UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 2045920549 

FORM 10-Q

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

For the quarterly period ended March 31, 20172018, 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 companycompany. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý  Accelerated filer ¨
Non-accelerated filer ¨  Smaller reporting company ¨
    Emerging growth company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.¨

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 –174,816,000–175,754,000 shares outstanding as of April 28, 2017.27, 2018.


FULTON FINANCIAL CORPORATION
FORM 10-Q FOR THE THREE MONTHS ENDED MARCH 31, 20172018
INDEX
 
DescriptionPage
   
PART I. FINANCIAL INFORMATION 
   
 
   
(a)
   
(b)
   
(c)
   
(d)
   
(e)
   
(f)
   
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
   
   
   
 
   
   
   
   
 
   
Item 4. Mine Safety Disclosures - (not applicable) 
   
Item 5. Other Information - (none to be reported)
 
   
   
   





Item 1. Financial Statements
 

CONSOLIDATED BALANCE SHEETS 
 
(in thousands, except per-share data)
March 31,
2017
 December 31,
2016
March 31,
2018
 December 31,
2017
(unaudited) (unaudited) 
ASSETS      
Cash and due from banks$93,844
 $118,763
$100,151
 $108,291
Interest-bearing deposits with other banks284,750
 233,763
210,906
 293,805
Federal Reserve Bank and Federal Home Loan Bank stock65,637
 57,489
56,900
 60,761
Loans held for sale24,783
 28,697
23,450
 31,530
Available for sale investment securities2,506,017
 2,559,227
2,592,823
 2,547,956
Loans, net of unearned income14,963,177
 14,699,272
15,696,284
 15,768,247
Less: Allowance for loan losses(170,076) (168,679)(163,217) (169,910)
Net Loans14,793,101
 14,530,593
15,533,067
 15,598,337
Premises and equipment216,171
 217,806
230,313
 222,802
Accrued interest receivable46,355
 46,294
53,060
 52,910
Goodwill and intangible assets531,556
 531,556
531,556
 531,556
Other assets616,362
 620,059
616,715
 588,957
Total Assets$19,178,576
 $18,944,247
$19,948,941
 $20,036,905
LIABILITIES      
Deposits:      
Noninterest-bearing$4,417,733
 $4,376,137
$4,291,821
 $4,437,294
Interest-bearing10,672,611
 10,636,727
11,185,282
 11,360,238
Total Deposits15,090,344
 15,012,864
15,477,103
 15,797,532
Short-term borrowings:      
Federal funds purchased54,421
 278,570
395,000
 220,000
Other short-term borrowings398,896
 262,747
542,852
 397,524
Total Short-Term Borrowings453,317
 541,317
937,852
 617,524
Accrued interest payable12,506
 9,632
9,681
 9,317
Other liabilities329,817
 329,916
350,313
 344,329
Federal Home Loan Bank advances and long-term debt1,137,909
 929,403
Federal Home Loan Bank advances and other long-term debt938,499
 1,038,346
Total Liabilities17,023,893
 16,823,132
17,713,448
 17,807,048
SHAREHOLDERS’ EQUITY      
Common stock, $2.50 par value, 600 million shares authorized, 220.1 million shares issued in 2017 and 219.9 million shares issued in 2016550,292
 549,707
Common stock, $2.50 par value, 600 million shares authorized, 221.1 million shares issued in 2018 and 220.9 million shares issued in 2017552,682
 552,232
Additional paid-in capital1,471,601
 1,467,602
1,481,545
 1,478,389
Retained earnings756,305
 732,099
857,153
 821,619
Accumulated other comprehensive loss(34,552) (38,449)(67,172) (32,974)
Treasury stock, at cost, 45.8 million shares in 2017 and 2016(588,963) (589,844)
Treasury stock, at cost, 45.7 million shares in 2018 and 2017(588,715) (589,409)
Total Shareholders’ Equity2,154,683
 2,121,115
2,235,493
 2,229,857
Total Liabilities and Shareholders’ Equity$19,178,576
 $18,944,247
$19,948,941
 $20,036,905
      
See Notes to Consolidated Financial Statements      
 


CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except per-share data)Three months ended March 31Three months ended March 31
2017 20162018 2017
INTEREST INCOME      
Loans, including fees$142,566
 $134,079
$160,136
 $142,566
Investment securities:      
Taxable11,914
 12,003
13,193
 11,914
Tax-exempt2,849
 2,040
2,965
 2,849
Dividends129
 160
5
 129
Loans held for sale187
 131
216
 187
Other interest income842
 898
1,172
 842
Total Interest Income158,487
 149,311
177,687
 158,487
INTEREST EXPENSE      
Deposits11,801
 10,727
16,450
 11,801
Short-term borrowings855
 268
2,041
 855
Long-term debt8,252
 9,262
Federal Home Loan Bank advances and other long-term debt7,878
 8,252
Total Interest Expense20,908
 20,257
26,369
 20,908
Net Interest Income137,579
 129,054
151,318
 137,579
Provision for credit losses4,800
 1,530
3,970
 4,800
Net Interest Income After Provision for Credit Losses132,779
 127,524
147,348
 132,779
NON-INTEREST INCOME      
Investment management and trust services12,871
 11,808
Service charges on deposit accounts11,962
 12,400
Other service charges and fees12,437
 10,750
11,419
 12,437
Service charges on deposit accounts12,400
 12,558
Investment management and trust services11,808
 10,988
Mortgage banking income4,596
 4,030
4,193
 4,596
Other5,411
 4,326
Non-interest income before investment securities gains45,856
 45,567
Investment securities gains, net1,106
 947
19
 1,106
Other4,326
 3,864
Total Non-Interest Income46,673
 43,137
45,875
 46,673
NON-INTEREST EXPENSE      
Salaries and employee benefits69,236
 69,372
75,768
 69,236
Net occupancy expense12,663
 12,220
13,632
 12,663
Data processing and software10,473
 8,979
Other outside services5,546
 6,056
8,124
 5,546
Software4,693
 3,921
Data processing4,286
 5,400
Professional fees4,816
 2,737
Equipment expense3,359
 3,371
3,534
 3,359
Professional fees2,737
 2,333
FDIC insurance expense2,058
 2,949
2,953
 2,058
State Taxes2,302
 2,087
Marketing1,986
 1,624
2,250
 1,986
Amortization of tax credit investments1,637
 998
Other15,711
 13,167
11,172
 12,626
Total Non-Interest Expense122,275
 120,413
136,661
 122,275
Income Before Income Taxes57,177
 50,248
56,562
 57,177
Income taxes13,797
 11,991
7,082
 13,797
Net Income$43,380
 $38,257
$49,480
 $43,380
      
PER SHARE:      
Net Income (Basic)$0.25
 $0.22
$0.28
 $0.25
Net Income (Diluted)0.25
 0.22
0.28
 0.25
Cash Dividends0.11
 0.09
0.12
 0.11
See Notes to Consolidated Financial Statements      



CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
 
(in thousands)
Three months ended March 31Three months ended March 31
2017 20162018 2017
  
Net Income$43,380
 $38,257
$49,480
 $43,380
Other Comprehensive Income, net of tax:   
Unrealized gain on securities4,273
 17,026
Other Comprehensive (Loss) Income, net of tax:   
Unrealized (loss) gain on securities(27,644) 4,273
Reclassification adjustment for securities gains included in net income(719) (616)(16) (719)
Amortization of unrealized loss on derivative financial instruments
 4
Non-credit related unrealized gain on other-than-temporarily impaired debt securities224
 
Amortization of net unrecognized pension and postretirement items343
 466
339
 343
Other Comprehensive Income3,897
 16,880
Other Comprehensive (Loss) Income(27,097) 3,897
Total Comprehensive Income$47,277
 $55,137
$22,383
 $47,277
      
See Notes to Consolidated Financial Statements      




CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 20172018 AND 20162017
 
(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, 2017175,170
 $552,232
 $1,478,389
 $821,619
 $(32,974) $(589,409) $2,229,857
Net income
 
 
 49,480
 
 
 49,480
Other comprehensive loss
 
 
 
 (27,097) 
 (27,097)
Stock issued234
 450
 1,646
 
 
 694
 2,790
Stock-based compensation awards
 
 1,510
 
 
 
 1,510
Reclassification of stranded tax effects (1)
      7,101
 (7,101)   
Common stock cash dividends - $0.12 per share
 
 
 (21,047) 
 
 (21,047)
Balance at March 31, 2018175,404
 $552,682
 $1,481,545
 $857,153
 $(67,172) $(588,715) $2,235,493
              
Balance at December 31, 2016174,040
 $549,707
 $1,467,602
 $732,099
 $(38,449) $(589,844) $2,121,115
174,040
 $549,707
 $1,467,602
 $732,099
 $(38,449) $(589,844) $2,121,115
Net income
 
 
 43,380
 
 
 43,380

 
 
 43,380
 
 
 43,380
Other comprehensive income
 
 
 
 3,897
 
 3,897

 
 
 
 3,897
 
 3,897
Stock issued303
 585
 3,265
 
 
 881
 4,731
303
 585
 3,265
 
 
 881
 4,731
Stock-based compensation awards
 
 734
 
 
 
 734

 
 734
 
 
 
 734
Common stock cash dividends - $0.11 per share
 
 
 (19,174) 
 
 (19,174)
 
 
 (19,174) 
 
 (19,174)
Balance at March 31, 2017174,343
 $550,292
 $1,471,601
 $756,305
 $(34,552) $(588,963) $2,154,683
174,343
 $550,292
 $1,471,601
 $756,305
 $(34,552) $(588,963) $2,154,683
                          
Balance at December 31, 2015174,176
 $547,141
 $1,450,690
 $641,588
 $(22,017) $(575,508) $2,041,894
Net income
 
 
 38,257
 
 
 38,257
Other comprehensive loss
 
 
 
 16,880
 
 16,880
Stock issued, including related tax benefits134
 121
 345
 
 
 1,181
 1,647
Stock-based compensation awards
 
 1,436
 
 
 
 1,436
Acquisition of treasury stock(917)         (11,196) (11,196)
Common stock cash dividends - $0.09 per share
 
 
 (15,609) 
 
 (15,609)
Balance at March 31, 2016173,393
 $547,262
 $1,452,471
 $664,236
 $(5,137) $(585,523) $2,073,309
             
See Notes to Consolidated Financial Statements                          
(1) Result of adoption of ASU 2018-02, See Note 1 to Consolidated Financial Statements for further details.(1) Result of adoption of ASU 2018-02, See Note 1 to Consolidated Financial Statements for further details.        
 


CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
(in thousands)
Three months ended March 31Three months ended March 31
2017 20162018 2017
CASH FLOWS FROM OPERATING ACTIVITIES:      
Net Income$43,380
 $38,257
$49,480
 $43,380
Adjustments to reconcile net income to net cash provided by operating activities:      
Provision for credit losses4,800
 1,530
3,970
 4,800
Depreciation and amortization of premises and equipment7,032
 6,949
7,329
 7,032
Amortization of tax credit investments8,364
 9,128
Net amortization of investment securities premiums2,416
 2,055
2,517
 2,416
Investment securities gains, net(1,106) (947)(19) (1,106)
Gain on sales of mortgage loans held for sale(3,074) (2,670)(2,645) (3,074)
Proceeds from sales of mortgage loans held for sale115,417
 114,255
170,693
 115,417
Originations of mortgage loans held for sale(108,429) (114,418)(159,968) (108,429)
Amortization of issuance costs on long-term debt168
 154
194
 168
Stock-based compensation734
 1,436
1,510
 734
Excess tax benefits from stock-based compensation
 (10)
Increase in accrued interest receivable(61) (1,612)(150) (61)
Decreases (increase) in other assets4,614
 (4,469)
Increase in other assets(6,923) (4,514)
Increase in accrued interest payable2,874
 2,843
364
 2,874
Decrease in other liabilities(4,244) (9,245)
(Decrease) increase in other liabilities(2,890) 1,039
Total adjustments21,141
 (4,149)22,346
 26,424
Net cash provided by operating activities64,521
 34,108
71,826
 69,804
CASH FLOWS FROM INVESTING ACTIVITIES:      
Proceeds from sales of securities available for sale8,735
 46,541
1,444
 8,735
Proceeds from principal repayments and maturities of securities available for sale98,024
 117,221
78,150
 98,024
Purchase of securities available for sale(49,430) (169,436)(161,944) (49,430)
Increase in short-term investments(59,135) (115,544)
Net increase in loans(267,383) (38,976)
Decrease (increase) in short-term investments86,760
 (59,135)
Net decrease (increase) in loans67,928
 (267,383)
Net purchases of premises and equipment(5,397) (9,471)(14,840) (5,397)
Net cash used in investing activities(274,586) (169,665)
Net change in tax credit investments(20,783) (5,283)
Net cash provided by (used in) investing activities36,715
 (279,869)
CASH FLOWS FROM FINANCING ACTIVITIES:      
Net increase in demand and savings deposits112,348
 269,899
Net (decrease) increase in time deposits(34,868) 2,064
Decrease in short-term borrowings(88,000) (144,780)
Net (decrease) increase in demand and savings deposits(278,626) 112,348
Net decrease in time deposits(41,803) (34,868)
Increase (decrease) in short-term borrowings320,328
 (88,000)
Additions to long-term debt223,375
 16,000

 223,375
Repayments of long-term debt(15,037) (42)(100,041) (15,037)
Net proceeds from issuance of common stock4,731
 1,637
2,790
 4,731
Excess tax benefits from stock-based compensation
 10
Dividends paid(17,403) (15,676)(19,329) (17,403)
Acquisition of treasury stock
 (11,196)
Net cash provided by financing activities185,146
 117,916
Net cash (used in) provided by financing activities(116,681) 185,146
Net Decrease in Cash and Due From Banks(24,919) (17,641)(8,140) (24,919)
Cash and Due From Banks at Beginning of Period118,763
 101,120
108,291
 118,763
Cash and Due From Banks at End of Period$93,844
 $83,479
$100,151
 $93,844
Supplemental Disclosures of Cash Flow Information:      
Cash paid during the period for:      
Interest$18,034
 $17,414
$26,005
 $18,034
Income taxes116
 3,972
154
 116
See Notes to Consolidated Financial Statements      
 


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'sCorporation's Annual Report on Form 10-K for the year ended December 31, 2016.2017. Operating results for the three months ended March 31, 20172018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.2018. The Corporation evaluates subsequent events through the date of filing of this Form 10-Q with the Securities and Exchange Commission ("SEC").

Recently Adopted Accounting Standards

The Corporation adoptedIn May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting StandardStandards Codification ("ASC") Update 2016-09, "Stock Compensation: Improvements to Employee Share-Based Payment Accounting" effective January 1, 2017. This standards update simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liability, and classification on the statement of cash flows. ASC Update 2016-09 was effective for interim and annual reporting periods that began after December 15, 2016 with early application permitted. For the Corporation, this standards update was effective with this March 31, 2017 quarterly report on Form 10-Q. The adoption of ASC Update 2016-09 did not have a material impact on the Corporation's consolidated financial statements.

Recently Issued Accounting Standards

In May 2014, the FASB issued ASC Update 2014-09, "Revenue from Contracts with Customers." This standards update establishesestablished a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle prescribed by this standards update is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard applies to all contracts with customers, except those that are within the scope of other topics in the FASB ASC.The standard also requires significantly expanded disclosures about revenue recognition. During 2016, the FASB issued amendments toCorporation adopted this standard, (ASCand all subsequent Accounting Standards Updates 2016-08, 2016-10, 2016-11 and 2016-12). These amendments provide further clarification to("ASU") that modified it on January 1, 2018 under the standard. For public business entities, ASC Update 2014-09 is effective for interim and annual reporting periods beginning after December 15, 2017. Early application is not permitted. For the Corporation, this standards update is effectivemodified retrospective approach with no material impact on its March 31, 2018 quarterly report on Form 10-Q.consolidated financial statements. The Corporation is currently evaluatingevaluated the impact of the adoption of ASC Update 2014-09 on its consolidated financial statements.statements and did not identify any significant changes in the timing of revenue recognition as a result of this amended guidance. The sources of revenue for the Corporation are interest income from loans and investments, net of interest expense on deposits and borrowings, and non-interest income. Non-interest income is earned from various banking and financial services that the Corporation offers through its subsidiary banks. Revenue is recognized as earned based on contractual terms, as transactions occur, or as services are provided. Following is further detail of the various types of revenue the Corporation earns and when it is recognized.

Interest income: Interest income is recognized on an accrual basis according to loan agreements, securities contracts or other such written contracts and is outside the scope of ASC Update 2014-09.

Investment management and trust services: Consists of trust commission income, brokerage income, money market income and insurance commission income. Trust commission income consists of advisory fees that are based on market values of clients' managed portfolios and transaction fees for fiduciary services performed, both of which are recognized as earned. Brokerage income includes advisory fees which are recognized as earned on a monthly basis and transaction fees that are recognized when transactions occur. Money market income is based on the balances held in trust accounts and is recognized monthly. Insurance commission income is earned and recognized when policies are originated. Currently, no investment management and trust service income is based on performance or investment results.

Service charges on deposit accounts: Consists of cash management, overdraft, non-sufficient fund fees and other service charges on deposit accounts. Revenue is primarily transactional and recognized when earned, at the time the transactions occur.

Other service charges and fees: Consists of branch fees, automated teller machine fees, debit card income and merchant services fees. These fees are primarily transactional, and revenue is recognized when transactions occur. Also included in other service charges and fees are letter of credit fees, foreign exchange income and commercial loan interest rate swap fees, which are outside the scope of ASC Update 2014-09.

Mortgage banking income: Consists of gains or losses on the sale of residential mortgage loans and mortgage loan servicing income. These revenues are outside the scope of ASC Update 2014-09.



Other Income: Includes credit card income, gains on sales of Small Business Association ("SBA") loans, cash surrender value of life insurance, and other miscellaneous income. These items are either outside the scope of ASC Update 2014-09 or are immaterial.

In January 2016, the FASB issued ASC Update 2016-01, "Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities." ASC Update 2016-01 provides guidance regarding the income statement impact of equity investments held by an entity and the recognition of changes in fair value of financial liabilities when the fair value option is elected.Thiselected. This standard will requirerequires equity investments to be measured at fair value, with changes recorded in net income. This ASU also requires the use of the exit price notion when measuring the fair value of financial instruments for disclosure purposes. ASC Update 2016-01 iswas effective for public business entities'interim and annual and interim reporting periods beginning after December 15, 2017, with earlier adoption permitted.2017. The Corporation intends to adoptadopted this standards update effective with its March 31, 2018 quarterly report on Form 10-Q and does not expect the adoption of ASC Update 2016-01 todid not have a material impact on its consolidated financial statements.

In February 2016, the FASB issued ASC Update 2016-02, "Leases." This standards update states that a lessee should recognize the assets and liabilities that arise from all leases with a term greater than 12 months. The core principle requires the lessee to recognize a liability to make lease payments and a "right-of-use" asset. The accounting applied by the lessor is relatively unchanged. The standards update also requires expanded qualitative and quantitative disclosures. For public business entities, ASC Update 2016-02 is effective for interim and annual reporting periods beginning after December 15, 2018. ASC Update 2016-02 mandates a modified retrospective transition for all entities, which requires restatement of all comparative periods in the year of adoption.


Early adoption is permitted. For the Corporation, this standards update is effective with its March 31, 2019 quarterly report on Form 10-Q. The Corporation is currently evaluating the impact of the adoption of ASC Update 2016-02 on its consolidated financial statements. The Corporation currently operates a number of branches that are leased, with the leases accounted for as operating leases that are not recognized on the consolidated balance sheet. Under ASC Update 2016-02, right-of-use assets and lease liabilities will need to be recognized on the consolidated balance sheet for these branches. This is expected to be the most significant impact of the adoption of this standards update.

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 under current U.S. GAAP. ASC Update 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019. Early adoption is permitted. The Corporation intends to adopt this standards update 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.

In August 2016, the FASB issued ASC Update 2016-15, "Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments." This standards update provides guidance regarding the presentation of certain cash receipts and cash payments in the statement of cash flows, addressing eight specific cash flow classification issues, in order to reduce existing diversity in practice. ASC Update 2016-15 iswas effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted. The Corporation intends to adoptadopted this standards update effective with its March 31, 2018 quarterly report on Form 10-Q and does not expect the adoption of ASC Update 2016-15 todid not have a material impact on its consolidated financial statements.

In November 2016, the FASB issued ASC Update 2016-18, "Statement of Cash Flows - Restricted Cash." This standards update provides guidance regarding the presentation of restricted cash in the statement of cash flows. The update requires companies to include amounts generally described as restricted cash and restricted cash equivalents, along with cash and cash equivalents, when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. It also requires an entity to disclose the nature of the restrictions on cash and cash equivalents. ASC Update 2016-18 was effective for interim and annual reporting periods beginning after December 15, 2017. The Corporation adopted this standards update effective with its March 31, 2018 quarterly report on Form 10-Q and the adoption of ASC Update 2016-18 did not have a material impact on its consolidated financial statements.

In March 2017, the FASB issued ASC Update 2017-07, "Improving the Presentation of Net Periodic Pension Costs and Net Periodic Benefit Cost." This standards update requires a company to present service cost separately from the other components of net benefit cost. In addition, the update provides explicit guidance on how to present the service cost component and the other components of net benefit cost in the income statement and allows only the service cost component of net benefit cost to be eligible for capitalization. ASC Update 2017-07 was effective for interim and annual reporting periods beginning after December 15, 2017. The Corporation adopted this standards update effective with its March 31, 2018 quarterly report on Form 10-Q and the adoption of ASC Update 2017-07 did not have a material impact on its consolidated financial statements.

In February 2018, the FASB issued ASC Update 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income." This ASU permits a reclassification from accumulated other comprehensive income ("AOCI") to retained earnings of the stranded tax effects resulting from the application of the Tax Cuts and Jobs Act of 2017 ("Tax Act"), which changed the corporate tax rate from 35% to 21%. This ASU is effective for interim and annual reporting periods beginning after December 15, 2017.2018, with early adoption permitted. The Corporation adopted this standards update effective January 1, 2018 and elected to reclassify $7.1 million of stranded tax effects from AOCI to retained earnings at the beginning of the period of adoption. The Corporation's policy for releasing income tax effects from accumulated other comprehensive income is to release them as investments are sold or mature and pension and post-retirement liabilities are extinguished.

Recently Issued Accounting Standards

In February 2016, the FASB issued ASC Update 2016-02, "Leases." This standards update states that a lessee should recognize the assets and liabilities that arise from all leases with a term greater than 12 months. The core principle requires the lessee to recognize a liability to make lease payments and a "right-of-use" asset. The accounting applied by the lessor is relatively unchanged. The standards update also requires expanded qualitative and quantitative disclosures. The FASB has also issued amendments to this standard (ASC Updates 2017-13, 2018-01). ASC Update 2016-02 is effective for interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted. The Corporation intends to adopt this standards update effective with its March 31, 20182019 quarterly report on Form 10-Q and does not expect10-Q. The Corporation is currently evaluating the impact of the adoption of ASC Update 2016-18 to have a material impact2016-02 on its consolidated financial statements. The Corporation currently operates a number of branches that are leased, with the leases accounted for as operating leases that are not recognized on the consolidated balance sheet. Under ASC Update 2016-02, right-of-use assets and lease liabilities will need to be recognized on the consolidated balance sheet for these branches, which will


also have an impact on regulatory capital ratios. The recognition of operating leases on the Corporation's consolidated balance sheet is expected to be the most significant impact of the adoption of this standards update.

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 held to maturity 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 under current U.S. GAAP. ASU 2016-13 also requires new disclosures for financial assets measured at amortized cost, loans and available-for-sale debt securities. Entities will apply the standard's provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. ASC Update 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019. Early adoption is permitted. The Corporation intends to adopt this standards update 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 and disclosures. While the Corporation is currently unable to reasonably estimate the impact of adopting ASU 2016-13, it expects that the impact of adoption could be significantly influenced by the composition, characteristics and quality of its loan portfolio as well as the prevailing economic conditions and forecasts as of the adoption date. As part of the evaluation process, the Corporation has established a steering committee and working group that includes individuals from various functional areas to assess processes, portfolio segmentation, systems requirements and needed resources to implement this new accounting standard.

In January 2017, the FASB issued ASC Update 2017-04, "Intangibles - Goodwill and Other." This standards update eliminates Step 2 of the goodwill impairment test which measures the impairment amount. Identifying and measuring impairment will take place in a single quantitative step. In addition, no separate qualitative assessment for reporting units with zero or negative carrying amount is required. Entities must disclose the existence of these reporting units and the amount of goodwill allocated to them. This update should be applied on a prospective basis, and an entity is required to disclose the nature of and reason for the change in accounting principle upon transition. ASC Update 2017-04 is effective for annual or interim goodwill impairment tests in reporting periods beginning after December 15, 2019. Early adoption is permitted. The Corporation intends to adopt this standards update effective with its 2020 goodwill impairment test and does not expect the adoption of ASC Update 2017-04 to have a material impact on its consolidated financial statements.

In March 2017, the FASB issued ASC Update 2017-07, "Improving the Presentation of Net Periodic Pension Costs and Net Periodic Benefit Cost." This standards update requires a company to present service cost separately from the other components of net benefit cost. In addition, the update provides explicit guidance on how to present the service cost component and the other components of net benefit cost in the income statement and allow only the service cost component of net benefit cost to be eligible for capitalization. ASC Update 2017-07 is effective for annual or interim reporting periods beginning after December 15, 2017. Early adoption is permitted. The Corporation intends to adopt this standards update effective with its March 31, 2018 quarterly report on Form 10-Q and is currently evaluating the impact of the adoption of ASC Update 2017-07 on its consolidated financial statements.

In March 2017, the FASB issued ASC Update 2017-08, "Premium Amortization on Purchased Callable Debt Securities." This standards update requires that a company amortize the premium on callable debt securities to the earliest call date versus current U.S. GAAP which requires amortization over the contractual life of the securities. The amortization period for callable debt securities purchased at a discount would not be impacted by the new accounting standards update. This amendment is to be adopted on a modified retrospective basis with a cumulative effect adjustment to retained earnings as of the beginning of the period of adoption. ASC Update 2017-08 is effective for annual or interim reporting periods beginning after December 15, 2018. Early adoption is permitted. The Corporation intends to adopt this standards update effective with its March 31, 2019 quarterly report


on Form 10-Q and does not expect the adoption of ASC Update 2017-08 to have a material impact on its consolidated financial statements.

Reclassifications

Certain amounts in the 2017 consolidated financial statements and notes have been reclassified to conform to the 2018 presentation. On the Consolidated Statements of Cash Flows, the net change in tax credit investments is presented as cash flows from investing activities. Prior to the quarter ended March 31, 2018, these cash flows were presented as cash flows from operating activities, included in the net increase (decrease) in other liabilities. The presentation of the cash flows for the quarter ended March 31, 2017 were changed to conform to this presentation, resulting in a $5.3 million decrease in net cash flows used in investing activities and a corresponding increase in net cash flows provided by operating activities. The change had no impact on net income or retained earnings. In addition, the Corporation will revise the Consolidated Statements of Cash Flows for each of the comparative 2017 periods in future filings.

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-based restricted stock units ("PSUs"). PSUs are required to be included in weighted average shares outstanding if performance measures, as defined in each PSU award agreement, are met as of the end of the period.



A reconciliation of weighted average shares outstanding used to calculate basic net income per share and diluted net income per share follows:
Three months ended March 31Three months ended March 31 
2017 20162018 2017 
(in thousands)(in thousands)
Weighted average shares outstanding (basic)174,150
 173,331
175,303
 174,150
 
Impact of common stock equivalents1,427
 1,085
1,265
 1,427
 
Weighted average shares outstanding (diluted)175,577
 174,416
176,568
 175,577
 
For the three months ended March 31, 2016, 885,000 stock options were excluded from the diluted net income per share computation as their effect would have been anti-dilutive. There were no stock options excluded for the three months ended March 31, 2017.


NOTE 3 – Accumulated Other Comprehensive Income

The following table presents changes in other comprehensive income:income (loss):
Before-Tax Amount Tax Effect Net of Tax AmountBefore-Tax Amount Tax Effect Net of Tax Amount
(in thousands)(in thousands)
Three months ended March 31, 2018     
Unrealized loss on securities$(34,991) $7,347
 $(27,644)
Reclassification adjustment for securities gains included in net income (1)
(19) 3
 (16)
Non-credit related unrealized gains on other-than-temporarily impaired debt securities285
 (61) 224
Amortization of net unrecognized pension and postretirement items (2)
430
 (91) 339
Total Other Comprehensive Loss$(34,295) $7,198
 $(27,097)
Three months ended March 31, 2017          
Unrealized gain on securities$6,575
 $(2,302) $4,273
$6,575
 $(2,302) $4,273
Reclassification adjustment for securities gains included in net income (1)
(1,106) 387
 (719)(1,106) 387
 (719)
Amortization of net unrecognized pension and postretirement items (3)
528
 (185) 343
Amortization of net unrecognized pension and postretirement items (2)
528
 (185) 343
Total Other Comprehensive Income$5,997
 $(2,100) $3,897
$5,997
 $(2,100) $3,897
Three months ended March 31, 2016     
Unrealized gain on securities$26,193
 $(9,167) $17,026
Reclassification adjustment for securities gains included in net income (1)
(947) 331
 (616)
Amortization of unrealized loss on derivative financial instruments(2)
6
 (2) 4
Amortization of net unrecognized pension and postretirement items (3)
717
 (251) 466
Total Other Comprehensive Income$25,969
 $(9,089) $16,880

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


The following table presents changes in each component of accumulated other comprehensive income (loss), net of tax: 
Unrealized Gains (Losses) on Investment Securities Not Other-Than-Temporarily Impaired Unrealized Non-Credit Gains (Losses) on Other-Than-Temporarily Impaired Debt Securities Unrealized Effective Portions of Losses on Forward-Starting Interest Rate Swaps Unrecognized Pension and Postretirement Plan Income (Costs) TotalUnrealized Gains (Losses) on Investment Securities Not Other-Than-Temporarily Impaired Unrealized Non-Credit Gains (Losses) on Other-Than-Temporarily Impaired Debt Securities Unrecognized Pension and Postretirement Plan Income (Costs) Total
(in thousands)(in thousands)
Three months ended March 31, 2018       
Balance at December 31, 2017$(18,509) $458
 $(14,923) $(32,974)
Other comprehensive loss before reclassifications(27,644) 224
 
 (27,420)
Amounts reclassified from accumulated other comprehensive income (loss)(16) 
 339
 323
Reclassification of stranded tax effects(3,887) 
 (3,214) (7,101)
Balance at March 31, 2018$(50,056) $682
 $(17,798) $(67,172)
Three months ended March 31, 2017         
 
 
 
Balance at December 31, 2016$(23,047) $273
 $
 $(15,675) $(38,449)$(23,047) $273
 $(15,675) $(38,449)
Other comprehensive loss before reclassifications4,273
 
 
 
 4,273
Other comprehensive income before reclassifications4,273


 
 4,273
Amounts reclassified from accumulated other comprehensive income (loss)(719) 
 
 343
 (376)(719) 
 343
 (376)
Balance at March 31, 2017$(19,493) $273
 $
 $(15,332) $(34,552)$(19,493) $273
 $(15,332) $(34,552)
Three months ended March 31, 2016
 
   
 
Balance at December 31, 2015$(6,499) $458
 $(15) $(15,961) $(22,017)
Other comprehensive income before reclassifications17,026


 
 
 17,026
Amounts reclassified from accumulated other comprehensive income (loss)(616) 
 4
 466
 (146)
Balance at March 31, 2016$9,911
 $458
 $(11) $(15,495) $(5,137)



NOTE 4 – Investment Securities

The following table presents the amortized cost and estimated fair values of investment securities, which were all classified as available for sale:
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
(in thousands)(in thousands)
March 31, 2017       
March 31, 2018       
U.S. Government sponsored agency securities$5,959
 $37
 $
 $5,996
$21,105
 $40
 $(183) $20,962
State and municipal securities404,125
 2,352
 (13,853) 392,624
413,632
 2,247
 (9,780) 406,099
Corporate debt securities109,595
 2,055
 (3,773) 107,877
101,367
 2,482
 (1,894) 101,955
Collateralized mortgage obligations575,596
 1,811
 (11,521) 565,886
695,840
 236
 (16,376) 679,700
Mortgage-backed securities1,321,573
 6,155
 (14,107) 1,313,621
Residential mortgage-backed securities1,084,582
 3,006
 (33,422) 1,054,166
Commercial mortgage-backed securities231,378
 15
 (4,501) 226,892
Auction rate securities107,312
 
 (9,873) 97,439
107,410
 
 (4,361) 103,049
Total debt securities2,524,160
 12,410
 (53,127) 2,483,443
Equity securities11,416
 11,158
 
 22,574
Total$2,535,576
 $23,568
 $(53,127) $2,506,017
$2,655,314
 $8,026
 $(70,517) $2,592,823
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, 2016       
December 31, 2017       
U.S. Government sponsored agency securities$132
 $2
 $
 $134
$5,962
 $2
 $(26) $5,938
State and municipal securities405,274
 2,043
 (15,676) 391,641
405,860
 5,638
 (2,549) 408,949
Corporate debt securities112,016
 1,978
 (4,585) 109,409
96,353
 2,832
 (1,876) 97,309
Collateralized mortgage obligations604,095
 1,943
 (12,178) 593,860
611,927
 491
 (9,795) 602,623
Mortgage-backed securities1,353,292
 6,546
 (17,437) 1,342,401
Residential mortgage-backed securities1,132,080
 3,957
 (15,241) 1,120,796
Commercial mortgage-backed securities215,351
 
 (2,596) 212,755
Auction rate securities107,215
 
 (9,959) 97,256
107,410
 
 (8,742) 98,668
Total debt securities2,582,024
 12,512
 (59,835) 2,534,701
2,574,943
 12,920
 (40,825) 2,547,038
Equity securities12,231
 12,295
 
 24,526
776
 142
 
 918
Total$2,594,255
 $24,807
 $(59,835) $2,559,227
$2,575,719
 $13,062
 $(40,825) $2,547,956
Securities carried at $1.8 billion as ofat March 31, 20172018 and December 31, 20162017, 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 $21.6 million at March 31, 2017 and $23.5 million at December 31, 2016) and other equity investments (estimated fair value of $969,000 at March 31, 2017 and $1.0 million at December 31, 2016).
As of March 31, 2017, the financial institutions stock portfolio had a cost basis of $10.6 million and an estimated fair value of $21.6 million, including an investment in a single financial institution with a cost basis of $5.1 million and an estimated fair value of $9.6 million. The estimated fair value of this investment accounted for 44.6% of the estimated fair value of the Corporation's investments in 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 estimated fair value.


The amortized cost and estimated fair values of debt securities as of March 31, 2017,2018, by contractual maturity, are shown in the following table. Actual maturities may differ from contractual maturities as certain investment securities are subject to call or prepayment 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 $53,510
 $53,729
 $14,055
 $14,063
Due from one year to five years 27,178
 27,785
 36,871
 36,986
Due from five years to ten years 113,529
 113,708
 119,069
 119,529
Due after ten years 432,774
 408,714
 473,519
 461,487
 626,991
 603,936
 643,514
 632,065
Collateralized mortgage obligations 575,596
 565,886
Mortgage-backed securities 1,321,573
 1,313,621
Total debt securities $2,524,160
 $2,483,443
Residential mortgage-backed securities(1)
 1,084,582
 1,054,166
Commercial mortgage-backed securities(1)
 231,378
 226,892
Collateralized mortgage obligations(1)
 695,840
 679,700
Total $2,655,314
 $2,592,823
(1) Maturities for mortgage-backed securities and collateralized mortgage obligations are dependent upon the interest rate environment and prepayments on the underlying loans.(1) Maturities for mortgage-backed securities and collateralized mortgage obligations are dependent upon the interest rate environment and prepayments on the underlying loans.
The following table presents information related to the gross realized gains and losses on the sales of equity and debt securities:
Gross
Realized
Gains
 Gross
Realized
Losses
 Net Gains (Losses)Gross
Realized
Gains
Three months ended March 31, 2018(in thousands)
Equity securities$9
Debt securities10
Total$19
Three months ended March 31, 2017(in thousands) 
Equity securities$1,045
 $
 $1,045
$1,045
Debt securities61
 
 61
61
Total$1,106
 $
 $1,106
$1,106
Three months ended March 31, 2016     
Equity securities$733
 $
 $733
Debt securities214
 
 214
Total$947
 $
 $947
 

The cumulative balance of credit relatedcredit-related other-than-temporary impairment charges, previously recognized as components of earnings, for debt securities held by the Corporation at March 31, 20172018 and March 31, 20162017 was $11.5 million. There were no other-than-temporary impairment charges recognized for the three months ended March 31, 20172018 and March 31, 2016.2017.


The following tables presenttable presents the gross unrealized losses and estimated fair values of investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 20172018 and December 31, 2016:2017:
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
March 31, 2017(in thousands)
March 31, 2018(in thousands)
U.S. Government sponsored agency securities$12,499
 $(183) $
 $
 $12,499
 $(183)
State and municipal securities$237,313
 $(13,853) $
 $
 $237,313
 $(13,853)163,345
 (3,132) 114,024
 (6,648) 277,369
 (9,780)
Corporate debt securities4,020
 (11) 35,364
 (3,762) 39,384
 (3,773)9,466
 (130) 28,219
 (1,764) 37,685
 (1,894)
Collateralized mortgage obligations145,052
 (3,672) 246,408
 (7,849) 391,460
 (11,521)456,200
 (7,184) 176,076
 (9,192) 632,276
 (16,376)
Mortgage-backed securities1,089,397
 (14,107) 
 
 1,089,397
 (14,107)
Residential mortgage-backed securities527,502
 (13,611) 471,703
 (19,811) 999,205
 (33,422)
Commercial mortgage-backed securities196,887
 (3,884) 21,539
 (617) 218,426
 (4,501)
Auction rate securities
 
 97,439
 (9,873) 97,439
 (9,873)
 
 103,049
 (4,361) 103,049
 (4,361)
Total debt securities1,475,782
 (31,643) 379,211
 (21,484) 1,854,993
 (53,127)
Total$1,365,899
 $(28,124) $914,610
 $(42,393) $2,280,509
 $(70,517)
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
December 31, 2016(in thousands)
December 31, 2017(in thousands)
U.S. Government sponsored agency securities$5,830
 $(26) $
 $
 $5,830
 $(26)
State and municipal securities$247,509
 $(15,676) $
 $
 $247,509
 $(15,676)11,650
 (50) 118,297
 (2,499) 129,947
 (2,549)
Corporate debt securities11,922
 (110) 34,629
 (4,475) 46,551
 (4,585)4,544
 (48) 32,163
 (1,828) 36,707
 (1,876)
Collateralized mortgage obligations166,905
 (3,899) 258,237
 (8,279) 425,142
 (12,178)303,932
 (2,408) 187,690
 (7,387) 491,622
 (9,795)
Mortgage-backed securities1,137,510
 (17,437) 
 
 1,137,510
 (17,437)
Residential mortgage-backed securities511,378
 (4,348) 500,375
 (10,893) 1,011,753
 (15,241)
Commercial mortgage-backed securities190,985
 (2,118) 21,770
 (478) 212,755
 (2,596)
Auction rate securities
 
 97,256
 (9,959) 97,256
 (9,959)
 
 98,668
 (8,742) 98,668
 (8,742)
Total debt securities1,563,846
 (37,122) 390,122
 (22,713) 1,953,968
 (59,835)
Total$1,028,319
 $(8,998) $958,963
 $(31,827) $1,987,282
 $(40,825)

The declineCorporation’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. The change in marketfair value of these securities is attributable to changes in interest rates and not credit quality, and 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, thereforecost. Therefore, the Corporation does not consider these investments to be other-than-temporarily impaired as of March 31, 2017.2018.
As of March 31, 2017,2018, all of the auction rate securities (auction rate certificates, or "ARCs"), were rated above investment grade. All of the loans underlying the ARCs have principal payments which are guaranteed by the federal government. As of March 31, 2017, all ARCs were current and making scheduled interest payments, and basedBased on management’s evaluations, none of the ARCs were not subject to any other-than-temporary impairment charges as offor the three months ended March 31, 2017.2018. 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.


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 valuevalues of corporate debt securities:
March 31, 2017 December 31, 2016March 31, 2018 December 31, 2017
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$43,770
 $40,720
 $43,746
 $39,829
$31,352
 $30,513
 $31,335
 $30,703
Subordinated debt43,787
 44,399
 46,231
 46,723
54,011
 54,357
 49,013
 49,533
Senior debt18,036
 18,334
 18,037
 18,433
12,029
 12,245
 12,031
 12,392
Pooled trust preferred securities
 422
 
 422

 865
 
 707
Corporate debt securities issued by financial institutions105,593
 103,875
 108,014
 105,407
97,392
 97,980
 92,379
 93,335
Other corporate debt securities4,002
 4,002
 4,002
 4,002
3,975
 3,975
 3,974
 3,974
Available for sale corporate debt securities$109,595
 $107,877
 $112,016
 $109,409
$101,367
 $101,955
 $96,353
 $97,309

Single-issuer trust preferred securities had an unrealized loss of $3.1 million$839,000 at March 31, 2017. Six2018. Four of the 1917 single-issuer trust preferred securities, with an amortized cost of $11.6$4.9 million and an estimated fair value of $10.3$4.7 million at March 31, 2017,2018, were rated below investment grade by at least one ratings agency. All of the single-issuer trust preferred securities rated below investment grade were rated either "BB" andor "Ba". Two single-issuer trust preferred securities with an amortized cost of $3.8 million and an estimated fair value of $2.8$3.1 million at March 31, 20172018 were not rated by any ratings agency.
Based on management’s evaluations, no corporate debt securities were subject to any other-than-temporary impairment charges as offor the three months ended March 31, 2017.2018. The Corporation does not have the intent to sell and does not believe it will more likely than not be required to sell any of these securities prior to a recovery of their fair value to amortized cost, which may be at maturity.



NOTE 5 – Loans and Allowance for Credit Losses

Loans, Net of Unearned Income

Loans, net of unearned income are summarized as follows:
March 31,
2017
 December 31, 2016March 31,
2018
 December 31, 2017
(in thousands)(in thousands)
Real-estate - commercial mortgage$6,118,533
 $6,018,582
$6,332,508
 $6,364,804
Commercial - industrial, financial and agricultural4,167,809
 4,087,486
4,299,072
 4,300,297
Real-estate - residential mortgage1,665,142
 1,601,994
1,976,524
 1,954,711
Real-estate - home equity1,595,901
 1,625,115
1,514,241
 1,559,719
Real-estate - construction882,983
 843,649
976,131
 1,006,935
Consumer288,826
 291,470
326,766
 313,783
Leasing and other262,315
 246,704
297,465
 291,556
Overdrafts3,342
 3,662
2,031
 4,113
Loans, gross of unearned income14,984,851
 14,718,662
15,724,738
 15,795,918
Unearned income(21,674) (19,390)(28,454) (27,671)
Loans, net of unearned income$14,963,177
 $14,699,272
$15,696,284
 $15,768,247

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 both secured 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 vehicle loans.

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 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 individually evaluated for impairment under FASB(FASB ASC Section 310-10-35;310-10-35); and (2) allowances calculated for pools of loans measuredcollectively evaluated for impairment under FASB(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 both secured 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 vehicle loans.450-20).

The following table presents the components of the allowance for credit losses:
March 31,
2017
 December 31,
2016
March 31,
2018
 December 31,
2017
(in thousands)(in thousands)
Allowance for loan losses$170,076
 $168,679
$163,217
 $169,910
Reserve for unfunded lending commitments2,571
 2,646
12,802
 6,174
Allowance for credit losses$172,647
 $171,325
$176,019
 $176,084



The following table presents the activity in the allowance for credit losses:
Three months ended March 31Three months ended March 31
2017 20162018 2017
(in thousands)(in thousands)
Balance at beginning of period$171,325
 $171,412
$176,084
 $171,325
Loans charged off(9,407) (11,155)(6,397) (9,407)
Recoveries of loans previously charged off5,929
 4,278
2,362
 5,929
Net loans charged off(3,478) (6,877)(4,035) (3,478)
Provision for credit losses4,800
 1,530
3,970
 4,800
Balance at end of period$172,647
 $166,065
$176,019
 $172,647

The Corporation has historically maintained an unallocated allowance for credit losses for factors and conditions that exist at the balance sheet date, but are not specifically identifiable, and to recognize the inherent imprecision in estimating and measuring loss exposure. In the second quarter of 2017, enhancements were made to allow for the impact of these factors and conditions to be quantified in the allowance allocation process. Accordingly, an unallocated allowance for credit losses is no longer necessary.

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, other
and
overdrafts
 Unallocated Total
Real Estate -
Commercial
Mortgage
 
Commercial -
Industrial,
Financial and
Agricultural
 
Real Estate -
Home
Equity
 
Real Estate -
Residential
Mortgage
 
Real Estate -
Construction
 Consumer 
Leasing, other
and
overdrafts
 Unallocated Total
(in thousands)(in thousands)
Three months ended March 31, 2018                 
Balance at December 31, 2017$58,793
 $66,280
 $18,127
 $16,088
 $6,620
 $2,045
 $1,957
 $
 $169,910
Loans charged off(267) (4,005) (408) (162) (158) (892) (505) 
 (6,397)
Recoveries of loans previously charged off279
 1,075
 206
 107
 306
 179
 210
 
 2,362
Net loans charged off12
 (2,930) (202) (55) 148
 (713) (295) 
 (4,035)
Provision for loan losses (1)
(88) (1,520) (397) (772) (844) 571
 392
 
 (2,658)
Balance at March 31, 2018$58,717
 $61,830
 $17,528
 $15,261
 $5,924
 $1,903
 $2,054
 $
 $163,217
Three months ended March 31, 2017                                  
Balance at December 31, 2016$46,842
 $54,353
 $26,801
 $22,929
 $6,455
 $3,574
 $3,192
 $4,533
 $168,679
$46,842
 $54,353
 $26,801
 $22,929
 $6,455
 $3,574
 $3,192
 $4,533
 $168,679
Loans charged off(1,224) (5,527) (698) (216) (247) (856) (639) 
 (9,407)(1,224) (5,527) (698) (216) (247) (856) (639) 
 (9,407)
Recoveries of loans previously charged off450
 4,191
 137
 230
 548
 236
 137
 
 5,929
450
 4,191
 137
 230
 548
 236
 137
 
 5,929
Net loans charged off(774) (1,336) (561) 14
 301
 (620) (502) 
 (3,478)(774) (1,336) (561) 14
 301
 (620) (502) 
 (3,478)
Provision for loan losses (1)1,305
 2,292
 (2,419) (925) 745
 77
 578
 3,222
 4,875
1,305
 2,292
 (2,419) (925) 745
 77
 578
 3,222
 4,875
Balance at March 31, 2017$47,373
 $55,309
 $23,821
 $22,018
 $7,501
 $3,031
 $3,268
 $7,755
 $170,076
$47,373
 $55,309
 $23,821
 $22,018
 $7,501
 $3,031
 $3,268
 $7,755
 $170,076
Three months ended March 31, 2016                 
Balance at December 31, 2015$47,866
 $57,098
 $22,405
 $21,375
 $6,529
 $2,585
 $2,468
 $8,728
 $169,054
Loans charged off(582) (6,188) (1,541) (1,068) (326) (1,007) (443) 
 (11,155)
Recoveries of loans previously charged off825
 2,319
 338
 136
 383
 196
 81
 
 4,278
Net loans charged off243
 (3,869) (1,203) (932) 57
 (811) (362) 
 (6,877)
Provision for loan losses (1)202
 1,104
 1,322
 (515) (304) 550
 868
 (1,563) 1,664
Balance at March 31, 2016$48,311
 $54,333
 $22,524
 $19,928
 $6,282
 $2,324
 $2,974
 $7,165
 $163,841

(1)The provision for loan losses excluded an increase of $6.6 million and a $75,000 and an $134,000 decrease respectively,of $75,000 in the reserve for unfunded lending commitments for the three months ended March 31, 2018 and March 31, 2017, and 2016.respectively. These amounts were reclassified to Other Liabilities.











The following table presents loans, net of unearned income and their related allowance for loan losses, by portfolio segment:
 
Real Estate -
Commercial
Mortgage
 
Commercial -
Industrial,
Financial and
Agricultural
 
Real Estate -
Home
Equity
 
Real Estate -
Residential
Mortgage
 
Real Estate -
Construction
 Consumer 
Leasing, other
and
overdrafts
 Unallocated Total
 (in thousands)
Allowance for loan losses at March 31, 2017:              
Measured for impairment under FASB ASC Subtopic 450-20$37,457
 $43,155
 $14,744
 $10,581
 $4,915
 $3,007
 $3,268
 $7,755
 $124,882
Evaluated for impairment under FASB ASC Section 310-10-359,916
 12,154
 9,077
 11,437
 2,586
 24
 
 N/A
 45,194
 $47,373
 $55,309
 $23,821
 $22,018
 $7,501
 $3,031
 $3,268
 $7,755
 $170,076
                  
Loans, net of unearned income at March 31, 2017:              
Measured for impairment under FASB ASC Subtopic 450-20$6,067,492
 $4,119,550
 $1,576,949
 $1,620,302
 $869,225
 $288,789
 $243,983
 N/A
 $14,786,290
Evaluated for impairment under FASB ASC Section 310-10-3551,041
 48,259
 18,952
 44,840
 13,758
 37
 
 N/A
 176,887
 $6,118,533
 $4,167,809
 $1,595,901
 $1,665,142
 $882,983
 $288,826
 $243,983
 N/A
 $14,963,177
                  
Allowance for loan losses at March 31, 2016:              
Measured for impairment under FASB ASC Subtopic 450-20$35,914
 $40,969
 $13,541
 $7,599
 $4,004
 $2,302
 $1,756
 $7,165
 $113,250
Evaluated for impairment under FASB ASC Section 310-10-3512,397
 13,364
 8,983
 12,329
 2,278
 22
 1,218
 N/A
 50,591
 $48,311
 $54,333
 $22,524
 $19,928
 $6,282
 $2,324
 $2,974
 $7,165
 $163,841
                  
Loans, net of unearned income at March 31, 2016:              
Measured for impairment under FASB ASC Subtopic 450-20$5,499,820
 $3,992,567
 $1,641,457
 $1,329,114
 $797,282
 $263,189
 $164,806
 N/A
 $13,688,235
Evaluated for impairment under FASB ASC Section 310-10-3558,288
 42,766
 18,024
 48,345
 13,590
 32
 1,421
 N/A
 182,466
 $5,558,108
 $4,035,333
 $1,659,481
 $1,377,459
 $810,872
 $263,221
 $166,227
 N/A
 $13,870,701
 
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)
Allowance for loan losses at March 31, 2018:              
Loans collectively evaluated for impairment$50,392
 $51,314
 $6,440
 $5,610
 $5,245
 $1,887
 $2,054
 N/A
 $122,942
Loans individually evaluated for impairment8,325
 10,516
 11,088
 9,651
 679
 16
 
 N/A
 40,275
 $58,717
 $61,830
 $17,528
 $15,261
 $5,924
 $1,903
 $2,054
 N/A
 $163,217
                  
Loans, net of unearned income at March 31, 2018              
Loans collectively evaluated for impairment$6,279,144
 $4,234,362
 $1,489,429
 $1,935,587
 $965,398
 $326,742
 $271,042
 N/A
 $15,501,704
Loans individually evaluated for impairment53,364
 64,710
 24,812
 40,937
 10,733
 24
 
 N/A
 194,580
 $6,332,508
 $4,299,072
 $1,514,241
 $1,976,524
 $976,131
 $326,766
 $271,042
 N/A
 $15,696,284
                  
Allowance for loan losses at March 31, 2017:              
Loans collectively evaluated for impairment$37,457
 $43,155
 $14,744
 $10,581
 $4,915
 $3,007
 $3,268
 $7,755
 $124,882
Loans individually evaluated for impairment9,916
 12,154
 9,077
 11,437
 2,586
 24
 
 N/A
 45,194
 $47,373
 $55,309
 $23,821
 $22,018
 $7,501
 $3,031
 $3,268
 $7,755
 $170,076
                  
Loans, net of unearned income at March 31, 2017:              
Loans collectively evaluated for impairment$6,067,492
 $4,119,550
 $1,576,949
 $1,620,302
 $869,225
 $288,789
 $243,983
 N/A
 $14,786,290
Loans individually evaluated for impairment51,041
 48,259
 18,952
 44,840
 13,758
 37
 
 N/A
 176,887
 $6,118,533
 $4,167,809
 $1,595,901
 $1,665,142
 $882,983
 $288,826
 $243,983
 N/A
 $14,963,177
 
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 $4.8 million provision for credit losses during the three months ended March 31, 2017, compared to a $1.5 million provision for credit losses for the same period in 2016.
All loans individually evaluated for impairment under FASB ASC Section 310-10-35 are measured for losses on a quarterly basis. As of March 31, 20172018 and December 31, 2016,2017, 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.estate.

As of March 31, 2018 and 2017, approximately 72% and 2016, approximately 67% and 77%, 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 of the collateral using state certified third-party appraisals that had been updated in the preceding 12 months.months, performed by state certified third-party appraisers.

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 loan-to-value position and, in the opinion of the Corporation's internal credit 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(generally less than 70%).




The following table presents total impaired loans by class segment:
 March 31, 2017 December 31, 2016
 
Unpaid
Principal
Balance
 
Recorded
Investment
 
Related
Allowance
 
Unpaid
Principal
Balance
 
Recorded
Investment
 
Related
Allowance
 (in thousands)
With no related allowance recorded:          
Real estate - commercial mortgage$25,043
 $22,236
 $
 $28,757
 $25,447
 $
Commercial - secured33,791
 25,622
 
 29,296
 25,526
 
Real estate - residential mortgage4,657
 4,657
 
 4,689
 4,689
 
Construction - commercial residential6,169
 4,692
 
 6,271
 4,795
 
Construction - commercial603
 603
 
 
 
 
 70,263
 57,810
 
 69,013
 60,457
 
With a related allowance recorded:          
Real estate - commercial mortgage37,069
 28,805
 9,916
 37,132
 29,446
 10,162
Commercial - secured26,205
 21,872
 11,739
 27,767
 22,626
 13,198
Commercial - unsecured1,061
 765
 415
 1,122
 823
 455
Real estate - home equity23,351
 18,952
 9,077
 23,971
 19,205
 9,511
Real estate - residential mortgage47,442
 40,183
 11,437
 48,885
 41,359
 11,897
Construction - commercial residential13,451
 7,286
 2,134
 10,103
 4,206
 1,300
Construction - commercial141
 81
 31
 681
 435
 145
Construction - other1,096
 1,096
 421
 1,096
 1,096
 423
Consumer - direct20
 20
 14
 19
 19
 12
Consumer - indirect17
 17
 10
 21
 21
 14
 149,853
 119,077
 45,194
 150,797
 119,236
 47,117
Total$220,116
 $176,887
 $45,194
 $219,810
 $179,693
 $47,117
 March 31, 2018 December 31, 2017
 
Unpaid
Principal
Balance
 
Recorded
Investment
 
Related
Allowance
 
Unpaid
Principal
Balance
 
Recorded
Investment
 
Related
Allowance
 (in thousands)
With no related allowance recorded:          
Real estate - commercial mortgage$29,862
 $27,819
 $
 $26,728
 $22,886
 $
Commercial46,673
 40,525
 
 44,936
 39,550
 
Real estate - residential mortgage4,547
 4,547
 
 4,575
 4,575
 
Construction12,343
 7,842
 
 12,477
 8,100
 
 93,425
 80,733
 
 88,716
 75,111
 
With a related allowance recorded:          
Real estate - commercial mortgage32,863
 25,545
 8,325
 33,710
 25,895
 8,112
Commercial29,723
 24,185
 10,516
 29,816
 24,175
 11,406
Real estate - home equity28,387
 24,812
 11,088
 28,282
 24,693
 11,124
Real estate - residential mortgage41,889
 36,390
 9,651
 42,597
 37,132
 9,895
Construction6,186
 2,891
 679
 7,308
 4,097
 967
Consumer25
 24
 16
 26
 26
 17
 139,073
 113,847
 40,275
 141,739
 116,018
 41,521
Total$232,498
 $194,580
 $40,275
 $230,455
 $191,129
 $41,521
As of March 31, 20172018 and December 31, 2016,2017, there were $57.8$80.7 million and $60.5$75.1 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 theythe loans were previously charged down to realizable collateral values. Accordingly, no specific valuation allowance was considered to be necessary.


The following table presents average impaired loans by class segment:
 Three months ended March 31
 2017 2016
 Average
Recorded
Investment
 Interest
Income (1)
 Average
Recorded
Investment
 Interest
Income (1)
 (in thousands)
With no related allowance recorded:       
Real estate - commercial mortgage$23,842
 $70
 $22,810
 $69
Commercial - secured25,574
 36
 12,964
 16
Real estate - residential mortgage4,673
 26
 5,501
 30
Construction - commercial residential4,744
 2
 7,582
 19
Construction - commercial302
 
 
 
 59,135
 134
 48,857
 134
With a related allowance recorded:       
Real estate - commercial mortgage29,126
 85
 35,482
 108
Commercial - secured22,249
 32
 31,642
 38
Commercial - unsecured795
 
 853
 1
Real estate - home equity19,079
 95
 16,896
 57
Real estate - residential mortgage40,839
 230
 43,885
 235
Construction - commercial residential5,746
 3
 6,189
 15
Construction - commercial258
 
 616
 
Construction - other1,096
 
 402
 
Consumer - direct20
 
 17
 
Consumer - indirect18
 
 16
 
Leasing, other and overdrafts713
 
 1,423
 
 119,939
 445
 137,421
 454
Total$179,074
 $579
 $186,278
 $588
        
 Three months ended March 31
 2018 2017
 Average
Recorded
Investment
 Interest
Income (1)
 Average
Recorded
Investment
 Interest
Income (1)
 (in thousands)
With no related allowance recorded:       
Real estate - commercial mortgage$25,353
 $83
 $23,842
 $70
Commercial40,038
 73
 25,574
 36
Real estate - residential mortgage4,561
 27
 4,673
 26
Construction7,971
 
 5,046
 2
 77,923
 183
 59,135
 134
With a related allowance recorded:       
Real estate - commercial mortgage25,720
 84
 29,126
 85
Commercial24,181
 44
 23,044
 32
Real estate - home equity24,752
 184
 19,079
 95
Real estate - residential mortgage36,761
 221
 40,839
 230
Construction3,495
 
 7,100
 3
Consumer25
 
 38
 
Leasing, other and overdrafts
 
 713
 
 114,934
 533
 119,939
 445
Total$192,857
 $716
 $179,074
 $579
        
(1)All impaired loans, excluding accruing TDRs, were non-accrual loans. Interest income recognized for the three months ended March 31, 20172018 and 20162017 represents amounts earned on accruing TDRs.




Credit Quality Indicators and Non-performing Assets

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 following table presents internal credit risk ratings for the indicated loan class segments:
 Pass Special Mention Substandard or Lower Total
 March 31, 2017 December 31, 2016 March 31, 2017 December 31, 2016 March 31, 2017 December 31, 2016 March 31, 2017 December 31, 2016
 (dollars in thousands)
Real estate - commercial mortgage$5,860,141
 $5,763,122
 $137,643
 $132,484
 $120,749
 $122,976
 $6,118,533
 $6,018,582
Commercial - secured3,753,918
 3,686,152
 138,242
 128,873
 138,757
 118,527
 4,030,917
 3,933,552
Commercial - unsecured127,858
 145,922
 6,471
 4,481
 2,563
 3,531
 136,892
 153,934
Total commercial - industrial, financial and agricultural3,881,776
 3,832,074
 144,713
 133,354
 141,320
 122,058
 4,167,809
 4,087,486
Construction - commercial residential124,415
 113,570
 10,677
 15,447
 16,221
 13,172
 151,313
 142,189
Construction - commercial674,863
 635,963
 4,902
 3,412
 5,363
 5,115
 685,128
 644,490
Total construction (excluding Construction - other)799,278
 749,533
 15,579
 18,859
 21,584
 18,287
 836,441
 786,679
 $10,541,195
 $10,344,729
 $297,935
 $284,697
 $283,653
 $263,321
 $11,122,783
 $10,892,747
% of Total94.8% 95.0% 2.6% 2.6% 2.6% 2.4% 100.0% 100.0%

The risk rating process allows management to identify 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. The Corporation's loan review officers provide an independent assessment of risk rating accuracy. Ratings may be changed based on the ongoing monitoring procedures performed by loan officers or credit administration staff, or if specific loan review activities identify a deterioration or an improvement in the loan.
The following table presents internal credit risk ratings for the indicated loan class segments:
 Pass Special Mention Substandard or Lower Total
 March 31, 2018 December 31, 2017 March 31, 2018 December 31, 2017 March 31, 2018 December 31, 2017 March 31, 2018 December 31, 2017
 (dollars in thousands)
Real estate - commercial mortgage$6,027,210
 $6,066,396
 $144,809
 $147,604
 $160,489
 $150,804
 $6,332,508
 $6,364,804
Commercial - secured3,873,737
 3,831,485
 100,242
 121,842
 180,234
 179,113
 4,154,213
 4,132,440
Commercial - unsecured139,139
 159,620
 3,378
 5,478
 2,342
 2,759
 144,859
 167,857
Total commercial - industrial, financial and agricultural4,012,876
 3,991,105
 103,620
 127,320
 182,576
 181,872
 4,299,072
 4,300,297
Construction - commercial residential141,587
 143,759
 4,613
 5,259
 12,282
 14,084
 158,482
 163,102
Construction - commercial744,274
 761,218
 834
 846
 3,688
 3,752
 748,796
 765,816
Total construction (excluding Construction - other)885,861
 904,977
 5,447
 6,105
 15,970
 17,836
 907,278
 928,918
 $10,925,947
 $10,962,478
 $253,876
 $281,029
 $359,035
 $350,512
 $11,538,858
 $11,594,019
% of Total94.7% 94.6% 2.2% 2.4% 3.1% 3.0% 100.0% 100.0%

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

The following table presents a summary of performing, delinquent and non-performing loans for the indicated loan class segments:
Performing Delinquent (1) Non-performing (2) TotalPerforming Delinquent (1) Non-performing (2) Total
March 31, 2017 December 31, 2016 March 31, 2017 December 31, 2016 March 31, 2017 December 31, 2016 March 31, 2017 December 31, 2016March 31, 2018 December 31, 2017 March 31, 2018 December 31, 2017 March 31, 2018 December 31, 2017 March 31, 2018 December 31, 2017
(dollars in thousands)(dollars in thousands)
Real estate - home equity$1,576,374
 $1,602,687
 $7,295
 $9,274
 $12,232
 $13,154
 $1,595,901
 $1,625,115
$1,493,485
 $1,535,557
 $8,731
 $12,655
 $12,025
 $11,507
 $1,514,241
 $1,559,719
Real estate - residential mortgage1,624,477
 1,557,995
 17,068
 20,344
 23,597
 23,655
 1,665,142
 1,601,994
1,938,817
 1,914,888
 17,539
 18,852
 20,168
 20,971
 1,976,524
 1,954,711
Construction - other45,446
 55,874
 
 
 1,096
 1,096
 46,542
 56,970
68,363
 77,403
 
 203
 490
 411
 68,853
 78,017
Consumer - direct84,670
 93,572
 1,383
 1,752
 1,129
 1,563
 87,182
 96,887
55,681
 54,828
 323
 315
 54
 70
 56,058
 55,213
Consumer - indirect199,542
 190,656
 2,055
 3,599
 47
 328
 201,644
 194,583
267,584
 254,663
 2,931
 3,681
 193
 226
 270,708
 258,570
Total consumer284,212
 284,228
 3,438
 5,351
 1,176
 1,891
 288,826
 291,470
323,265
 309,491
 3,254
 3,996
 247
 296
 326,766
 313,783
Leasing242,120
 229,591
 1,425
 1,068
 438
 317
 243,983
 230,976
270,027
 267,111
 843
 855
 172
 32
 271,042
 267,998
$3,772,629
 $3,730,375
 $29,226
 $36,037
 $38,539
 $40,113
 $3,840,394
 $3,806,525
$4,093,957
 $4,104,450
 $30,367
 $36,561
 $33,102
 $33,217
 $4,157,426
 $4,174,228
% of Total98.2% 98.0% 0.8% 0.9% 1.0% 1.1% 100.0% 100.0%98.5% 98.3% 0.7% 0.9% 0.8% 0.8% 100.0% 100.0%

(1)Includes all accruing loans 30 days to 89 days past due.
(2)Includes all accruing loans 90 days or more past due and all non-accrual loans.


The following table presents non-performing assets:
March 31,
2017
 December 31,
2016
March 31,
2018
 December 31,
2017
(in thousands)(in thousands)
Non-accrual loans$117,264
 $120,133
$122,966
 $124,749
Loans 90 days or more past due and still accruing14,268
 11,505
11,676
 10,010
Total non-performing loans131,532
 131,638
134,642
 134,759
Other real estate owned (OREO)11,906
 12,815
10,744
 9,823
Total non-performing assets$143,438
 $144,453
$145,386
 $144,582

The following table presentstables present past due status and non-accrual loans by portfolio segment and class segment:
March 31, 2017March 31, 2018
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
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$9,890
 $971
 $910
 $35,803
 $36,713
 $47,574
 $6,070,959
 $6,118,533
$11,606
 $1,091
 $1,001
 $35,183
 $36,184
 $48,881
 $6,283,627
 $6,332,508
Commercial - secured4,530
 3,179
 2,511
 40,084
 42,595
 50,304
 3,980,613
 4,030,917
4,048
 3,607
 1,935
 52,336
 54,271
 61,926
 4,092,287
 4,154,213
Commercial - unsecured309
 54
 497
 734
 1,231
 1,594
 135,298
 136,892
814
 159
 10
 634
 644
 1,617
 143,242
 144,859
Total commercial - industrial, financial and agricultural4,839
 3,233
 3,008
 40,818
 43,826
 51,898
 4,115,911
 4,167,809
4,862
 3,766
 1,945
 52,970
 54,915
 63,543
 4,235,529
 4,299,072
Real estate - home equity6,181
 1,114
 2,881
 9,351
 12,232
 19,527
 1,576,374
 1,595,901
6,401
 2,330
 3,280
 8,745
 12,025
 20,756
 1,493,485
 1,514,241
Real estate - residential mortgage12,829
 4,239
 5,790
 17,807
 23,597
 40,665
 1,624,477
 1,665,142
12,725
 4,814
 4,833
 15,335
 20,168
 37,707
 1,938,817
 1,976,524
Construction - commercial residential1,550
 801
 65
 11,705
 11,770
 14,121
 137,192
 151,313

 
 
 10,422
 10,422
 10,422
 148,060
 158,482
Construction - commercial1,546
 142
 
 684
 684
 2,372
 682,756
 685,128

 
 
 19
 19
 19
 748,777
 748,796
Construction - other
 
 
 1,096
 1,096
 1,096
 45,446
 46,542

 
 198
 292
 490
 490
 68,363
 68,853
Total real estate - construction3,096
 943
 65
 13,485
 13,550
 17,589
 865,394
 882,983

 
 198
 10,733
 10,931
 10,931
 965,200
 976,131
Consumer - direct939
 444
 1,129
 
 1,129
 2,512
 84,670
 87,182
211
 112
 54
 
 54
 377
 55,681
 56,058
Consumer - indirect1,784
 271
 47
 
 47
 2,102
 199,542
 201,644
2,253
 678
 193
 
 193
 3,124
 267,584
 270,708
Total consumer2,723
 715
 1,176
 
 1,176
 4,614
 284,212
 288,826
2,464
 790
 247
 
 247
 3,501
 323,265
 326,766
Leasing, other and overdrafts981
 444
 438
 
 438
 1,863
 242,120
 243,983
662
 181
 172
 
 172
 1,015
 270,027
 271,042
Total$40,539
 $11,659
 $14,268
 $117,264
 $131,532
 $183,730
 $14,779,447
 $14,963,177
$38,720
 $12,972
 $11,676
 $122,966
 $134,642
 $186,334
 $15,509,950
 $15,696,284


December 31, 2016December 31, 2017
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
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$6,254
 $1,622
 $383
 $38,936
 $39,319
 $47,195
 $5,971,387
 $6,018,582
$9,456
 $4,223
 $625
 $34,822
 $35,447
 $49,126
 $6,315,678
 $6,364,804
Commercial - secured6,660
 2,616
 959
 41,589
 42,548
 51,824
 3,881,728
 3,933,552
4,778
 5,254
 1,360
 52,255
 53,615
 63,647
 4,068,793
 4,132,440
Commercial - unsecured898
 35
 152
 760
 912
 1,845
 152,089
 153,934
305
 10
 45
 649
 694
 1,009
 166,848
 167,857
Total commercial - industrial, financial and agricultural7,558
 2,651
 1,111
 42,349
 43,460
 53,669
 4,033,817
 4,087,486
5,083
 5,264
 1,405
 52,904
 54,309
 64,656
 4,235,641
 4,300,297
Real estate - home equity6,596
 2,678
 2,543
 10,611
 13,154
 22,428
 1,602,687
 1,625,115
9,640
 3,015
 2,372
 9,135
 11,507
 24,162
 1,535,557
 1,559,719
Real estate - residential mortgage15,600
 4,744
 5,224
 18,431
 23,655
 43,999
 1,557,995
 1,601,994
11,961
 6,891
 5,280
 15,691
 20,971
 39,823
 1,914,888
 1,954,711
Construction - commercial residential233
 51
 36
 8,275
 8,311
 8,595
 133,594
 142,189

 439
 
 11,767
 11,767
 12,206
 150,896
 163,102
Construction - commercial743
 
 
 435
 435
 1,178
 643,312
 644,490
483
 
 
 19
 19
 502
 765,314
 765,816
Construction - other
 
 
 1,096
 1,096
 1,096
 55,874
 56,970
203
 
 
 411
 411
 614
 77,403
 78,017
Total real estate - construction976
 51
 36
 9,806
 9,842
 10,869
 832,780
 843,649
686
 439
 
 12,197
 12,197
 13,322
 993,613
 1,006,935
Consumer - direct1,211
 541
 1,563
 
 1,563
 3,315
 93,572
 96,887
260
 55
 70
 
 70
 385
 54,828
 55,213
Consumer - indirect3,200
 399
 328
 
 328
 3,927
 190,656
 194,583
3,055
 626
 226
 
 226
 3,907
 254,663
 258,570
Total consumer4,411
 940
 1,891
 
 1,891
 7,242
 284,228
 291,470
3,315
 681
 296
 
 296
 4,292
 309,491
 313,783
Leasing, other and overdrafts543
 525
 317
 
 317
 1,385
 229,591
 230,976
568
 287
 32
 
 32
 887
 267,111
 267,998
Total$41,938
 $13,211
 $11,505
 $120,133
 $131,638
 $186,787
 $14,512,485
 $14,699,272
$40,709
 $20,800
 $10,010
 $124,749
 $134,759
 $196,268
 $15,571,979
 $15,768,247

The following table presents TDRs, by class segment:
March 31,
2017
 December 31,
2016
March 31,
2018
 December 31,
2017
(in thousands)(in thousands)
Real-estate - residential mortgage$27,033
 $27,617
$25,602
 $26,016
Real-estate - commercial mortgage15,237
 15,957
18,181
 13,959
Real estate - home equity9,601
 8,594
16,067
 15,558
Commercial7,441
 6,627
11,740
 10,820
Construction273
 726
Consumer37
 39
24
 26
Total accruing TDRs59,622
 59,560
71,614
 66,379
Non-accrual TDRs (1)
27,220
 27,850
24,897
 29,051
Total TDRs$86,842
 $87,410
$96,511
 $95,430
 
(1)Included in non-accrual loans in the preceding table detailing non-performing assets.

As of both March 31, 2017 and December 31, 2016, there were $3.6 million of commitments to lend additional funds to borrowers whose loans were modified under TDRs.



The following table presents TDRs, by class segment and type of concession for loans that were modified during the three months ended March 31, 20172018 and 2016:2017:
 Three months ended March 31 Three months ended March 31
2017 2016 2018 2017
Number of Loans Post-Modification Recorded Investment Number of Loans Post-Modification Recorded InvestmentNumber of Loans Post-Modification Recorded Investment Number of Loans Post-Modification Recorded Investment
(dollars in thousands) (dollars in thousands)
Real estate – residential mortgage:Real estate – residential mortgage:       Real estate – residential mortgage:       
Extend maturity without rate concession2
 $337
 
 $
Extend maturity without rate concession
 
 2
 337
Bankruptcy1
 178
 
 
Bankruptcy1
 5
 1
 178
Real estate - commercial mortgage:Real estate - commercial mortgage:       Real estate - commercial mortgage:       
Extend maturity without rate concession1
 318
 
 
Extend maturity without rate concession
 
 1
 318
Real estate - home equity:Real estate - home equity:       Real estate - home equity:       
Extend maturity with rate concession
 
 1
 44
Extend maturity without rate concession17
 1,276
 16
 1,284
Extend maturity without rate concession16
 1,284
 
 
Bankruptcy2
 108
 7
 453
Bankruptcy7
 453
 37
 2,698
Commercial:Commercial:       Commercial:       
Extend maturity without rate concession4
 3,126
 4
 933
Consumer:       
Bankruptcy
 
 1
 2
Extend maturity without rate concession9
 9,359
 4
 3,126
                
TotalTotal31
 $5,696
 43
 $3,677
Total29
 $10,748
 31
 $5,696
                

The following table presents TDRs, by class segment, as of March 31, 20172018 and 2016,2017, that were modified in the previous 12 months and had a post-modification payment default during the three months ended March 31, 20172018 and 2016.2017. The Corporation defines a payment default as a single missed payment.
2017 20162018 2017
Number of Loans Recorded Investment Number of Loans Recorded InvestmentNumber of Loans Recorded Investment Number of Loans Recorded Investment
(dollars in thousands)(dollars in thousands)
Real estate - residential mortgage8
 $2,006
 3
 $260
5
 $332
 8
 $2,006
Real estate - commercial mortgage2
 430
 3
 235
1
 180
 2
 430
Real estate - home equity14
 639
 14
 1,039
18
 1,000
 14
 639
Commercial6
 3,654
 1
 47
6
 526
 6
 3,654
Construction2
 1,484
 
 
Total30
 $6,729
 21
 $1,581
32
 $3,522
 30
 $6,729



NOTE 6 – Mortgage Servicing Rights

The following table summarizes the changes in mortgage servicing rights ("MSRs"), which are included in other assets on the consolidated balance sheets:
Three months ended March 31Three months ended March 31
2017 20162018 2017
(in thousands)(in thousands)
Amortized cost:      
Balance at beginning of period$38,822
 $40,944
$37,663
 $38,822
Originations of mortgage servicing rights1,183
 920
1,483
 1,183
Amortization(1,462) (1,669)(1,398) (1,462)
Balance at end of period$38,543
 $40,195
$37,748
 $38,543
      
Valuation Allowance - Balance at end of period$(1,291) $
Valuation allowance:   
Valuation Allowance - Balance at beginning and end of period$
 $(1,291)
      
Net MSRs at end of period$37,252
 $40,195
$37,748
 $37,252

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 a valuation allowance was not necessary as of March 31, 2018. For the three months ended March 31, 2017, the Corporation determined that no adjustment to the valuation allowance of $1.3 million was necessary fornecessary. Additions and reductions to the three months ended March 31, 2017. No valuation allowance was determinedare recorded as decreases and increases, respectively, to be necessary as"mortgage banking income" on the consolidated statements of March 31, 2016.

income.

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-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.

Fair values for RSUs and a majority of PSUs are based on the trading price of the Corporation’s stock on the date of grant and earn dividend equivalents during the vesting period, which are forfeitable if the awards do not vest. The fair value of certain PSUs are estimated through the use of the Monte Carlo valuation methodology as of the date of grant.



As of March 31, 2018, the Employee Equity Plan had 11.1 million shares reserved for future grants through 2023, and the Directors’ Plan had approximately 360,000 shares reserved for future grants through 2021.

The following table presents compensation (benefit) expense and the related tax benefits for equity awards recognized in the consolidated statements of income:
Three months ended March 31Three months ended March 31
2017 20162018 2017
(in thousands)(in thousands)
Stock-based compensation expense$734
 $1,436
Compensation expense$1,510
 $734
Tax benefit(744) (433)(461) (744)
Stock-based compensation expense, net of tax benefit$(10) $1,003
$1,049
 $(10)

For the quarter ended March 31, 2017, the tax benefit exceeded the stock-based compensation expense as a result of excess tax benefits related to stock option exercises during the quarter, which were recorded as a reduction to income tax expense as required under ASU 2016-09.

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 or dividend equivalents during the vesting period, which are forfeitable if the awards do not vest. The fair value of certain PSUs are estimated through the use of the Monte Carlo valuation methodology as of the date of grant.

As of March 31, 2017, the Employee Equity Plan had 11.5 million shares reserved for future grants through 2023, and the Directors’ Plan had approximately 371,000 shares reserved for future grants through 2021.

NOTE 8 – Employee Benefit Plans

The net periodic benefitpension cost for the Corporation’s Defined Benefit Pension Plan ("Pension Plan") consisted of the following components:
Three months ended March 31Three months ended March 31
2017 20162018 2017
(in thousands)(in thousands)
Service cost (1)
$
 $150
Interest cost830
 881
$831
 $830
Expected return on plan assets(451) (726)(451) (451)
Net amortization and deferral663
 782
664
 663
Net periodic benefit cost$1,042
 $1,087
Net periodic pension cost$1,044
 $1,042

(1)The Pension Plan was curtailed effective January 1, 2008. Service cost was related to administrative costs associated with the plan and was not due to the accrual of additional participant benefits.

The components of the net periodic benefit offor the Corporation’s Postretirement Benefits Plan ("Postretirement Plan") consisted of the following components:following:
Three months ended March 31Three months ended March 31
2017 20162018 2017
(in thousands)(in thousands)
Interest cost$17
 $38
$17
 $17
Net accretion and deferral(141) (65)(141) (141)
Net periodic benefit$(124) $(27)$(124) $(124)

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.



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 valuesvalue recognized in earnings as components of non-interest income andor 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 in other assets and other liabilities, respectively, on the consolidated balance sheets, and changes in fair values during the period are recorded in 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 and the gross fair values are recorded in other assets and other liabilities on the consolidated balance sheets, with changes in fair values during the period recorded in other non-interest expense on the consolidated statements of income. Fulton Bank, N.A. ("Fulton Bank"), the Corporation's largest banking subsidiary, exceeded $10 billion in total assets as of December 31, 2016 and wasis required to clear all eligible interest rate swap contracts with a central counterparty, effective January 1, 2017. As a result, Fulton Bank becameis subject to the regulations of the Commodity Futures Trading Commission ("CFTC").

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 futurespecific date at a contractual price. The Corporation offsetslimits its foreign exchange contract exposure with customers by entering into contracts with third-party correspondent financial institutionsinstitutional counterparties to mitigate its exposure to fluctuations in foreign currency exchange rates.risk. The Corporation also holds certain amounts of foreign currency with international correspondent banks.banks ("Foreign Currency Nostro Accounts"). The Corporation's policyCorporation limits the total overnight net foreign currency open positions, which includesis defined as an aggregate of all outstanding contracts and foreign accountForeign Currency Nostro Account balances, to $500,000. Gross fair values are recorded in other assets and other liabilities on the consolidated balance sheets, with changes in fair values during the period recorded withinin other service charges and fees on the consolidated statements of income.
















The following table presents a summary of the notional amounts and fair values of derivative financial instruments:
March 31, 2017 December 31, 2016March 31, 2018 December 31, 2017
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$120,577
 $1,509
 $87,119
 $863
$142,131
 $1,210
 $129,469
 $1,059
Negative fair values3,761
 (28) 18,239
 (227)10,572
 (81) 8,957
 (59)
Net interest rate locks with customers
 1,481
 
 636

 1,129
 
 1,000
Forward Commitments              
Positive fair values20,362
 21
 70,031
 2,223
112,544
 47
 3,856
 34
Negative fair values81,615
 (289) 19,964
 (112)
 
 100,808
 (213)
Net forward commitments  (268)   2,111
  47
   (179)
Interest Rate Swaps with Customers              
Positive fair values1,024,684
 24,810
 876,744
 24,397
464,300
 7,581
 1,316,548
 24,505
Negative fair values625,050
 (18,226) 583,060
 (16,998)1,654,770
 (44,696) 716,634
 (18,978)
Net interest rate swaps with customers  6,584
   7,399
  (37,115)   5,527
Interest Rate Swaps with Dealer Counterparties              
Positive fair values625,050
 18,226
 583,060
 16,998
Negative fair values (1)
1,024,684
 (22,624) 876,744
 (24,397)
Positive fair values (1) (3)
1,654,770
 39,466
 716,634
 18,941
Negative fair values (2) (3)
464,300
 (6,475) 1,316,548
 (19,764)
Net interest rate swaps with dealer counterparties  (4,398)   (7,399)  32,991
   (823)
Foreign Exchange Contracts with Customers              
Positive fair values8,184
 428
 11,674
 504
9,914
 228
 4,852
 276
Negative fair values5,035
 (137) 4,659
 (221)3,330
 (64) 5,914
 (119)
Net foreign exchange contracts with customers  291
   283
  164
   157
Foreign Exchange Contracts with Correspondent Banks              
Positive fair values9,260
 159
 7,040
 241
13,953
 182
 7,960
 184
Negative fair values10,198
 (402) 12,869
 (447)8,682
 (165) 6,048
 (255)
Net foreign exchange contracts with correspondent banks  (243)   (206)  17
   (71)
Net derivative fair value asset  $3,447
   $2,824
  $(2,767)   $5,611

(1) Includes centrally cleared interest rate swaps with a notional amount of $134.9$371.1 million and a fair value of $0 as of March 31, 2018 and a notional amount of $24.4 million and a fair value of $0 as of December 31, 2017. Collateral is
(2) Includes centrally cleared interest rate swaps with a notional amount of $83.3 million and a fair value of $0 as of March 31, 2018 and a notional amount of $377.1 million and a fair value of $0 as of December 31, 2017.
(3) The variation margin posted daily through a clearing agent for changes inas collateral on centrally cleared interest rate swaps, which represents the fair value.value of such swaps, is legally characterized as settlements of the outstanding derivative contracts instead of cash collateral. Accordingly, the fair values of centrally cleared interest rate swaps were offset by variation margins of $4.3 million at March 31, 2018, increasing the fair value of such swaps to $0, and $4.6 million at December 31, 2017, reducing the fair value of such swaps to $0.


















The following table presents a summary of the fair value (losses) gains (losses) on derivative financial instruments:
Three months ended March 31Three months ended March 31
2017 20162018 2017
(in thousands)(in thousands)
Interest rate locks with customers$845
 $1,232
$129
 $845
Forward commitments(2,379) (1,106)226
 (2,379)
Interest rate swaps with customers(815) 29,431
(42,642) (815)
Interest rate swaps with dealer counterparties(1)3,001
 (29,431)33,814
 3,001
Foreign exchange contracts with customers8
 374
7
 8
Foreign exchange contracts with correspondent banks(37) (279)88
 (37)
Net fair value gains on derivative financial instruments$623
 $221
$(8,378) $623

(1) Not included is $8.9 million of gains representing the change in the variation margin for the three months ended March 31, 2018 and $2.2 million of losses representing the change in the variation margin for the three months ended March 31, 2017.

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.value. Derivative financial instruments related to thesemortgage banking activities are also recorded at fair value, as noted 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 in interest income on the consolidated statements of income.

The following table presents a summary of the Corporation’s mortgage loans held for sale:
March 31,
2017
 December 31,
2016
March 31,
2018
 December 31,
2017
(in thousands)(in thousands)
Cost(1)$24,255
 $28,708
$23,186
 $31,069
Fair value24,783
 28,697
23,450
 31,530
(1) Cost basis of mortgage loans held for sale represents the unpaid principal balance.

DuringFor the three months ended March 31, 2017 and 2016, the Corporation recorded gains2018, losses related to changes in fair values of mortgage loans held for sale of $539,000were $197,000 and, $230,000, respectively.for the three months ended March 31, 2017, gains were $539,000.

Balance Sheet Offsetting

CertainAlthough 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. Theagreements, the Corporation elects to not offset such qualifying assets and liabilities subject to such arrangements on the consolidated financial statements.liabilities.

The Corporation is a party to interest rate swap transactions with financial institution counterparties and customers, disclosed in detail 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. Collateral is postedA daily settlement occurs through a clearing agent for changes in the fair value of centrally cleared derivatives with negative fair values.derivatives. As a result, the total fair values of interest rate swap derivative assets and derivative liabilities recognized on the consolidated balance sheet are not equal and offsetting.

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, 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.

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 in short-term borrowings on the consolidated balance sheets, while the securities underlying the repurchase agreements remain classified with investment securities on the consolidated balance sheets. The Corporation has no intention of setting off these amounts. Therefore, these repurchase agreements are not eligible for offset.
















The following table presents the Corporation's financial instruments that are eligible for offset, and the effects of offsetting, on the consolidated balance sheets:
Gross Amounts Gross Amounts Not Offset  Gross Amounts Gross Amounts Not Offset  
Recognized  on the Consolidated  Recognized  on the Consolidated  
on the Balance Sheets  on the Balance Sheets  
Consolidated Financial Cash NetConsolidated Financial Cash Net
Balance Sheets 
Instruments(1)
 
Collateral (2)

 AmountBalance Sheets 
Instruments(1)
 
Collateral (2)

 Amount
(in thousands)(in thousands)
March 31, 2017       
March 31, 2018       
Interest rate swap derivative assets$43,036
 $(17,394) $
 $25,642
$47,047
 $(7,339) $(34,170) $5,538
Foreign exchange derivative assets with correspondent banks159
 (159) 
 
182
 (165) 
 17
Total$43,195
 $(17,553) $
 $25,642
$47,229
 $(7,504) $(34,170) $5,555
              
Interest rate swap derivative liabilities$40,850
 $(17,394) $(2,850) $20,606
$51,171
 $(7,339) $(8,806) $35,026
Foreign exchange derivative liabilities with correspondent banks402
 (159) (200) 43
165
 (165) 
 
Total$41,252
 $(17,553) $(3,050) $20,649
$51,336
 $(7,504) $(8,806) $35,026
              
December 31, 2016       
December 31, 2017       
Interest rate swap derivative assets$41,395
 $(15,117) $
 $26,278
$43,446
 $(16,844) $
 $26,602
Foreign exchange derivative assets with correspondent banks241
 (241) 
 
184
 (184) 
 
Total$41,636
 $(15,358) $
 $26,278
$43,630
 $(17,028) $
 $26,602
              
Interest rate swap derivative liabilities$41,395
 $(15,117) $(4,010) $22,268
$38,742
 $(16,844) $(6,588) $15,310
Foreign exchange derivative liabilities with correspondent banks447
 (241) (206) 
255
 (184) 
 71
Total$41,842
 $(15,358) $(4,216) $22,268
$38,997
 $(17,028) $(6,588) $15,381

(1)For derivativeinterest rate swap assets, amounts represent any derivative liability fair values that could be offset in the event of counterparty or customer default. For derivativeinterest rate swap liabilities, amounts represent any derivative asset fair values that could be offset in the event of counterparty or customer default.
(2)Amounts represent cash collateral received from the counterparty or posted by the Corporation.Corporation on interest rate swap transactions and foreign exchange contracts with financial institution counterparties. Interest rate swaps with customers are collateralized by the same collateral securing the underlying loans to those borrowers. Cash and securities collateral amounts are included in the table only to the extent of the net derivative fair values.


NOTE 10 – Commitments and Contingencies

Commitments

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

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

The outstanding amounts of commitments to extend credit and letters of credit were as follows:
March 31,
2017
 December 31, 2016March 31,
2018
 December 31, 2017
(in thousands)(in thousands)
Commitments to extend credit$6,228,866
 $6,075,567
$6,418,380
 $6,205,029
Standby letters of credit357,313
 356,359
318,827
 326,973
Commercial letters of credit38,003
 38,901
43,709
 41,801



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






Residential Lending

Residential mortgages originated and sold by the Corporation consist primarily of conforming, prime loans sold to government sponsored agencies, such as the Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac"). The Corporation also sells certainCertain prime loans it originatesmay also be sold 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 both March 31, 20172018 and December 31, 2016, total2017, outstanding repurchase requests 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"). The Corporation provided a "credit enhancement" for residential mortgage loans sold under the MPF Program whereby it would assume credit losses in excess of a defined "First Loss Account," or "FLA" balance, up to specified amounts. The FLA is funded by the Federal Home Loan Bank of Pittsburgh based on a percentage of the outstanding principal balance of loans sold. As of March 31, 2017,2018, the unpaid principal balance of loans sold under the MPF Program was approximately $98$80 million. As of both March 31, 20172018 and December 31, 2016,2017, the reserve for estimated credit losses related to loans sold under the MPF Program was $1.7 million.$1.1 million and $1.2 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 both March 31, 20172018 and December 31, 2016,2017, the total reserve for losses on residential mortgage loans sold was $2.6$2.1 million, respectively, including both reserves for credit losses under the MPF Program and reserves for representation and warranty exposures. Management believes that the reserves recorded as of March 31, 20172018 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.

In 2017, the Corporation began selling certain non-prime loans to Fannie Mae, under programs designed to extend credit to borrowers who do not meet the underwriting criteria for conforming, prime loans. Under this program, loans sold must be repurchased by the Corporation if they become delinquent, as defined in the agreement, within three years of the date the loan is funded. In the first quarter of 2018, approximately $44.9 million of loans were sold under this program, and the total unpaid principal balance of loans sold under this program was $58.4 million at March 31, 2018. Based on the credit characteristics of this portfolio, no reserve for estimated credit losses for these loans has been recognized in the consolidated balance sheet at March 31, 2018.

Legal Proceedings

The Corporation and its subsidiaries areis involved in various pending and threatened claims and other legal proceedings in the ordinary course of business activities of the Corporation. The Corporation periodically evaluates the possible impact of pending litigationthese matters, based on, among other factors,taking into consideration the advicemost recent information available. A loss reserve is established for those matters for which the Corporation believes a loss is both probable and reasonably estimable. Once established, the reserve is adjusted as appropriate to reflect any subsequent developments. Actual losses may be more or less than the amount estimated by the Corporation. For matters where a loss is not probable, or the amount of counsel, available insurance coverage and recorded liabilities and reserves for probable legal liabilities and costs. the loss cannot be estimated by the Corporation, no loss reserve is established.

In addition, from time to time, the Corporation is the subject of investigations or other forms of regulatory or governmental inquiry covering a range of possible issues and, in some cases, these may be part of similar reviews of the specified activities of other industry participants. These inquiries could lead to administrative, civil or criminal proceedings, and could possibly result in fines, penalties, restitution or the need to alter the Corporation’s business practices, and cause the Corporation to incur additional costs. The Corporation’s practice is to cooperate fully with regulatory and governmental investigations.

As of the date of this report, the Corporation believes that any liabilities, individually or in the aggregate, which may result from the final outcomes of pending proceedings will not have a material adverse effect on the financial 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 eachthree 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 itsthe affected 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. The Corporation and itsthe affected bank subsidiaries have implemented numerous enhancements to the BSA/AML Compliance Program, completed the retrospective reviews required under


the Consent Orders, and continue to strengthen and refine the BSA/AML Compliance Program to achieve a sustainable program 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 isand the affected bank subsidiaries are subject to certain restrictions on expansion activities of the Corporation and its bank subsidiaries.activities. Further, any failure to comply with the requirements of any of the Consent Orders involving the Corporation or itsthe affected 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.

As previously disclosed, on October 27, 2017, the Office of the Comptroller of the Currency (the "OCC") terminated the Consent Orders that it issued on July 14, 2014 to three of the Corporation's bank subsidiaries, Fulton Bank, N.A., FNB Bank, N.A. and Swineford National Bank, relating to deficiencies in the BSA/AML Compliance Programs at those bank subsidiaries.

Fair Lending Investigation

During the second quarter of 2015, Fulton Bank, N.A., 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 (specifically, the Equal Credit Opportunity Act and the Fair Housing Act) by Fulton Bank, N.A. in certain geographies. Fulton Bank, N.A. has been and is cooperating with the Department and responding to the Department’s requests for information. During the third quarter of 2016, the Department informed the Corporation, Fulton Bank, N.A., and three of the Corporation’s other bank subsidiaries, Fulton Bank of New Jersey, The Columbia Bank and Lafayette Ambassador Bank, that the Department was expanding its investigation of potential lending discrimination on the basis of race and national origin to encompass additional geographies that were not included in the initial letter from the Department. In addition to requesting information concerning the lending activities of these bank subsidiaries, the Department also requested information concerning the Corporation and the residential mortgage lending activities conducted under the Fulton Mortgage Company brand, the trade name used by all of the Corporation’s bank subsidiaries for residential mortgage lending. The investigation relates to lending activities during the period January 1, 2009 to the present. The Corporation and the identified bank subsidiaries are cooperating with the Department and responding to the Department’s requests for information. The Corporation and its bank subsidiaries are not able at this time to determine the terms on which this investigation will be resolved or the timing of such resolution, or to reliably estimate the amounts of any settlement, fines or other penalties or the cost of any other remedial actions, if enforcement action is taken. In addition, should the investigation result in an enforcement action against the Corporation or its bank subsidiaries, or a settlement with the Department, the ability of the Corporation and its bank subsidiaries to engage in certain expansion or other activities may be restricted.

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. (“Ameriprise”) and Riverview Bank (“Riverview”), have been named as defendants in a lawsuit brought on behalf of a group of 67 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 fraud scheme over a period of years through the sale of fictitious high-yield 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 through defendant Ameriprise, which caused 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 and Riverview, 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 31, 2016, the plaintiffs filed a motion to remand the lawsuit to the Court of Common Pleas for Dauphin County, Pennsylvania. On October 24, 2016, the District Court granted the plaintiffs' motion and the lawsuit was remanded back to the Court of Common Pleas for Dauphin County. All defendants subsequently filed preliminary objections to the Complaint, including objections that, if granted, would result in dismissal of the case. On April 17, 2017, the Court of Common Pleas for Dauphin County heard oral arguments concerning the preliminary objections to the Complaint.




NOTE 11 – Fair Value Measurements

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

The following tables present summaries of the Corporation’s assets and liabilities measured at fair value on a recurring basis and reported on the consolidated balance sheets:
March 31, 2017March 31, 2018
Level 1 Level 2 Level 3 TotalLevel 1 Level 2 Level 3 Total
(in thousands)(in thousands)
Mortgage loans held for sale$
 $24,783
 $
 $24,783
$
 $23,450
 $
 $23,450
Available for sale investment securities:              
Equity securities22,574
 
 
 22,574
U.S. Government sponsored agency securities
 5,996
 
 5,996

 20,962
 
 20,962
State and municipal securities
 392,624
 
 392,624

 406,099
 
 406,099
Corporate debt securities
 104,705
 3,172
 107,877

 97,995
 3,960
 101,955
Collateralized mortgage obligations
 565,886
 
 565,886

 679,700
 
 679,700
Mortgage-backed securities
 1,313,621
 
 1,313,621
Residential mortgage-backed securities
 1,054,166
 
 1,054,166
Commercial mortgage-backed securities
 226,892
 
 226,892
Auction rate securities
 
 97,439
 97,439

 
 103,049
 103,049
Total available for sale investment securities22,574
 2,382,832
 100,611
 2,506,017

 2,485,814
 107,009
 2,592,823
Other assets18,170
 44,567
 
 62,737
19,505
 48,304
 
 67,809
Total assets$40,744
 $2,452,182
 $100,611
 $2,593,537
$19,505
 $2,557,568
 $107,009
 $2,684,082
Other liabilities$18,099
 $41,167
 $
 $59,266
$19,307
 $51,251
 $
 $70,558
December 31, 2016December 31, 2017
Level 1 Level 2 Level 3 TotalLevel 1 Level 2 Level 3 Total
(in thousands)(in thousands)
Mortgage loans held for sale$
 $28,697
 $
 $28,697
$
 $31,530
 $
 $31,530
Available for sale investment securities:              
Equity securities24,526
 
 
 24,526
918
 
 
 918
U.S. Government sponsored agency securities
 134
 
 134

 5,938
 
 5,938
State and municipal securities
 391,641
 
 391,641

 408,949
 
 408,949
Corporate debt securities
 106,537
 2,872
 109,409

 93,552
 3,757
 97,309
Collateralized mortgage obligations
 593,860
 
 593,860

 602,623
 
 602,623
Mortgage-backed securities
 1,342,401
 
 1,342,401
Residential mortgage-backed securities
 1,120,796
 
 1,120,796
Commercial mortgage-backed securities
 212,755
 
 212,755
Auction rate securities
 
 97,256
 97,256

 
 98,668
 98,668
Total available for sale investment securities24,526
 2,434,573
 100,128
 2,559,227
918
 2,444,613
 102,425
 2,547,956
Other assets17,111
 44,481
 
 61,592
19,451
 44,539
 
 63,990
Total assets$41,637
 $2,507,751
 $100,128
 $2,649,516
$20,369
 $2,520,682
 $102,425
 $2,643,476
Other liabilities$17,032
 $41,734
 $
 $58,766
$19,357
 $39,014
 $
 $58,371


The valuation techniques used to measure fair value for the items in the preceding tables are as follows:
Mortgage loans held for sale – This category consists of mortgage loans held for sale that the Corporation has elected to measure at fair value. Fair values as of March 31, 20172018 and December 31, 20162017 were measured based on the price that


secondary market investors were offering for loans with similar characteristics. See Note 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 in this asset category are both equity and debt securities. Level 2 available for sale debt securities are valued by a third-party pricing service commonly used in the banking industry. The pricing service uses pricing models that vary based on asset class and incorporate available market information, including quoted prices of investment securities with similar characteristics. Because many fixed income securities do not trade on a daily basis, pricing models use available information, as applicable, through processes such as benchmark yield curves, benchmarking of like securities, sector groupings, and matrix pricing.
Standard market inputs include: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data, including market research publications. For certain security types, additional inputs may be used, or some of the standard market inputs may not be applicable.

Management tests the values provided by the pricing service by obtaining securities prices from an alternative third-party source and comparing the results. This test is doneperformed for at least 80% of the securities valued by the pricing service. Generally, differences by security in excess of 5% are researched to reconcile the difference.
Equity securitiesAs of March 31, 2018, the Corporation did not hold any equity securities. Equity securities consistheld as of December 31, 2017 consisted of common stocks of financial institutions ($21.6 million at March 31, 2017 and $23.5 million at December 31, 2016) and other equity investments ($969,000 at March 31, 2017 and $1.0 million at December 31, 2016).investments. These Level 1 investments arewere 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-backedResidential mortgage-backed securities/Commercial 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 and senior debt issued by financial institutions ($62.766.6 million at March 31, 20172018 and $65.2$61.9 million at December 31, 2016)2017), single-issuer trust preferred securities issued by financial institutions ($40.730.5 million at March 31, 20172018 and $39.8$30.7 million at December 31, 2016)2017), pooled trust preferred securities issued by financial institutions ($422,000865,000 at both March 31, 20172018 and $707,000 at December 31, 2016)2017) and other corporate debt issued by non-financial institutions ($4.0 million at both March 31, 20172018 and December 31, 2016)2017).
Level 2 investments include the Corporation’s holdings of subordinated debt and senior debt, other corporate debt issued by non-financial institutions and $38.0$27.4 million and $37.3$27.7 million of single-issuer trust preferred securities held at March 31, 20172018 and December 31, 2016,2017, 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 ($422,000865,000 at both March 31, 20172018 and $707,000 at December 31, 2016)2017) and certain single-issuer trust preferred securities ($2.83.1 million at both March 31, 20172018 and $2.5 million at December 31, 2016)2017). 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 in 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 in this category are the following:
Level 1 assets include mutual funds that are held in trust for employee deferred compensation plans ($17.619.1 million at March 31, 20172018 and $16.4$19.0 million at December 31, 2016)2017) and the fair value of foreign currency exchange contracts ($587,000428,000 at March 31, 20172018 and $745,000$460,000 at December 31, 2016)2017). 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 ($1.51.2 million at March 31, 20172018 and $3.1$1.1 million at December 31, 2016)2017) and the fair value of interest rate swaps ($43.047.0 million at March 31, 20172018 and $41.4$43.4 million at December 31, 2016)2017). 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 in this category are the following:

Level 1 liabilities include employee deferred compensation liabilities which represent amounts due to employees under deferred compensation plans ($17.619.1 million at March 31, 20172018 and $16.4$19.0 million at December 31, 2016)2017) and the fair value of foreign currency exchange contracts ($539,000229,000 at March 31, 20172018 and $668,000$374,000 at December 31, 2016)2017). 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 ($317,00081,000 at March 31, 20172018 and $339,000$272,000 at December 31, 2016)2017) and the fair value of interest rate swaps ($40.951.2 million at March 31, 20172018 and $41.4$37.8 million at December 31, 2016)2017). The fair values of these liabilities are determined in the same manner as the related assets, as described under the heading "Other assets" above.

The following table presents the changes in the Corporation’s available for sale investment securities measured at fair value on a recurring basis using unobservable inputs (Level 3):
Three months ended March 31, 2017Three months ended March 31, 2018
Pooled Trust
Preferred
Securities
 Single-issuer
Trust Preferred
Securities
 ARCs
(in thousands)
Balance at December 31, 2017$707
 $3,050
 $98,668
Unrealized adjustment to fair value (1)
158
 42
 4,381
Discount accretion (2)

 3
 
Balance at March 31, 2018$865
 $3,095
 $103,049
Pooled Trust
Preferred
Securities
 Single-issuer
Trust Preferred
Securities
 ARCs     
(in thousands)Three months ended March 31, 2017
Balance at December 31, 2016$422
 $2,450
 $97,256
$422
 $2,450
 $97,256
Unrealized adjustment to fair value (1)

 297
 86

 297
 86
Discount accretion (2)

 3
 97

 3
 97
Balance at March 31, 2017$422
 $2,750
 $97,439
$422
 $2,750
 $97,439
     
Three months ended March 31, 2016
Balance at December 31, 2015$706
 $2,630
 $98,059
Unrealized adjustment to fair value (1)

 (233) (832)
Discount accretion (2)

 3
 99
Balance at March 31, 2016$706
 $2,400
 $97,326

(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"available for sale investment securitiessecurities" on the consolidated balance sheets.
(2)Included as a component of net"net interest incomeincome" on the consolidated statements of income.





Certain financial assets are not measured at fair value on an ongoing basis, but are subject to fair value measurement in certain circumstances, such as upon their acquisition or when there is evidence of impairment. The following table presents the Corporation’s Level 3 financial assets measured at fair value on a nonrecurring basis and reported on the Corporation’s consolidated balance sheets:
 March 31, 2017
 Level 1 Level 2 Level 3 Total
 (in thousands)
Net loans$
 $
 $131,693
 $131,693
Other financial assets
 
 49,158
 49,158
Total assets$
 $
 $180,851
 $180,851
December 31, 2016
Level 1 Level 2 Level 3 TotalMarch 31, 2018 December 31, 2017
(in thousands)(in thousands)
Net loans$
 $
 $132,576
 $132,576
$154,305
 $149,608
Other financial assets
 
 50,347
 50,347
OREO10,744
 9,823
MSRs37,748
 37,663
Total assets$
 $
 $182,923
 $182,923
$202,797
 $197,094
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 collectively 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 assetsOREO – This category includes OREO, ($11.9 million at March 31, 2017 and $12.8 million at December 31, 2016) and MSRs ($37.3 million at March 31, 2017 and $37.5 million at December 31, 2016), 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 – This category includes MSRs, classified as Level 3 assets. MSRs are initially recorded at fair value upon the sale of residential mortgage loans to secondary market investors. MSRs are amortized as a reduction to servicing income over the estimated lives of the underlying loans. MSRs are stratified and evaluated for impairment by comparing each stratum's carrying amount to its estimated fair value. Fair values are determined at the end of each quarter through a discounted cash flows valuation performed by a third-party valuation expert. Significant inputs to the valuation included expected net servicing income, the discount rate and the expected life of the underlying loans. Expected life is based on the contractual terms of the loans, as adjusted for prepayment projections. The weighted average annual constant prepayment rate and the weighted average discount rate used in the March 31, 20172018 valuation were 11.3%9.7% and 10.1%9.5%, respectively. Management tests the reasonableness of the significant inputs to the third-party valuation in comparison to market data.











As required by FASB ASC Section 825-10-50, the following table details the book values and estimated fair values of the Corporation’s financial instruments as of March 31, 20172018 and December 31, 2016.2017. In addition, a general description of the methods and assumptions used to estimate such fair values is also provided.
March 31, 2017 December 31, 2016March 31, 2018
Book Value Estimated
Fair Value
 Book Value Estimated
Fair Value
Amortized CostLevel 1Level 2Level 3Estimated
Fair Value
(in thousands)(in thousands)
FINANCIAL ASSETS        
Cash and due from banks$93,844
 $93,844
 $118,763
 $118,763
$100,151
$100,151
$
$
$100,151
Interest-bearing deposits with other banks284,750
 284,750
 233,763
 233,763
210,906
210,906


210,906
Federal Reserve Bank and Federal Home Loan Bank stock65,637
 65,637
 57,489
 57,489
56,900

56,900

56,900
Loans held for sale (1)
24,783
 24,783
 28,697
 28,697
23,450

23,450

23,450
Available for sale investment securities (1)
2,506,017
 2,506,017
 2,559,227
 2,559,227
2,592,823

2,485,814
107,009
2,592,823
Net Loans (1)
14,793,101
 14,592,018
 14,530,593
 14,387,454
15,533,067


14,933,445
14,933,445
Accrued interest receivable46,355
 46,355
 46,294
 46,294
53,060
53,060


53,060
Other financial assets (1)
206,555
 206,555
 206,132
 206,132
216,952
120,156
48,304
48,492
216,952
FINANCIAL LIABILITIES          
Demand and savings deposits$12,371,970
 $12,371,970
 $12,259,622
 $12,259,622
$12,763,521
$12,763,521
$
$
$12,763,521
Brokered deposits64,195
64,195


64,195
Time deposits2,718,374
 2,735,944
 2,753,242
 2,769,757
2,649,387

2,647,498

2,647,498
Short-term borrowings453,317
 453,317
 541,317
 541,317
937,852
937,852


937,852
Accrued interest payable12,506
 12,506
 9,632
 9,632
9,681
9,681


9,681
Other financial liabilities (1)
219,600
 219,600
 216,080
 216,080
Other financial liabilities209,483
158,232
51,251

209,483
Federal Home Loan Bank advances and long-term debt1,137,909
 1,132,282
 929,403
 928,167
938,499

914,763

914,763
 
December 31, 2017
Book ValueLevel 1Level 2Level 3Estimated
Fair Value
(in thousands)
FINANCIAL ASSETS 
Cash and due from banks$108,291
$108,291
$
$
$108,291
Interest-bearing deposits with other banks293,805
293,805


293,805
Federal Reserve Bank and Federal Home Loan Bank stock60,761

60,761

60,761
Loans held for sale31,530

31,530

31,530
Available for sale investment securities2,547,956
918
2,444,613
102,425
2,547,956
Net Loans15,598,337


15,380,974
15,380,974
Accrued interest receivable52,910
52,910


52,910
Other financial assets215,464
123,439
44,539
47,486
215,464
FINANCIAL LIABILITIES   
Demand and savings deposits$13,042,147
$13,042,147
$
$
$13,042,147
Brokered deposits90,473
90,473


90,473
Time deposits2,664,912

2,664,912

2,664,912
Short-term borrowings617,524
617,524


617,524
Accrued interest payable9,317
9,317


9,317
Other financial liabilities227,569
188,555
39,014

227,569
Federal Home Loan Bank advances and long-term debt1,038,346

1,038,346

1,038,346
 
(1)These financial instruments, or certain financial instruments in 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-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.
As of March 31, 2018, Fair values for loans and time deposits were estimated by discounting future cash flows using the current rates, as adjusted for liquidity considerations, at which similar loans would be made to borrowers and similar deposits would be issued to customers for the same remaining maturities. Fair values of loans also include estimated credit losses that would be assumed in a market transaction. Fair values estimated in this manner are considered to represent estimated exit prices, required by ASU 2016-01, as of March 31, 2018. As of December 31, 2017, loan fair values do not fully incorporate an exit price approach to fair value, as defined in FASB ASC Topic 820.value.
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 in Level 2 liabilities under FASB ASC Topic 820.




NOTE 12 – Long-Term Debt and Subsequent Event

In March 2017, the Corporation issued $125.0 million of senior notes, with a fixed rate of 3.60% and effective rate of 3.95%, that mature in 2022. A portion of the net proceeds from this issuance were used to repay $100.0 million of 10-year subordinated notes, which matured on May 1, 2017 and carried a fixed rate of 5.75% and an effective rate of approximately 5.96%.



Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Management’s Discussion and Analysis of Financial Condition and Results of Operations ("Management’s Discussion") relates to Fulton Financial Corporation (the "Corporation"), a financial holding company registered under the Bank Holding Company Act 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 notesother financial information presented in this report.

FORWARD-LOOKING STATEMENTS

The Corporation has made, and may continue to make, certain forward-looking statements with respect to its financial condition, and results of operations.operations and business. 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""intends," "projects," the negative of these terms and similar expressions which are intended to identify forward-looking statements.  

other comparable terminology. These forward-looking statements are not guaranteesmay include projections of, or guidance on, the Corporation's future financial performance, expected levels of future performanceexpenses, anticipated growth strategies, descriptions of new business initiatives and anticipated trends in the Corporation's business or financial results.

Forward-looking statements are neither historical facts, nor assurance of future performance. Instead, they are based on current beliefs, expectations and assumptions regarding the future of the Corporation's business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements related to the future, they are subject to inherent uncertainties, risks and uncertainties, somechanges in circumstances that are difficult to predict and many of which are beyondoutside of the Corporation's control, and ability to predict, that could cause actual results toand financial condition may differ materially from those expressedindicated in the forward-looking statements. Therefore, you should not unduly rely on any of these forward-looking statements. Any forward-looking statement is based only on information currently available and speaks only as of the date when made. The Corporation undertakes no obligation, other than as required by law, to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Many factors could affect future financial results including, without limitation:

the impact of adverse 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 interest rate-sensitive assets to interest 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 abilityeffects of the extensive level of regulation and supervision to manage liquidity, both atwhich the holding company levelCorporation and at its bank subsidiaries;
the impact of increased regulatory scrutiny of the banking industry;subsidiaries are subject;
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, investigations and investigations,examinations 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 three of 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 manycontinuing impact of the regulations mandated byDodd-Frank Act on the Dodd-Frank Act;Corporation's business and results of operations;
the effects of, and uncertainty surrounding, potentialnew legislation, changes in legislation, regulation and government policy, as aand changes in leadership at the federal banking agencies, which could result in significant changes in banking and financial services regulation;
the effects of actions by the federal government, including those of the recent changeFederal Reserve Board and other government agencies, that impact money supply and market interest rates;
the effects of changes in U.S. federal, administration;state or local tax laws;
the effects of negative publicity on the Corporation’s reputation;
the effects of adverse outcomes in litigation and governmental or administrative proceedings;
the potential to incur losses in connection with repurchase and indemnification payments related to sold loans;


the Corporation's ability to obtain regulatory approvals to consolidate its bank subsidiaries and achieve intended reductions in the time, expense and resources associated with regulatory compliance from such consolidations;
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 effects of changes in accounting policies, standards, and interpretations on the presentation of the Corporation's financial condition and results of operations;
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;risks, including data breaches and cyber-attacks;
the Corporation’s ability to keep pace with technological changes;
the Corporation’s ability to attract and retain talented personnel;
capital and liquidity strategies, including the Corporation’s ability to comply with applicable capital and liquidity requirements, and the Corporation’s ability to generate capital internally or raise capital on favorable terms;
the Corporation’s reliance on its subsidiaries for substantially all of its revenues and its ability to pay dividends or other distributions; and
the effects of any downgrade in the Corporation’s credit ratings on its borrowing costs or access to capital markets.



RESULTS OF OPERATIONS

Overview

Fulton FinancialThe Corporation is a financial holding company comprised of six wholly owned bank subsidiaries which provide a full range of retail and commercial financial services through locations in Pennsylvania, Delaware, Maryland, New Jersey and Virginia and eight wholly owned non-bank subsidiaries.Virginia. The Corporation generates the majority of its revenue through net interest income, or the difference between interest earned on loans, investments and other interest-earning assets, and interest paid on deposits and borrowings. Growth in net interest income is dependent upon balance sheet growth and 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
March 31
As of or for the
three months ended
March 31
2017 20162018 2017
Net income (in thousands)$43,380
 $38,257
$49,480
 $43,380
Diluted net income per share$0.25
 $0.22
$0.28
 $0.25
Return on average assets0.92% 0.86%1.01% 0.92%
Return on average equity8.22% 7.47%9.02% 8.22%
Return on average tangible equity (1)
10.93% 10.07%11.85% 10.93%
Net interest margin (2)
3.26% 3.23%3.35% 3.26%
Efficiency ratio (1)
64.76% 68.33%67.5% 64.2%
Non-performing assets to total assets0.75% 0.82%0.73% 0.75%
Annualized net charge-offs to average loans0.09% 0.20%0.10% 0.09%

(1)Ratio represents a financial measure derived by methods other than U.S. Generally Accepted Accounting Principles ("U.S. GAAP"). See reconciliation of this non-U.S. GAAP financial measure to the most comparable U.S. GAAP measure under the heading, "Supplemental Reporting of Non-U.S.GAAP Based Financial Measures" at the end of this "Overview and Outlook""Overview" section.
(2)Presented on an FTE basis, using a 21% and a 35% federal tax rate and statutory interest expense disallowances.disallowances in 2018 and 2017, respectively. See also the “Net Interest Income” section of Management’s Discussion.

Net income for the three months ended March 31, 2017 increased $5.1 million, or 13.4%, compared to the same period in 2016.The increase was mainly due to higher net interest income and non-interest income, partially offset by increases in the provision for credit losses and non-interest expenses.

The following is a summary of financial highlights for the three months ended March 31, 2018. Unless noted otherwise, all comparisons are to the three month period ended March 31, 2017:

FTE Net Income and Net Income Per Share Growth - Net income was $49.5 million for the three months ended March 31, 2018, an increase of $6.1 million, or 14.1%, compared to the same period in 2017. Diluted net income per share for the first quarter of 2018 increased $0.03, or 12.0%, to $0.28 per diluted share compared to the first quarter of 2017. The increase was primarily driven by growth in the balance sheet and an increase in the net interest margin.

Net Interest Income Growth - Net interest income for the first quarter of 2018 was $151.3 million, an increase of $13.7 million, or 10.0%, compared to the same period of 2017. The increase was the result of growth in interest-earning assets, primarily loans, and the impact of a 9 basis point increase in net interest margin, reflecting the impact of increases in the federal funds rate in 2017.

Net Interest Margin - For the three months ended March 31, 2017, FTE2018, the net interest income increased $9.2margin increase was driven by a 19 basis point increase in yields on interest-earning assets, partially offset by a 13 basis point increase in the cost of interest-bearing liabilities. The enactment of the Tax Cuts and Jobs Act ("Tax Act"), in December 2017 resulted in a 6 basis point decrease in average yields on interest earning assets and net interest margin as a result of the impact of the Tax Act on calculated FTE yields on tax exempt loans and investment securities.

Loan Growth - Average loans were $803.5 million, or 5.4%, higher at March 31, 2018 compared to March 31, 2017. The most notable increases were in commercial and residential mortgages and construction loans. The loan growth occurred throughout all of the Corporation's geographic markets.



Deposit Growth - Average deposits grew $534.0 million, or 6.9%3.6%, in comparisonduring the first quarter ended March 31, 2018 compared to the same period in 2016. This2017. The increase was driven byresulted from growth in interest-earning assetsdemand and a 3 basis point increase in the net interest margin.


Average interest-earning assets increased $1.1 billion, or 6.4%, in the first quarter of 2017 in comparison to the same period in 2016, mainly due to a $1.0 billion, or 7.2%, increase in average loans and a $106.9 million, or 4.4%, increase in average investment securities,savings accounts, partially offset by a $46.3 million, or 12.9%, decrease in average other interest-earning assets. Average interest-bearing liabilities increased $644.7 million, or 5.5%, primarily due to a $345.8 million, or 3.4%, increase in average interest-bearing deposits, a $267.1 million, or 60.0%, increase in average short-term borrowingstime and a $31.8 million, or 3.3%, increase in average FHLB advances and long-term debt. Additional funding to support the increase in average interest-earning assets was provided by a $333.8 million, or 8.4%, increase in average noninterest-bearing demand deposits.

Long-term Debt- In March 2017, the Corporation issued $125.0 million of senior notes, with a fixed rate of 3.60% and an effective rate of 3.95%, that mature in 2022. A portion of the net proceeds from this issuance were used on May 1, 2017 to repay $100.0 million of 10-year subordinated notes, which matured and carried a fixed rate of 5.75% and an effective rate of approximately 5.96%. The net impact of these transactions will be a decrease in interest expense of approximately $300,000 per quarter, which will be fully realized beginning in the third quarter of 2017.

Asset Quality - Overall credit metrics and key asset quality ratios improved for the three months ended March 31, 2018 compared to the three months ended March 31, 2017. Non-performing assets decreased to 0.73% as a percentage of total assets, compared to 0.75% as of March 31, 2017. The Corporation recorded a $4.8 milliontotal delinquency rate improved to 1.19% as of March 31, 2018, from 1.23% as of March 31, 2017. Annualized net charge-offs to average loans outstanding were 0.10% for the first quarter of 2018, up slightly compared to 0.09% for the first quarter of 2017.

The provision for credit losses for the three months ended March 31, 2017,2018 was $4.0 million, compared to a $1.5$4.8 million provision for the same period in 2016.2017. The increasedecrease in provision for credit losses in 2017the 2018 period was largely due to growthimpacted by improved risk characteristics in the loan portfolio.

Asset quality improved for the three months ended March 31, 2017 as compared to the same period of 2016. Annualized net charge-offs to average loans outstanding were 0.09% for the first quarter of 2017, compared to 0.20% for the first quarter of 2016.Non-performing assets decreased $4.7 million, or 3.2%, as of March 31, 2017 compared to March 31, 2016 and were 0.75% and 0.82% of total assets as of March 31, 2017 and March 31, 2016, respectively. The total delinquency rate was 1.23% as of March 31, 2017, compared to 1.44% as of March 31, 2016.

Non-interest Income - For the three months ended March 31, 2017,2018, non-interest income, excluding investment securities gains, increased $3.4 million, or 8.0%, in comparisonwas relatively unchanged compared to the same period in 2016. The increase was primarily driven2017. Increases in investment management and trust services income, merchant and cash management fee income during the first quarter of 2018 were partially offset by higherdecreases in commercial loan interest rate swap fees, investment management and trust income and mortgage banking income.fees.

Investment securities gains for the three months ended March 31, 2017 were $1.1 million as compared to $947,000 for the same period in 2016.

Non-interest Expense - For the three months ended March 31, 2017,2018, non-interest expense increased $1.9$14.4 million, or 1.5%11.8%, in comparison to the first quartersame periods of 2016.2017. The increase wasincreases were primarily a result of increases in state taxes, amortization of certain community development investmentsdriven by higher salaries and software expenses, partially offset by decreases in data processing expenseemployee benefits, other outside services, professional fees and FDIC insurance expense.























Income Taxes - Income tax expense of $7.1 million for the three months ended March 31, 2018 resulted in an effective tax rate ("ETR"), or income taxes as a percentage of income before income taxes, of 12.5%, as compared to 24.1% for same period of 2017. The ETR for the three months ended March 31, 2018 was significantly impacted by the reduction in the federal statutory income tax rate as the result of the Tax Act.



Supplemental Reporting of Non-U.S. 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 U.S. GAAP. The Corporation has presented these non-U.S. 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-U.S. GAAP financial measures is consistent with how the Corporation evaluates its performance internally, and these non-U.S. GAAP financial measures are frequently used by securities analysts, investors and other interested parties in the evaluation of the Corporation and companies in the Corporation's industry. Management believes that these non-U.S. GAAP financial measures, in addition to U.S. GAAP measures, are also useful to investors to evaluate the Corporation's results. Investors should recognize that the Corporation's presentation of these non-U.S. GAAP financial measures might not be comparable to similarly-titled measures ofat other companies. These non-U.S. GAAP financial measures should not be considered a substitute for U.S. GAAP basis measures, and the Corporation strongly encourages a review of its consolidated financial statements in their entirety. Following are reconciliations of these non-U.S. GAAP financial measures to the most directly comparable U.S. GAAP measure as of and for the three months ended March 31:measure:

As of or for the
Three months ended
March 31
As of or for the
three months ended
March 31
 
2017 20162018 2017 
(in thousands)(dollars in thousands)
Return on average tangible equity
Return on average shareholders' equity (tangible)Return on average shareholders' equity (tangible)
Net income - numerator$43,380
 $38,257
$49,480
 $43,380
 
       
Average common shareholders' equity$2,140,547
 $2,058,799
$2,224,615
 $2,140,547
 
Less: Average goodwill and intangible assets(531,556) (531,556)(531,556) (531,556) 
Average tangible shareholders' equity - denominator$1,608,991
 $1,527,243
$1,693,059
 $1,608,991
 
       
Return on average tangible equity, annualized10.93% 10.07%11.85% 10.93% 
       
Efficiency ratio       
Non-interest expense - numerator$122,275
 $120,413
Non-interest expense$136,661
 $122,275
 
Less: Amortization of tax credit investments(1,637) (998) 
Numerator$135,024
 $121,277
 
       
Net interest income (fully taxable equivalent) (1)
$143,243
 $134,026
$154,232
 $143,243
 
Plus: Total Non-interest income46,673
 43,137
45,875
 46,673
 
Less: Investment securities gains, net(1,106) (947)(19) (1,106) 
Denominator$188,810
 $176,216
$200,088
 $188,810
 
       
Efficiency ratio64.76% 68.33%67.5% 64.2% 

(1)Presented on an FTE basis, using a 21% and 35% federal tax rate and statutory interest expense disallowances.disallowances in 2018 and 2017, respectively. See also the “Net Interest Income” section of Management’s Discussion.



Quarter Ended March 31, 20172018 compared to the Quarter Ended March 31, 20162017

Net Interest Income

FTE net interest income increased $9.2$11.0 million, to $154.2 million, in the first quarter of 2018, from $143.2 million in the first quarter of 2017, from $134.0 million in the first quarter of 2016.2017. The increase was due to a $1.1 billion,an $849.0 million, or 6.4%4.8%, increase in interest-earning assets and a 39 basis points or 0.9%2.8%, increase in the net interest margin, to 3.26%3.35%, for the first quarter of 20172018 compared to 3.23%3.26% for the first quarter of 2016.2017. 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 21% and 35% federal tax rate and statutory interest expense disallowances.disallowances for the three months ended March 31, 2018 and 2017, respectively. The enactment of the Tax Act resulted in a 6 basis point decrease in average yields on interest earning assets and net interest margin in the first quarter of 2018, as a result of the impact of the Tax Act on calculated FTE yields on tax exempt loans and investment securities. The discussion following this table is based on these FTE amounts.
Three months ended March 31Three months ended March 31
2017 20162018 2017
Average
Balance
 Interest (1) 
Yield/
Rate
 
Average
Balance
 Interest (1) 
Yield/
Rate
Average
Balance
 Interest 
Yield/
Rate
 
Average
Balance
 Interest 
Yield/
Rate
ASSETS(dollars in thousands)(dollars in thousands)
Interest-earning assets:                      
Loans, net of unearned income (2)(1)
$14,857,562
 $146,650
 4.00% $13,853,420
 $137,895
 4.00%$15,661,032
 $162,262
 4.19% $14,857,562
 $146,650
 4.00%
Taxable investment securities (3)(2)
2,145,656
 11,914
 2.19
 2,180,593
 12,003
 2.20
2,198,838
 13,193
 2.40
 2,145,656
 11,914
 2.22
Tax-exempt investment securities (3)(2)
403,856
 4,383
 4.34
 259,396
 3,138
 4.84
412,830
 3,753
 3.64
 403,856
 4,383
 4.34
Equity securities (3)(2)
11,740
 176
 6.08
 14,386
 218
 6.10
509
 5
 3.93
 11,740
 176
 6.08
Total investment securities2,561,252
 16,473
 2.57
 2,454,375
 15,359
 2.50
2,612,177
 16,951
 2.60
 2,561,252
 16,473
 2.57
Loans held for sale15,857
 187
 4.72
 12,252
 131
 4.28
20,015
 216
 4.31
 15,857
 187
 4.72
Other interest-earning assets312,295
 842
 1.08
 358,562
 898
 1.00
302,783
 1,172
 1.55
 312,295
 842
 1.08
Total interest-earning assets17,746,966
 164,152
 3.74% 16,678,609
 154,283
 3.72%18,596,007
 180,601
 3.93% 17,746,966
 164,152
 3.74%
Noninterest-earning assets:                      
Cash and due from banks116,529
     98,449
    105,733
     116,529
    
Premises and equipment217,875
     226,284
    230,247
     217,875
    
Other assets1,149,621
     1,137,292
    1,113,326
     1,149,621
    
Less: Allowance for loan losses(170,134)     (167,372)    (169,220)     (170,134)    
Total Assets$19,060,857
     $17,973,262
    $19,876,093
     $19,060,857
    
LIABILITIES AND EQUITY                      
Interest-bearing liabilities:                      
Demand deposits$3,650,931
 $2,239
 0.25% $3,438,355
 $1,494
 0.17%$3,958,894
 $4,004
 0.41% $3,650,931
 $2,239
 0.25%
Savings and money market deposits4,194,216
 2,211
 0.21
 3,932,824
 1,804
 0.18
4,494,445
 4,367
 0.39
 4,194,216
 2,211
 0.21
Brokered deposits74,026
 276
 1.51
 
 
 
Time deposits2,739,453
 7,351
 1.09
 2,867,651
 7,429
 1.04
2,646,779
 7,803
 1.20
 2,739,453
 7,351
 1.09
Total interest-bearing deposits10,584,600
 11,801
 0.45
 10,238,830
 10,727
 0.42
11,174,144
 16,450
 0.60
 10,584,600
 11,801
 0.45
Short-term borrowings712,497
 855
 0.48
 445,402
 268
 0.24
896,839
 2,041
 0.91
 712,497
 855
 0.48
Federal Home Loan Bank advances and long-term debt990,044
 8,252
 3.35
 958,213
 9,262
 3.88
FHLB advances and other long-term debt987,315
 7,878
 3.21
 990,044
 8,252
 3.35
Total interest-bearing liabilities12,287,141
 20,908
 0.69% 11,642,445
 20,257
 0.70%13,058,298
 26,369
 0.82% 12,287,141
 20,908
 0.69%
Noninterest-bearing liabilities:
          
          
Demand deposits4,301,727
     3,967,887
    4,246,168
     4,301,727
    
Other331,442
     304,131
    347,012
     331,442
    
Total Liabilities16,920,310
     15,914,463
    17,651,478
     16,920,310
    
Shareholders’ equity2,140,547
     2,058,799
    2,224,615
     2,140,547
    
Total Liabilities and Shareholders’ Equity$19,060,857
     $17,973,262
    $19,876,093
     $19,060,857
    
Net interest income/net interest margin (FTE)  143,244
 3.26%   134,026
 3.23%  154,232
 3.35%   143,244
 3.26%
Tax equivalent adjustment  (5,665)     (4,972)    (2,914)     (5,665)  
Net interest income  $137,579
     $129,054
    $151,318
     $137,579
  
(1)Includes dividends earned on equity securities.
(2)Includes non-performing loans.
(3)(2)Balances include amortized historical cost for available for sale securities; the related unrealized holding gains (losses) are included in other assets.



The following table summarizes the changes in FTE interest income and interest expense resulting from changes in average balances (volume) and changes in rates for the three months ended March 31, 20172018 in comparison to the three months ended March 31, 2016:2017:
2017 vs. 2016
Increase (Decrease) due
to change in
2018 vs. 2017
Increase (Decrease) due
to change in
Volume Rate NetVolume Rate Net
(in thousands)(in thousands)
Interest income on:          
Loans, net of unearned income$8,772
 $(17) $8,755
$8,151
 $7,461
 $15,612
Taxable investment securities(67) (22) (89)300
 979
 1,279
Tax-exempt investment securities1,586
 (341) 1,245
93
 (723) (630)
Equity securities(41) (1) (42)(125) (46) (171)
Loans held for sale42
 14
 56
46
 (17) 29
Other interest-earning assets(125) 69
 (56)(26) 356
 330
Total interest income$10,167
 $(298) $9,869
$8,439
 $8,010
 $16,449
Interest expense on:          
Demand deposits$95
 $650
 $745
$206
 $1,559
 $1,765
Savings and money market deposits120
 287
 407
168
 1,988
 2,156
Brokered deposits276
 
 276
Time deposits(368) 290
 (78)(255) 707
 452
Short-term borrowings224
 363
 587
266
 920
 1,186
Federal Home Loan Bank advances and long-term debt291
 (1,301) (1,010)
FHLB advances and other long-term debt(23) (351) (374)
Total interest expense$362
 $289
 $651
$638
 $4,823
 $5,461
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. The impact of the Tax Act on FTE interest income is included in "Rate" in the table above.

As summarized above, the increase in average interest-earning assets, primarily loans, since the first quarter of 20162017 resulted in an $10.2$8.4 million increase in FTE interest income. ThisThe 19 basis points increase was partially offset by a decrease of $298,000 related to rate changes largely withinin the investment portfolio.yield on average interest-earning assets resulted in an $8.0 million increase in FTE interest income. The yield on the loan portfolio was unchangedincreased 19 basis points, or 4.8%, from the first quarter of 2016, 2017,the net result of maturing, refinanced or adjustable rate loans originated in earlier periods at higher rates and originations of new loans or loans that repriced at lower current rates, offset by the impact of increases in rates for certain variable rate loans related to increases in the federal fund rate.

Not shown in the table above is a comparison of the first quarter of 2017 to the fourth quarter of 2016. However, given recent interest rate increases, this comparison provides additional insights into trends in interest income. FTE interest income increased $5.8 million in comparison to the fourth quarter of 2016, with the increase equally divided between the impact of the growth in average balances and the impact of higher rates. Higher rates resulted from federal funds rate increases that occurred in December 2016 and March 2017, which impacted variable rate loans and adjustable rate loans that repriced inat higher rates since the first quarter of 2017, andas well as higher rates on new loan originations.loans originated.

Interest expense increased $5.5 million primarily due to the 16 and 18 basis point increases in the rates on average interest-bearing demand deposits and savings and money market deposits, respectively. These rate increases contributed $1.6 million and $2.0 million to the increase in FTE interest expense, respectively. In addition, an increase in short-term borrowings contributed $266,000 to the increase in FTE interest expense, while a 43 basis point increase in the average rate contributed $920,000 to the increase in interest expense.

Interest rate increases on both interest-earning assets and interest-bearing liabilities were largely the result of three 25-basis point increases in the federal funds target rate over the past year.

















Average loans and average FTE yields, by type, are summarized in the following table:
Three months ended March 31 Increase (Decrease) inThree months ended March 31 Increase (Decrease) in
2017 2016 Balance2018 2017 Balance
Balance Yield Balance Yield $ %Balance Yield Balance Yield $ %
(dollars in thousands)(dollars in thousands)
Real estate – commercial mortgage$6,039,140
 3.98% $5,487,421
 4.03% $551,719
 10.1%$6,305,821
 4.16% $6,039,140
 3.98% $266,681
 4.4%
Commercial – industrial, financial and agricultural4,205,070
 3.89
 4,095,268
 3.79
 109,802
 2.7
4,288,634
 4.15
 4,205,070
 3.89
 83,564
 2.0
Real estate – residential mortgage1,637,669
 3.76
 1,381,409
 3.78
 256,260
 18.6
1,958,505
 3.85
 1,637,669
 3.76
 320,836
 19.6
Real estate – home equity1,613,249
 4.18
 1,674,032
 4.10
 (60,783) (3.6)1,538,974
 4.65
 1,613,249
 4.18
 (74,275) (4.6)
Real estate – construction840,968
 3.97
 792,014
 3.82
 48,954
 6.2
984,242
 4.22
 840,966
 3.97
 143,276
 17.0
Consumer284,352
 5.26
 263,295
 5.53
 21,057
 8.0
315,927
 4.67
 284,352
 5.26
 31,575
 11.1
Leasing, other and overdrafts237,114
 5.08
 159,981
 7.46
 77,133
 48.2
Leasing260,780
 4.53
 233,486
 4.43
 27,294
 11.7
Other8,149
 
 3,630
 
 4,519
 124.5
Total$14,857,562
 4.00% $13,853,420
 4.00% $1,004,142
 7.2%$15,661,032
 4.19% $14,857,562
 4.00% $803,470
 5.4%
N/M - Not meaningful

Average loans increased $1.0 billion,$803.5 million, or 7.2%5.4%, compared to the first quarter of 2016.2017. The increase was driven largely by growth in the commercial mortgage and residential mortgage portfolios, as well as the construction and commercial loan construction and leasing portfolios.portfolio. The $551.7$266.7 million, or 10.1%4.4%, increase in commercial mortgages occurred in both owner-occupied and investment property types and was realized across most geographic markets. The $320.8 million, or 19.6%, increase in residential mortgages was experienced across all geographic markets, but largelywith the most significant increases occurring in the PennsylvaniaMaryland and Maryland markets.Virginia. This growth was, in part, related to new product offerings and marketing efforts targeting specific customer segments, including loans to low- to moderate-income and minority borrowers and loans in low- to moderate-income and majority-minority geographies. The $256.3$83.6 million, or 18.6%, increase in the residential mortgages was primarily the result of a strategic decision to retain certain mortgage loans. The $109.8 million, or 2.7%2.0%, increase in commercial loans was spread across a broad range of industries and primarily concentrated in the Pennsylvania market. The average yield on loans remained unchanged, at 4.00% in both 2017 and 2016.New Jersey.

Average total interest-bearing liabilities increased $644.7$771.2 million, or 5.5%6.3%, compared to the first quarter of 2016.2017. Interest expense increased $651,000,$5.5 million, or 3.2%26.1%, to $20.9$26.4 million in the first quarter of 2017.2018. Average deposits and average interest rates, by type, are summarized in the following table:
Three months ended March 31 Increase (Decrease) in BalanceThree months ended March 31 Increase (Decrease) in Balance
2017 2016 2018 2017 
Balance Rate Balance Rate $ %Balance Rate Balance Rate $ %
(dollars in thousands)(dollars in thousands)
Noninterest-bearing demand$4,301,727
 % $3,967,887
 % $333,840
 8.4%$4,246,168
 % $4,301,727
 % $(55,559) (1.3)%
Interest-bearing demand3,650,931
 0.25
 3,438,355
 0.17
 212,576
 6.2
3,958,894
 0.41
 3,650,931
 0.25
 307,963
 8.4
Savings and money market accounts4,194,216
 0.21
 3,932,824
 0.18
 261,392
 6.6
4,494,445
 0.39
 4,194,216
 0.21
 300,229
 7.2
Total demand and savings12,146,874
 0.15
 11,339,066
 0.12
 807,808
 7.1
12,699,507
 0.27
 12,146,874
 0.15
 552,633
 4.5
Brokered deposits74,026
 1.51
 
 
 74,026
 N/M
Time deposits2,739,453
 1.09
 2,867,651
 1.04
 (128,198) (4.5)2,646,779
 1.20
 2,739,453
 1.09
 (92,674) (3.4)
Total deposits$14,886,327
 0.32% $14,206,717
 0.30% $679,610
 4.8%$15,420,312
 0.43% $14,886,327
 0.32% $533,985
 3.6 %
N/M - Not meaningful

The $807.8$552.6 million, or 7.1%4.5%, increase in total demand and savings accounts was primarily due to a $468.7$535.3 million, or 8.9%9.3%, increase in personalconsumer account balances.

During the third quarter of 2017, the Corporation began accepting deposits under an agreement with a non-bank third party pursuant to which excess cash in the accounts of customers of the third party is swept on a collective basis, as frequently as every business day, by the third party, into omnibus deposit accounts maintained by one of the Corporation’s subsidiary banks ("Third-Party Deposit Sweep Arrangement"). Under the agreement with the third party, cash in accounts of customers of the third party may be swept into the omnibus deposit accounts. The average balance in the omnibus accounts was $74.0 million and is shown as “brokered deposits” in the above table. This source of funding is considered to be both geographically diverse and relatively stable, with balances in the omnibus deposit accounts bearing interest at a $274.1rate based on the federal funds rate.



Time deposits decreased $92.7 million, or 6.7%3.4%, increase in business account balances and a $51.9 million, or 2.7%, increase in municipal account balances.as customer preferences continued to shift toward shorter-term non-maturity deposits. The average cost of total deposits increased 211 basis points to 0.43% in the first quarter of 2018, compared to 0.32% in the first quarter of 2017 compared to 0.30% in the first quarter of 2016.















2017.

Average borrowings and interest rates, by type, are summarized in the following table:
 Three months ended March 31 Increase
 2017 2016 in Balance
 Balance Rate Balance Rate $ %
 (dollars in thousands)
Short-term borrowings:           
Customer repurchase agreements and short-term promissory notes279,388
 0.08
 245,421
 0.09
 33,967
 13.8
Federal funds purchased308,220
 0.73
 183,970
 0.42
 124,250
 67.5
Short-term FHLB advances (1)
124,889
 0.77
 16,011
 0.46
 108,878
 N/M
Total short-term borrowings712,497
 0.48
 445,402
 0.24
 267,095
 60.0
Long-term debt:    
   
 
FHLB advances605,835
 2.36
 596,351
 3.19
 9,484
 1.6
Other long-term debt384,209
 4.92
 361,862
 5.00
 22,347
 6.2
Total long-term debt990,044
 3.35
 958,213
 3.88
 31,831
 3.3
Total borrowings$1,702,541
 2.15% $1,403,615
 2.72% $298,926
 21.3%
N/M - Not meaningful

 Three months ended March 31 Increase (Decrease)
 2018 2017 in Balance
 Balance Rate Balance Rate $ %
 (dollars in thousands)
Short-term borrowings:           
Customer repurchase agreements and short-term promissory notes$484,017
 0.41% $279,388
 0.08% $204,629
 73.2 %
Federal funds purchased379,822
 1.50
 308,220
 0.73
 71,602
 23.2
Short-term FHLB advances (1)
      and other borrowings
33,000
 1.62
 124,889
 0.77
 (91,889) (73.6)
Total short-term borrowings896,839
 0.91
 712,497
 0.48
 184,342
 25.9
Long-term debt:    
   
 
FHLB advances600,984
 2.41
 605,835
 2.36
 (4,851) (0.8)
Other long-term debt386,331
 4.45
 384,209
 4.92
 2,122
 0.6
Total long-term debt987,315
 3.21
 990,044
 3.35
 (2,729) (0.3)
Total$1,884,154
 2.12% $1,702,541
 2.15% $181,613
 10.7 %
(1) Represents FHLB advances with an original maturity term of less than one year.

TotalAverage total short-term borrowings increased $267.1$184.3 million, or 60.0%25.9%, as a result of loan growth out-pacing thea $204.6 million, or 73.2%, increase in deposits.customer repurchase agreements and short-term promissory notes during the first quarter of 2018 as customers shifted deposit balances to higher-yielding short-term promissory notes.

Average long-term debt increased $31.8decreased slightly to $987.3 million or 3.3%, due mainly to the $125 million of senior notes issued in March 2017. The 53 basis point, or 13.7%, decrease induring the average rate on long-term debt was primarily a resultfirst quarter of $2002018 compared to $990.0 million during the same period of FHLB advances that were refinanced in December of 2016, which reduced the weighted average rate on these advances from 4.03% to 2.40%.2017.

Provision for Credit Losses

The provision for credit losses was $4.8$4.0 million for the first quarter of 2017, an increase2018, a decrease of $3.3 million$830,000 from the first quarter of 2016, 2017,driven mainly by improved risk characteristics in the loan growth.portfolio.

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 allowanceprovision and provisionallowance for credit losses.



















Non-Interest Income

The following table presents the components of non-interest income:
Three months ended March 31 Increase (Decrease)Three months ended March 31 Increase (Decrease)
2017 2016 $ %2018 2017 $ %
(dollars in thousands)(dollars in thousands)
Other service charges and fees:       
Merchant fees$3,607
 $3,682
 $(75) (2.0)%
Commercial interest rate swap fees3,058
 1,442
 1,616
 112.1
Debit card income2,665
 2,511
 154
 6.1
Letter of credit fees1,200
 1,146
 54
 4.7
Other1,907
 1,969
 (62) (3.1)
Total other service charges and fees12,437
 10,750
 1,687
 15.7
Investment management and trust services$12,871
 $11,808
 $1,063
 9.0 %
Service charges on deposit accounts:              
Overdraft fees$5,469
 $5,272
 $197
 3.7 %5,145
 5,469
 (324) (5.9)
Cash management fees3,537
 3,466
 71
 2.0
4,317
 3,537
 780
 22.1
Other3,394
 3,820
 (426) (11.2)2,500
 3,394
 (894) (26.3)
Total service charges on deposit accounts12,400
 12,558
 (158) (1.3)11,962
 12,400
 (438) (3.5)
Investment management and trust services11,808
 10,988
 820
 7.5
Other service charges and fees:       
Merchant fees4,115
 3,607
 508
 14.1
Debit card income2,817
 2,665
 152
 5.7
Commercial loan interest rate swap fees1,291
 3,058
 (1,767) (57.8)
Letter of credit fees992
 1,200
 (208) (17.3)
Foreign exchange income533
 334
 199
 59.6
Other1,671
 1,573
 98
 6.2
Total other service charges and fees11,419
 12,437
 (1,018) (8.2)
Mortgage banking income:              
Gains on sales of mortgage loans3,074
 2,670
 404
 15.1
2,647
 3,074
 (427) (13.9)
Mortgage servicing income1,522
 1,360
 162
 11.9
1,546
 1,522
 24
 1.6
Total mortgage banking income4,596
 4,030
 566
 14.0
4,193
 4,596
 (403) (8.8)
Other income:       
Credit card income2,648
 2,424
 224
 9.2
2,816
 2,648
 168
 6.3
SBA lending income357
 429
 (72) (16.8)
Other income1,678
 1,440
 238
 16.5
2,238
 1,249
 989
 79.2
Total other income5,411
 4,326
 1,085
 25.1
Total, excluding investment securities gains, net45,567
 42,190
 3,377
 8.0
45,856
 45,567
 289
 0.6
Investment securities gains, net1,106
 947
 159
 16.8
19
 1,106
 (1,087) N/M
Total$46,673
 $43,137
 $3,536
 8.2 %$45,875
 $46,673
 $(798) (1.7)%
N/M - Not meaningful

Excluding investment securities gains, non-interest income increased $3.4 million,$289,000, or 8.0%. Other service charges and fees increased $1.7 million, or 15.7%0.6%, mainly duein the first quarter of 2018 as compared to a $1.6 million increasethe same period in commercial loan interest rate swap fees, driven by loan growth and a favorable interest rate environment.
2017. Investment management and trust services income increased $820,000,$1.1 million, or 7.5%9.0%, in the first quarter of 2018 as compared to the same period in 2017, with growth in both trust commissions and brokerage income, due to overall market performance and an increase in new assets under management.
Service charges on deposit accounts decreased $438,000, or 3.5%, in the first quarter of 2018 as compared to the same period in 2017 with decreases in overdraft fees and other service charges being partially offset by an increase in cash management fees. The increase in cash management fees and the decrease in other service charges largely reflects a classification change, effective in the first quarter of 2018, of certain types of deposit service charges.
Other service charges and fees decreased $1.0 million, or 8.2%, primarily due to a $1.8 million decrease in commercial loan interest rate swap fees, resulting from lower new commercial loan originations, partially offset by increases in merchant fees, debit card and foreign exchange income. Both merchant fees and debit card income increases were driven by higher transaction volumes.
The $989,000 increase in other income was mainly due to gains realized in the bank owned life insurance portfolio.
Gains on sales of mortgage loans increased $404,000,decreased $427,000, or 15.1%13.9%, in the first quarter of 2018 compared to the same period in 2016, as2017, driven by a decline in pricing spreads, increased. Mortgage servicing income increased $162,000, or 11.9%, compared to the first quarter of 2016, due to lower mortgage servicing rights amortization as prepayments slowed.slightly offset by an increase in volumes.
Other income increased $238,000, or 16.5%, due mainly to higher gains on sales of loans guaranteed by the Small Business Administration.

Investment securities gains increased $159,000decreased $1.1 million from the first quarter of 2016.2017 as the prior year included gains on sales of financial institution common stocks. See Note 4, "Investment Securities," in the Notes to Consolidated Financial Statements for additional details.











Non-Interest Expense

The following table presents the components of non-interest expense:
Three months ended March 31 Increase (Decrease)Three months ended March 31 Increase (Decrease)
2017 2016 $ %2018 2017 $ %
(dollars in thousands)(dollars in thousands)
Salaries and employee benefits$69,236
 $69,372
 $(136) (0.2)%$75,768
 $69,236
 $6,532
 9.4%
Net occupancy expense12,663
 12,220
 443
 3.6
13,632
 12,663
 969
 7.7
Data processing and software10,473
 8,979
 1,494
 16.6
Other outside services5,546
 6,056
 (510) (8.4)8,124
 5,546
 2,578
 46.5
Software4,693
 3,921
 772
 19.7
Data processing4,286
 5,400
 (1,114) (20.6)
Professional fees4,816
 2,737
 2,079
 76.0
Equipment expense3,359
 3,371
 (12) (0.4)3,534
 3,359
 175
 5.2
Professional fees2,737
 2,333
 404
 17.3
FDIC insurance expense2,058
 2,949
 (891) (30.2)2,953
 2,058
 895
 43.5
State taxes2,302
 2,087
 215
 10.3
Marketing1,986
 1,624
 362
 22.3
2,250
 1,986
 264
 13.3
Amortization of tax credit investments1,637
 998
 639
 64.0
Other15,711
 13,167
 2,544
 19.3
11,172
 12,626
 (1,454) (11.5)
Total$122,275
 $120,413
 $1,862
 1.5 %$136,661
 $122,275
 $14,386
 11.8%
N/M - Not meaningful

The decreaseincrease in salaries and employee benefits expense reflects higher salary expense deferrals,was driven entirely by an increase in loan origination volumes in this quarter,salaries, reflecting annual merit increases and lower severance costs, partially offset by the net impact of an increase in staffing levels and salary rates.

levels. Average full-time equivalent employees increased 1.7%, to 3,577, in 2018, as compared to 3,518 in 2017. In addition, expenses for certain incentive compensation plans were higher in 2018.
Net occupancy expenses increased $969,000, or 7.7%, primarily due to higher snow removal costs, and additional amortization related to branch renovations.
Data processing and software expense increased $443,000,$1.5 million, or 3.6%16.6%, reflecting higher transaction volumes and new processing platforms, as well as benefits realized in 2017 as a result of higher rent expense and maintenance costs. Outsiderenegotiated contracts.
Other outside services which include fees paid to consultants and expenses for contractedincreased $2.6 million, or outsourced services, decreased $510,000, or 8.4%, compared to the first quarter of 2016. These costs can fluctuate based on the timing and need for such services.

Software expense increased $772,000, or 19.7%46.5%, largely due to investments in cloud basedconsulting services related to various banking and technology solutions. Data processing expense decreased $1.1initiatives, as well as the timing of engagements.
The $2.1 million, or 20.6%, due to benefits from renegotiated contracts. The $404,000, or 17.3%76.0%, increase in professional fees was driven by higher legal expenses. The Corporation incurs fees related to various legal matters in the normal course of business. These fees can fluctuate based on the timing and extent of these matters.
FDIC insurance expense decreased $891,000,increased $895,000, or 30.2% as43.5%, reflecting that the assessment rates for banks with less thanCorporation's largest banking subsidiary recently exceeded $10 billion in assets and became subject to higher premium assessments applicable to banks of that size.
Other expenses decreased when the Deposit Insurance Fund (DIF) exceeded 1.15% of the deposit base in 2016. Marketing expense increased $362,000,$1.5 million, or 22.3%11.5%, compared to the first quarter of 2016,primarily due to the timing of various marketing promotions.

Other expense increased $2.5 million, or 19.3%,lower operating risk loss, as provisions for loan repurchase exposures decreased, and postage expenses declined due to increases in state franchise taxes and amortizationcustomers electing electronic delivery of certain community development investments.statements.

Income Taxes

Income tax expense for the first quarter of 20172018 was $13.8$7.1 million, a $1.8$6.7 million, or 15.1%48.7%, increasedecrease from $12.0$13.8 million for the first quarter of 2016.

2017. This decrease was primarily a result of the reduction of the U.S. corporate income tax rate as a result of the passage of the Tax Act, which lowered the U.S. corporate income tax rate from a top rate of 35% to a flat rate of 21%. The Corporation’s effective tax rateETR was 12.5% for the three months ended March 31, 2018, as compared to 24.1% in the first quartersame period of 2017, as compared to 23.9% in the first quarter of 2016.2017. Theeffective tax rate ETR is generally lower than the federal statutory rate of 35%21% due to tax-exempt interest income earned on loans, investments in tax-free municipal securities and credits earned frominvestments in community development investments in partnershipsprojects that generate tax credits under various federal programs. Absent the impact of the federal statutory tax rate reduction, income tax expense and the ETR for the three months ended March 31, 2018 would have been approximately $12.9 million and 22.8%, respectively.



The ETR in any quarter may be positively or negatively affected by adjustments that are required to be reported in the specific quarter of resolution. While the Corporation has made reasonable estimates of the impact of the Tax Act, final results may differ due to, among other things, changes in interpretations and assumptions, additional guidance that may be issued by the Internal Revenue Service, and actions taken by the Corporation.
 
 
 
 
 
 
 


FINANCIAL CONDITION

The table below presents condensed consolidated ending balance sheets.
  Increase (Decrease)  Increase (Decrease)
March 31, 2017 December 31, 2016 $ %March 31, 2018 December 31, 2017 $ %
(dollars in thousands)(dollars in thousands)
Assets              
Cash and due from banks$93,844
 $118,763
 $(24,919) (21.0)%$100,151
 $108,291
 $(8,140) (7.5)%
Other interest-earning assets350,387
 291,252
 59,135
 20.3
267,806
 354,566
 (86,760) (24.5)
Loans held for sale24,783
 28,697
 (3,914) (13.6)23,450
 31,530
 (8,080) (25.6)
Investment securities2,506,017
 2,559,227
 (53,210) (2.1)2,592,823
 2,547,956
 44,867
 1.8
Loans, net of allowance14,793,101
 14,530,593
 262,508
 1.8
15,533,067
 15,598,337
 (65,270) (0.4)
Premises and equipment216,171
 217,806
 (1,635) (0.8)230,313
 222,802
 7,511
 3.4
Goodwill and intangible assets531,556
 531,556
 
 
531,556
 531,556
 
 
Other assets662,717
 666,353
 (3,636) (0.5)669,775
 641,867
 27,908
 4.3
Total Assets$19,178,576
 $18,944,247
 $234,329
 1.2 %$19,948,941
 $20,036,905
 $(87,964) (0.4)%
Liabilities and Shareholders’ Equity              
Deposits$15,090,344
 $15,012,864
 $77,480
 0.5 %$15,477,103
 $15,797,532
 $(320,429) (2.0)%
Short-term borrowings453,317
 541,317
 (88,000) (16.3)937,852
 617,524
 320,328
 51.9
Long-term debt1,137,909
 929,403
 208,506
 22.4
938,499
 1,038,346
 (99,847) (9.6)
Other liabilities342,323
 339,548
 2,775
 0.8
359,994
 353,646
 6,348
 1.8
Total Liabilities17,023,893
 16,823,132
 200,761
 1.2
17,713,448
 17,807,048
 (93,600) (0.5)
Total Shareholders’ Equity2,154,683
 2,121,115
 33,568
 1.6
2,235,493
 2,229,857
 5,636
 0.3
Total Liabilities and Shareholders’ Equity$19,178,576
 $18,944,247
 $234,329
 1.2 %$19,948,941
 $20,036,905
 $(87,964) (0.4)%

Other Interest-earning Assets

The $59.1Other interest-earning assets decreased $86.8 million, or 20.3%24.5%, increase in other interest-earning assets during the first three months of 2017 resulted from higher2018, driven by a decrease in balances on deposit with the Federal Reserve Bank, duewhich were used to supplement funding needs as a temporary increaseresult of the overall decrease in item clearing balances.deposits.



















Investment Securities

The following table presents the carrying amount of investment securities:
  Increase (Decrease)  Increase (Decrease)
March 31, 2017 December 31, 2016 $ %March 31, 2018 December 31, 2017 $ %
(dollars in thousands)(dollars in thousands)
U.S. Government sponsored agency securities$5,996
 $134
 $5,862
 N/M
$20,962
 $5,938
 $15,024
 N/M
State and municipal securities392,624
 391,641
 983
 0.3
406,099
 408,949
 (2,850) (0.7)%
Corporate debt securities107,877
 109,409
 (1,532) (1.4)101,955
 97,309
 4,646
 4.8
Collateralized mortgage obligations565,886
 593,860
 (27,974) (4.7)679,700
 602,623
 77,077
 12.8
Mortgage-backed securities1,313,621
 1,342,401
 (28,780) (2.1)
Residential mortgage-backed securities1,054,166
 1,120,796
 (66,630) (5.9)
Commercial mortgage-backed securities226,892
 212,755
 14,137
 6.6
Auction rate securities97,439
 97,256
 183
 0.2
103,049
 98,668
 4,381
 4.4
Total debt securities2,483,443
 2,534,701
 (51,258) (2.0)2,592,823
 2,547,038
 45,785
 1.8
Equity securities22,574
 24,526
 (1,952) (8.0)
 918
 (918) (100.0)
Total$2,506,017
 $2,559,227
 $(53,210) (2.1)%$2,592,823
 $2,547,956
 $44,867
 1.8 %
N/M - Not meaningful





U.S. Government sponsored agency securities increased $5.9 million. Collateralized$15.0 million during the first three months of 2018, collateralized mortgage obligations decreased $28.0increased $77.1 million, or 4.7%12.8%, as the Corporation reduced its holdings in corresponding lower coupon investments due to volatility in market pricing. Mortgage-backedand commercial mortgage-backed securities decreased $28.8increased $14.1 million, or 2.1% as6.6%. Cash flows from maturities and repayments of residential mortgage-backed securities, which decreased $66.6 million, or 5.9%, were reinvested in these investment categories to diversify the portfolio cash flows were used to partially fund loan growth.into securities with a shorter projected average life.

Loans, net of Unearned IncomeAllowance for Loan Losses

The following table presents ending balances of loans outstanding, net of unearned income:
    Increase (Decrease)    Increase (Decrease)
March 31, 2017 December 31, 2016 $ %March 31, 2018 December 31, 2017 $ %
(dollars in thousands)  (dollars in thousands)  
Real estate – commercial mortgage$6,118,533
 $6,018,582
 $99,951
 1.7 %$6,332,508
 $6,364,804
 $(32,296) (0.5)%
Commercial – industrial, financial and agricultural4,167,809
 4,087,486
 80,323
 2.0
4,299,072
 4,300,297
 (1,225) 
Real estate – residential mortgage1,665,142
 1,601,994
 63,148
 3.9
1,976,524
 1,954,711
 21,813
 1.1
Real estate – home equity1,595,901
 1,625,115
 (29,214) (1.8)1,514,241
 1,559,719
 (45,478) (2.9)
Real estate – construction882,983
 843,649
 39,334
 4.7
976,131
 1,006,935
 (30,804) (3.1)
Consumer288,826
 291,470
 (2,644) (0.9)326,766
 313,783
 12,983
 4.1
Leasing, other and overdrafts243,983
 230,976
 13,007
 5.6
271,042
 267,998
 3,044
 1.1
Loans, net of unearned income$14,963,177
 $14,699,272
 $263,905
 1.8 %15,696,284
 15,768,247
 (71,963) (0.5)
Allowance for loan losses(163,217) (169,910) 6,693
 (3.9)
Loans, net of allowance for loan losses$15,533,067
 $15,598,337
 $(65,270) (0.4)%

Loans, net of unearned income, increased $263.9decreased $72.0 million, or 1.8%0.5%, in comparison to December 31, 2016.2017. In general, this growth resulted from improved customer sentiment and a more favorable economic outlook, as well asloan demand is seasonally lower during the addition of commercial relationship managers in 2016. Increases were realized across allfirst quarter of the Corporation's geographicyear, which was evidenced by declines in both line borrowings and total originations in comparison to the fourth quarter of 2017. The lower origination volumes were seen in most loan types. In addition, competition for new loans intensified, during the first quarter of 2018 in many of the markets in which the Corporation operates. Real estate - home equity loans decreased $45.5 million, or 2.9%, compared to December 31, 2017 with declines experienced in all markets. This continues recent downward trends in this loan type.

Commercial mortgage loans increased $100.0decreased $32.3 million, or 1.7%0.5%, in comparison to December 31, 2016,2017, with the growthdeclines occurring primarilylargely in Pennsylvania ($23.7 million, or 0.7%), Maryland ($9.5 million, or 1.4%) and Virginia ($8.6 million, or 1.6%) partially offset by increases in the Maryland ($60.4New Jersey and Delaware markets.



Construction loans decreased $30.8 million, or 9.7%), Pennsylvania ($34.5 million, or 1.1%) and New Jersey ($14.1 million, or 1.0%) markets. Commercial - industrial, financial and agricultural loans increased $80.3 million, or 2.0%3.1%, in comparison to December 31, 2016,2017, with the growthdecrease occurring primarily in the Pennsylvania ($82.047.5 million, or 2.7%), Virginia ($3.7 million, or 3.5%9.1%) and New Jersey ($1.89.4 million, or 0.3%5.0%), partially offset by growth in Maryland ($13.4 million, or 9.2%), Virginia ($9.2 million, or 13.1%) markets.and Delaware ($3.4 million, or 4.2%).

Residential mortgage loans increased $63.1$21.8 million, or 3.9%1.1%, compared to December 31, 2016,2017, with the growth occurring primarilyin Virginia ($17.7 million, or 4.1%) and Maryland ($14.0 million, or 3.3%) partially offset by declines in the Maryland ($30.6 million, or 10.4%), Virginia ($26.1 million, or 8.4%),Pennsylvania and New Jersey ($7.5 million, or 3.1%) and Delaware ($2.7 million, or 3.6%) markets.Construction The Corporation continues to retain certain types of residential mortgage loans increased $39.3 million, or 4.7%, in comparison to December 31, 2016, with the growth occurring primarilyits portfolio rather than selling in the Maryland ($16.3 million, or 17.5%), Delaware ($10.4 million, or 19.4%) and Pennsylvania ($6.8 million, or 1.4%) markets. Leasing, other and overdrafts increased compared to December 31, 2016 as a result of a $15.6 million increase in the leasing portfolio.secondary market.

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:
March 31, 2017 December 31, 2016March 31, 2018 December 31, 2017
Balance Delinquency Rate (1) % of Total Balance Delinquency Rate (1) % of TotalBalance Delinquency Rate (1) % of Total Balance Delinquency Rate (1) % of Total
(dollars in thousands)(dollars in thousands)
Commercial$685,128
 0.3% 77.6% $644,490
 0.2% 76.4%$748,796
 % 76.7% $765,816
 0.1% 76.1%
Commercial - residential151,313
 9.3
 17.1
 142,189
 6.0
 16.9
158,482
 6.6
 16.2
 163,102
 7.5
 16.2
Other46,542
 2.4
 5.3
 56,970
 1.9
 6.7
68,853
 0.7
 7.1
 78,017
 0.8
 7.7
Total Real estate - construction$882,983
 2.0% 100.0% $843,649
 1.3% 100.0%$976,131
 1.1% 100.0% $1,006,935
 1.3% 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 geographicalgeographic location. Approximately $7.0$7.3 billion, or 46.8%46.6%, of the loan portfolio was in commercial mortgage and construction loans as of March 31, 2017.2018. The Corporation's maximum total lending commitment to an individual borrowing relationship was $50.0$50 million as of March 31, 2017.2018. In addition to its policy of limiting the maximum total lending commitment to any individual borrowing


relationship to $50.0$50 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 borrowing relationship at the time the lending commitment is approved. As of March 31, 2017, the Corporation had 122 individual borrowing relationships with total borrowing commitments between $20.0 million and $50.0 million.

The following table summarizes the industry concentrations within the commercial loan portfolio:
 March 31,
2017
 December 31, 2016
Services22.5% 21.8%
Retail15.3
 15.1
Health care10.2
 10.5
Manufacturing9.0
 9.2
Construction (1)
8.4
 9.0
Wholesale7.6
 7.0
Real estate (2)
6.8
 6.7
Agriculture4.6
 5.0
Arts and entertainment2.5
 2.6
Financial services2.3
 2.1
Transportation2.2
 2.3
Other8.6
 8.7
   Total100.0% 100.0%

(1)Includes commercial loans to borrowers engaged in the construction industry.
(2)Includes commercial loans to borrowers engaged in the business of: renting, leasing or managing real estate for others; selling and/or buying real estate for others; and appraising real estate.

Commercial - industrial, financial and agricultural loans and commercial mortgage loans also include shared national credits, which are participations in loans or loan commitments of at least $20.0$100 million that are shared by three or more banks. Effective January 1, 2018, the Office of the Comptroller of the Currency ("OCC") increased the threshold for defining a shared national credit to $100 million from $20 million. Below is a summary of the Corporation's outstanding purchased shared national credits:

March 31, 2017 December 31, 2016March 31, 2018 December 31, 2017
(in thousands)(in thousands)
Commercial - industrial, financial and agricultural$151,840
 $155,353
$60,320
 $156,277
Real estate - commercial mortgage83,300
 81,573

 110,658
Total$235,140
 $236,926
$60,320
 $266,935
Total shared national credits decreased $1.8$206.6 million, or 0.8%77.4%, in comparison to December 31, 2016.2017 as a result of the new threshold. The Corporation's shared national credits are to borrowers located in its geographicalgeographic markets, and are granted subject to normal lending activities consistent with the Corporation's standard underwriting policies. None of the shared national credits were past due as of March 31, 20172018 or December 31, 2016.





2017.











Provision and Allowance for Credit Losses

The following table presents the components of the allowance for credit losses:
 March 31,
2018
 December 31,
2017
 (dollars in thousands)
Allowance for loan losses$163,217
 $169,910
Reserve for unfunded lending commitments12,802
 6,174
Allowance for credit losses$176,019
 $176,084
    
Allowance for loan losses to loans outstanding1.04% 1.08%
Allowance for credit losses to loans outstanding1.12% 1.12%
Management believes that the allowance for credit losses of $176.0 million as of March 31, 2018 is sufficient to cover incurred losses in the loan and lease portfolio, unfunded lending commitments and letters of credit as of that date and is appropriate based on U.S. GAAP.

The allowance for loan losses decreased $6.7 million, or 3.9%, from December 31, 2017 as a result of improvements in loss assumptions used in the allowance allocation methodology, as well as the decrease in loan balances. As a result, the allowance for loan losses to loans outstanding decreased by 4 basis points to 1.04%. The total allowance for credit losses, which includes reserves for all lending-related credit exposures, was basically unchanged in terms of both the total balance and as a percentage of loans outstanding.

As of March 31, 2018, the reserve for unfunded lending commitments was $12.8 million, including $10.7 million allocated for letters of credit associated with a single customer relationship. The reserve for unfunded lending commitments increased $6.6 million, or 107.4%, from December 31, 2017 to March 31, 2018 mainly as a result of additional loss allocations relating to this customer relationship. The exposure to this customer relationship is fully reserved and additional increases in the reserve for unfunded lending commitments for this customer relationship are not expected.































The following table presents the activity in the allowance for credit losses:
 Three months ended March 31
 2017 2016
 (dollars in thousands)
Average balance of loans, net of unearned income$14,857,562
 $13,853,420
    
Balance of allowance for credit losses at beginning of period$171,325
 $171,412
Loans charged off:   
Commercial – industrial, financial and agricultural5,527
 6,188
Real estate – residential mortgage216
 1,068
Real estate – home equity698
 1,541
Real estate – commercial mortgage1,224
 582
Consumer856
 1,007
Real estate – construction247
 326
Leasing, other and overdrafts639
 443
Total loans charged off9,407
 11,155
Recoveries of loans previously charged off:   
Commercial – industrial, financial and agricultural4,191
 2,319
Real estate – residential mortgage230
 136
Real estate – home equity137
 338
Real estate – commercial mortgage450
 825
Consumer236
 196
Real estate – construction548
 383
Leasing, other and overdrafts137
 81
Total recoveries5,929
 4,278
Net loans charged off3,478
 6,877
Provision for credit losses4,800
 1,530
Balance of allowance for credit losses at end of period$172,647
 $166,065
    
Net charge-offs to average loans (annualized)0.09% 0.20%
The following table presents the components of the allowance for credit losses:
 March 31,
2017
 December 31,
2016
 (dollars in thousands)
Allowance for loan losses$170,076
 $168,679
Reserve for unfunded lending commitments2,571
 2,646
Allowance for credit losses$172,647
 $171,325
    
Allowance for credit losses to loans outstanding1.15% 1.17%
 Three months ended March 31
 2018 2017
 (dollars in thousands)
Average balance of loans, net of unearned income$15,661,032
 $14,857,562
    
Balance of allowance for credit losses at beginning of period$176,084
 $171,325
Loans charged off:   
Real estate – commercial mortgage267
 1,224
Commercial – industrial, financial and agricultural4,005
 5,527
Real estate – residential mortgage162
 216
Real estate – home equity408
 698
Real estate – construction158
 247
Consumer892
 856
Leasing, other and overdrafts505
 639
Total loans charged off6,397
 9,407
Recoveries of loans previously charged off:   
Real estate – commercial mortgage279
 450
Commercial – industrial, financial and agricultural1,075
 4,191
Real estate – residential mortgage107
 230
Real estate – home equity206
 137
Real estate – construction306
 548
Consumer179
 236
Leasing, other and overdrafts210
 137
Total recoveries2,362
 5,929
Net loans charged off4,035
 3,478
Provision for credit losses3,970
 4,800
Balance of allowance for credit losses at end of period$176,019
 $172,647
    
Net charge-offs to average loans (annualized)0.10% 0.09%
The provision for credit losses for the three months ended March 31, 20172018 was $4.8$4.0 million, an increasea decrease of $3.3 million$830,000 in comparison to the same period in 2016.first three months of 2017. The increasedecreases in the provision for credit losses largely reflectedwas driven primarily by improved risk characteristics in the loan growth.portfolio.
Net charge-offs decreased $3.4increased $557,000, to $4.0 million for the first quarter of 2018, compared to $3.5 million for the first quarter of 2017, compared to $6.9 million for the first quarter of 2016. Gross charge-offs decreased by $1.7 million and recoveries increased by $1.7 million. Of the $3.5 million ofresulting in a one basis point increase in net charge-offs recorded inas a percentage of average loans. This modest increase resulted from the first quarternet impact of 2017, the majority were forlower gross charge-offs and lower recoveries on loans originated in Pennsylvania ($2.6 million) and New Jersey ($1.0 million), partially offset by net recoveries in Maryland, Virginia and Delaware.previously charged off.
















The following table summarizes non-performing assets as of the indicated dates:
March 31, 2017 March 31, 2016 December 31, 2016March 31, 2018 March 31, 2017 December 31, 2017
(dollars in thousands)(dollars in thousands)
Non-accrual loans$117,264
 $122,170
 $120,133
$122,966
 $117,264
 $124,749
Loans 90 days or more past due and still accruing14,268
 15,013
 11,505
11,676
 14,268
 10,010
Total non-performing loans131,532
 137,183
 131,638
134,642
 131,532
 134,759
Other real estate owned (OREO)11,906
 10,946
 12,815
10,744
 11,906
 9,823
Total non-performing assets$143,438
 $148,129
 $144,453
$145,386
 $143,438
 $144,582
Non-accrual loans to total loans0.78% 0.88% 0.82%0.78% 0.78% 0.79%
Non-performing assets to total assets0.75% 0.82% 0.76%0.73% 0.75% 0.72%
Allowance for credit losses to non-performing loans131.26% 121.05% 130.15%130.73% 131.26% 130.67%
Allowance for loan losses to non-performing loans121.22% 129.30% 126.08%

The following table presents accruing loans whose terms have been modified under troubled debt restructurings ("TDRs"), by
type, as of the indicated dates:
March 31, 2017 March 31, 2016 December 31, 2016March 31, 2018 March 31, 2017 December 31, 2017
(in thousands)(in thousands)
Real-estate - residential mortgage$27,033
 $27,565
 $27,617
$25,602
 $27,033
 $26,016
Real-estate - commercial mortgage15,237
 17,427
 15,957
18,181
 15,237
 13,959
Real estate - home equity9,601
 6,530
 8,594
16,067
 9,601
 15,558
Commercial7,441
 5,650
 6,627
11,740
 7,441
 10,820
Construction273
 3,092
 726

 273
 
Consumer37
 32
 39
24
 37
 26
Total accruing TDRs59,622
 60,296
 59,560
71,614
 59,622
 66,379
Non-accrual TDRs (1)
27,220
 27,277
 27,850
24,897
 27,220
 29,051
Total TDRs$86,842
 $87,573
 $87,410
$96,511
 $86,842
 $95,430
(1) Included with non-accrual loans in the preceding table.

TDRs modified during the first three months of 20172018 and still outstanding as of March 31, 20172018 totaled $5.7$10.7 million. During the first three months of 2017, $6.72018, $3.5 million of TDRs that were modified in the previous 12 months had a payment default, which the Corporation definesis defined as a single missed scheduled payment, subsequent to modification.
The following table presents the changes in non-accrual loans for the three months ended March 31, 2017:2018:
Commercial -
Industrial,
Financial and
Agricultural
 Real Estate -
Commercial
Mortgage
 Real Estate -
Construction
 Real Estate -
Residential
Mortgage
 Real Estate -
Home
Equity
 Consumer Leasing TotalCommercial -
Industrial,
Financial and
Agricultural
 Real Estate -
Commercial
Mortgage
 Real Estate -
Construction
 Real Estate -
Residential
Mortgage
 Real Estate -
Home
Equity
 Consumer Leasing Total
(in thousands)(in thousands)
Balance of non-accrual loans at December 31, 2016$42,349
 $38,936
 $9,806
 $18,431
 $10,611
 $
 $
 $120,133
Three months ended March 31, 2018Three months ended March 31, 2018              
Balance of non-accrual loans at December 31, 2017$52,904
 $34,822
 $12,197
 $15,691
 $9,135
 $
 $
 $124,749
Additions8,013
 2,998
 5,056
 662
 1,021
 856
 263
 18,869
14,059
 5,391
 117
 632
 1,288
 892
 124
 22,503
Payments(4,017) (3,444) (1,130) (939) (417) 
 
 (9,947)(9,531) (2,768) (1,423) (220) (353) 
 
 (14,295)
Charge-offs(5,527) (1,224) (247) (216) (698) (856) (263) (9,031)(4,005) (267) (158) (162) (408) (892) (124) (6,016)
Transfers to accrual status
 (913) 
 
 (428) 
 
 (1,341)(457) (604) 
 (37) (158) 
 
 (1,256)
Transfers to OREO
 (550) 
 (131) (738) 
 
 (1,419)
 (1,391) 
 (569) (759) 
 
 (2,719)
Balance of non-accrual loans at March 31, 2017$40,818
 $35,803
 $13,485
 $17,807
 $9,351
 $
 $
 $117,264
Balance of non-accrual loans at March 31, 2018$52,970
 $35,183
 $10,733
 $15,335
 $8,745
 $
 $
 $122,966

Non-accrual loans decreased $4.9increased $5.7 million, or 4.0%, and $2.9 million, or 2.4%4.9%, in comparison to March 31, 20162017 and decreased $1.8 million, or 1.4%, in comparison to December 31, 2016, respectively.


2017.


The following table summarizes non-performing loans, by type, as of the indicated dates:
March 31, 2017 March 31, 2016 December 31, 2016March 31, 2018 March 31, 2017 December 31, 2017
(in thousands)(in thousands)
Commercial – industrial, financial and agricultural$43,826
 $39,140
 $43,460
$54,915
 $43,826
 $54,309
Real estate – commercial mortgage36,713
 43,132
 39,319
36,184
 36,713
 35,447
Real estate – residential mortgage23,597
 25,182
 23,655
20,168
 23,597
 20,971
Real estate – home equity12,025
 12,232
 11,507
Real estate – construction13,550
 12,005
 9,842
10,931
 13,550
 12,197
Real estate – home equity12,232
 14,408
 13,154
Consumer1,176
 1,802
 1,891
247
 1,176
 296
Leasing438
 1,514
 317
172
 438
 32
Total non-performing loans$131,532
 $137,183
 $131,638
$134,642
 $131,532
 $134,759

Non-performing loans decreased $5.7increased $3.1 million, or 4.1%, and $106,000, or 0.1%2.4%, in comparison to March 31, 20162017 and were largely unchanged from December 31, 2016, respectively. The decrease in non-performing2017. Non-performing loans as a percentage of total loans was realized across most loan categories except commercial, which increased $4.7 million, or 12.0%, and $366,000, or 0.8%,0.86% at March 31, 2018 in comparison to 0.88% at March 31, 20162017 and 0.85% at December 31, 2016, respectively, and real estate - construction loans, which increased $1.5 million, or 12.9%, and $3.7 million, or 37.7% in comparison to March 31, 2016 and December 31, 2016, respectively.2017.

The following table summarizes the Corporation’s OREO, by property type, as of the indicated dates:
March 31, 2017 March 31, 2016 December 31, 2016March 31, 2018 March 31, 2017 December 31, 2017
(in thousands)(in thousands)
Residential properties$6,112
 $6,235
 $7,655
$4,613
 $6,112
 $4,562
Commercial properties3,134
 3,101
 2,651
4,349
 3,134
 3,331
Undeveloped land2,660
 1,610
 2,509
1,782
 2,660
 1,930
Total OREO$11,906
 $10,946
 $12,815
$10,744
 $11,906
 $9,823

The 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 ratedrisk-rated loans were $11.1$11.5 billion and $10.9$11.6 billion as of March 31, 20172018 and December 31, 2016,2017, 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"criticized" loans) or Substandard or lower (considered classified"classified" loans), by class segment:segment.
Special Mention Increase (decrease) Substandard or lower Increase (decrease) Total Criticized and Classified LoansSpecial Mention Decrease Substandard or lower Increase (Decrease) Total Criticized and Classified Loans
March 31, 2017 December 31, 2016 $ % March 31, 2017 December 31, 2016 $ % March 31, 2017 December 31, 2016March 31, 2018 December 31, 2017 $ % March 31, 2018 December 31, 2017 $ % March 31, 2018 December 31, 2017
(dollars in thousands)(dollars in thousands)
Real estate - commercial mortgage$137,643
 $132,484
 $5,159
 3.9 % $120,749
 $122,976
 $(2,227) (1.8)% $258,392
 $255,460
$144,809
 $147,604
 $(2,795) (1.9)% $160,489
 $150,804
 $9,685
 6.4 % $305,298
 $298,408
Commercial - secured138,242
 128,873
 9,369
 7.3
 138,757
 118,527
 20,230
 17.1
 276,999
 247,400
100,242
 121,842
 (21,600) (17.7) 180,234
 179,113
 1,121
 0.6
 280,476
 300,955
Commercial -unsecured6,471
 4,481
 1,990
 44.4
 2,563
 3,531
 (968) (27.4) 9,034
 8,012
3,378
 5,478
 (2,100) (38.3) 2,342
 2,759
 (417) (15.1) 5,720
 8,237
Total Commercial - industrial, financial and agricultural144,713
 133,354
 11,359
 8.5
 141,320
 122,058
 19,262
 15.8
 286,033
 255,412
103,620
 127,320
 (23,700) (18.6) 182,576
 181,872
 704
 0.4
 286,196
 309,192
Construction - commercial residential10,677
 15,447
 (4,770) (30.9) 16,221
 13,172
 3,049
 23.1
 26,898
 28,619
4,613
 5,259
 (646) (12.3) 12,282
 14,084
 (1,802) (12.8) 16,895
 19,343
Construction - commercial4,902
 3,412
 1,490
 43.7
 5,363
 5,115
 248
 4.8
 10,265
 8,527
834
 846
 (12) (1.4) 3,688
 3,752
 (64) (1.7) 4,522
 4,598
Total real estate - construction (excluding construction - other)15,579
 18,859
 (3,280) (17.4) 21,584
 18,287
 3,297
 18.0
 37,163
 37,146
5,447
 6,105
 (658) (10.8) 15,970
 17,836
 (1,866) (10.5) 21,417
 23,941
Total$297,935
 $284,697
 $13,238
 4.6 % $283,653
 $263,321
 $20,332
 7.7 % $581,588
 $548,018
$253,876
 $281,029
 $(27,153) (9.7)% $359,035
 $350,512
 $8,523
 2.4 % $612,911
 $631,541
                                      
% of total risk rated loans2.6% 2.6%     2.6% 2.4%     5.2% 5.0%
% of total risk-rated loans2.2% 2.4%     3.1% 3.0%     5.3% 5.4%

The following table summarizes loan delinquency rates, by type, as of the dates indicated:
March 31, 2017 March 31, 2016 December 31, 2016March 31, 2018 March 31, 2017 December 31, 2017
30-89
Days
 ≥ 90 Days (1) Total 30-89
Days
 ≥ 90 Days (1) Total 30-89
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 mortgage0.18% 0.60% 0.78% 0.15% 0.78% 0.93% 0.13% 0.65% 0.78%0.20% 0.57% 0.77% 0.18% 0.60% 0.78% 0.21% 0.56% 0.77%
Commercial – industrial, financial and agricultural0.19% 1.06% 1.25% 0.49% 0.97% 1.46% 0.25% 1.06% 1.31%0.20% 1.28% 1.48% 0.19% 1.06% 1.25% 0.24% 1.26% 1.50%
Real estate – construction0.46% 1.53% 1.99% 0.52% 1.48% 2.00% 0.12% 1.17% 1.29%% 1.12% 1.12% 0.46% 1.53% 1.99% 0.11% 1.21% 1.32%
Real estate – residential mortgage1.03% 1.41% 2.44% 1.27% 1.83% 3.10% 1.27% 1.48% 2.75%0.89% 1.02% 1.91% 1.03% 1.41% 2.44% 0.96% 1.08% 2.04%
Real estate – home equity0.46% 0.76% 1.22% 0.54% 0.87% 1.41% 0.57% 0.81% 1.38%0.58% 0.79% 1.37% 0.46% 0.76% 1.22% 0.81% 0.74% 1.55%
Consumer, leasing and other0.91% 0.31% 1.22% 0.95% 0.77% 1.72% 1.23% 0.42% 1.65%0.69% 0.07% 0.76% 0.91% 0.31% 1.22% 0.83% 0.06% 0.89%
Total0.35% 0.88% 1.23% 0.45% 0.99% 1.44% 0.38% 0.89% 1.27%0.33% 0.86% 1.19% 0.35% 0.88% 1.23% 0.39% 0.85% 1.24%
Total dollars (in thousands)$52,198
 $131,532
 $183,730
 $62,922
 $137,183
 $200,105
 $55,149
 $131,638
 $186,787
$51,692
 $134,642
 $186,334
 $52,198
 $131,532
 $183,730
 $61,509
 $134,759
 $196,268
(1)Includes non-accrual loans.
Management believes that the allowance for credit losses of $172.6 million as of March 31, 2017 is sufficient to cover incurred losses in the loan portfolio and unfunded lending commitments as of that date and is appropriate based on applicable accounting standards.












Deposits and Borrowings

The following table presents ending deposits, by type:type, as of the dates indicated:
    Increase (Decrease)    Decrease
March 31, 2017 December 31, 2016 $ %March 31, 2018 December 31, 2017 $ %
(dollars in thousands)(dollars in thousands)
Noninterest-bearing demand$4,417,733
 $4,376,137
 $41,596
 1.0 %$4,291,821
 $4,437,294
 $(145,473) (3.3)%
Interest-bearing demand3,702,663
 3,703,712
 (1,049) 
3,984,423
 4,018,107
 (33,684) (0.8)
Savings and money market accounts4,251,574
 4,179,773
 71,801
 1.7
4,487,277
 4,586,746
 (99,469) (2.2)
Total demand and savings12,371,970
 12,259,622
 112,348
 0.9
12,763,521
 13,042,147
 (278,626) (2.1)
Brokered deposits64,195
 90,473
 (26,278) (29.0)
Time deposits2,718,374
 2,753,242
 (34,868) (1.3)2,649,387
 2,664,912
 (15,525) (0.6)
Total deposits$15,090,344
 $15,012,864
 $77,480
 0.5 %$15,477,103
 $15,797,532
 $(320,429) (2.0)%

The $320.4 million overall decrease in deposits reflected a seasonal decrease in municipal deposits and an increase in short-term promissory notes, which are included in short-term borrowings.

Noninterest-bearing demand deposits increased $41.6decreased $145.5 million, or 1.0%3.3%, primarily as a result of increases in personal account balances of $49.8a $197.2 million, or 5.7%5.9%, and business account balances of $37.9 million, or 1.1%,decrease in commercial accounts, partially offset by increases of $33.2 million, or 3.6%, and $16.9 million, or 19.2%, in consumer and municipal accounts, respectively.

Interest-bearing demand accounts decreased $33.7 million, or 0.8%, due to a $126.8 million, or 9.5%, seasonal decrease in municipal account balances of $38.4partially offset by a $24.8 million, or 25.4%.1.2%, increase in consumer accounts and a $1.3 million, or 0.4%, increase in commercial account balances.

The $71.8$99.5 million, or 1.7%2.2%, increasedecrease in savings and money market account balances was due to an $82.9a $48.4 million, or 3.0%6.3%, increasedecrease in personalcommercial account balances, a $18.9$47.3 million, or 2.4%, increase in business account balances, partially offset by a $29.9 million, or 5.2%, seasonal decrease in municipal account balances. Interest-bearing demand accounts decreased $1.0 million, due to a $53.1 million, or 4.1%9.0%, seasonal decrease in municipal account balances which was mostly offset byand a $44.5$3.7 million decrease in consumer account balances.

Brokered deposits decreased $26.3 million, or 2.1%29.0%, increase in personal account balances and a $7.5 million, or 2.3%, increase in business account balances.as the Corporation reduced funding through the Third-Party Deposit Sweep Arrangement.

The following table presents ending short-term borrowings and long-term debt, by type:type, as of the dates indicated:
  Increase (Decrease)  Increase (Decrease)
March 31, 2017 December 31, 2016 $ %March 31, 2018 December 31, 2017 $ %
(dollars in thousands)(dollars in thousands)
Short-term borrowings:              
Customer repurchase agreements$181,170
 $195,734
 $(14,564) (7.4)%$165,186
 $172,017
 $(6,831) (4.0)%
Customer short-term promissory notes87,726
 67,013
 20,713
 30.9
342,666
 225,507
 117,159
 52.0
Total short-term customer funding268,896
 262,747
 6,149
 2.3
507,852
 397,524
 110,328
 27.8
Federal funds purchased54,421
 278,570
 (224,149) (80.5)395,000
 220,000
 175,000
 79.5
Short-term FHLB advances (1)
130,000
 
 130,000
 N/M
35,000
 
 35,000
 N/M
Total short-term borrowings453,317
 541,317
 (88,000) (16.3)937,852
 617,524
 320,328
 51.9
Long-term debt:              
FHLB advances652,209
 567,240
 84,969
 15.0
552,080
 652,113
 (100,033) (15.3)
Other long-term debt485,700
 362,163
 123,537
 34.1
386,419
 386,233
 186
 N/M
Total long-term debt1,137,909
 929,403
 208,506
 22.4
938,499
 1,038,346
 (99,847) (9.6)
Total borrowings$1,591,226
 $1,470,720
 $120,506
 8.2 %$1,876,351
 $1,655,870
 $220,481
 13.3 %
              
N/M - Not meaningful
(1) Represents FHLB advances with an original maturity term of less than one year.



Total borrowings increased $120.5$220.5 million, or 8.2%13.3%, asprimarily due to a result of a $208.5$320.3 million, or 22.4%51.9%, increase in long-term debt, partially offset by an $88.0 million, or 16.3%, decrease in short-term borrowings. The increase in long-term debtshort-term borrowings was primarily the result of a shift in customer deposit balances towards short-term promissory notes and increases in short-term FHLB advances and federal funds purchased, as borrowings were used to supplement funding needs created by the issuancedecrease in deposit balances. The decrease of $125.0$100.0 million, or 15.3%, in long-term FHLB advances was the result of senior notes in March 2017 as discussed in the "Results of Operations."






a maturity which was replaced with short-term federal funds purchased.

Shareholders' Equity

Total shareholders’ equity increased $33.6$5.6 million or 1.6%, during the first three months of 2017.2018. The increase was due primarily to $43.4$49.5 million of net income $4.7and $2.8 million of stock issued, andpartially offset by a $3.9$27.1 million increase in other comprehensive income, partially offset by $19.2loss and $21.0 million of common stock dividends. The increase in other comprehensive loss resulted primarily from unrealized losses on investment securities as interest rates continued to rise during the first quarter of 2018.

In November 2016,2017, the Corporation's board of directors approved an extension through December 31, 2017, to 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. 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.December 31, 2018. As of March 31, 2017,2018, 1.5 million shares werehad been repurchased under this program, forall prior to 2017, at a total cost of $18.5 million, or an average of $12.48 per share. Up to an additional $31.5 million of the Corporation's common stock may be repurchased under this program through December 31, 2017.2018.

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 reviserevised the risk-based capital requirements applicable to bank holding companies and depository institutions.

The 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 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 a minimum Total capital ratio of 8.00% of risk-weighted assets and a minimum Tier 1 leverage capital ratio of 4.00% of average assets; and
Comply with a revised definition of capital to improve the ability of regulatory capital instruments to absorb losses. Certain non-qualifying capital instruments, including cumulative preferred stock and trust preferred securities ("TruPS"), have been phased out as a component of Tier 1 capital for institutions of the Corporation's size.
When fully phased in on January 1, 2019, the Corporation and its bank subsidiaries will also be required to maintain a "capital conservation buffer" of 2.50% above the minimum risk-based capital requirements, which must be maintained to avoid restrictions on capital distributions and certain discretionary bonus payments.

The U.S. Basel III Capital Rules use a standardized approach for risk weightings that expands the risk-weightings for assets and off-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 weightsweightings for a variety of asset categories.

As of March 31, 2017, the Corporation and each of its bank subsidiaries met the minimum requirements of the U.S. Basel III Capital Rules, and each of the Corporation’s bank subsidiaries’ capital ratios exceeded the amounts required to be considered "well capitalized" as defined in the regulations. As of March 31, 2017,2018, the Corporation's capital levels also metmeet the fully-phased infully phased-in minimum capital requirements, including the new capital conservation buffers, as prescribed in the U.S. Basel III Capital Rules.







As of March 31, 2018, each of the Corporation’s subsidiary banks was well capitalized under the regulatory framework for prompt corrective action based on their capital ratio calculations. To be categorized as well capitalized, these banks must maintain minimum total risk-based, Tier I risk-based, Common Equity Tier I risk-based and Tier I leverage ratios as set forth in the following table. There are no conditions or events since March 31, 2018 that management believes have changed the institutions’ categories.


The following table summarizes the Corporation’s capital ratios in comparison to regulatory requirements:
March 31, 2017 December 31, 2016 Regulatory
Minimum
for Capital
Adequacy
 Fully Phased-in, with Capital Conservation BuffersMarch 31, 2018 December 31, 2017 Regulatory
Minimum
for Capital
Adequacy
 Fully Phased-in, with Capital Conservation Buffers
Total Capital (to Risk-Weighted Assets)13.2% 13.2% 8.0% 10.5%13.2% 13.0% 8.0% 10.5%
Tier I Capital (to Risk-Weighted Assets)10.4% 10.4% 6.0% 8.5%10.6% 10.4% 6.0% 8.5%
Common Equity Tier I (to Risk-Weighted Assets)10.4% 10.4% 4.5% 7.0%10.6% 10.4% 4.5% 7.0%
Tier I Capital (to Average Assets)9.0% 9.0% 4.0% 4.0%9.2% 8.9% 4.0% 4.0%

The increases in regulatory capital ratios from December 31, 2017 to March 31, 2018 largely reflected increases in regulatory capital, generated by net income less shareholder dividends, outpacing the growth in risk-weighted and total assets.




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, foreign currency price risk and commodity price risk are not significant to the Corporation.

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") 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.

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 12-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 the 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, i.e. a non-parallel instantaneous shock, on net interest income as of March 31, 20172018 (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$100.0$84.5 million 16.8%13.1%
+200 bp+ $67.7$57.8 million 11.4%9.0%
+100 bp+ $34.0$29.0 million 5.7%4.5%
–100 bp$49.8$49.0 million 8.3%7.62%

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


economic value of equity for a 100 basis point shock in interest rates, 20% for a 200 basis point shock and 30% for a 300 basis


point shock. As of March 31, 2017,2018, the Corporation was within economic value of equity policy limits for every 100 basis point shock.

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 thatand the gross fair values are recorded at their fair value in other assets and other liabilities on the consolidated balance sheets. Changessheets, with 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. In addition, the Corporation has filed a shelf registration statement with the Securities and Exchange Commission under which the Corporation may, from time to time subject to then current market conditions, offer various types of debt and equity securities.

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

Each of the Corporation’s subsidiary banks is a member of the FHLB and has access to FHLB overnight and term credit facilities. As of March 31, 2017,2018, the Corporation had $652.2$552.1 million of advances outstanding from the FHLB with an additional borrowing capacity of approximately $3.1$3.8 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 March 31, 2017,2018, the Corporation had aggregate availability under federal funds lines of $1.1$1.0 billion with $54.4$400 million borrowed against that amount. A combination of commercial real estate loans, commercial loans and securities are pledged to the Federal Reserve Bank of Philadelphia to provide access to Federal Reserve Bank Discount Window borrowings. As of March 31, 2017,2018, the Corporation had $1.2 billion$490.3 million 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 adequatelysufficiently capitalized and to meet its cash needs.

The Corporation’s sources and uses of funds were discussed in general terms in the "Net Interest Income" section of Management’s Discussion and Analysis. The consolidated statements of cash flows provide additional information. The Corporation’s operating activities during the first three months of 20172018 generated $64.5$71.8 million of cash, mainly due to net income. Cash used inprovided by investing activities was $274.6$36.7 million, mainly due to net increasesdecreases in loans and short-term investments. Net cash provided byused in financing activities was $185.1$116.7 million due mainly to an increase in long-term debt, driven by the impact of the $125 million issuance of senior debt, increases in deposits, partially offset by a decrease inlong-term debt and short-term borrowings and cash dividends.

Equity Market Price Risk

Equity market price risk is the risk that changes in the values of equity investments could have a material impact on the financial position or results of operations of the Corporation. As of March 31, 2017, equity investments consisted of $21.6 million of common stocks of publicly traded financial institutions and $969,000 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 $10.6 million and an estimated fair value of $21.6 million at March 31, 2017, including an investment in a single financial institution with a cost basis of $5.1 million and an estimated fair value of $9.6 million. The fair value of this investment accounted for 44.6% 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 $11.0 million as of March 31, 2017.

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.borrowings.

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 commercial and residential mortgage-backed securities and collateralized mortgage obligations have principal payments that are guaranteed by U.S. government sponsored agencies.


State and Municipal Securities

As of March 31, 2017,2018, the Corporation owned $392.6$406.1 million of municipal securities issued by various states or municipalities. Downward 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 state or municipality and then, to a lesser extent, on any underlying credit enhancement. State or municipal securities can be supported by the general obligation of the issuing state or municipality, allowing the securities to be repaid by any means available to the issuing municipality. As of March 31, 2017,2018, approximately 98% of state or municipal securities were supported by the general obligation of corresponding states or municipalities. Approximately 59%61% of these securities were school district issuances, which are also supported by the states of the issuing municipalities.

Auction Rate Securities

As of March 31, 2017,2018, the Corporation’s investments in student loan auction rate certificates ("ARCs"), a type of auction rate security, had a cost basis of $107.3$107.4 million and a fair value of $97.4$103.0 million.

As of March 31, 2017,2018, the fair values of the ARCs currently in the portfolio were derived using significant unobservable inputs based on an expected cash flows modelflow models 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 modelflow models produced fair values which assumed a return to market liquidity sometime inwithin the next five years. The Corporation believes that the trusts underlying the ARCs will self-liquidate as student loans are repaid.

The credit quality of the underlying debt associated with the ARCs is also a factor in the determination of their estimated fair value. As of March 31, 2017,2018, 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 March 31, 2017,2018, 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 and senior debt issued by financial institutions. As of March 31, 2017,2018, these securities had an amortized cost of $109.6$101.4 million and an estimated fair value of $107.9$102.0 million.

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.



PART II – OTHER INFORMATION

Item 1. Legal Proceedings

The information presented in the "Legal Proceedings" section of Note 10 "Commitment"Commitments and Contingencies" of the Notes to Consolidated Financial Statements is incorporated herein by reference.

Item 1A. Risk Factors

There have been no material changes to the risk factors previously disclosed in Part I, Item 1A of the Corporation’s Annual Report on Form 10-K for the year ended December 31, 20162017.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
(a)  None.
(b)  None.
(c)  There were no purchases of equity securities by the issuer or any affiliated purchasers during the three months ended March 31, 2017.2018.


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.
3.1

3.2
31.1

31.2

32.1

32.2
101
Financial statements from the Quarterly Report on Form 10-Q of Fulton Financial Corporation for the period ended March 31, 2018, filed on May 8, 2018, 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 Statements of Cash Flows and (vi) the Notes to Consolidated Financial Statements - filed herewith.





FULTON FINANCIAL CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
FULTON FINANCIAL CORPORATION  
     
Date: May 5, 20178, 2018 /s/ E. Philip Wenger
    E. Philip Wenger
    Chairman and Chief Executive Officer and President
     
Date: May 5, 20178, 2018 /s/ Philmer H. RohrbaughMark R. McCollom
    Philmer H. RohrbaughMark R. McCollom
    Senior Executive Vice President and Chief OperatingFinancial Officer
    and Chief Financial Officer



EXHIBIT INDEX
Exhibits Required Pursuant
to Item 601 of Regulation S-K
3.1Articles 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. (File No. 0-10587)
3.2Bylaws 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.
4.1Indenture, dated March 16, 2017, between Fulton Financial Corporation and Wilmington Trust, National Association - Incorporated by reference to Exhibit 4.1 of the Fulton Financial Corporation Current Report on Form 8-K dated March 16, 2017.
4.2First Supplemental Indenture, dated March 16, 2017, between Fulton Financial Corporation and Wilmington Trust, National Association - Incorporated by reference to Exhibit 4.2 of the Fulton Financial Corporation Current Report on Form 8-K dated March 16, 2017.
31.1Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101
Financial statements from the Quarterly Report on Form 10-Q of Fulton Financial Corporation for the period ended March 31, 2017, filed on May 5, 2017, 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 Statements of Cash Flows and (vi) the Notes to Consolidated Financial Statements - filed herewith.



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