial - residential183,667
 4.9
 21.5
 179,303
 7.3
 22.4
Other65,919
 3.8
 7.7
 60,694
 1.1
 7.6
Total Real estate - construction$853,699
 1.9% 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.

The Corporation does not have a significant concentration of credit risk with any single borrower, industry or geographical location. Approximately $6.1$6.5 billion, or 45.1%45.8%, of the loan portfolio was in commercial mortgage and construction loans as of SeptemberJune 30, 2015.2016. The Corporation's maximum total lending commitment to an individual borrower was $50.0 million as of SeptemberJune 30, 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 SeptemberJune 30, 2015,2016, the Corporation had 101113 relationships with total borrowing commitments between $20.0 million and $50.0 million.
Commercial loans increased $204.3 million, or 5.5%. The increase was primarily in the Pennsylvania ($191.0 million, or 7.3%) and Maryland ($25.8 million, or 8.6%) markets, partially offset by decreases in the Delaware and New Jersey markets.Commercial mortgage loans increased $142.8 million, or 2.7%, in comparison to December 31, 2014, generally in all markets, with the exception of the New Jersey market, which experienced a slight decrease.

The following table summarizes the percentage ofindustry concentrations within the commercial loans, by industry:loan portfolio:
September 30,
2015		 December 31, 2014June 30,
2016		 December 31, 2015
Services20.2% 19.2%21.9% 22.6%
Health care11.2
 10.6
Manufacturing12.5
 13.1
10.7
 11.3
Health care10.5
 9.0
Construction (1)10.4
 11.0
9.8
 9.7
Retail8.8
 9.6
9.2
 8.3
Wholesale8.6
 8.7
8.0
 8.0
Real estate (2)7.5
 7.6
7.7
 7.3
Agriculture4.9
 5.5
4.8
 5.1
Arts and entertainment2.9
 3.4
2.8
 2.8
Transportation2.2
 2.4
2.7
 2.7
Financial services1.9
 1.9
2.0
 1.7
Other9.6
 8.6
9.2
 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.



57





Commercial loans and commercial mortgage loans also include shared national credits, which are participations in loans or loan commitments of at least $20.0 million that are shared by three or more banks. Below is a summary of the Corporation's outstanding purchased shared national credits:
September 30, 2015 December 31, 2014June 30, 2016 December 31, 2015
(in thousands)(in thousands)
Commercial - industrial, financial and agricultural$147,791
 $116,705
$162,712
 $152,830
Real estate - commercial mortgage124,971
 137,952
104,418
 96,219
$272,762
 $254,657
Total$267,130
 $249,049


Total shared national credits increased $18.1 million, or 7.1%7.3%, 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 SeptemberJune 30, 2015, two2016, none of the shared national credits were past due compared to one credit totaling $1.1 million, or 0.6%0.4%, of the total balance were past due. There were no shared national creditsthat was past due atas of December 31, 2014.
Construction loans include loans to commercial borrowers secured by commercial real estate, loans to commercial borrowers secured by residential real estate, and other construction loans, which represent loans to individuals secured by residential real estate. The following table presents outstanding construction loans and their delinquency rates by these class segments:
 September 30, 2015 December 31, 2014
 Balance Delinquency Rate (1) % of Total Balance Delinquency Rate (1) % of Total
 (dollars in thousands)
Commercial$521,866
 0.5% 67.8% $427,419
 0.6% 61.9%
Commercial - residential190,521
 7.4
 24.8
 203,670
 6.6
 29.5
Other57,178
 1.2
 7.4
 59,512
 0.6
 8.6
Total Real estate - construction$769,565
 2.3% 100.0% $690,601
 2.4% 100.0%
2015.

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

Construction loans increased $79.0 million, or 11.4%, in comparison to December 31, 2014 and comprised 5.7% of the total loan portfolio at September 30, 2015 as compared to 5.3% at December 31, 2014.The increase in construction loans was primarily in loans secured by commercial real estate. Geographically, the increase in real estate construction loans was primarily in the Pennsylvania ($94.7 million, or 26.1%) and New Jersey ($43.9 million, or 48.3%) markets, partially offset by decreases in the Virginia ($27.5 million, or 30.4%), Maryland ($23.8 million, or 27.5%) and Delaware ($8.3 million, or 13.8%) markets.
Leasing and other loans increased $30.3 million, or 25.4%, in comparison to December 31, 2014 as a result of new products and services being added during 2015 and a focus on growing this portfolio.
Home equity loans decreased $43.0 million, or 2.5%, primarily as a result of customers refinancing outstanding home equity loans into residential mortgages.










58





Provision for Credit Losses and Allowance for Credit Losses

The following table presents the activity in the allowance for credit losses:
Three months ended September 30 Nine months ended September 30Three months ended June 30 Six months ended June 30
2015 2014 2015 20142016 2015 2016 2015
(dollars in thousands)(dollars in thousands)
Average balance of loans, net of unearned income$13,369,874
 $12,922,821
 $13,220,339
 $12,827,563
$13,966,024
 $13,192,600
 $13,909,722
 $13,144,332
              
Balance of allowance for credit losses at beginning of period$169,453
 $193,442
 $185,931
 $204,917
$166,065
 $179,658
 $171,412
 $185,931
Loans charged off:
 
           
Commercial – industrial, financial and agricultural1,640
 5,167
 14,669
 15,804
4,625
 11,166
 10,813
 13,029
Real estate – residential mortgage1,035
 231
 3,099
 2,166
340
 783
 1,408
 2,064
Real estate – home equity940
 1,492
 2,578
 4,377
1,045
 870
 2,586
 1,638
Real estate – commercial mortgage660
 1,557
 3,011
 5,084
1,474
 1,642
 2,056
 2,351
Consumer650
 538
 1,787
 1,738
569
 357
 1,576
 1,137
Real estate – construction114
 313
 201
 745
742
 87
 1,068
 87
Leasing and other522
 306
 1,352
 1,434
Leasing, other and overdrafts1,951
 467
 2,394
 830
Total loans charged off5,561
 9,604
 26,697
 31,348
10,746
 15,372
 21,901
 21,136
Recoveries of loans previously charged off:              
Commercial – industrial, financial and agricultural1,598
 1,013
 3,855
 2,532
2,931
 1,471
 5,250
 2,257
Real estate – residential mortgage201
 95
 547
 319
420
 187
 556
 346
Real estate – home equity304
 336
 744
 869
350
 189
 688
 440
Real estate – commercial mortgage842
 1,167
 1,729
 1,641
1,367
 451
 2,192
 887
Consumer314
 448
 923
 1,059
539
 368
 735
 609
Real estate – construction898
 470
 2,276
 852
1,563
 231
 1,946
 1,378
Leasing and other346
 241
 587
 767
Leasing, other and overdrafts108
 70
 189
 241
Total recoveries4,503
 3,770
 10,661
 8,039
7,278
 2,967
 11,556
 6,158
Net loans charged off1,058
 5,834
 16,036
 23,309
3,468
 12,405
 10,345
 14,978
Provision for credit losses1,000
 3,500
 (500) 9,500
2,511
 2,200
 4,041
 (1,500)
Balance of allowance for credit losses at end of period$169,395
 $191,108
 $169,395
 $191,108
$165,108
 $169,453
 $165,108
 $169,453
              
Net charge-offs to average loans (annualized)0.03% 0.18% 0.16% 0.24%0.10% 0.38% 0.15% 0.23%
The following table presents the components of the allowance for credit losses:
September 30,
2015		 December 31,
2014		June 30,
2016		 December 31,
2015
(dollars in thousands)(dollars in thousands)
Allowance for loan losses$167,136
 $184,144
$162,546
 $169,054
Reserve for unfunded lending commitments2,259
 1,787
2,562
 2,358
Allowance for credit losses$169,395
 $185,931
$165,108
 $171,412
      
Allowance for credit losses to loans outstanding1.25% 1.42%1.17% 1.24%
The provision for credit losses for the three months ended SeptemberJune 30, 20152016 was $1.0$2.5 million, a decreasean increase of $2.5 million$311,000 in comparison to the same period in 2014.2015. For the ninesix months ended SeptemberJune 30, 2015,2016, the provision for credit losses was a negative $500,000, a decrease$4.0 million, an increase of $10.0$5.5 million comparedin comparison to the same period in 2014.first six months of 2015. The decreaseincrease in the provision for credit losses was based onlargely due to a


negative provision recorded in the evaluation ofsix months ended June 30, 2015 which was driven by an improvement in net charge-off levels, particularly among pooled impaired loans across all relevant credit quality factors and the results of the allowance for credit losses allocation methodology.portfolio segments.
Net charge-offs decreased $4.8$8.9 million, or 81.9%72.0%, to $1.1$3.5 million for the thirdsecond quarter of 2015,2016, compared to $5.8$12.4 million for the thirdsecond quarter of 2014.2015. Gross charge-offs decreased by $4.6 million and recoveries increased by $4.3 million. Of the $3.5 million of net charge-offs recorded in the second quarter of 2016, the majority were for loans originated in New Jersey ($2.5 million) and Pennsylvania ($2.4 million) partially offset by net recoveries in Maryland ($1.2 million) and, to a lesser extent, Delaware and Virginia.
During the first half of 2016, net charge-offs decreased $4.6 million, or 30.9%, to $10.3 million compared to $15.0 million for the first half of 2015. The decrease in net charge-offs was primarily due to a $4.1 million decreasean increase in commercial loan net charge-

59





offs.recoveries during the first half of 2016 compared to the same period in the prior year. Of the $1.1 million of net charge-offs recorded in the third quarter of 2015, the majority were for loans originated in Pennsylvania.
During the first nine months of 2015, net charge-offs decreased $7.3 million, or 31.2%, to $16.0 million, compared to $23.3 million for the first nine months of 2014. The decrease in net charge-offs was primarily due to a $2.5 million, or 18.5%, decrease in commercial loan net charge-offs, a $2.2 million, or 62.8%, decrease in commercial mortgage net charge-offs, a $2.0 million decrease in real estate construction net charge-offs and a $1.7 million, or 47.7%, decrease in home equity net charges-offs, partially offset by a $705,000, or 38.2%, increase in residential mortgage net charge-offs. Of the $16.0$10.3 million of net charge-offs recorded in the first nine monthshalf of 2015,2016, the majority were for loans originated in Pennsylvania ($7.9 million) and New Jersey.Jersey ($3.7 million) partially offset by net recoveries in Maryland ($1.0 million) and, to a lesser extent, Delaware and Virginia.

The following table summarizes non-performing assets as of the indicated dates:
September 30, 2015 September 30, 2014 December 31, 2014June 30, 2016 June 30, 2015 December 31, 2015
(dollars in thousands)(dollars in thousands)
Non-accrual loans$132,154
 $126,420
 $121,080
$111,742
 $129,152
 $129,523
Loans 90 days or more past due and accruing12,867
 17,428
 17,402
Loans 90 days or more past due and still accruing15,992
 20,353
 15,291
Total non-performing loans145,021
 143,848
 138,482
127,734
 149,505
 144,814
Other real estate owned (OREO)10,561
 13,489
 12,022
11,918
 12,763
 11,099
Total non-performing assets$155,582
 $157,337
 $150,504
$139,652
 $162,268
 $155,913
Non-accrual loans to total loans0.98% 0.97% 0.92%0.79% 0.98% 0.94%
Non-performing assets to total assets0.87% 0.91% 0.88%0.76% 0.93% 0.87%
Allowance for credit losses to non-performing loans116.81% 132.85% 134.26%129.26% 113.34% 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:
September 30, 2015 September 30, 2014 December 31, 2014June 30, 2016 June 30, 2015 December 31, 2015
(in thousands)(in thousands)
Real estate – residential mortgage$29,330
 $30,850
 $31,308
$27,324
 $31,584
 $28,511
Real estate – commercial mortgage17,282
 18,869
 18,822
17,808
 17,482
 17,563
Real estate – construction4,363
 9,251
 9,241
3,086
 4,482
 3,942
Commercial – industrial, financial and agricultural7,399
 5,115
 5,237
5,756
 6,975
 5,953
Real estate – home equity3,954
 2,904
 2,975
7,173
 3,084
 4,556
Consumer29
 23
 38
18
 34
 33
Total accruing TDRs62,357
 67,012
 67,621
61,165
 63,641
 60,558
Non-accrual TDRs (1)27,618
 27,724
 24,616
24,887
 27,230
 31,035
Total TDRs$89,975
 $94,736
 $92,237
$86,052
 $90,871
 $91,593
(1) Included with non-accrual loans in the preceding table.

TDRs modified during the first ninesix months of 20152016 and still outstanding as of SeptemberJune 30, 20152016 totaled $16.1$6.5 million.During the first ninesix months of 2015, $5.02016, $3.7 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.

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The following table presents the changes in non-accrual loans for the three and ninesix months ended SeptemberJune 30, 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)
Three months ended September 30, 2015              
Balance of non-accrual loans at June 30, 2015$35,109
 $47,985
 $14,468
 $21,611
 $9,979
 $—
 $—
 $129,152
Three months ended June 30, 2016Three months ended June 30, 2016              
Balance of non-accrual loans at March 31, 2016$37,116
 $40,861
 $10,498
 $20,780
 $11,494
 $—
 $1,421
 $122,170
Additions9,960
 4,109
 1,488
 2,768
 2,516
 650
 149
 21,640
6,340
 4,835
 3,098
 2,100
 2,068
 572
 207
 19,220
Payments(5,187) (2,411) (1,269) (938) (766) —
 —
 (10,571)(2,888) (5,150) (2,396) (1,595) (1,086) (1) (20) (13,136)
Charge-offs(1,640) (660) (114) (1,035) (940) (650) (149) (5,188)(4,625) (1,474) (742) (340) (1,045) (569) (1,608) (10,403)
Transfers to accrual status—
 —
 —
 (136) (60) —
 —
 (196)—
 (3,149) —
 (150) (206) (2) —
 (3,507)
Transfers to OREO(1,689) (196) —
 (293) (505) —
 —
 (2,683)(405) (411) (1,038) (226) (522) —
 —
 (2,602)
Balance of non-accrual loans at September 30, 2015$36,553
 $48,827
 $14,573
 $21,977
 $10,224
 $—
 $—
 $132,154
Balance of non-accrual loans at June 30, 2016$35,538
 $35,512
 $9,420
 $20,569
 $10,703
 $—
 $—
 $111,742
                              
Nine months ended September 30, 2015              
Balance of non-accrual loans as of December 31, 2014$29,769
 $44,437
 $16,348
 $20,043
 $10,483
 $—
 $—
 $121,080
Six months ended June 30, 2016Six months ended June 30, 2016              
Balance of non-accrual loans as of December 31, 2015$42,199
 $40,731
 $12,044
 $21,914
 $11,210
 $—
 $1,425
 $129,523
Additions37,661
 22,047
 3,966
 9,737
 6,110
 1,789
 506
 81,816
12,776
 10,794
 3,850
 3,497
 5,055
 1,579
 292
 37,843
Payments(13,827) (13,710) (5,540) (2,373) (1,464) (2) —
 (36,916)(8,219) (8,693) (4,368) (1,746) (1,452) (1) (24) (24,503)
Charge-offs(14,669) (3,011) (201) (3,099) (2,578) (1,787) (506) (25,851)(10,813) (2,056) (1,068) (1,408) (2,586) (1,576) (1,693) (21,200)
Transfers to accrual status—
 (44) —
 (440) (524) —
 —
 (1,008)—
 (3,149) —
 (310) (881) (2) —
 (4,342)
Transfers to OREO(2,381) (892) —
 (1,891) (1,803) —
 —
 (6,967)(405) (2,115) (1,038) (1,378) (643) —
 —
 (5,579)
Balance of non-accrual loans at September 30, 2015$36,553
 $48,827
 $14,573
 $21,977
 $10,224
 $—
 $—
 $132,154
Balance of non-accrual loans at June 30, 2016$35,538
 $35,512
 $9,420
 $20,569
 $10,703
 $—
 $—
 $111,742

Non-accrual loans increased $5.7decreased $17.4 million, or 4.5%13.5%, and $11.1$17.8 million, or 9.1%13.7%, in comparison to SeptemberJune 30, 20142015 and December 31, 2014,2015, respectively.

The following table summarizes non-performing loans, by type, as of the indicated dates:
September 30, 2015 September 30, 2014 December 31, 2014June 30, 2016 June 30, 2015 December 31, 2015
(in thousands)(in thousands)
Real estate – commercial mortgage$49,021
 $44,602
 $45,237
$35,704
 $49,932
 $41,170
Commercial – industrial, financial and agricultural38,032
 33,277
 30,388
38,902
 35,839
 44,071
Real estate – residential mortgage27,707
 28,135
 28,995
25,030
 31,562
 28,484
Real estate – home equity14,173
 14,632
 14,683
Real estate – construction14,989
 19,860
 16,399
11,879
 14,884
 12,460
Real estate – home equity13,107
 15,071
 14,740
Consumer2,079
 2,515
 2,590
1,888
 2,583
 2,440
Leasing86
 388
 133
158
 73
 1,506
Total non-performing loans$145,021
 $143,848
 $138,482
$127,734
 $149,505
 $144,814

Non-performing loans increased $1.2decreased $21.8 million, or 0.8%14.6%, and $17.1 million, or 11.8%, in comparison to SeptemberJune 30, 2014. Non-performing commercial2015 and December 31, 2015, respectively. The decrease in non-performing loans increased $4.8 million, or 14.3%, and non-performing commercial mortgages increased $4.4 million, or 9.9%, while non-performing construction loans decreased $4.9 million, or 24.5%, and non-performing home equity loans decreased $2.0 million, or 13.0%, in comparison to September 30, 2014.was realized across all loan categories.







61





The following table summarizes the Corporation’s OREO, by property type, as of the indicated dates:
September 30, 2015 September 30, 2014 December 31, 2014June 30, 2016 June 30, 2015 December 31, 2015
(in thousands)(in thousands)
Residential properties$6,934
 $8,121
 $6,656
$6,098
 $7,992
 $7,303
Commercial properties1,584
 3,758
 3,453
3,686
 2,123
 2,167
Undeveloped land2,043
 1,610
 1,913
2,134
 2,648
 1,629
Total OREO$10,561
 $13,489
 $12,022
$11,918
 $12,763
 $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.

Total internally risk rated loans were $10.0$10.5 billion and $10.3 billion as of SeptemberJune 30, 20152016 and $9.6 billion as of December 31, 2014.2015, respectively. 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 LoansSpecial Mention Increase (decrease) Substandard or lower Increase (decrease) Total Criticized and Classified Loans
September 30, 2015 December 31, 2014 $ % September 30, 2015 December 31, 2014 $ % September 30, 2015 December 31, 2014June 30, 2016 December 31, 2015 $ % June 30, 2016 December 31, 2015 $ % June 30, 2016 December 31, 2015
(dollars in thousands)(dollars in thousands)
Real estate - commercial mortgage$132,823
 $127,302
 $5,521
 4.3 % $178,450
 $170,837
 $7,613
 4.5 % $311,273
 $298,139
$141,417
 $102,625
 $38,792
 37.8 % $122,564
 $155,442
 $(32,878) (21.2)% $263,981
 $258,067
Commercial - secured97,617
 120,584
 (22,967) (19.0) 105,820
 110,544
 (4,724) (4.3) 203,437
 231,128
95,330
 92,711
 2,619
 2.8
 130,180
 136,710
 (6,530) (4.8) 225,510
 229,421
Commercial -unsecured3,568
 7,463
 (3,895) (52.2) 4,805
 6,810
 (2,005) (29.4) 8,373
 14,273
2,467
 2,761
 (294) (10.6) 3,421
 3,346
 75
 2.2
 5,888
 6,107
Total Commercial - industrial, financial and agricultural101,185
 128,047
 (26,862) (21.0) 110,625
 117,354
 (6,729) (5.7) 211,810
 245,401
97,797
 95,472
 2,325
 2.4
 133,601
 140,056
 (6,455) (4.6) 231,398
 235,528
Construction - commercial residential16,763
 27,495
 (10,732) (39.0) 29,429
 40,066
 (10,637) (26.5) 46,192
 67,561
17,012
 17,154
 (142) (0.8) 14,838
 21,812
 (6,974) (32.0) 31,850
 38,966
Construction - commercial1,693
 12,202
 (10,509) (86.1) 5,204
 5,586
 (382) (6.8) 6,897
 17,788
2,548
 3,684
 (1,136) (30.8) 4,594
 3,597
 997
 27.7
 7,142
 7,281
Total real estate - construction (excluding construction - other)18,456
 39,697
 (21,241) (53.5) 34,633
 45,652
 (11,019) (24.1) 53,089
 85,349
19,560
 20,838
 (1,278) (6.1) 19,432
 25,409
 (5,977) (23.5) 38,992
 46,247
Total$252,464
 $295,046
 $(42,582) (14.4)% $323,708
 $333,843
 $(10,135) (3.0)% $576,172
 $628,889
$258,774
 $218,935
 $39,839
 18.2 % $275,597
 $320,907
 $(45,310) (14.1)% $534,371
 $539,842
                                      
% of total risk rated loans2.5% 3.1%     3.3% 3.5%     5.8% 6.6%2.5% 2.1%     2.6% 3.1%     5.1% 5.2%













62





The following table summarizes loan delinquency rates, by type, as of the dates indicated:
September 30, 2015 September 30, 2014 December 31, 2014June 30, 2016 June 30, 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 mortgage0.16% 0.92% 1.08% 0.48% 0.86% 1.34% 0.35% 0.87% 1.22%0.18% 0.63% 0.81% 0.34% 0.96% 1.30% 0.14% 0.77% 0.91%
Commercial – industrial, financial and agricultural0.35% 0.97% 1.32% 0.28% 0.91% 1.19% 0.17% 0.81% 0.98%0.30% 0.95% 1.25% 0.22% 0.93% 1.15% 0.21% 1.06% 1.27%
Real estate – construction0.30% 1.95% 2.25% 0.03% 2.89% 2.92% 0.02% 2.38% 2.40%0.54% 1.39% 1.93% 0.02% 2.04% 2.06% 0.28% 1.59% 1.87%
Real estate – residential mortgage1.27% 2.00% 3.27% 1.81% 2.06% 3.87% 1.96% 2.10% 4.06%0.97% 1.73% 2.70% 1.53% 2.30% 3.83% 1.33% 2.07% 3.40%
Real estate – home equity0.54% 0.77% 1.31% 0.59% 0.87% 1.46% 0.63% 0.85% 1.48%0.61% 0.86% 1.47% 0.55% 0.87% 1.42% 0.53% 0.87% 1.40%
Consumer, leasing and other1.30% 0.51% 1.81% 1.41% 0.75% 2.16% 1.56% 0.70% 2.26%1.03% 0.43% 1.46% 1.29% 0.65% 1.94% 1.36% 0.92% 2.28%
Total0.42% 1.07% 1.49% 0.58% 1.11% 1.69% 0.52% 1.06% 1.58%0.39% 0.91% 1.30% 0.47% 1.13% 1.60% 0.37% 1.04% 1.41%
Total dollars (in thousands)$56,694
 $145,021
 $201,715
 $75,976
 $143,848
 $219,824
 $68,346
 $138,482
 $206,828
$55,744
 $127,734
 $183,478
 $61,931
 $149,505
 $211,436
 $51,927
 $144,814
 $196,741
 
(1)Includes non-accrual loans.
Management believes that the allowance for credit losses of $169.4$165.1 million as of SeptemberJune 30, 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.
Other Assets and Other Liabilities

The $77.4 million, or 13.1%, increase in other assets and the $99.4 million, or 33.9%, increase in other liabilities were driven by higher fair values for derivative financial instruments, mainly commercial loan interest rate swaps. See Note 9, "Derivative Financial Instruments," in the Notes to Consolidated Financial Statements for additional details.

Deposits and Borrowings
The following table presents ending deposits, by type:
    Increase (Decrease)    Increase (Decrease)
September 30, 2015 December 31, 2014 $ %June 30, 2016 December 31, 2015 $ %
(dollars in thousands)(dollars in thousands)
Noninterest-bearing demand$3,906,228
 $3,640,623
 $265,605
 7.3 %$4,125,375
 $3,948,114
 $177,261
 4.5 %
Interest-bearing demand3,362,336
 3,150,612
 211,724
 6.7
3,358,536
 3,451,207
 (92,671) (2.7)
Savings3,880,103
 3,504,820
 375,283
 10.7
3,986,008
 3,868,046
 117,962
 3.0
Total demand and savings11,148,667
 10,296,055
 852,612
 8.3
11,469,919
 11,267,367
 202,552
 1.8
Time deposits2,935,727
 3,071,451
 (135,724) (4.4)2,822,645
 2,864,950
 (42,305) (1.5)
Total deposits$14,084,394
 $13,367,506
 $716,888
 5.4 %$14,292,564
 $14,132,317
 $160,247
 1.1 %

Non-interest bearingNoninterest-bearing demand deposits increased $265.6$177.3 million, or 7.3%4.5%, primarily as a result of increases in business account balances of $256.0$195.2 million, or 9.3%6.5%, and municipal account balances of $12.6$11.5 million, or 12.6%, partially offset by decreases in personal account balances of $16.6 million, or 2.0%, and other account balances of $12.9 million, or 27.5%.

Interest-bearing demand accounts increased $211.7The $118.0 million, or 6.7%, due to a $188.6 million, or 15.8%, seasonal increase in municipal account balances and a $25.9 million, or 20.3%, increase in business account balances. The $375.3 million, or 10.7%3.0%, increase in savings account balances was primarily due to a $205.6$215.6 million, or 9.4%8.6%, increase in personal account balances partially offset by a seasonal increasedecrease of $91.3$58.9 million, or 15.9%7.4%, in business account balances and a $38.7 million, or 6.7%, decrease in municipal account balances.

Interest-bearing demand accounts decreased $92.7 million, or 2.7%, primarily due to a $58.8 million, or 2.9%, decrease in personal account balances, a $22.4 million, or 1.9%, decrease in municipal account balances and a $78.3an $11.6 million, or 10.6%1.9%, increasedecrease in business account balances. The $135.7 million, or 4.4%, decrease in time deposits was primarily due to a decrease in time deposits with original maturities of less than two years.











63





The following table summarizes the changes in ending borrowings, by type:
  Increase (Decrease)  Increase (Decrease)
September 30, 2015 December 31, 2014 $ %June 30, 2016 December 31, 2015 $ %
(dollars in thousands)(dollars in thousands)
Short-term borrowings:              
Customer repurchase agreements$145,225
 $158,394
 $(13,169) (8.3)%$168,521
 $111,496
 $57,025
 51.1%
Customer short-term promissory notes80,879
 95,106
 (14,227) (15.0)69,509
 78,932
 (9,423) (11.9)
Total short-term customer funding226,104
 253,500
 (27,396) (10.8)238,030
 190,428
 47,602
 25.0
Federal funds purchased5,527
 6,219
 (692) (11.1)449,184
 197,235
 251,949
 127.7
Short-term FHLB advances (1)200,000
 70,000
 130,000
 185.7
35,000
 110,000
 (75,000) (68.2)
Total short-term borrowings431,631
 329,719
 101,912
 30.9
722,214
 497,663
 224,551
 45.1
Long-term debt:              
FHLB advances617,790
 673,107
 (55,317) (8.2)603,685
 587,756
 15,929
 2.7
Other long-term debt361,643
 466,306
 (104,663) (22.4)361,867
 361,786
 81
 —
Total long-term debt979,433
 1,139,413
 (159,980) (14.0)965,552
 949,542
 16,010
 1.7
Total borrowings$1,411,064
 $1,469,132
 $(58,068) (4.0)%$1,687,766
 $1,447,205
 $240,561
 16.6%
              
(1) Represents FHLB advances with an original maturity term of less than one year.

The $101.9$224.6 million, or 45.1%, increase in total short-term borrowings was largely due to a $130.0 million, or 185.7%, increase in short-term FHLB advances. The $55.3 million decrease in long-term FHLB advances resulted from maturities that were replaced with short-term advances. Other long-term debt decreased by $104.7 million, or 22.4%, primarily as a resultloan growth exceeding deposit growth during the first six months of the the maturity of $100 million of subordinated debt in April 2015. In June 2015, the Corporation issued $150 million of ten-year subordinated debt at an effective rate of 4.69%. The proceeds were used to redeem $150 million of TruPS, that carried an effective rate of 6.52%, in July 2015.2016.

Shareholders' Equity

Total shareholders’ equity increased $29.2$65.1 million, or 1.5%3.2%, during the first ninesix months of 2015.2016. The increase was due primarily to $111.0$78.0 million of net income and a $29.7 million increase in other comprehensive income, partially offset by $47.5$33.0 million of common stock dividends and $50.0$16.3 million in treasury stock purchases.

Regulatory Capital

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 TruPS, are being phased out as a component of Tier 1 capital for institutions of the Corporation's size.

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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-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 SeptemberJune 30, 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 SeptemberJune 30, 2015,2016, the Corporation's capital levels also met the fully-phased in minimum capitalrequirements, 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:
 September 30, 2015 December 31, 2014 Regulatory
Minimum
for Capital
Adequacy
Common Equity Tier I (to Risk-Weighted Assets)10.8% N/A
 4.5%
Total Capital (to Risk-Weighted Assets)13.8% 14.7% 8.0%
Tier I Capital (to Risk-Weighted Assets)10.8% 12.3% 6.0%
Tier I Capital (to Average Assets)9.4% 10.0% 4.0%

The September 30, 2015 capital ratios presented above were determined in accordance with the Basel III Capital Rules while the December 31, 2014 capital ratios were calculated under the prior capital standards. The impact of transitioning to the Basel III Capital Rules was a decrease of approximately 45 basis points in the risk-based capital ratios, primarily as a result of the changes in risk-weightings.

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, may need credit availability. Liquidity is provided on a continuous basis through scheduled and unscheduled principal and interest payments on outstanding loans and investments and through the availability of deposits and borrowings. The Corporation also maintains secondary sources that provide liquidity on a secured and unsecured basis to meet short-term and long-term needs.

The Corporation maintains liquidity sources in the form of demand and savings deposits, time deposits, repurchase agreements and short-term promissory notes. The Corporation can access additional liquidity from these sources, if necessary, by increasing 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 September 30, 2015, the Corporation had $817.8 million of short and long-term advances outstanding from the FHLB with an additional borrowing capacity of approximately $2.1 billion under these facilities. Advances from the FHLB are secured by qualifying commercial real estate and residential mortgage loans, investments and other assets.

As of September 30, 2015, the Corporation had aggregate availability under Federal funds lines of $1.2 billion with no borrowings outstanding on those lines. As of September 30, 2015, the Corporation had a repurchase agreement relationship with a community bank, with a balance of $5.5 million, classified as Federal funds purchased. A combination of commercial real estate loans, commercial loans and securities are pledged to the Federal Reserve Bank of Philadelphia to provide access to Federal Reserve Bank Discount Window borrowings. As of September 30, 2015, the Corporation had $1.3 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

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 June 30, 2016 December 31, 2015 Regulatory
Minimum
for Capital
Adequacy		 Fully Phased-in, with Capital Conservation Buffers
Total Capital (to Risk-Weighted Assets)13.1% 13.2% 8.0% 10.5%
Tier I Capital (to Risk-Weighted Assets)10.3% 10.2% 6.0% 8.5%
Common Equity Tier I (to Risk-Weighted Assets)10.3% 10.2% 4.5% 7.0%
Tier I Capital (to Average Assets)9.0% 9.0% 4.0% 4.0%




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 nine months of 2015 generated $134.9 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 and investment securities gains. Cash used in investing activities was $714.5 million, due to net increases in loans, short-term investments, and investment securities. Net cash provided by financing activities was $567.7 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.

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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 September 30, 2015, equity investments consisted of $22.4 million of common stocks of publicly traded financial institutions and $1.1 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 $15.1 million and a fair value of $22.4 million at September 30, 2015, including an investment in a single financial institution with a cost basis of $8.5 million and a fair value of $12.8 million. The fair value of this investment accounted for 57.1% of the fair value of the common stocks of publicly traded financial institutions. No other investment in a single financial institution within the financial institutions stock portfolio exceeded 5% of the portfolio's fair value. As of September 30, 2015, the financial institutions stock portfolio had $7.3 million of net unrealized gains.
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 September 30, 2015, the Corporation owned municipal securities issued by various municipalities with a total fair value of $240.2 million. The Corporation evaluates existing and potential holdings primarily based on the creditworthiness of the issuing municipality and then, to a lesser extent, on any underlying credit enhancement. Municipal securities can be supported by the general obligation of the issuing municipality, allowing the securities to be repaid by any means available to the issuing municipality. As of September 30, 2015, approximately 95% of municipal securities were supported by the general obligation of corresponding municipalities. Approximately 83% of these securities were school district issuances, which are also supported by the states of the issuing municipalities.
Auction Rate Certificates
As of September 30, 2015, the Corporation’s investments in student loan auction rate certificates (ARCs), had a cost basis of $106.7 million and a fair value of $97.9 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, since early 2008, market auctions for these securities failed due to an insufficient number of buyers, resulting in an illiquid market. Therefore, as of September 30, 2015, 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,

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prepared by a third-party valuation expert, produced fair values that assumed a return to market liquidity sometime within the next five years. The Corporation believes that the trusts underlying the ARCs will self-liquidate as student loans are repaid.
The credit quality of the underlying debt associated with ARCs is also a factor in the determination of their estimated fair value. As of September 30, 2015, all of the ARCs were rated above investment grade, with approximately $5 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. As of September 30, 2015, all ARCs were current and making scheduled interest payments.

Corporate Debt Securities Issued by Financial Institutions
The Corporation holds corporate debt securities in the form of pooled trust preferred securities, single-issuer trust preferred securities and subordinated debt issued by financial institutions, as presented in the following table as of September 30, 2015:
 
Amortized
cost
 
Estimated
fair value
 (in thousands)
Single-issuer trust preferred securities$46,624
 $41,787
Subordinated debt51,625
 53,576
Pooled trust preferred securities—
 530
Corporate debt securities issued by financial institutions$98,249
 $95,893

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 $4.8 million at September 30, 2015. The Corporation did not record any other-than-temporary impairment charges for single-issuer trust preferred securities during the three and nine months ended September 30, 2015 or 2014. Seven of the Corporation's 19 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 $13.2 million as of September 30, 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 $3.7 million and an estimated fair value of $2.7 million at September 30, 2015 were not rated by any ratings agency.
As of September 30, 2015, the Corporation held two pooled trust preferred securities with an amortized cost of $0 and an estimated fair value of $530,000, that were rated below investment grade by at least one ratings agency. 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 13, "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.
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, may need credit availability. Liquidity is provided on a continuous basis through scheduled and unscheduled principal and interest payments on outstanding loans and investments and

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through the availability of deposits and borrowings. The Corporation also maintains secondary sources that provide liquidity on a secured and unsecured basis to meet short-term and long-term needs.

The following table provides information about the Corporation’s interest rate sensitive financial instruments as of September 30, 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)$975,597
 $484,581
 $350,691
 $380,102
 $239,651
 $678,863
 $3,109,485
 $3,078,275
Average rate3.60% 4.20% 4.07% 4.43% 4.32% 3.61% 3.90% 
                
Floating rate loans (1) (2)2,392,556
 1,597,191
 1,293,230
 1,095,874
 1,069,244
 2,976,168
 10,424,263
 10,347,127
Average rate3.66% 3.76% 3.79% 3.81% 3.77% 3.71% 3.73% 
                
Fixed rate investments (3)435,564
 324,117
 252,653
 223,718
 215,175
 800,264
 2,251,491
 2,269,686
Average rate2.80% 2.83% 2.69% 2.58% 2.49% 2.59% 2.67% 
                
Floating rate investments (3)4,985
 4,972
 106,681
 22
 —
 40,166
 156,826
 143,359
Average rate1.04% 1.90% 1.90% 2.00% —% 1.50% 1.77% 
                
Other interest-earning assets537,880
 —
 —
 —
 —
 68,977
 606,857
 606,857
Average rate0.36% —% —% —% —% 5.03% 0.89% 
                
Total$4,346,582
 $2,410,861
 $2,003,255
 $1,699,716
 $1,524,070
 $4,564,438
 $16,548,922
 $16,445,304
Average rate3.15% 3.72% 3.60% 3.79% 3.68% 3.50% 3.50% 
                
Fixed rate deposits (4)$1,216,409
 $501,015
 $257,453
 $364,496
 $258,021
 $24,697
 $2,622,091
 $2,642,857
Average rate0.60% 1.10% 1.39% 2.03% 2.05% 1.94% 1.13% 
                
Floating rate deposits (5)5,342,016
 856,561
 552,477
 310,183
 284,762
 210,076
 7,556,075
 7,544,200
Average rate0.17% 0.11% 0.10% 0.08% 0.08% 0.13% 0.15% 
                
Fixed rate borrowings (6)31,297
 351,638
 668
 130,533
 157,947
 290,854
 962,937
 996,097
Average rate1.69% 4.51% 4.65% 2.12% 2.78% 4.31% 3.75% 
                
Floating rate borrowings (7)431,632
 —
 —
 —
 —
 16,496
 448,128
 438,296
Average rate0.05% —% —% —% —% 2.46% 0.14% 
                
Total$7,021,354
 $1,709,214
 $810,598
 $805,212
 $700,730
 $542,123
 $11,589,231
 $11,621,450
Average rate0.24% 1.30% 0.51% 1.30% 1.41% 2.53% 0.67% 
(1)Amounts are based on contractual payments and maturities, adjusted for expected prepayments. Excludes $2.6 million of overdraft deposit balances.
(2)Line of credit amounts are based on historical cash flows, with an average life of approximately 5 years.
(3)Amounts are based on contractual maturities; adjusted for expected prepayments on mortgage-backed securities and collateralized mortgage obligations and expected calls on agency and municipal securities. Excludes equity securities as such investments do not have maturity dates.
(4)Amounts are based on contractual maturities of time deposits.
(5)Estimated based on history of deposit flows.
(6)Amounts are based on contractual maturities of debt instruments, adjusted for possible calls. Amounts also include junior subordinated deferrable interest debentures.
(7)Amounts include Federal Funds purchased, short-term promissory notes and securities sold under agreements to repurchase, which mature in less than 90 days, in addition to junior subordinated deferrable interest debentures.
The preceding table and discussion addressed the liquidity implications of interest rate risk and focused on expected cash flows from financial instruments. Expected maturities, however, do not necessarily reflect the net interest 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 $10.4 billion of floating rate loans above are $3.3 billion of loans, or 31.9% of the total, that float with the prime interest rate, $2.3 billion, or 22.1%, of loans that float with other interest rates, primarily the London Interbank Offered Rate ("LIBOR"), and $4.8 billion, or 46.0%, of adjustable rate loans. The $4.8 billion of adjustable rate loans include loans that are fixed rate instruments for a certain period of time, and then convert to floating rates.



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The following table presents the percentage of adjustable rate loans, at September 30, 2015, stratified by the period until their next repricing:
Percent of Total
Adjustable Rate
Loans
One year33.4%
Two years17.9
Three years17.4
Four years12.9
Five years11.1
Greater than five years7.3
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 June 30, 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+ $ 65.5$73.3 million    +13.3%14.1%
+200 bp+ $ 42.2$49.1 million +8.69.43%
+100 bp+ $ 18.4$22.5 million +3.74.3%
–100 bp– $ 16.3$15.6 million –3.3 3.0%

(1) The inclusion of only one -100 bp rate shock reflects the effect of implicit and explicit floors that limit further reduction in interest rates.
(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 SeptemberJune 30, 2015,2016, the Corporation was within economic value of equity policy limits for every 100 basis point shock.

Interest Rate Swaps
70
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 June 30, 2016, the Corporation had $638.7 million of short- and long-term advances outstanding from the FHLB with an additional borrowing capacity of approximately $2.8 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 June 30, 2016, the Corporation had aggregate availability under federal funds lines of $1.1 billion with $449.2 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 June 30, 2016, the Corporation had $1.3 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 six months of 2016 generated $74.1 million of cash, mainly due to net income. Cash used in investing activities was $447.0 million, mainly due to net increases in loans and short-term investments. Net cash provided by financing activities was $356.4 million due to increases in deposits, short-term borrowings and additions to long-term debt, partially offset by 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 June 30, 2016, equity investments consisted of $19.8 million of common stocks of publicly traded financial institutions and $895,000 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 $19.8 million at June 30, 2016, including an investment in a single financial


institution with a cost basis of $7.4 million and a fair value of $10.4 million. The fair value of this investment accounted for 52.5% 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 $6.5 million as of June 30, 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 June 30, 2016, the Corporation owned $345.3 million of municipal securities issued by various municipalities. Ongoing uncertainty with respect to the financial strength of municipal bond insurers places 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 June 30, 2016, approximately 97% of municipal securities were supported by the general obligation of corresponding municipalities. Approximately 77% of these securities were school district issuances, which are also supported by the states of the issuing municipalities.

Auction Rate Securities

As of June 30, 2016, the Corporation’s investments in student loan auction rate certificates (ARC), a type of auction rate securities, had a cost basis of $106.9 million and a fair value of $97.9 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 June 30, 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 June 30, 2016, all of the ARCs were rated above investment grade. All of the loans underlying the ARCs have principal payments that are guaranteed by the federal government. At June 30, 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, subordinated debt issued by financial institutions and senior debt. As of June 30, 2016, these securities had an amortized cost of $95.4 million and an estimated fair value of $91.5 million. The amortized cost of pooled trust preferred securities was $0 as of June 30, 2016.

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.


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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.

During the second quarter of 2015, Fulton Bank, N.A. (the "Bank"), the Corporation’s largest banking 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 lawsincorporated herein by the Bank in certain of its geographies. The Bank is cooperating with the Department and responding to the Department’s request for information. Although this matter appears to be at a preliminary stage, it could result in legal proceedings the resolution of which could potentially involve a settlement, fines or other remedial actions.

The Corporation and each of its banking 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 subsidiary banks undertake a number of required actions to strengthen and enhance the BSA/AML Compliance Program. Further information pertaining to the Consent Orders was previously disclosed by the Corporation in Part II, Item 9B of its Annual Report on Form 10-K and in its Form 10-K/A each for the year ended December 31, 2014 and filed with the SEC on February 27, 2015 and June 8, 2015, respectively; in its Form 10-Q for the quarter-ended March 31, 2015 filed with the SEC on May 11, 2015; and in Current Reports on Form 8-K filed with the SEC on July 18, September 9, and December 29, 2014.

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 of the Corporation. However, legal proceedings are often unpredictable, and it is possible that the ultimate resolution of any such matters, if unfavorable, may be material to the Corporation’s results of 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.


Item 1A. Risk Factors

There have been no material changes to the risk factors as previously disclosed inSee Part I, Item 1A of the Corporation’s Annual Report on Form 10-K for the year ended December 31, 20142015. for a detailed discussion of risk factors affecting the Company. Following is an additional risk factor:
Changes in accounting policies, standards, and interpretations could materially affect how we report our financial condition and results of operations.

The preparation of the Corporation’s financial statements in accordance with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements, as well as revenues and expenses during the period. A summary of the accounting policies that the Corporation considers to be most important to the presentation of its financial condition and results of operations, because they require management’s most difficult judgments as a result of the need to make estimates about the effects of matters that are inherently uncertain, is set forth under the heading "Critical Accounting Policies" within Item 7. "Management’s Discussion and Analysis of Financial Condition and Results of Operations," of the Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015.
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A variety of factors could affect the ultimate values of assets, liabilities, income and expenses recognized and reported in the Corporation’s financial statements and these ultimate values may differ materially from those determined based on management’s estimates and assumptions. In addition, the Financial Accounting Standards Board (FASB), regulatory agencies, and other bodies that establish accounting standards from time to time change the financial accounting and reporting standards governing the preparation of the Corporation’s financial statements. Further, those bodies that establish and interpret the accounting standards (such as the FASB, the Securities and Exchange Commission, and banking regulators) may change prior interpretations or positions regarding how these standards should be applied. These changes can be difficult to predict and can materially affect how the Corporation records and reports its financial condition and results of operations. For example, the FASB recently issued a new accounting standard that will require the recognition of credit losses on loans and other financial assets based on an entity’s current estimate of expected losses over the lifetime of each loan or other financial asset, as opposed to current accounting standards, which require recognition of losses on loans and other financial assets only when those losses are "probable." The Corporation’s adoption of this accounting standard could materially affect the Corporation’s allowance for credit losses methodology, financial condition, capital levels and results of operations, including expenses the Corporation may incur in implementing this accounting standard.






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

The following table presents the Corporation's monthly repurchases of its common stock during the thirdsecond quarter of 2015:2016:

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
         
July 1, 2015 to July 31, 2015 1,192,400
 $12.74
 1,192,400
 $15,790,528
August 1, 2015 to August 31, 2015 1,245,870
 $12.67
 1,245,870
 —
September 1, 2015 to September 31, 2015 —
 $—
 —
 —
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
         
April 1, 2016 to April 30, 2016 —
 $—
 —
 $38,804,488
May 1, 2016 to May 31, 2016 —
 —
 —
 38,804,488
June 1, 2016 to June 30, 2016 392,938
 12.87
 392,938
 33,746,157

On April 21,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, 2015. 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 secondfirst quarter of 2015, 1.5 million2016, 917,200 shares had been repurchased under this program for a total cost of $19.0$11.2 million, or $12.36$12.21 per share. During the thirdsecond quarter of 2015, the remaining $31.02016, 392,938 shares had been repurchased under this program for a total cost of $5.1 million, or approximately 2.4 million shares at an average $12.71$12.87 per share, were repurchased, completing this repurchase program.share.

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

Item 3. Defaults Upon Senior Securities
Not applicable.

Item 4. Mine Safety Disclosures
Not applicable.

Item 5. Other Information
Not applicable.

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

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FULTON FINANCIAL CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
FULTON FINANCIAL CORPORATION  
     
Date: November 6, 2015August 5, 2016 /s/ E. Philip Wenger
    E. Philip Wenger
    Chairman, Chief Executive Officer and President
     
Date: November 6, 2015August 5, 2016 /s/ Patrick S. Barrett
    Patrick S. Barrett
    Senior Executive Vice President and
    Chief Financial Officer


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EXHIBIT INDEX
Exhibits Required Pursuant
to Item 601 of Regulation S-K
 
    
3.1  Articles of Incorporation, as amended and restated, of Fulton Financial Corporation– Incorporated by reference to Exhibit 3.1 of the Fulton Financial Corporation Current Report on Form 8-K dated June 24, 2011.
    
3.2  Bylaws of Fulton Financial Corporation as amended – Incorporated by reference to Exhibit 3.1 of the Fulton Financial Corporation Current Report on an Amended Form 8-K dated September 23, 2014.
10.1Fulton Financial Corporation Equity and Cash Incentive Compensation Plan, as amended and restated effective June 30, 2016.
    
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.
    
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Financial statements from the Quarterly Report on Form 10-Q of Fulton Financial Corporation for the period ended SeptemberJune 30, 2015,2016, filed on November 6, 2015,August 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.
    



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