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 SeptemberJune 30, 20162017, 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 –173,271,000–174,941,000 shares outstanding as of OctoberJuly 28, 2016.2017.


FULTON FINANCIAL CORPORATION
FORM 10-Q FOR THE THREE AND NINESIX MONTHS ENDED SEPTEMBERJUNE 30, 20162017
INDEX
 
DescriptionPage
   
PART I. FINANCIAL INFORMATION 
   
Item 1. Financial Statements (Unaudited):
 
   
(a)
Consolidated Balance Sheets - SeptemberJune 30, 20162017 and December 31, 20152016
3
   
(b)
Consolidated Statements of Income - Three and ninesix months ended SeptemberJune 30, 20162017 and 20152016
4
   
(c)
Consolidated Statements of Comprehensive Income - Three and ninesix months ended September June 30, 20162017 and 20152016
5
   
(d)
Consolidated Statements of Shareholders’ Equity - NineSix months ended September June 30, 20162017 and 20152016
6
   
(e)
Consolidated Statements of Cash Flows - NineSix months ended September June 30, 20162017 and 20152016
7
   
(f)
Notes to Consolidated Financial Statements
8
   
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
3941
   
Item 3. Quantitative and Qualitative Disclosures about Market Risk
6566
   
Item 4. Controls and Procedures
6970
   
PART II. OTHER INFORMATION
 
   
Item 1. Legal Proceedings
7071
   
Item 1A. Risk Factors
7071
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
71
   
Item 3. Defaults Upon Senior Securities - (not applicable)
71
   
Item 4. Mine Safety Disclosures - (not applicable)
71
   
Item 5. Other Information - (none to be reported)
71
   
Item 6. Exhibits
71
   
Signatures
72
   
Exhibit Index
73
   





Item 1. Financial Statements
 

CONSOLIDATED BALANCE SHEETS 
 
(in thousands, except per-share data)
September 30,
2016		 December 31,
2015		June 30,
2017		 December 31,
2016
(unaudited) (unaudited) 
ASSETS      
Cash and due from banks$86,497
 $101,120
$94,938
 $118,763
Interest-bearing deposits with other banks368,031
 230,300
322,514
 233,763
Federal Reserve Bank and Federal Home Loan Bank stock60,935
 62,216
70,328
 57,489
Loans held for sale27,836
 16,886
62,354
 28,697
Available for sale investment securities2,508,068
 2,484,773
2,488,699
 2,559,227
Loans, net of unearned income14,391,238
 13,838,602
15,346,617
 14,699,272
Less: Allowance for loan losses(162,526) (169,054)(172,342) (168,679)
Net Loans14,228,712
 13,669,548
15,174,275
 14,530,593
Premises and equipment228,009
 225,535
217,558
 217,806
Accrued interest receivable43,600
 42,767
47,603
 46,294
Goodwill and intangible assets531,556
 531,556
531,556
 531,556
Other assets617,818
 550,017
637,610
 620,059
Total Assets$18,701,062
 $17,914,718
$19,647,435
 $18,944,247
LIABILITIES      
Deposits:      
Noninterest-bearing$4,210,099
 $3,948,114
$4,574,619
 $4,376,137
Interest-bearing10,742,380
 10,184,203
10,782,742
 10,636,727
Total Deposits14,952,479
 14,132,317
15,357,361
 15,012,864
Short-term borrowings:      
Federal funds purchased8,444
 197,235
206,269
 278,570
Other short-term borrowings255,598
 300,428
488,590
 262,747
Total Short-Term Borrowings264,042
 497,663
694,859
 541,317
Accrued interest payable13,645
 10,724
7,804
 9,632
Other liabilities376,174
 282,578
357,680
 329,916
Federal Home Loan Bank advances and long-term debt965,286
 949,542
Federal Home Loan Bank advances and other long-term debt1,037,961
 929,403
Total Liabilities16,571,626
 15,872,824
17,455,665
 16,823,132
SHAREHOLDERS’ EQUITY      
Common stock, $2.50 par value, 600 million shares authorized, 219.1 million shares issued in 2016 and 218.9 million shares issued in 2015547,735
 547,141
Common stock, $2.50 par value, 600 million shares authorized, 220.8 million shares issued in 2017 and 219.9 million shares issued in 2016551,936
 549,707
Additional paid-in capital1,457,597
 1,450,690
1,473,549
 1,467,602
Retained earnings710,833
 641,588
782,541
 732,099
Accumulated other comprehensive income (loss)4,491
 (22,017)
Treasury stock, at cost, 45.9 million shares in 2016 and 44.7 million shares in 2015(591,220) (575,508)
Accumulated other comprehensive loss(24,875) (38,449)
Treasury stock, at cost, 45.9 million shares in 2017 and 45.8 million shares in 2016(591,381) (589,844)
Total Shareholders’ Equity2,129,436
 2,041,894
2,191,770
 2,121,115
Total Liabilities and Shareholders’ Equity$18,701,062
 $17,914,718
$19,647,435
 $18,944,247
      
See Notes to Consolidated Financial Statements      
 


CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
 
(in thousands, except per-share data)Three months ended September 30 Nine months ended September 30Three months ended June 30 Six months ended June 30
2016 2015 2016 20152017 2016 2017 2016
INTEREST INCOME              
Loans, including fees$136,639
 $131,804
 $405,361
 $391,491
$148,440
 $134,643
 $291,006
 $268,722
Investment securities:              
Taxable10,874
 11,252
 34,036
 33,478
11,474
 11,159
 23,388
 23,162
Tax-exempt2,550
 1,904
 6,910
 5,872
2,856
 2,320
 5,705
 4,360
Dividends143
 190
 438
 834
109
 135
 238
 295
Loans held for sale210
 194
 529
 632
201
 188
 388
 319
Other interest income1,052
 884
 2,814
 3,922
801
 864
 1,643
 1,762
Total Interest Income151,468
 146,228
 450,088
 436,229
163,881
 149,309
 322,368
 298,620
INTEREST EXPENSE              
Deposits11,311
 10,217
 32,925
 30,093
12,884
 10,887
 24,685
 21,614
Short-term borrowings254
 92
 739
 272
974
 217
 1,829
 485
Long-term debt9,338
 10,225
 27,889
 33,669
Federal Home Loan Bank advances and other long-term debt8,460
 9,289
 16,712
 18,551
Total Interest Expense20,903
 20,534
 61,553
 64,034
22,318
 20,393
 43,226
 40,650
Net Interest Income130,565
 125,694
 388,535
 372,195
141,563
 128,916
 279,142
 257,970
Provision for credit losses4,141
 1,000
 8,182
 (500)6,700
 2,511
 11,500
 4,041
Net Interest Income After Provision for Credit Losses126,424
 124,694
 380,353
 372,695
134,863
 126,405
 267,642
 253,929
NON-INTEREST INCOME              
Other service charges and fees14,407
 10,965
 38,140
 31,316
14,342
 12,983
 26,779
 23,733
Service charges on deposit accounts13,078
 12,982
 38,532
 37,188
12,914
 12,896
 25,314
 25,454
Investment management and trust services11,425
 11,237
 33,660
 33,137
12,132
 11,247
 23,940
 22,235
Mortgage banking income4,529
 3,864
 12,456
 13,891
6,141
 3,897
 10,737
 7,927
Investment securities gains, net2
 1,730
 1,025
 8,290
1,436
 76
 2,542
 1,023
Other4,708
 3,996
 13,610
 12,178
5,406
 5,038
 9,732
 8,902
Total Non-Interest Income48,149
 44,774
 137,423
 136,000
52,371
 46,137
 99,044
 89,274
NON-INTEREST EXPENSE              
Salaries and employee benefits70,696
 65,308
 210,097
 195,365
74,496
 70,029
 143,732
 139,401
Net occupancy expense11,782
 10,710
 35,813
 36,211
12,316
 11,811
 24,979
 24,031
Other outside services5,783
 7,373
 17,347
 21,248
7,708
 5,508
 13,254
 11,564
Data processing4,610
 5,105
 15,486
 14,767
4,619
 5,476
 8,905
 10,876
Software4,117
 3,984
 11,991
 10,678
4,435
 3,953
 9,128
 7,874
Amortization of tax credit investments3,151
 —
 4,149
 —
Equipment expense3,137
 3,595
 9,380
 10,888
3,034
 2,872
 6,393
 6,243
Supplies and postage2,559
 2,708
 7,844
 7,803
Professional fees2,535
 2,828
 8,221
 8,430
2,931
 3,353
 5,668
 5,686
FDIC insurance expense1,791
 2,867
 7,700
 8,574
2,366
 2,960
 4,424
 5,909
Marketing1,774
 2,102
 5,314
 5,570
2,234
 1,916
 4,220
 3,540
Telecommunications1,411
 1,587
 4,358
 4,920
Other real estate owned and repossession expense742
 1,016
 1,745
 2,507
Operating risk loss556
 1,136
 2,082
 2,637
Loss on redemption of trust preferred securities—
 5,626
 —
 5,626
Intangible amortization—
 5
 —
 241
Other8,355
 8,939
 24,520
 26,256
15,405
 13,759
 30,118
 26,926
Total Non-Interest Expense119,848
 124,889
 361,898
 361,721
132,695
 121,637
 254,970
 242,050
Income Before Income Taxes54,725
 44,579
 155,878
 146,974
54,539
 50,905
 111,716
 101,153
Income taxes13,257
 10,328
 36,403
 36,007
9,072
 11,155
 22,869
 23,146
Net Income$41,468
 $34,251
 $119,475
 $110,967
$45,467
 $39,750
 $88,847
 $78,007
              
PER SHARE:              
Net Income (Basic)$0.24
 $0.20
 $0.69
 $0.63
$0.26
 $0.23
 $0.51
 $0.45
Net Income (Diluted)0.24
 0.20
 0.69
 0.63
0.26
 0.23
 0.51
 0.45
Cash Dividends0.10
 0.09
 0.29
 0.27
0.11
 0.10
 0.22
 0.19
See Notes to Consolidated Financial Statements              



CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
 
(in thousands)
Three months ended September 30 Nine months ended September 30Three months ended June 30 Six months ended June 30
2016 2015 2016 20152017 2016 2017 2016
  
Net Income$41,468
 $34,251
 $119,475
 $110,967
$45,467
 $39,750
 $88,847
 $78,007
Other Comprehensive Income (Loss), net of tax:       
Unrealized (loss) gain on securities(3,580) 7,857
 26,285
 5,841
Other Comprehensive Income, net of tax:       
Unrealized gain on securities10,268
 12,839
 14,541
 29,865
Reclassification adjustment for securities gains included in net income(1) (1,124) (666) (5,388)(932) (49) (1,651) (665)
Reclassification adjustment for loss on derivative financial instruments included in net income—
 2,456
 —
 2,456
Non-credit related unrealized gain on other-than-temporarily impaired debt securities—
 —
 —
 125
Amortization of unrealized loss on derivative financial instruments4
 3
 12
 71
—
 4
 —
 8
Amortization of net unrecognized pension and postretirement items379
 466
 877
 1,398
341
 32
 684
 498
Other Comprehensive (Loss) Income(3,198) 9,658
 26,508
 4,503
Other Comprehensive Income9,677
 12,826
 13,574
 29,706
Total Comprehensive Income$38,270
 $43,909
 $145,983
 $115,470
$55,144
 $52,576
 $102,421
 $107,713
              
See Notes to Consolidated Financial Statements              




CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)
NINESIX MONTHS ENDED SEPTEMBERJUNE 30, 20162017 AND 20152016
 
(in thousands, except per-share data)
Common Stock   
Retained
Earnings
   
Treasury
Stock
 TotalCommon Stock   
Retained
Earnings
   
Treasury
Stock
 Total
Shares
Outstanding
 Amount 
Additional Paid-in
Capital
 
Accumulated
Other Comprehensive
Income (Loss)
 
Shares
Outstanding
 Amount 
Additional Paid-in
Capital
 
Accumulated
Other Comprehensive
Income (Loss)
 
  
Balance at December 31, 2015174,176
 $547,141
 $1,450,690
 $641,588
 $(22,017) $(575,508) $2,041,894
Balance at December 31, 2016174,040
 $549,707
 $1,467,602
 $732,099
 $(38,449) $(589,844) $2,121,115
Net income
 
 
 119,475
 
 
 119,475

 
 
 88,847
 
 
 88,847
Other comprehensive income
 
 
 
 26,508
 
 26,508

 
 
 
 13,574
 
 13,574
Stock issued, including related tax benefits454
 594
 2,099
 
 
 2,833
 5,526
Stock issued877
 2,229
 4,178
 
 
 (1,537) 4,870
Stock-based compensation awards
 
 4,808
 
 
 
 4,808

 
 1,769
 
 
 
 1,769
Acquisition of treasury stock(1,486)         (18,545) (18,545)
Common stock cash dividends - $0.29 per share
 
 
 (50,230) 
 
 (50,230)
Balance at September 30, 2016173,144
 $547,735
 $1,457,597
 $710,833
 $4,491
 $(591,220) $2,129,436
Common stock cash dividends - $0.22 per share
 
 
 (38,405) 
 
 (38,405)
Balance at June 30, 2017174,917
 $551,936
 $1,473,549
 $782,541
 $(24,875) $(591,381) $2,191,770
                          
Balance at December 31, 2014178,924
 $545,555
 $1,420,523
 $558,810
 $(17,722) $(510,501) $1,996,665
Balance at December 31, 2015174,176
 $547,141
 $1,450,690
 $641,588
 $(22,017) $(575,508) $2,041,894
Net income
 
 
 110,967
 
 
 110,967

 
 
 78,007
 
 
 78,007
Other comprehensive loss
 
 
 
 4,503
 
 4,503

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

 
 3,256
 
 
 
 3,256
Acquisition of treasury stock(3,976)         (50,000) (50,000)(1,310)         (16,254) (16,254)
Settlement of accelerated stock repurchase agreement(1,790)   20,000
    —
(20,000) —
Common stock cash dividends - $0.27 per share
 
 
 (47,540) 
 
 (47,540)
Balance at September 30, 2015173,771
 $546,444
 $1,447,569
 $622,237
 $(13,219) $(577,127) $2,025,904
Common stock cash dividends - $0.19 per share
 
 
 (32,960) 
 
 (32,960)
Balance at June 30, 2016173,139
 $547,530
 $1,455,351
 $686,635
 $7,689
 $(590,208) $2,106,997
                          
See Notes to Consolidated Financial Statements                          
 


CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
(in thousands)
Nine months ended September 30Six months ended June 30
2016 20152017 2016
CASH FLOWS FROM OPERATING ACTIVITIES:      
Net Income$119,475
 $110,967
$88,847
 $78,007
Adjustments to reconcile net income to net cash provided by operating activities:      
Provision for credit losses8,182
 (500)11,500
 4,041
Depreciation and amortization of premises and equipment20,547
 20,302
13,974
 13,804
Net amortization of investment securities premiums7,434
 5,369
4,775
 4,647
Investment securities gains, net(1,025) (8,290)(2,542) (1,023)
Gain on sales of mortgage loans held for sale(11,967) (10,588)(6,562) (7,110)
Proceeds from sales of mortgage loans held for sale493,457
 599,557
283,251
 304,516
Originations of mortgage loans held for sale(492,440) (598,384)(281,356) (314,850)
Amortization of intangible assets—
 241
Amortization of issuance costs on long-term debt347
 432
382
 193
Stock-based compensation4,808
 4,371
1,769
 3,256
Excess tax benefits from stock-based compensation(58) (86)—
 (28)
Loss on redemption of trust preferred securities—
 5,626
Increase in accrued interest receivable(833) (1,028)(1,309) (549)
Increase in other assets(9,075) (10,926)(26,610) (18,268)
Increase (decrease) in accrued interest payable2,921
 (3,318)
Increase in other liabilities2,061
 21,604
Decrease in accrued interest payable(1,828) (2,388)
(Decrease) increase in other liabilities(9,327) 9,866
Total adjustments24,359
 24,382
(13,883) (3,893)
Net cash provided by operating activities143,834
 135,349
74,964
 74,114
CASH FLOWS FROM INVESTING ACTIVITIES:      
Proceeds from sales of securities available for sale84,978
 29,309
29,518
 84,972
Proceeds from principal repayments and maturities of securities available for sale426,932
 317,813
225,788
 282,832
Purchase of securities available for sale(484,164) (444,111)(158,078) (355,220)
Increase in short-term investments(136,450) (156,837)(101,590) (115,570)
Net increase in loans(567,061) (440,681)(655,172) (326,902)
Net purchases of premises and equipment(23,021) (19,980)(13,726) (17,130)
Net cash used in investing activities(698,786) (714,487)(673,260) (447,018)
CASH FLOWS FROM FINANCING ACTIVITIES:      
Net increase in demand and savings deposits880,795
 852,611
351,329
 202,552
Net decrease in time deposits(60,633) (135,723)(6,832) (42,305)
(Decrease) increase in short-term borrowings(233,621) 101,912
Increase in short-term borrowings153,542
 224,551
Additions to long-term debt16,000
 347,778
223,251
 16,000
Repayments of long-term debt(603) (510,038)(115,075) (183)
Net proceeds from issuance of common stock5,468
 6,852
4,870
 3,320
Excess tax benefits from stock-based compensation58
 86
—
 28
Dividends paid(48,590) (46,239)(36,614) (31,278)
Acquisition of treasury stock(18,545) (50,000)—
 (16,254)
Net cash provided by financing activities540,329
 567,239
574,471
 356,431
Net Decrease in Cash and Due From Banks(14,623) (11,899)(23,825) (16,473)
Cash and Due From Banks at Beginning of Period101,120
 105,702
118,763
 101,120
Cash and Due From Banks at End of Period$86,497
 $93,803
$94,938
 $84,647
Supplemental Disclosures of Cash Flow Information:      
Cash paid during the period for:      
Interest$58,632
 $67,352
$45,054
 $43,038
Income taxes9,404
 9,168
7,016
 9,087
Supplemental schedule of certain noncash activities:   
Transfer of student loans to loans held for sale$28,990
 $—
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's Annual Report on Form 10-K for the year ended December 31, 2015.2016. Operating results for the three and ninesix months ended SeptemberJune 30, 20162017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.2017. The Corporation evaluates subsequent events through the date of filing of this Form 10-Q with the Securities and Exchange Commission ("SEC").

Recently Issued Accounting Standards

In May 2014, the Financial Accounting Standards Board ("FASB")FASB issued ASC Update 2014-09, "Revenue from Contracts with Customers." This standards update establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle prescribed by this standards update is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard applies to all contracts with customers, except those that are within the scope of other topics in the FASB ASC. The standard also requires significantly expanded disclosures about revenue recognition. During 2016, the FASB issued amendments to this standard (ASC Updates 2016-08, 2016-10, 2016-11 and 2016-12). These amendments provide further clarification to the standard. For public business entities, ASC Update 2014-09 is effective for interim and annual reporting periods beginning after December 15, 2017. Early application is not permitted. For the Corporation, this standards update is effective with its March 31, 2018 quarterly report on Form 10-Q. The Corporation is currently evaluating the impact of the adoption of ASC Update 2014-09 on its consolidated financial statements.

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

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

In March 2016, The Corporation currently operates a number of branches that are leased, with the FASB issuedleases accounted for as operating leases that are not recognized on the consolidated balance sheet. Under ASC Update 2016-09, "Stock Compensation: Improvements2016-02, right-of-use assets and lease liabilities will need to Employee Share-Based Payment Accounting." The purpose of this standards update is to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liability, and classificationbe recognized on the statementconsolidated balance sheet for these branches. The recognition of cash flows. ASC Update 2016-09operating leases on the consolidated balance sheet is effective for interim and annual reporting periods beginning after December 15, 2016. Early application is permitted. Forexpected to be the Corporation, this standards update is effective with its March 31, 2017 quarterly report on Form 10-Q. The Corporation is currently evaluating themost significant impact of the adoption of ASC Update 2016-09 on its consolidated financial statements and does not expect the adoption of ASC Update 2016-09 to have a material impact on its consolidated financial statements.


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 (current practice).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 is effective for interim and annual 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 does not expect the adoption of ASC Update 2016-15 to 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 updaterequires 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 is effective for interim and annual 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 does not expect the adoption of ASC Update 2016-18 to have a material impact on its consolidated financial statements.

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.

In May 2017, the FASB issued ASC Update 2017-09, "Scope of Modification Accounting." This standards update provides clarity and reduces both (1) diversity in practice and (2) cost and complexity, when applying the guidance in the stock compensation standard, to a change to the terms or conditions of a share-based payment award. ASC Update 2017-09 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 does not expect the adoption of ASC Update 2017-09 to have a material impact on its consolidated financial statements.




Reclassifications

Certain amounts in the 20152016 consolidated financial statements and notes have been reclassified to conform to the 20162017 presentation.

NOTE 2 – Net Income Per Share

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

A reconciliation of weighted average shares outstanding used to calculate basic net income per share and diluted net income per share follows:
Three months ended September 30 Nine months ended September 30Three months ended June 30 Six months ended June 30
2016 2015 2016 20152017 2016 2017 2016
(in thousands)(in thousands)
Weighted average shares outstanding (basic)173,020
 174,338
 173,248
 176,399
174,597
 173,394
 174,375
 173,363
Impact of common stock equivalents1,044
 1,004
 1,017
 1,029
935
 924
 1,179
 1,004
Weighted average shares outstanding (diluted)174,064
 175,342
 174,265
 177,428
175,532
 174,318
 175,554
 174,367
For the three and ninesix months ended SeptemberJune 30, 2016, 447,000802,000 and 712,000844,000 stock options, respectively, were excluded from the diluted net income per share computation as their effect would have been anti-dilutive. ForThere were no stock options excluded for the three and ninesix months ended SeptemberJune 30, 2015, 1.5 million and 1.8 million stock options, respectively, were excluded from the diluted net income per share computation as their effect would have been anti-dilutive.2017.


NOTE 3 – Accumulated Other Comprehensive Income

The following table presents changes in other comprehensive income: 
Before-Tax Amount Tax Effect Net of Tax AmountBefore-Tax Amount Tax Effect Net of Tax Amount
(in thousands)(in thousands)
Three months ended September 30, 2016     
Unrealized loss on securities$(5,505) $1,925
 $(3,580)
Reclassification adjustment for securities gains included in net income (1)
(2) 1
 (1)
Amortization of unrealized loss on derivative financial instruments (2)
6
 (2) 4
Amortization of net unrecognized pension and postretirement items (3)
583
 (204) 379
Total Other Comprehensive Loss$(4,918) $1,720
 $(3,198)
Three months ended September 30, 2015     
Three months ended June 30, 2017     
Unrealized gain on securities$12,088
 $(4,231) $7,857
$15,798
 $(5,530) $10,268
Reclassification adjustment for securities gains included in net income (1)
(1,730) 606
 (1,124)(1,436) 504
 (932)
Reclassification adjustment for loss on derivative financial instruments included in net income (2)
3,778
 (1,322) 2,456
Amortization of unrealized loss on derivative financial instruments(2)
5
 (2) 3
Amortization of net unrecognized pension and postretirement items (3)
717
 (251) 466
522
 (181) 341
Total Other Comprehensive Income$14,858
 $(5,200) $9,658
$14,884
 $(5,207) $9,677
     
Nine months ended September 30, 2016     
Three months ended June 30, 2016     
Unrealized gain on securities$40,441
 $(14,156) $26,285
$19,753
 $(6,914) $12,839
Reclassification adjustment for securities gains included in net income (1)
(1,025) 359
 (666)(76) 27
 (49)
Amortization of unrealized loss on derivative financial instruments (2)
18
 (6) 12
6
 (2) 4
Amortization of net unrecognized pension and postretirement items (3)
1,349
 (472) 877
49
 (17) 32
Total Other Comprehensive Income$40,783
 $(14,275) $26,508
$19,732
 $(6,906) $12,826
          
Nine months ended September 30, 2015     
Six months ended June 30, 2017     
Unrealized gain on securities$8,987
 $(3,146) $5,841
$22,374
 $(7,833) $14,541
Reclassification adjustment for securities gains included in net income (1)
(8,290) 2,902
 (5,388)(2,542) 891
 (1,651)
Reclassification adjustment for loss on derivative financial instruments included in net income (2)
3,778
 (1,322) 2,456
Non-credit related unrealized gains on other-than-temporarily impaired debt securities192
 (67) 125
Amortization of net unrecognized pension and postretirement items (3)
1,051
 (367) 684
Total Other Comprehensive Income$20,883
 $(7,309) $13,574
     
Six months ended June 30, 2016     
Unrealized gain on securities$45,946
 $(16,081) $29,865
Reclassification adjustment for securities gains included in net income (1)
(1,023) 358
 (665)
Amortization of unrealized loss on derivative financial instruments (2)
110
 (39) 71
12
 (4) 8
Amortization of net unrecognized pension and postretirement items (3)
2,151
 (753) 1,398
766
 (268) 498
Total Other Comprehensive Income$6,928
 $(2,425) $4,503
$45,701
 $(15,995) $29,706

(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) Total
 (in thousands)
Three months ended September 30, 2016         
Balance at June 30, 2016$22,701
 $458
 $(7) $(15,463) $7,689
Other comprehensive loss before reclassifications(3,580) —
 —
 —
 (3,580)
Amounts reclassified from accumulated other comprehensive income (loss)(1) —
 4
 379
 382
Balance at September 30, 2016$19,120
 $458
 $(3) $(15,084) $4,491
Three months ended September 30, 2015
 
   
 
Balance at June 30, 2015$830
 $344
 $(2,478) $(21,573) $(22,877)
Other comprehensive income before reclassifications7,857

—
 —
 —
 7,857
Amounts reclassified from accumulated other comprehensive income (loss)(1,124) —
 3
 466
 (655)
Reclassification adjustment for loss on derivative financial instruments included in net income—
 —
 2,456
 —
 2,456
Balance at September 30, 2015$7,563
 $344
 $(19) $(21,107) $(13,219)
          
Nine months ended September 30, 2016         
Balance at December 31, 2015$(6,499) $458
 $(15) $(15,961) $(22,017)
Other comprehensive income before reclassifications26,285
 —
 —
 —
 26,285
Amounts reclassified from accumulated other comprehensive income (loss)(666) —
 12
 877
 223
Balance at September 30, 2016$19,120
 $458
 $(3) $(15,084) $4,491
Nine months ended September 30, 2015         
Balance at December 31, 2014$5,980
 $1,349
 $(2,546) $(22,505) $(17,722)
Other comprehensive income before reclassifications5,841
 125
 —
 —
 5,966
Amounts reclassified from accumulated other comprehensive income (loss)(4,258) (1,130) 71
 1,398
 (3,919)
Reclassification adjustment for loss on derivative financial instruments included in net income—
 —
 2,456
 —
 2,456
Balance at September 30, 2015$7,563
 $344
 $(19) $(21,107) $(13,219)
 Unrealized Gains (Losses) on Investment Securities Not Other-Than-Temporarily Impaired Unrealized Non-Credit Gains (Losses) on Other-Than-Temporarily Impaired Debt Securities Unrealized Effective Portions of Losses on Forward-Starting Interest Rate Swaps Unrecognized Pension and Postretirement Plan Income (Costs) Total
 (in thousands)
Three months ended June 30, 2017         
Balance at March 31, 2017$(19,493) $273
 $—
 $(15,332) $(34,552)
Other comprehensive income before reclassifications10,268
 —
 —
 —
 10,268
Amounts reclassified from accumulated other comprehensive income (loss)(932) —
 —
 341
 (591)
Balance at June 30, 2017$(10,157) $273
 $—
 $(14,991) $(24,875)
Three months ended June 30, 2016
 
   
 
Balance at March 31, 2016$9,911
 $458
 $(11) $(15,495) $(5,137)
Other comprehensive income before reclassifications12,839

—
 —
 —
 12,839
Amounts reclassified from accumulated other comprehensive income (loss)(49) —
 4
 32
 (13)
Balance at June 30, 2016$22,701
 $458
 $(7) $(15,463) $7,689
          
Six months ended June 30, 2017         
Balance at December 31, 2016$(23,047) $273
 $—
 $(15,675) $(38,449)
Other comprehensive income before reclassifications14,541
 —
 —
 —
 14,541
Amounts reclassified from accumulated other comprehensive income (loss)(1,651) —
 —
 684
 (967)
Balance at June 30, 2017$(10,157) $273
 $—
 $(14,991) $(24,875)
Six months ended June 30, 2016         
Balance at December 31, 2015$(6,499) $458
 $(15) $(15,961) $(22,017)
Other comprehensive income before reclassifications29,865
 —
 —
 —
 29,865
Amounts reclassified from accumulated other comprehensive income (loss)(665) —
 8
 498
 (159)
Balance at June 30, 2016$22,701
 $458
 $(7) $(15,463) $7,689



NOTE 4 – Investment Securities

The following table presents the amortized cost and estimated fair values of investment securities, which were all classified as available for sale:
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
(in thousands)(in thousands)
September 30, 2016       
June 30, 2017       
U.S. Government sponsored agency securities$137
 $3
 $—
 $140
$5,960
 $94
 $—
 $6,054
State and municipal securities394,162
 8,145
 (735) 401,572
405,035
 3,726
 (7,125) 401,636
Corporate debt securities109,495
 3,096
 (5,350) 107,241
88,887
 2,531
 (2,426) 88,992
Collateralized mortgage obligations651,060
 4,070
 (2,771) 652,359
546,847
 1,399
 (9,739) 538,507
Mortgage-backed securities1,201,771
 24,790
 (14) 1,226,547
Residential mortgage-backed securities1,218,257
 5,782
 (10,974) 1,213,065
Commercial mortgage-backed securities121,012
 390
 (335) 121,067
Auction rate securities107,107
 —
 (9,381) 97,726
107,410
 —
 (9,487) 97,923
Total debt securities2,463,732
 40,104
 (18,251) 2,485,585
2,493,408
 13,922
 (40,086) 2,467,244
Equity securities14,206
 8,277
 —
 22,483
10,487
 10,968
 —
 21,455
Total$2,477,938
 $48,381
 $(18,251) $2,508,068
$2,503,895
 $24,890
 $(40,086) $2,488,699
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, 2015       
December 31, 2016       
U.S. Government sponsored agency securities$25,154
 $35
 $(53) $25,136
$132
 $2
 $—
 $134
State and municipal securities256,746
 6,019
 —
 262,765
405,274
 2,043
 (15,676) 391,641
Corporate debt securities100,336
 2,695
 (6,076) 96,955
112,016
 1,978
 (4,585) 109,409
Collateralized mortgage obligations835,439
 3,042
 (16,972) 821,509
604,095
 1,943
 (12,178) 593,860
Mortgage-backed securities1,154,935
 10,104
 (6,204) 1,158,835
Residential mortgage-backed securities1,328,192
 6,546
 (16,900) 1,317,838
Commercial mortgage-backed securities25,100
 —
 (537) 24,563
Auction rate securities106,772
 —
 (8,713) 98,059
107,215
 —
 (9,959) 97,256
Total debt securities2,479,382
 21,895
 (38,018) 2,463,259
2,582,024
 12,512
 (59,835) 2,534,701
Equity securities14,677
 6,845
 (8) 21,514
12,231
 12,295
 —
 24,526
Total$2,494,059
 $28,740
 $(38,026) $2,484,773
$2,594,255
 $24,807
 $(59,835) $2,559,227
Securities carried at $1.7 billion and $1.8 billion as of SeptemberJune 30, 20162017 and $1.7 billion as of December 31, 20152016, respectively, were pledged as collateral to secure public and trust deposits and customer repurchase agreements.
Equity securities include common stocks of publicly traded financial institutions (estimated fair value of $21.6$20.5 million at SeptemberJune 30, 20162017 and $20.6$23.5 million at December 31, 2015)2016) and other equity investments (estimated fair value of $901,000$1.0 million at Septemberboth June 30, 20162017 and $914,000 at December 31, 2015)2016).
As of SeptemberJune 30, 2016,2017, the financial institutions stock portfolio had a cost basis of $13.4$9.7 million and an estimated fair value of $21.6$20.5 million, including an investment in a single financial institution with a cost basis of $7.4$4.3 million and an estimated fair value of $11.4$8.8 million. The estimated fair value of this investment accounted for 52.7%42.9% 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 SeptemberJune 30, 2016,2017, 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 $50,521
 $51,020
 $20,103
 $20,336
Due from one year to five years 34,278
 35,356
 27,967
 28,335
Due from five years to ten years 96,172
 99,187
 111,883
 113,050
Due after ten years 429,930
 421,116
 447,339
 432,884
 610,901
 606,679
 607,292
 594,605
Residential mortgage-backed securities 1,218,257
 1,213,065
Commercial mortgage-backed securities 121,012
 121,067
Collateralized mortgage obligations 651,060
 652,359
 546,847
 538,507
Mortgage-backed securities 1,201,771
 1,226,547
Total debt securities $2,463,732
 $2,485,585
 $2,493,408
 $2,467,244
The following table presents information related to the gross realized gains and losses on the sales of equity and debt securities:
Gross
Realized
Gains		 Gross
Realized
Losses		 Net Gains (Losses)Gross
Realized
Gains		 Gross
Realized
Losses		 Net Gains (Losses)
Three months ended September 30, 2016(in thousands)
Three months ended June 30, 2017(in thousands)
Equity securities$2
 $—
 $2
$1,305
 $—
 $1,305
Debt securities—
 —
 —
145
 (14) 131
Total$2
 $—
 $2
$1,450
 $(14) $1,436
Three months ended September 30, 2015     
Three months ended June 30, 2016     
Equity securities$1,730
 $—
 $1,730
$4
 $(10) $(6)
Debt securities—
 —
 —
108
 (26) 82
Total$1,730
 $—
 $1,730
$112
 $(36) $76
          
Nine months ended September 30, 2016     
Six months ended June 30, 2017     
Equity securities$739
 $(10) $729
$2,350
 $—
 $2,350
Debt securities322
 (26) 296
206
 (14) 192
Total$1,061
 $(36) $1,025
$2,556
 $(14) $2,542
Nine months ended September 30, 2015     
Six months ended June 30, 2016     
Equity securities$5,990
 $—
 $5,990
$737
 $(10) $727
Debt securities2,300
 —
 2,300
322
 (26) 296
Total$8,290
 $—
 $8,290
$1,059
 $(36) $1,023

The following table presents a summarycumulative balance of the cumulative credit related other-than-temporary impairment charges, previously recognized as components of earnings, for debt securities held by the Corporation at SeptemberJune 30, 2017 and June 30, 2016 was $10.0 million. There were no other-than-temporary impairment charges recognized for the three and 2015:six months ended June 30, 2017 and June 30, 2016.

 Three months ended September 30 Nine months ended September 30
 2016 2015 2016 2015
 (in thousands)
Balance of cumulative credit losses on debt securities, beginning of period$(11,510) $(11,510) $(11,510) $(16,242)
Reductions for securities sold during the period—
 —
 —
 4,730
Reductions for increases in cash flows expected to be collected that are recognized over the remaining life of the security—
 —
 —
 2
Balance of cumulative credit losses on debt securities, end of period$(11,510) $(11,510) $(11,510) $(11,510)





The following table presents the gross unrealized losses and estimated fair values of investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at SeptemberJune 30, 2017 and December 31, 2016:
Less than 12 months 12 months or longer TotalLess than 12 months 12 months or longer Total
Estimated
Fair Value
 
Unrealized
Losses
 
Estimated
Fair Value
 
Unrealized
Losses
 
Estimated
Fair Value
 
Unrealized
Losses
Estimated
Fair Value
 
Unrealized
Losses
 
Estimated
Fair Value
 
Unrealized
Losses
 
Estimated
Fair Value
 
Unrealized
Losses
(in thousands)
June 30, 2017(in thousands)
State and municipal securities$91,790
 $(735) $—
 $—
 $91,790
 $(735)$214,497
 $(7,125) $—
 $—
 $214,497
 $(7,125)
Corporate debt securities4,000
 (35) 33,766
 (5,315) 37,766
 (5,350)4,020
 (9) 32,148
 (2,417) 36,168
 (2,426)
Collateralized mortgage obligations124,739
 (376) 266,062
 (2,395) 390,801
 (2,771)144,523
 (3,057) 231,936
 (6,682) 376,459
 (9,739)
Mortgage-backed securities6,171
 (14) —
 —
 6,171
 (14)
Residential mortgage-backed securities896,206
 (10,974) —
 —
 896,206
 (10,974)
Commercial mortgage-backed securities68,546
 (335) —
 —
 68,546
 (335)
Auction rate securities—
 —
 97,726
 (9,381) 97,726
 (9,381)—
 —
 97,923
 (9,487) 97,923
 (9,487)
Total debt securities226,700
 (1,160) 397,554
 (17,091) 624,254
 (18,251)$1,327,792
 $(21,500) $362,007
 $(18,586) $1,689,799
 $(40,086)
Equity securities—
 —
 —
 —
 —
 —
Total$226,700
 $(1,160) $397,554
 $(17,091) $624,254
 $(18,251)
 Less than 12 months 12 months or longer Total
 Estimated
Fair Value		 Unrealized
Losses		 Estimated
Fair Value		 Unrealized
Losses		 Estimated
Fair Value		 Unrealized
Losses
December 31, 2016(in thousands)
State and municipal securities$247,509
 $(15,676) $—
 $—
 $247,509
 $(15,676)
Corporate debt securities11,922
 (110) 34,629
 (4,475) 46,551
 (4,585)
Collateralized mortgage obligations166,905
 (3,899) 258,237
 (8,279) 425,142
 (12,178)
Residential mortgage-backed securities1,112,947
 (16,900) —
 —
 1,112,947
 (16,900)
Commercial mortgage-backed securities24,563
 (537) —
 —
 24,563
 (537)
Auction rate securities—
 —
 97,256
 (9,959) 97,256
 (9,959)
Total debt securities$1,563,846
 $(37,122) $390,122
 $(22,713) $1,953,968
 $(59,835)
The declinechange 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 SeptemberJune 30, 2016.2017.
As of SeptemberJune 30, 2016,2017, 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 SeptemberJune 30, 2016,2017, all ARCs were current and making scheduled interest payments. Basedpayments, and based on management’s evaluations, ARCs with an estimated fair value of $97.7 million were not subject to any other-than-temporary impairment charges as of SeptemberJune 30, 2016.2017. The Corporation does not have the intent to sell and does not believe it will more likely than not be required to sell any of these securities prior to a recovery of their fair value to amortized cost, which may be at maturity.
For its investments in equity securities, particularly its investments in stocks of financial institutions, management evaluates the near-term prospects of the issuers in relation to the severity and duration of the impairment. Based on that evaluation and the Corporation’s ability and intent to hold those investments for a reasonable period of time sufficient for a recovery of fair value, the Corporation does not consider those investments with unrealized holding losses as of September 30, 2016 to be other-than-temporarily impaired.


The majority of the Corporation's available for sale corporate debt securities are issued by financial institutions. The following table presents the amortized cost and estimated fair value of corporate debt securities:
September 30, 2016 December 31, 2015June 30, 2017 December 31, 2016
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$43,720
 $39,253
 $44,648
 $39,106
$43,795
 $42,478
 $43,746
 $39,829
Subordinated debt43,715
 44,660
 39,610
 40,779
29,069
 29,697
 46,231
 46,723
Senior debt18,039
 18,601
 12,043
 12,329
12,035
 12,407
 18,037
 18,433
Pooled trust preferred securities—
 706
 —
 706
—
 422
 —
 422
Corporate debt securities issued by financial institutions105,474
 103,220
 96,301
 92,920
84,899
 85,004
 108,014
 105,407
Other corporate debt securities4,021
 4,021
 4,035
 4,035
3,988
 3,988
 4,002
 4,002
Available for sale corporate debt securities$109,495
 $107,241
 $100,336
 $96,955
$88,887
 $88,992
 $112,016
 $109,409



Single-issuer trust preferred securities had an unrealized loss of $4.5$1.3 million at SeptemberJune 30, 2016.2017. Six of the 19 single-issuer trust preferred securities, with an amortized cost of $11.5$11.6 million and an estimated fair value of $10.1$10.9 million at SeptemberJune 30, 2016,2017, 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 "BB" and "Ba". Two single-issuer trust preferred securities with an amortized cost of $3.7$3.8 million and an estimated fair value of $2.4$2.8 million at SeptemberJune 30, 20162017 were not rated by any ratings agency.
Based on management’s evaluations, no corporate debt securities with a fair value of $107.2 million were not subject to any other-than-temporary impairment charges as of SeptemberJune 30, 2016.2017. 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:
September 30,
2016		 December 31, 2015June 30,
2017		 December 31, 2016
(in thousands)(in thousands)
Real-estate - commercial mortgage$5,818,915
 $5,462,330
$6,262,008
 $6,018,582
Commercial - industrial, financial and agricultural4,024,119
 4,088,962
4,245,849
 4,087,486
Real-estate - residential mortgage1,784,712
 1,601,994
Real-estate - home equity1,640,421
 1,684,439
1,579,739
 1,625,115
Real-estate - residential mortgage1,542,696
 1,376,160
Real-estate - construction861,634
 799,988
938,900
 843,649
Consumer283,673
 268,588
283,156
 291,470
Leasing and other235,793
 170,914
269,787
 246,704
Overdrafts2,320
 2,737
4,435
 3,662
Loans, gross of unearned income14,409,571
 13,854,118
15,368,586
 14,718,662
Unearned income(18,333) (15,516)(21,969) (19,390)
Loans, net of unearned income$14,391,238
 $13,838,602
$15,346,617
 $14,699,272

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 evaluated for impairment under the FASB'sFASB ASC Section 310-10-35; and (2) allowances calculated for pools of loans measured for impairment under FASB ASC Subtopic 450-20.

The Corporation segments its loan portfolio by general loan type, or "portfolio segments," as presented in the table under the heading, "Loans, Net of Unearned Income," above. Certain portfolio segments are further disaggregated and evaluated collectively for impairment based on "class segments," which are largely based on the type of collateral underlying each loan. Commercial loans include 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.










The following table presents the components of the allowance for credit losses:
September 30,
2016		 December 31,
2015		June 30,
2017		 December 31,
2016
(in thousands)(in thousands)
Allowance for loan losses$162,526
 $169,054
$172,342
 $168,679
Reserve for unfunded lending commitments2,643
 2,358
2,656
 2,646
Allowance for credit losses$165,169
 $171,412
$174,998
 $171,325

The following table presents the activity in the allowance for credit losses:
Three months ended September 30 Nine months ended September 30Three months ended June 30 Six months ended June 30
2016 2015 2016 20152017 2016 2017 2016
(in thousands)(in thousands)
Balance at beginning of period$165,108
 $169,453
 $171,412
 $185,931
$172,647
 $166,065
 $171,325
 $171,412
Loans charged off(7,672) (5,561) (29,573) (26,697)(8,715) (10,746) (18,122) (21,901)
Recoveries of loans previously charged off3,592
 4,503
 15,148
 10,661
4,366
 7,278
 10,295
 11,556
Net loans charged off(4,080) (1,058) (14,425) (16,036)(4,349) (3,468) (7,827) (10,345)
Provision for credit losses4,141
 1,000
 8,182
 (500)6,700
 2,511
 11,500
 4,041
Balance at end of period$165,169
 $169,395
 $165,169
 $169,395
$174,998
 $165,108
 $174,998
 $165,108

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. During 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 September 30, 2016                 
Balance at June 30, 2016$43,740
 $51,755
 $26,170
 $21,226
 $5,772
 $2,984
 $2,518
 $8,381
 $162,546
Three months ended June 30, 2017                 
Balance at March 31, 2017$47,373
 $55,309
 $23,821
 $22,018
 $7,501
 $3,031
 $3,268
 $7,755
 $170,076
Loans charged off(1,350) (3,144) (709) (802) (150) (685) (832) —
 (7,672)(242) (5,353) (592) (124) (774) (430) (1,200) —
 (8,715)
Recoveries of loans previously charged off296
 1,539
 241
 228
 898
 222
 168
 —
 3,592
934
 1,974
 215
 151
 373
 470
 249
 —
 4,366
Net loans charged off(1,054) (1,605) (468) (574) 748
 (463) (664) —
 (4,080)692
 (3,379) (377) 27
 (401) 40
 (951) —
 (4,349)
Provision for loan losses (1)3,171
 (1,871) 1,419
 1,452
 23
 852
 1,075
 (2,061) 4,060
9,307
 15,712
 (5,988) (5,606) 2,434
 (1,277) (212) (7,755) 6,615
Balance at September 30, 2016$45,857
 $48,279
 $27,121
 $22,104
 $6,543
 $3,373
 $2,929
 $6,320
 $162,526
Three months ended September 30, 2015                 
Balance at June 30, 2015$50,680
 $49,170
 $22,506
 $22,787
 $7,749
 $2,608
 $1,615
 $10,370
 $167,485
Balance at June 30, 2017$57,372
 $67,642
 $17,456
 $16,439
 $9,534
 $1,794
 $2,105
 $—
 $172,342
Three months ended June 30, 2016                 
Balance at March 31, 2016$48,311
 $54,333
 $22,524
 $19,928
 $6,282
 $2,324
 $2,974
 $7,165
 $163,841
Loans charged off(660) (1,640) (940) (1,035) (114) (650) (522) —
 (5,561)(1,474) (4,625) (1,045) (340) (742) (569) (1,951) —
 (10,746)
Recoveries of loans previously charged off842
 1,598
 304
 201
 898
 314
 346
 —
 4,503
1,367
 2,931
 350
 420
 1,563
 539
 108
 —
 7,278
Net loans charged off182
 (42) (636) (834) 784
 (336) (176) —
 (1,058)(107) (1,694) (695) 80
 821
 (30) (1,843) —
 (3,468)
Provision for loan losses (1)825
 (405) 180
 (609) (964) 282
 223
 1,177
 709
(4,464) (884) 4,341
 1,218
 (1,331) 690
 1,387
 1,216
 2,173
Balance at September 30, 2015$51,687
 $48,723
 $22,050
 $21,344
 $7,569
 $2,554
 $1,662
 $11,547
 $167,136
Nine months ended September 30, 2016                 
Balance at June 30, 2016$43,740
 $51,755
 $26,170
 $21,226
 $5,772
 $2,984
 $2,518
 $8,381
 $162,546
Six months ended June 30, 2017                 
Balance at December 31, 2016$46,842
 $54,353
 $26,801
 $22,929
 $6,455
 $3,574
 $3,192
 $4,533
 $168,679
Loans charged off(1,466) (10,880) (1,290) (340) (1,021) (1,286) (1,839) —
 (18,122)
Recoveries of loans previously charged off1,384
 6,165
 352
 381
 921
 706
 386
 —
 10,295
Net loans charged off(82) (4,715) (938) 41
 (100) (580) (1,453) —
 (7,827)
Provision for loan losses (1)10,612
 18,004
 (8,407) (6,531) 3,179
 (1,200) 366
 (4,533) 11,490
Balance at June 30, 2017$57,372
 $67,642
 $17,456
 $16,439
 $9,534
 $1,794
 $2,105
 $—
 $172,342
Six months ended June 30, 2016                 
Balance at December 31, 2015$47,866
 $57,098
 $22,405
 $21,375
 $6,529
 $2,585
 $2,468
 $8,728
 $169,054
$47,866
 $57,098
 $22,405
 $21,375
 $6,529
 $2,585
 $2,468
 $8,728
 $169,054
Loans charged off(3,406) (13,957) (3,295) (2,210) (1,218) (2,261) (3,226) —
 (29,573)(2,056) (10,813) (2,586) (1,408) (1,068) (1,576) (2,394) —
 (21,901)
Recoveries of loans previously charged off2,488
 6,789
 929
 784
 2,844
 957
 357
 —
 15,148
2,192
 5,250
 688
 556
 1,946
 735
 189
 —
 11,556
Net loans charged off(918) (7,168) (2,366) (1,426) 1,626
 (1,304) (2,869) —
 (14,425)136
 (5,563) (1,898) (852) 878
 (841) (2,205) —
 (10,345)
Provision for loan losses (1)(1,091) (1,651) 7,082
 2,155
 (1,612) 2,092
 3,330
 (2,408) 7,897
(4,262) 220
 5,663
 703
 (1,635) 1,240
 2,255
 (347) 3,837
Balance at September 30, 2016$45,857
 $48,279
 $27,121
 $22,104
 $6,543
 $3,373
 $2,929
 $6,320
 $162,526
Nine months ended September 30, 2015                 
Balance at December 31, 2014$53,493
 $51,378
 $28,271
 $29,072
 $9,756
 $3,015
 $1,799
 $7,360
 $184,144
Loans charged off(3,011) (14,669) (2,578) (3,099) (201) (1,787) (1,352) —
 (26,697)
Recoveries of loans previously charged off1,729
 3,855
 744
 547
 2,276
 923
 587
 —
 10,661
Net loans charged off(1,282) (10,814) (1,834) (2,552) 2,075
 (864) (765) —
 (16,036)
Provision for loan losses (1)(524) 8,159
 (4,387) (5,176) (4,262) 403
 628
 4,187
 (972)
Balance at September 30, 2015$51,687
 $48,723
 $22,050
 $21,344
 $7,569
 $2,554
 $1,662
 $11,547
 $167,136
Balance at June 30, 2016$43,740
 $51,755
 $26,170
 $21,226
 $5,772
 $2,984
 $2,518
 $8,381
 $162,546

(1)
The provision for loan losses excluded an $81,000$85,000 and $285,000a $10,000 increase, respectively, in the reserve for unfunded lending commitments for the three and ninesix months ended SeptemberJune 30, 20162017 and a $291,000$338,000 and $472,000$204,000 increase, respectively, in the reserve for unfunded lending commitments for the three and    ninesix months ended SeptemberJune 30, 2015. The total provision for credit losses, comprised of allocations for both funded and unfunded loans, was $4.1 million and $8.2 million for the three and nine months ended September 30, 2016, respectively, and $1.0 million and a negative $500,000 for thethree and nine months ended September 30, 2015.
2016.


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
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)
Allowance for loan losses at September 30, 2016:              
Allowance for loan losses at June 30, 2017:Allowance for loan losses at June 30, 2017:              
Measured for impairment under FASB ASC Subtopic 450-20$36,151
 $38,858
 $17,828
 $10,410
 $4,422
 $3,346
 $2,929
 $6,320
 $120,264
$49,055
 $57,341
 $7,607
 $6,013
 $5,370
 $1,773
 $2,105
 $—
 $129,264
Evaluated for impairment under FASB ASC Section 310-10-359,706
 9,421
 9,293
 11,694
 2,121
 27
 —
 N/A
 42,262
8,317
 10,301
 9,849
 10,426
 4,164
 21
 —
 N/A
 43,078
$45,857
 $48,279
 $27,121
 $22,104
 $6,543
 $3,373
 $2,929
 $6,320
 $162,526
$57,372
 $67,642
 $17,456
 $16,439
 $9,534
 $1,794
 $2,105
 $—
 $172,342
                                  
Loans, net of unearned income at September 30, 2016:              
Loans, net of unearned income at June 30, 2017:Loans, net of unearned income at June 30, 2017:              
Measured for impairment under FASB ASC Subtopic 450-20$5,763,863
 $3,972,461
 $1,621,731
 $1,496,461
 $850,315
 $283,633
 $219,780
 N/A
 $14,208,244
$6,212,998
 $4,189,676
 $1,557,989
 $1,741,404
 $921,839
 $283,123
 $252,253
 N/A
 $15,159,282
Evaluated for impairment under FASB ASC Section 310-10-3555,052
 51,658
 18,690
 46,235
 11,319
 40
 —
 N/A
 182,994
49,010
 56,173
 21,750
 43,308
 17,061
 33
 —
 N/A
 187,335
$5,818,915
 $4,024,119
 $1,640,421
 $1,542,696
 $861,634
 $283,673
 $219,780
 N/A
 $14,391,238
$6,262,008
 $4,245,849
 $1,579,739
 $1,784,712
 $938,900
 $283,156
 $252,253
 N/A
 $15,346,617
                                  
Allowance for loan losses at September 30, 2015:              
Allowance for loan losses at June 30, 2016:Allowance for loan losses at June 30, 2016:              
Measured for impairment under FASB ASC Subtopic 450-20$38,490
 $36,002
 $14,867
 $7,921
 $5,119
 $2,535
 $1,662
 $11,547
 $118,143
$32,861
 $40,945
 $17,089
 $9,044
 $4,004
 $2,971
 $2,518
 $8,381
 $117,813
Evaluated for impairment under FASB ASC Section 310-10-3513,197
 12,721
 7,183
 13,423
 2,450
 19
 —
 N/A
 48,993
10,879
 10,810
 9,081
 12,182
 1,768
 13
 —
 N/A
 44,733
$51,687
 $48,723
 $22,050
 $21,344
 $7,569
 $2,554
 $1,662
 $11,547
 $167,136
$43,740
 $51,755
 $26,170
 $21,226
 $5,772
 $2,984
 $2,518
 $8,381
 $162,546
                                  
Loans, net of unearned income at September 30, 2015:              
Loans, net of unearned income at June 30, 2016:Loans, net of unearned income at June 30, 2016:              
Measured for impairment under FASB ASC Subtopic 450-20$5,273,819
 $3,885,956
 $1,679,471
 $1,330,778
 $750,629
 $271,667
 $149,530
 N/A
 $13,341,850
$5,582,027
 $4,057,883
 $1,629,443
 $1,399,399
 $841,193
 $278,053
 $194,254
 N/A
 $13,982,252
Evaluated for impairment under FASB ASC Section 310-10-3566,109
 43,952
 14,178
 51,307
 18,936
 29
 —
 N/A
 194,511
53,320
 41,294
 17,876
 47,893
 12,506
 18
 —
 N/A
 172,907
$5,339,928
 $3,929,908
 $1,693,649
 $1,382,085
 $769,565
 $271,696
 $149,530
 N/A
 $13,536,361
$5,635,347
 $4,099,177
 $1,647,319
 $1,447,292
 $853,699
 $278,071
 $194,254
 N/A
 $14,155,159
 
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 $4.1 million provision for credit losses during the three months ended September 30, 2016, compared to a $1.0 million provision for credit losses for the same period in 2015.
All loans individually evaluated for impairment under FASB ASC Section 310-10-35 are measured for losses on a quarterly basis. As of SeptemberJune 30, 20162017 and December 31, 2015,2016, substantially all of the Corporation’s individually evaluated impaired loans with total outstanding balances greater than or equal to $1.0 million were measured based on the estimated fair value of each loan’s collateral. Collateral could be in the form of real estate, in the case of impaired commercial mortgages and construction loans, or business assets, such as accounts receivable or inventory, in the case of commercial and industrial loans. Commercial and industrial loans may also be secured by real property.

As of SeptemberJune 30, 2017 and 2016, approximately 87% and 2015, approximately 73% and 77%89%, 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.

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 less than 70%.



The following table presents total impaired loans by class segment:
September 30, 2016 December 31, 2015June 30, 2017 December 31, 2016
Unpaid
Principal
Balance
 
Recorded
Investment
 
Related
Allowance
 
Unpaid
Principal
Balance
 
Recorded
Investment
 
Related
Allowance
Unpaid
Principal
Balance
 
Recorded
Investment
 
Related
Allowance
 
Unpaid
Principal
Balance
 
Recorded
Investment
 
Related
Allowance
(in thousands)(in thousands)
With no related allowance recorded:With no related allowance recorded:          With no related allowance recorded:          
Real estate - commercial mortgage$30,913
 $27,594
 $—
 $27,872
 $22,596
 $—
$25,219
 $22,396
 $—
 $28,757
 $25,447
 $—
Commercial - secured33,225
 29,535
 —
 18,012
 13,702
 —
43,206
 36,036
 —
 29,296
 25,526
 —
Real estate - residential mortgage6,312
 6,131
 —
 4,790
 4,790
 —
4,629
 4,629
 —
 4,689
 4,689
 —
Construction - commercial residential6,393
 4,923
 —
 9,916
 8,865
 —
10,054
 8,044
 —
 6,271
 4,795
 —
Construction - commercial598
 590
 —
 —
 —
 —
76,843
 68,183
 
 60,590
 49,953
 
83,706
 71,695
 
 69,013
 60,457
 
With a related allowance recorded:With a related allowance recorded:          With a related allowance recorded:          
Real estate - commercial mortgage37,212
 27,458
 9,706
 45,189
 35,698
 12,471
34,131
 26,614
 8,317
 37,132
 29,446
 10,162
Commercial - secured26,900
 21,192
 8,906
 39,659
 33,629
 14,085
23,576
 19,479
 9,947
 27,767
 22,626
 13,198
Commercial - unsecured1,228
 931
 515
 971
 821
 498
912
 658
 354
 1,122
 823
 455
Real estate - home equity23,580
 18,690
 9,293
 20,347
 15,766
 7,993
25,753
 21,750
 9,849
 23,971
 19,205
 9,511
Real estate - residential mortgage47,746
 40,104
 11,694
 55,242
 45,635
 13,422
45,300
 38,679
 10,426
 48,885
 41,359
 11,897
Construction - commercial residential8,053
 4,850
 1,560
 9,949
 6,290
 2,110
10,479
 7,210
 3,725
 10,103
 4,206
 1,300
Construction - commercial687
 450
 145
 820
 638
 217
186
 126
 45
 681
 435
 145
Construction - other1,096
 1,096
 416
 331
 193
 68
1,096
 1,091
 394
 1,096
 1,096
 423
Consumer - direct21
 21
 15
 19
 19
 14
18
 18
 12
 21
 21
 14
Consumer - indirect19
 19
 12
 14
 14
 8
16
 15
 9
 19
 19
 12
Leasing, other and overdrafts—
 —
 —
 1,658
 1,425
 704
146,542
 114,811
 42,262
 174,199
 140,128
 51,590
141,467
 115,640
 43,078
 150,797
 119,236
 47,117
Total$223,385
 $182,994
 $42,262
 $234,789
 $190,081
 $51,590
$225,173
 $187,335
 $43,078
 $219,810
 $179,693
 $47,117
As of SeptemberJune 30, 20162017 and December 31, 2015,2016, there were $68.2$71.7 million and $50.0$60.5 million, respectively, of impaired loans that did not have a related allowance for loan loss. The estimated fair values of the collateral securing these loans exceeded their carrying amount, or they were previously charged down to realizable collateral values. Accordingly, no specific valuation allowance was considered to be necessary.


The following table presents average impaired loans by class segment:
Three months ended September 30 Nine months ended September 30Three months ended June 30 Six months ended June 30
2016 2015 2016 20152017 2016 2017 2016
Average
Recorded
Investment		 Interest
Income (1)		 Average
Recorded
Investment		 Interest
Income (1)		 Average
Recorded
Investment		 Interest
Income (1)		 Average
Recorded
Investment		 Interest
Income (1)		Average
Recorded
Investment		 Interest
Income (1)		 Average
Recorded
Investment		 Interest
Income (1)		 Average
Recorded
Investment		 Interest
Income (1)		 Average
Recorded
Investment		 Interest
Income (1)
(in thousands)(in thousands)
With no related allowance recorded:                              
Real estate - commercial mortgage$25,048
 $78
 $25,216
 $68
 $23,929
 $219
 $26,033
 246
$22,316
 $71
 $22,762
 $72
 $23,360
 $141
 $22,707
 141
Commercial - secured23,836
 32
 17,609
 28
 18,400
 68
 16,142
 74
30,829
 46
 15,182
 20
 29,061
 82
 14,688
 36
Commercial - unsecured—
 —
 43
 —
 —
 —
 22
 —
Real estate - residential mortgage6,151
 33
 6,212
 34
 5,826
 96
 5,539
 94
4,643
 26
 6,191
 33
 4,658
 52
 5,724
 63
Construction - commercial residential5,734
 10
 10,558
 28
 6,658
 45
 12,390
 124
6,368
 4
 6,421
 16
 5,844
 6
 7,236
 35
Construction - commercial—
 —
 1,150
 —
 —
 —
 1,144
 —
597
 —
 —
 —
 398
 —
 —
 —
60,769
 153
 60,788
 158
 54,813
 428
 61,270
 538
64,753
 147
 50,556
 141
 63,321
 281
 50,355
 275
With a related allowance recorded:                              
Real estate - commercial mortgage29,139
 91
 40,572
 110
 32,310
 303
 40,116
 368
27,710
 88
 33,042
 104
 28,288
 173
 33,927
 212
Commercial - secured21,688
 29
 22,386
 36
 26,665
 100
 23,668
 111
20,675
 31
 25,919
 33
 21,325
 63
 28,489
 71
Commercial - unsecured953
 1
 2,788
 1
 903
 3
 1,981
 4
712
 —
 929
 1
 749
 —
 893
 2
Real estate - home equity18,283
 76
 13,728
 37
 17,589
 203
 13,417
 101
20,352
 117
 17,950
 70
 19,969
 212
 17,222
 127
Real estate - residential mortgage40,913
 221
 46,039
 254
 42,399
 683
 46,406
 797
39,500
 225
 41,928
 226
 40,119
 455
 43,164
 461
Construction - commercial residential4,947
 8
 5,746
 15
 5,568
 37
 6,496
 64
7,248
 4
 5,566
 14
 6,234
 7
 5,807
 29
Construction - commercial476
 —
 1,210
 —
 546
 —
 1,005
 —
104
 —
 548
 —
 214
 —
 578
 —
Construction - other756
 —
 281
 —
 579
 —
 281
 —
1,094
 —
 513
 —
 1,094
 —
 406
 —
Consumer - direct19
 —
 15
 —
 17
 1
 18
 —
19
 —
 10
 —
 19
 —
 16
 —
Consumer - indirect11
 —
 15
 —
 14
 —
 17
 —
17
 —
 15
 —
 17
 —
 11
 —
Leasing, other and overdrafts—
 —
 —
 —
 712
 —
 —
 —
—
 —
 711
 —
 475
 —
 949
 —
117,185
 426
 132,780
 453
 127,302
 1,330
 133,405
 1,445
117,431
 465
 127,131
 448
 118,503
 910
 131,462
 902
Total$177,954
 $579
 $193,568
 $611
 $182,115
 $1,758
 $194,675
 1,983
$182,184
 $612
 $177,687
 $589
 $181,824
 $1,191
 $181,817
 1,177
                              
(1)All impaired loans, excluding accruing TDRs, were non-accrual loans. Interest income recognized for the three and ninesix months ended SeptemberJune 30, 20162017 and 20152016 represents amounts earned on accruing TDRs.

Credit Quality Indicators and Non-performing Assets

The following table presents internal credit risk ratings for real estate - commercial mortgages, commercial - secured loans, commercial - unsecured loans, construction - commercial residential loans and construction - commercial loans:
 Pass Special Mention Substandard or Lower Total
 September 30, 2016 December 31, 2015 September 30, 2016 December 31, 2015 September 30, 2016 December 31, 2015 September 30, 2016 December 31, 2015
 (dollars in thousands)
Real estate - commercial mortgage$5,555,760
 $5,204,263
 $131,941
 $102,625
 $131,214
 $155,442
 $5,818,915
 $5,462,330
Commercial - secured3,648,221
 3,696,692
 106,701
 92,711
 121,611
 136,710
 3,876,533
 3,926,113
Commercial - unsecured139,673
 156,742
 5,009
 2,761
 2,904
 3,346
 147,586
 162,849
Total commercial - industrial, financial and agricultural3,787,894
 3,853,434
 111,710
 95,472
 124,515
 140,056
 4,024,119
 4,088,962
Construction - commercial residential131,875
 140,337
 15,853
 17,154
 14,180
 21,812
 161,908
 179,303
Construction - commercial629,314
 552,710
 2,530
 3,684
 5,048
 3,597
 636,892
 559,991
Total construction (excluding Construction - other)761,189
 693,047
 18,383
 20,838
 19,228
 25,409
 798,800
 739,294
 $10,104,843
 $9,750,744
 $262,034
 $218,935
 $274,957
 $320,907
 $10,641,834
 $10,290,586
% of Total95.0% 94.8% 2.4% 2.1% 2.6% 3.1% 100.0% 100.0%



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













The following table presents internal credit risk ratings for the indicated loan class segments:
 Pass Special Mention Substandard or Lower Total
 June 30, 2017 December 31, 2016 June 30, 2017 December 31, 2016 June 30, 2017 December 31, 2016 June 30, 2017 December 31, 2016
 (dollars in thousands)
Real estate - commercial mortgage$6,004,958
 $5,763,122
 $119,534
 $132,484
 $137,516
 $122,976
 $6,262,008
 $6,018,582
Commercial - secured3,813,864
 3,686,152
 119,119
 128,873
 169,602
 118,527
 4,102,585
 3,933,552
Commercial - unsecured134,455
 145,922
 6,264
 4,481
 2,545
 3,531
 143,264
 153,934
Total commercial - industrial, financial and agricultural3,948,319
 3,832,074
 125,383
 133,354
 172,147
 122,058
 4,245,849
 4,087,486
Construction - commercial residential131,115
 113,570
 9,789
 15,447
 16,387
 13,172
 157,291
 142,189
Construction - commercial718,702
 635,963
 4,727
 3,412
 5,220
 5,115
 728,649
 644,490
Total construction (excluding Construction - other)849,817
 749,533
 14,516
 18,859
 21,607
 18,287
 885,940
 786,679
 $10,803,094
 $10,344,729
 $259,433
 $284,697
 $331,270
 $263,321
 $11,393,797
 $10,892,747
% of Total94.8% 95.0% 2.3% 2.6% 2.9% 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 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, delinquencydelinquent and non-performing statusloans for home equity, real estate - residential mortgages, construction loans to individuals and consumer, leasing and other loans bythe indicated loan class segment:segments:
Performing Delinquent (1) Non-performing (2) TotalPerforming Delinquent (1) Non-performing (2) Total
September 30, 2016 December 31, 2015 September 30, 2016 December 31, 2015 September 30, 2016 December 31, 2015 September 30, 2016 December 31, 2015June 30, 2017 December 31, 2016 June 30, 2017 December 31, 2016 June 30, 2017 December 31, 2016 June 30, 2017 December 31, 2016
(dollars in thousands)(dollars in thousands)
Real estate - home equity$1,615,657
 $1,660,773
 $10,504
 $8,983
 $14,260
 $14,683
 $1,640,421
 $1,684,439
$1,557,629
 $1,602,687
 $10,223
 $9,274
 $11,887
 $13,154
 $1,579,739
 $1,625,115
Real estate - residential mortgage1,501,486
 1,329,371
 17,759
 18,305
 23,451
 28,484
 1,542,696
 1,376,160
1,746,977
 1,557,995
 15,889
 20,344
 21,846
 23,655
 1,784,712
 1,601,994
Construction - other61,738
 59,997
 —
 88
 1,096
 609
 62,834
 60,694
51,869
 55,874
 —
 —
 1,091
 1,096
 52,960
 56,970
Consumer - direct91,164
 94,262
 1,675
 2,254
 1,943
 2,203
 94,782
 98,719
55,825
 93,572
 1,761
 1,752
 1,143
 1,563
 58,729
 96,887
Consumer - indirect185,873
 166,823
 2,795
 2,809
 223
 237
 188,891
 169,869
222,380
 190,656
 1,921
 3,599
 126
 328
 224,427
 194,583
Total consumer277,037
 261,085
 4,470
 5,063
 2,166
 2,440
 283,673
 268,588
278,205
 284,228
 3,682
 5,351
 1,269
 1,891
 283,156
 291,470
Leasing218,275
 155,870
 1,454
 759
 51
 1,506
 219,780
 158,135
251,050
 229,591
 922
 1,068
 281
 317
 252,253
 230,976
$3,674,193
 $3,467,096
 $34,187
 $33,198
 $41,024
 $47,722
 $3,749,404
 $3,548,016
$3,885,730
 $3,730,375
 $30,716
 $36,037
 $36,374
 $40,113
 $3,952,820
 $3,806,525
% of Total98.0% 97.7% 0.9% 1.0% 1.1% 1.3% 100.0% 100.0%98.3% 98.0% 0.8% 0.9% 0.9% 1.1% 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:
September 30,
2016		 December 31,
2015		June 30,
2017		 December 31,
2016
(in thousands)(in thousands)
Non-accrual loans$124,017
 $129,523
$122,600
 $120,133
Loans 90 days or more past due and still accruing14,095
 15,291
13,143
 11,505
Total non-performing loans138,112
 144,814
135,743
 131,638
Other real estate owned (OREO)11,981
 11,099
11,432
 12,815
Total non-performing assets$150,093
 $155,913
$147,175
 $144,453

The following table presentstables present past due status and non-accrual loans by portfolio segment and class segment:
September 30, 2016June 30, 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$9,268
 $1,447
 $664
 $38,967
 $39,631
 $50,346
 $5,768,569
 $5,818,915
$8,259
 $676
 $309
 $32,267
 $32,576
 $41,511
 $6,220,497
 $6,262,008
Commercial - secured8,369
 3,622
 3,023
 43,304
 46,327
 58,318
 3,818,215
 3,876,533
6,411
 2,425
 3,135
 47,489
 50,624
 59,460
 4,043,125
 4,102,585
Commercial - unsecured234
 53
 137
 866
 1,003
 1,290
 146,296
 147,586
430
 57
 98
 598
 696
 1,183
 142,081
 143,264
Total commercial - industrial, financial and agricultural8,603
 3,675
 3,160
 44,170
 47,330
 59,608
 3,964,511
 4,024,119
6,841
 2,482
 3,233
 48,087
 51,320
 60,643
 4,185,206
 4,245,849
Real estate - home equity6,016
 4,488
 3,237
 11,023
 14,260
 24,764
 1,615,657
 1,640,421
8,103
 2,120
 2,167
 9,720
 11,887
 22,110
 1,557,629
 1,579,739
Real estate - residential mortgage12,920
 4,839
 4,070
 19,381
 23,451
 41,210
 1,501,486
 1,542,696
12,640
 3,249
 4,906
 16,940
 21,846
 37,735
 1,746,977
 1,784,712
Construction - commercial residential2,004
 629
 72
 8,930
 9,002
 11,635
 150,273
 161,908
538
 20
 978
 13,779
 14,757
 15,315
 141,976
 157,291
Construction - commercial—
 9
 675
 450
 1,125
 1,134
 635,758
 636,892
—
 —
 —
 716
 716
 716
 727,933
 728,649
Construction - other—
 —
 —
 1,096
 1,096
 1,096
 61,738
 62,834
—
 —
 —
 1,091
 1,091
 1,091
 51,869
 52,960
Total real estate - construction2,004
 638
 747
 10,476
 11,223
 13,865
 847,769
 861,634
538
 20
 978
 15,586
 16,564
 17,122
 921,778
 938,900
Consumer - direct1,147
 528
 1,943
 —
 1,943
 3,618
 91,164
 94,782
1,054
 707
 1,143
 —
 1,143
 2,904
 55,825
 58,729
Consumer - indirect2,466
 329
 223
 —
 223
 3,018
 185,873
 188,891
1,708
 213
 126
 —
 126
 2,047
 222,380
 224,427
Total consumer3,613
 857
 2,166
 —
 2,166
 6,636
 277,037
 283,673
2,762
 920
 1,269
 —
 1,269
 4,951
 278,205
 283,156
Leasing, other and overdrafts998
 456
 51
 —
 51
 1,505
 218,275
 219,780
671
 251
 281
 —
 281
 1,203
 251,050
 252,253
Total$43,422
 $16,400
 $14,095
 $124,017
 $138,112
 $197,934
 $14,193,304
 $14,391,238
$39,814
 $9,718
 $13,143
 $122,600
 $135,743
 $185,275
 $15,161,342
 $15,346,617


December 31, 2015December 31, 2016
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$6,469
 $1,312
 $439
 $40,731
 $41,170
 $48,951
 $5,413,379
 $5,462,330
$6,254
 $1,622
 $383
 $38,936
 $39,319
 $47,195
 $5,971,387
 $6,018,582
Commercial - secured5,654
 2,615
 1,853
 41,498
 43,351
 51,620
 3,874,493
 3,926,113
6,660
 2,616
 959
 41,589
 42,548
 51,824
 3,881,728
 3,933,552
Commercial - unsecured510
 83
 19
 701
 720
 1,313
 161,536
 162,849
898
 35
 152
 760
 912
 1,845
 152,089
 153,934
Total commercial - industrial, financial and agricultural6,164
 2,698
 1,872
 42,199
 44,071
 52,933
 4,036,029
 4,088,962
7,558
 2,651
 1,111
 42,349
 43,460
 53,669
 4,033,817
 4,087,486
Real estate - home equity6,438
 2,545
 3,473
 11,210
 14,683
 23,666
 1,660,773
 1,684,439
6,596
 2,678
 2,543
 10,611
 13,154
 22,428
 1,602,687
 1,625,115
Real estate - residential mortgage15,141
 3,164
 6,570
 21,914
 28,484
 46,789
 1,329,371
 1,376,160
15,600
 4,744
 5,224
 18,431
 23,655
 43,999
 1,557,995
 1,601,994
Construction - commercial residential1,366
 494
 —
 11,213
 11,213
 13,073
 166,230
 179,303
233
 51
 36
 8,275
 8,311
 8,595
 133,594
 142,189
Construction - commercial50
 176
 —
 638
 638
 864
 559,127
 559,991
743
 —
 —
 435
 435
 1,178
 643,312
 644,490
Construction - other88
 —
 416
 193
 609
 697
 59,997
 60,694
—
 —
 —
 1,096
 1,096
 1,096
 55,874
 56,970
Total real estate - construction1,504
 670
 416
 12,044
 12,460
 14,634
 785,354
 799,988
976
 51
 36
 9,806
 9,842
 10,869
 832,780
 843,649
Consumer - direct1,687
 567
 2,203
 —
 2,203
 4,457
 94,262
 98,719
1,211
 541
 1,563
 —
 1,563
 3,315
 93,572
 96,887
Consumer - indirect2,308
 501
 237
 —
 237
 3,046
 166,823
 169,869
3,200
 399
 328
 —
 328
 3,927
 190,656
 194,583
Total consumer3,995
 1,068
 2,440
 —
 2,440
 7,503
 261,085
 268,588
4,411
 940
 1,891
 —
 1,891
 7,242
 284,228
 291,470
Leasing, other and overdrafts483
 276
 81
 1,425
 1,506
 2,265
 155,870
 158,135
543
 525
 317
 —
 317
 1,385
 229,591
 230,976
Total$40,194
 $11,733
 $15,291
 $129,523
 $144,814
 $196,741
 $13,641,861
 $13,838,602
$41,938
 $13,211
 $11,505
 $120,133
 $131,638
 $186,787
 $14,512,485
 $14,699,272

The following table presents TDRs, by class segment:
September 30,
2016		 December 31,
2015		June 30,
2017		 December 31,
2016
(in thousands)(in thousands)
Real-estate - residential mortgage$26,854
 $28,511
$26,368
 $27,617
Real-estate - commercial mortgage16,085
 17,563
13,772
 15,957
Real estate - home equity7,668
 4,556
12,031
 8,594
Commercial - secured7,422
 5,833
Construction - commercial residential843
 3,942
Commercial - unsecured66
 120
Consumer - indirect20
 14
Consumer - direct19
 19
Commercial8,086
 6,627
Construction1,475
 726
Consumer33
 39
Total accruing TDRs58,977
 60,558
61,765
 59,560
Non-accrual TDRs (1)
27,904
 31,035
29,373
 27,850
Total TDRs$86,881
 $91,593
$91,138
 $87,410
 
(1)Included in non-accrual loans in the preceding table detailing non-performing assets.

As of SeptemberJune 30, 20162017 and December 31, 2015,2016, there were $3.5$2.6 million and $5.3$3.6 million respectively, of commitments, respectively, 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 and six months ended June 30, 2017 and 2016:
































  Three months ended June 30 Six months ended June 30
 2017 2016 2017 2016
Number of Loans Post-Modification Recorded Investment Number of Loans Post-Modification Recorded Investment Number of Loans Post-Modification Recorded Investment Number of Loans Post-Modification Recorded Investment
 (dollars in thousands)
Real estate – residential mortgage:               
 Extend maturity without rate concession—
 $—
 2
 $315
 2
 $337
 2
 $315
 Bankruptcy1
 157
 1
 373
 2
 335
 1
 373
Real estate - commercial mortgage:               
 Extend maturity without rate concession3
 663
 —
 —
 4
 981
 —
 $—
 Bankruptcy1
 12
 —
 —
 1
 12
 —
 $—
Real estate - home equity:               
 Extend maturity without rate concession17
 1,275
 18
 738
 33
 2,559
 39
 $1,995
 Bankruptcy10
 1,063
 5
 231
 17
 1,516
 22
 $1,716
Commercial:               
 Extend maturity without rate concession4
 2,567
 4
 1,146
 8
 5,693
 6
 1,976
 Bankruptcy1
 490
 —
 —
 1
 490
 —
 —
Commercial – unsecured:               
 Extend maturity without rate concession1
 33
 —
 —
 1
 33
 2
 103
Construction - commercial residential:               
 Extend maturity without rate concession1
 1,204
 —
 —
 1
 1,204
 —
 —
Consumer - indirect:               
 Bankruptcy—
 —
 —
 —
 —
 —
 1
 2
                 
Total39
 $7,464
 30
 $2,803
 70
 $13,160
 73
 $6,480
                 

The following table presents TDRs, by class segment, as of SeptemberJune 30, 20162017 and 2015, that were modified during the three and nine months ended September 30, 2016, and 2015:
  Three months ended September 30 Nine months ended September 30
 2016 2015 2016 2015
Number of Loans Post-Modification Recorded Investment Number of Loans Post-Modification Recorded Investment Number of Loans Post-Modification Recorded Investment Number of Loans Post-Modification Recorded Investment
 (dollars in thousands)
Commercial – secured:               
 Extend maturity with rate concession—
 $—
 2
 $1,374
 —
 $—
 2
 $1,374
 Extend maturity without rate concession4
 1,826
 1
 6
 10
 3,801
 12
 7,830
Commercial – unsecured:               
 Extend maturity without rate concession—
 —
 —
 —
 2
 103
 1
 42
Real estate - commercial mortgage:               
 Extend maturity with rate concession—
 —
 2
 188
 —
 —
 2
 188
 Extend maturity without rate concession—
 —
 —
 —
 —
 —
 4
 2,626
Real estate - home equity:               
 Extend maturity without rate concession24
 1,063
 5
 341
 63
 3,058
 5
 341
 Bankruptcy11
 563
 9
 221
 33
 2,279
 34
 1,452
Real estate – residential mortgage:               
 Extend maturity with rate concession—
 —
 1
 171
 —
 —
 2
 276
 Extend maturity without rate concession—
 —
 —
 —
 2
 315
 2
 225
 Bankruptcy2
 350
 1
 58
 3
 723
 6
 795
Construction - commercial residential:               
 Extend maturity without rate concession—
 —
 —
 —
 —
 —
 1
 889
Consumer - direct:               
 Bankruptcy—
 —
 —
 —
 1
 2
 —
 —
Consumer - indirect:               
 Bankruptcy1
 21
 —
 —
 1
 21
 1
 13
                 
Total42
 $3,823
 21
 $2,359
 115
 $10,302
 72
 $16,051
                 

The following table presents TDRs, by class segment, as of September 30, 2016 and 2015, that were modified in the previous 12 months and had a post-modification payment default during the ninesix months ended SeptemberJune 30, 20162017 and 2015.2016. The Corporation defines a payment default as a single missed payment.
2016 20152017 2016
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)
Commercial - secured6
 $2,593
 6
 $3,855
Commercial - unsecured1
 26
 —
 —
Real estate - residential mortgage7
 $1,911
 5
 $972
Real estate - commercial mortgage2
 129
 2
 233
3
 674
 2
 132
Real estate - home equity29
 1,902
 9
 459
16
 922
 22
 1,448
Real estate - residential mortgage7
 1,395
 4
 500
Commercial5
 2,772
 5
 1,123
Consumer1
 16
 —
 —
Total45
 $6,045
 21
 $5,047
32
 $6,295
 34
 $3,675



NOTE 6 – Mortgage Servicing Rights

The following table summarizes the changes in mortgage servicing rights ("MSRs"), which are included in other assets on the consolidated balance sheets:
Three months ended September 30 Nine months ended September 30Three months ended June 30 Six months ended June 30
2016 2015 2016 20152017 2016 2017 2016
(in thousands)(in thousands)
Amortized cost:              
Balance at beginning of period$39,874
 $41,598
 $40,944
 $42,148
$38,543
 $40,195
 $38,822
 $40,944
Originations of mortgage servicing rights1,499
 1,463
 3,927
 4,976
1,203
 1,508
 2,386
 2,428
Amortization(2,064) (1,829) (5,562) (5,892)(1,566) (1,829) (3,028) (3,498)
Balance at end of period$39,309
 $41,232
 $39,309
 $41,232
$38,180
 $39,874
 $38,180
 $39,874
              
Valuation allowance:              
Balance at beginning of period$(1,721) $—
 $—
 $—
$(1,291) $—
 $(1,291) $—
Additions(1,280) —
 (3,001) —
(Additions) reductions to valuation allowance1,291
 (1,721) 1,291
 (1,721)
Balance at end of period$(3,001) $—
 $(3,001) $—
$—
 $(1,721) $—
 $(1,721)
              
Net MSRs at end of period$36,308
 $41,232
 $36,308
 $41,232
$38,180
 $38,153
 $38,180
 $38,153

MSRs represent the economic value of existing contractual rights to service mortgage loans that have been sold. Accordingly, actual and expected prepayments of the underlying mortgage loans can impact the value of MSRs. The Corporation accounts for MSRs at the lower of amortized cost or fair value.

The fair value of MSRs is estimated by discounting the estimated cash flows from servicing income, net of expense, over the expected life of the underlying loans at a discount rate commensurate with the risk associated with these assets. Expected life is based on the contractual terms of the loans, as adjusted for prepayment projections. Based on its fair value analysis, the Corporation determined that additionsa reduction to the valuation allowance of $1.3 million was appropriate for the three and $3.0six months ended June 30, 2017. An addition to the valuation allowance of $1.7 million werewas determined to be necessary for the three and ninesix months ended SeptemberJune 30, 2016, respectively. No2016. Additions and reductions to the valuation allowance was necessaryare recorded as decreases and increases, respectively, to "mortgage banking income" on the consolidated statements of September 30, 2015.

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.



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 September 30 Nine months ended September 30Three months ended June 30 Six months ended June 30
2016 2015 2016 20152017 2016 2017 2016
(in thousands)(in thousands)
Stock-based compensation expense$1,552
 $1,533
 $4,808
 $4,371
$1,035
 $1,820
 $1,769
 $3,256
Tax benefit(536) (489) (1,611) (1,403)(1,940) (642) (2,684) (1,075)
Stock-based compensation expense, net of tax$1,016
 $1,044
 $3,197
 $2,968
Stock-based compensation expense, net of tax benefit$(905) $1,178
 $(915) $2,181

For the three and six months ended June 30, 2017, the tax benefit exceeded the stock-based compensation expense as a result of excess tax benefits arising from corporate stock price levels, stock option exercises and vesting restricted stock, RSUs and PSUs during these periods, which were recorded as reductions 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 SeptemberJune 30, 20162017, the Employee Equity Plan had 11.410.7 million shares reserved for future grants through 2023, and the Directors’ Plan had approximately 384,000360,000 shares reserved for future grants through 2021. On May 1, 2017, the Corporation granted approximately 284,000 PSUs and 140,000 RSUs under the Employee Equity Plan. On June 1, 2017, the Corporation granted approximately 11,000 shares of common stock to its directors for a total expense of $193,000 recognized in other expense.

NOTE 8 – Employee Benefit Plans

The Corporation maintains a defined benefit pension plan ("Pension Plan") for certain employees, which was curtailed in 2008. Contributions to the Pension Plan are actuarially determined and funded annually, if required. The Corporation made contributions totaling $4.6 million during the first nine months of 2016. Pension Plan assets are invested in: money markets; fixed income securities, including corporate bonds, U.S. Treasury securities and common trust funds; and equity securities, including common stocks and common stock mutual funds.
The net periodic benefit cost for the Corporation’s Defined Benefit Pension Plan ("Pension Plan") consisted of the following components:
Three months ended September 30 Nine months ended September 30Three months ended June 30 Six months ended June 30
2016 2015 2016 20152017 2016 2017 2016
(in thousands)(in thousands)
Service cost (1)
$172
 $145
 $516
 $435
$—
 $194
 $—
 $344
Interest cost880
 851
 2,640
 2,553
830
 879
 1,660
 1,760
Expected return on plan assets(580) (752) (1,739) (2,256)(451) (433) (902) (1,159)
Net amortization and deferral605
 782
 1,815
 2,346
663
 428
 1,326
 1,210
Net periodic benefit cost$1,077
 $1,026
 $3,232
 $3,078
$1,042
 $1,068
 $2,084
 $2,155

(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 Corporation provides benefits under a postretirement benefits plan ("Postretirement Plan") to certain retirees who were employees of the Corporation prior to January 1, 1998 and retired from employment with the Corporation prior to February 1, 2014.


The net periodic cost (benefit)benefit of the Corporation’s Postretirement Benefits Plan ("Postretirement Plan") consisted of the following components:
Three months ended September 30 Nine months ended September 30Three months ended June 30 Six months ended June 30
2016 2015 2016 20152017 2016 2017 2016
(in thousands)(in thousands)
Interest cost21
 52
 64
 156
$17
 $5
 $34
 $43
Expected return on plan assets—
 —
 (1) —
—
 (1) —
 (1)
Net accretion and deferral(138) (65) (413) (195)(141) (210) (282) (275)
Net periodic benefit$(117) $(13) $(350) $(39)$(124) $(206) $(248) $(233)



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 values recognized in earnings as components of non-interest income and non-interest expense on the consolidated statements of income.

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

Mortgage Banking Derivatives

In connection with its mortgage banking activities, the Corporation enters into commitments to originate certain fixed-rate residential mortgage loans for customers, also referred to as interest rate locks. In addition, the Corporation enters into forward commitments for the future sales or purchases of mortgage-backed securities to or from third-party counterparties to hedge the effect of changes in interest rates on the values of both the interest rate locks and mortgage loans held for sale. Forward sales commitments may also be in the form of commitments to sell individual mortgage loans at a fixed price at a future date. The amount necessary to settle each interest rate lock is based on the price that secondary market investors would pay for loans with similar characteristics, including interest rate and term, as of the date fair value is measured. Gross derivative assets and liabilities are recorded 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 was required to clear all eligible interest rate swap contracts with a central counterparty, effective January 1, 2017. As a result, Fulton Bank became 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 future date at a contractual price. The Corporation offsets its foreign exchange contract exposure with customers by entering into contracts with third-party correspondent financial institutions to mitigate its exposure to fluctuations in foreign currency exchange rates. The Corporation also holds certain amounts of foreign currency with international correspondent banks. The Corporation's policy limits the total net foreign currency open positions, which includes all outstanding contracts and foreign account balances, to $500,000. Gross fair values are recorded in other assets and other liabilities on the consolidated balance sheets, with changes in fair values during the period recorded within other service charges and fees on the consolidated statements of income.







The following table presents a summary of the notional amounts and fair values of derivative financial instruments:
September 30, 2016 December 31, 2015June 30, 2017 December 31, 2016
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$188,543
 $3,199
 $87,781
 $1,291
$141,136
 $1,354
 $87,119
 $863
Negative fair values611
 (2) 267
 (16)3,573
 (28) 18,239
 (227)
Net interest rate locks with customers
 3,197
 
 1,275

 1,326
 
 636
Forward Commitments              
Positive fair values22,037
 5
 69,045
 205
25,343
 94
 70,031
 2,223
Negative fair values137,181
 (866) 16,193
 (24)91,629
 (205) 19,964
 (112)
Net forward commitments  (861)   181
  (111)   2,111
Interest Rate Swaps with Customers              
Positive fair values1,307,072
 80,930
 846,490
 32,915
1,242,309
 34,331
 876,744
 24,397
Negative fair values8,000
 (18) 8,757
 (55)581,370
 (13,938) 583,060
 (16,998)
Net interest rate swaps with customers  80,912
   32,860
  20,393
   7,399
Interest Rate Swaps with Dealer Counterparties              
Positive fair values8,000
 18
 8,757
 55
581,370
 13,938
 583,060
 16,998
Negative fair values1,307,072
 (80,930) 846,490
 (32,915)
Negative fair values (1)
1,242,309
 (29,167) 876,744
 (24,397)
Net interest rate swaps with dealer counterparties  (80,912)   (32,860)  (15,229)   (7,399)
Foreign Exchange Contracts with Customers              
Positive fair values10,904
 464
 4,897
 114
4,460
 309
 11,674
 504
Negative fair values1,763
 (32) 8,050
 (184)7,295
 (343) 4,659
 (221)
Net foreign exchange contracts with customers  432
   (70)  (34)   283
Foreign Exchange Contracts with Correspondent Banks              
Positive fair values5,619
 59
 9,728
 428
9,268
 407
 7,040
 241
Negative fair values7,376
 (391) 6,899
 (147)6,873
 (283) 12,869
 (447)
Net foreign exchange contracts with correspondent banks  (332)   281
  124
   (206)
Net derivative fair value asset  $2,436
   $1,667
  $6,469
   $2,824

(1) Includes centrally cleared interest rate swaps with a notional amount of $240.7 million and a fair value of $0 as of June 30, 2017. Collateral is posted daily through a clearing agent for changes in the fair value.

The following table presents a summary of the fair value gains (losses) on derivative financial instruments:
Three months ended September 30 Nine months ended September 30Three months ended June 30 Six months ended June 30
2016 2015 2016 20152017 2016 2017 2016
(in thousands)(in thousands)
Interest rate locks with customers$178
 $1,041
 $1,922
 $876
$(155) $512
 $690
 $1,744
Forward commitments970
 (3,183) (1,042) (338)157
 (906) (2,222) (2,012)
Interest rate swaps with customers(1,948) 18,266
 48,052
 17,831
13,809
 20,569
 12,994
 50,000
Interest rate swaps with dealer counterparties1,948
 (18,266) (48,052) (17,831)(10,831) (20,569) (7,830) (50,000)
Foreign exchange contracts with customers47
 (197) 502
 (378)(325) 81
 (317) 455
Foreign exchange contracts with correspondent banks(266) 323
 (613) 710
367
 (68) 330
 (347)
Net fair value gains (losses) on derivative financial instruments$929
 $(2,016) $769
 $870
$3,022
 $(381) $3,645
 $(160)

Fair Value Option

U.S. GAAP permits entities to measure many financial instruments and certain other items at fair value and requires certain disclosures for amounts for which the fair value option is applied. The Corporation has elected to measure mortgage loans held


for sale at fair value to more accurately reflect the financial results of its mortgage banking activities in its consolidated financial statements. Derivative financial instruments related to these activities are also recorded at fair value, as noted 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:
September 30,
2016		 December 31,
2015		June 30,
2017		 December 31,
2016
(in thousands)(in thousands)
Cost$27,030
 $16,584
$32,810
 $28,708
Fair value27,836
 16,886
33,364
 28,697

During the three months ended SeptemberJune 30, 2016, the Corporation recorded losses related to changes in fair values of mortgage loans held for sale of $360,000 compared to gains of $531,000 for the same period in 2015. During the nine months ended September 30, 20162017 and 2015,2016, the Corporation recorded gains related to changes in fair values of mortgage loans held for sale of $504,000$26,000 and $309,000,$634,000, respectively. During the six months ended June 30, 2017 and 2016, the Corporation recorded gains related to changes in fair values of mortgage loans held for sale of $565,000 and $864,000, respectively.

Balance Sheet Offsetting

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

The Corporation is a party to interest rate swap transactions with financial institution counterparties and customers, disclosed in detail 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 posted daily through a clearing agent for changes in the fair value of centrally cleared derivatives with negative fair values. 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)
September 30, 2016       
June 30, 2017       
Interest rate swap derivative assets$80,948
 $(18) $—
 $80,930
$48,269
 $(14,372) $—
 $33,897
Foreign exchange derivative assets with correspondent banks59
 (59) —
 —
407
 (283) —
 124
Total$81,007
 $(77) $—
 $80,930
$48,676
 $(14,655) $—
 $34,021
              
Interest rate swap derivative liabilities$80,948
 $(18) $(80,930) $—
$43,105
 $(14,372) $(18,320) $10,413
Foreign exchange derivative liabilities with correspondent banks391
 (59) (260) 72
283
 (283) —
 —
Total$81,339
 $(77) $(81,190) $72
$43,388
 $(14,655) $(18,320) $10,413
              
December 31, 2015       
December 31, 2016       
Interest rate swap derivative assets$32,970
 $(55) $—
 $32,915
$41,395
 $(15,117) $—
 $26,278
Foreign exchange derivative assets with correspondent banks428
 (147) —
 281
241
 (241) —
 —
Total$33,398
 $(202) $—
 $33,196
$41,636
 $(15,358) $—
 $26,278
              
Interest rate swap derivative liabilities$32,970
 $(55) $(31,130) $1,785
$41,395
 $(15,117) $(4,010) $22,268
Foreign exchange derivative liabilities with correspondent banks147
 (147) —
 —
447
 (241) (206) —
Total$33,117
 $(202) $(31,130) $1,785
$41,842
 $(15,358) $(4,216) $22,268

(1)For derivative assets, amounts represent any derivative liability fair values that could be offset in the event of counterparty or customer default. For derivative liabilities, amounts represent any derivative asset fair values that could be offset in the event of counterparty or customer default.
(2)Amounts represent collateral received from the counterparty or posted by the Corporation.


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 as of the dates indicated were as follows:
September 30,
2016		 December 31, 2015June 30,
2017		 December 31, 2016
(in thousands)(in thousands)
Commitments to extend credit$6,073,712
 $5,784,138
$6,382,314
 $6,075,567
Standby letters of credit365,562
 374,729
349,953
 356,359
Commercial letters of credit35,532
 39,529
41,501
 38,901

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






Residential Lending

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

The Corporation provides customary representations and warranties to government sponsored entities and investors that specify, among other things, that the loans have been underwritten to the standards established by the government sponsored entity or investor. The Corporation may be required to repurchase a loan, or reimburse the government sponsored entity or investor for a credit loss incurred on a loan, if it is determined that the representations and warranties have not been met. Such repurchases or reimbursements generally result from an underwriting or documentation deficiency. As of both SeptemberJune 30, 20162017 and December 31, 2015,2016, total 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 SeptemberJune 30, 2016,2017, the unpaid principal balance of loans sold under the MPF Program was approximately $108$94 million. As of SeptemberJune 30, 20162017 and December 31, 2015,2016, the reserve for estimated credit losses related to loans sold under the MPF Program was $1.7$1.6 million and $1.8$1.7 million, respectively. Required reserves are calculated based on delinquency status and estimated loss rates established through the Corporation's existing allowance for credit losses methodology for residential mortgage loans.

As of SeptemberJune 30, 20162017 and December 31, 2015,2016, the total reserve for losses on residential mortgage loans sold was $2.5$2.4 million and $2.6$2.5 million, respectively, including both reserves for credit losses under the MPF Program and reserves for representation and warranty exposures. Management believes that the reserves recorded as of SeptemberJune 30, 20162017 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.

Legal Proceedings

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

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

BSA/AML Enforcement Orders

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

Fair Lending Investigation

During the second quarter of 2015, Fulton Bank, N.A., the 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 the 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 or range of possible 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 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 5867 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 deceasednow-deceased attorney, who is alleged to have operated a Ponzifraud scheme which defrauded the plaintiffs over a period of years through the sale of fictitious high-yieldinghigh-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 incurredcaused significant losses, and for Mr. Mottern’s personal expenses. The allegations against the Bank relate to a commercial checking account at the Bank maintained by Mr. Mottern in connection with Mr. Mottern’s law practice. The lawsuit alleges that the Bank is liable to the plaintiffs for failing to properly monitor Mr. Mottern’s checking account and detect Mr. Mottern’s fraudulent activity, and specifically alleges that the Bank aided and abetted Mr. Mottern’s: (1) fraud; (2) breach of fiduciary duty; (3) violations of the Pennsylvania Unfair Trade Practices and Consumer Protection Law; and (4) conversion. Similar claims have been asserted against Ameriprise Financial Services, Inc. and Riverview, Bank, which allegedly maintained a personal brokerage account and a trust account for client or other third-party funds, respectively, for Mr. Mottern. The lawsuit seeks damages from the defendants, including the Bank, alleged to be in excess of $11.3 million, treble damages and attorneys’ fees with respect to alleged violations of the Pennsylvania Unfair Trade Practices and Consumer Protection Law, punitive damages, plus interest and costs. On April 29, 2016, the Bank filed a Notice of Removal to remove this lawsuit to the United States District Court for the Middle District of Pennsylvania. On May 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 May 26, 2017, the Court of Common Pleas for Dauphin County denied all substantive preliminary objections filed by the Bank. On June 23, 2017, the Bank filed its Combined Motion for Partial Reconsideration of the Court’s May 26, 2017 Order and Application for Amendment of the Order to Set Forth Expressly the Statement in Pa.C.S. s. 702(b) (the “Motion”). The Bank also filed its Answer and New Matter (the “Answer”) on June 23, 2017. The Plaintiffs subsequently responded to the Motion and the Answer, and the case has now entered the discovery phase.




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:
September 30, 2016June 30, 2017
Level 1 Level 2 Level 3 TotalLevel 1 Level 2 Level 3 Total
(in thousands)(in thousands)
Mortgage loans held for sale$—
 $27,836
 $—
 $27,836
$—
 $33,364
 $—
 $33,364
Available for sale investment securities:              
Equity securities22,483
 —
 —
 22,483
21,455
 —
 —
 21,455
U.S. Government sponsored agency securities—
 140
 —
 140
—
 6,054
 —
 6,054
State and municipal securities—
 401,572
 —
 401,572
—
 401,636
 —
 401,636
Corporate debt securities—
 104,100
 3,141
 107,241
—
 85,795
 3,197
 88,992
Collateralized mortgage obligations—
 652,359
 —
 652,359
—
 538,507
 —
 538,507
Mortgage-backed securities—
 1,226,547
 —
 1,226,547
Residential mortgage-backed securities—
 1,213,065
 —
 1,213,065
Commercial mortgage-backed securities—
 121,067
 —
 121,067
Auction rate securities—
 —
 97,726
 97,726
—
 —
 97,923
 97,923
Total available for sale investment securities22,483
 2,384,718
 100,867
 2,508,068
21,455
 2,366,124
 101,120
 2,488,699
Other assets16,903
 84,152
 —
 101,055
18,533
 49,717
 —
 68,250
Total assets$39,386
 $2,496,706
 $100,867
 $2,636,959
$39,988
 $2,449,205
 $101,120
 $2,590,313
Other liabilities$16,800
 $81,815
 $—
 $98,615
$18,438
 $43,338
 $—
 $61,776
December 31, 2015December 31, 2016
Level 1 Level 2 Level 3 TotalLevel 1 Level 2 Level 3 Total
(in thousands)(in thousands)
Mortgage loans held for sale$—
 $16,886
 $—
 $16,886
$—
 $28,697
 $—
 $28,697
Available for sale investment securities:              
Equity securities21,514
 —
 —
 21,514
24,526
 —
 —
 24,526
U.S. Government sponsored agency securities—
 25,136
 —
 25,136
—
 134
 —
 134
State and municipal securities—
 262,765
 —
 262,765
—
 391,641
 —
 391,641
Corporate debt securities—
 93,619
 3,336
 96,955
—
 106,537
 2,872
 109,409
Collateralized mortgage obligations—
 821,509
 —
 821,509
—
 593,860
 —
 593,860
Mortgage-backed securities—
 1,158,835
 —
 1,158,835
Residential mortgage-backed securities—
 1,317,838
 —
 1,317,838
Commercial mortgage-backed securities—
 24,563
 —
 24,563
Auction rate securities—
 —
 98,059
 98,059
—
 —
 97,256
 97,256
Total available for sale investment securities21,514
 2,361,864
 101,395
 2,484,773
24,526
 2,434,573
 100,128
 2,559,227
Other assets16,129
 34,465
 —
 50,594
17,111
 44,481
 —
 61,592
Total assets$37,643
 $2,413,215
 $101,395
 $2,552,253
$41,637
 $2,507,751
 $100,128
 $2,649,516
Other liabilities$15,914
 $33,010
 $—
 $48,924
$17,032
 $41,734
 $—
 $58,766




The valuation techniques used to measure fair value for the items in the preceding tables are as follows:
Mortgage loans held for sale – This category consists of mortgage loans held for sale that the Corporation has elected to measure at fair value. Fair values as of SeptemberJune 30, 20162017 and December 31, 20152016 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 done for approximately 94%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 securities – Equity securities consist of common stocks of financial institutions ($21.620.5 million at SeptemberJune 30, 20162017 and $20.6$23.5 million at December 31, 2015)2016) and other equity investments ($901,0001.0 million at SeptemberJune 30, 20162017 and $914,000 at December 31, 2015)2016). These Level 1 investments are measured at fair value based on quoted prices for identical securities in active markets.
U.S. Government securities/U.S. Government sponsored agency securities/State and municipal securities/Collateralized mortgage obligations/Mortgage-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 issued by financial institutions ($44.742.1 million at SeptemberJune 30, 20162017 and $40.8$65.2 million at December 31, 2015), senior debt ($18.6 million at September 30, 2016 and $12.3 million at December 31, 2015)2016), single-issuer trust preferred securities issued by financial institutions ($39.342.5 million at SeptemberJune 30, 20162017 and $39.1$39.8 million at December 31, 2015)2016), pooled trust preferred securities issued by financial institutions ($706,000422,000 at both SeptemberJune 30, 20162017 and December 31, 2015)2016) and other corporate debt issued by non-financial institutions ($4.0 million at both SeptemberJune 30, 20162017 and December 31, 2015)2016).
Level 2 investments include the Corporation’s holdings of subordinated debt, other corporate debt issued by non-financial institutions and $36.8$39.7 million and $36.5$37.3 million of single-issuer trust preferred securities held at SeptemberJune 30, 20162017 and December 31, 2015,2016, respectively. The fair values for these corporate debt securities are determined by a third-party pricing service, as detailed above.
Level 3 investments include the Corporation’s investments in pooled trust preferred securities ($706,000422,000 at both SeptemberJune 30, 20162017 and December 31, 2015)2016) and certain single-issuer trust preferred securities ($2.42.8 million at SeptemberJune 30, 20162017 and $2.6$2.5 million at December 31, 2015)2016). 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 ($16.417.8 million at SeptemberJune 30, 20162017 and $15.6$16.4 million at December 31, 2015)2016) and the fair value of foreign currency exchange contracts ($527,000716,000 at SeptemberJune 30, 20162017 and $547,000$745,000 at December 31, 2015)2016). 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 ($3.21.4 million at SeptemberJune 30, 20162017 and $1.5$3.1 million at December 31, 2015)2016) and the fair value of interest rate swaps ($80.948.3 million at SeptemberJune 30, 20162017 and $33.0$41.4 million at December 31, 2015)2016). 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 ($16.417.8 million at SeptemberJune 30, 20162017 and $15.6$16.4 million at December 31, 2015)2016) and the fair value of foreign currency exchange contracts ($424,000626,000 at SeptemberJune 30, 20162017 and $331,000$668,000 at December 31, 2015)2016). 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 ($868,000233,000 at SeptemberJune 30, 20162017 and $40,000$339,000 at December 31, 2015)2016) and the fair value of interest rate swaps ($80.943.1 million at SeptemberJune 30, 20162017 and $33.0$41.4 million at December 31, 2015)2016). 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 September 30, 2016Three months ended June 30, 2017
Pooled Trust
Preferred
Securities		 Single-issuer
Trust Preferred
Securities		 ARCsPooled Trust
Preferred
Securities		 Single-issuer
Trust Preferred
Securities		 ARCs
(in thousands)(in thousands)
Balance at June 30, 2016$706
 $2,425
 $97,886
Balance at March 31, 2017$422
 $2,750
 $97,439
Unrealized adjustment to fair value (1)
—
 7
 (318)—
 22
 386
Discount accretion (2)
—
 3
 158
—
 3
 98
Balance at September 30, 2016$706
 $2,435
 $97,726
Balance at June 30, 2017$422
 $2,775
 $97,923
          
Three months ended September 30, 2015Three months ended June 30, 2016
Balance at June 30, 2015$530
 $3,820
 $98,606
Balance at March 31, 2016$706
 $2,400
 $97,326
Unrealized adjustment to fair value (1)
—
 (203) (890)—
 22
 482
Settlements - calls—
 (970) —
Discount accretion (2)
—
 3
 157
—
 3
 78
Balance at September 30, 2015$530
 $2,650
 $97,873
Balance at June 30, 2016$706
 $2,425
 $97,886
          
Nine months ended September 30, 2016Six months ended June 30, 2017
Pooled Trust
Preferred
Securities		 Single-issuer
Trust Preferred
Securities		 ARCs
(in thousands)
Balance at December 31, 2016$422
 $2,450
 $97,256
Unrealized adjustment to fair value (1)
—
 319
 472
Discount accretion (2)
—
 6
 195
Balance at June 30, 2017$422
 $2,775
 $97,923
Pooled Trust
Preferred
Securities		 Single-issuer
Trust Preferred
Securities		 ARCs     
(in thousands)Six months ended June 30, 2016
Balance at December 31, 2015$706
 $2,630
 $98,059
$706
 $2,630
 $98,059
Unrealized adjustment to fair value (1)
—
 (204) (668)—
 (211) (350)
Discount accretion (2)
—
 9
 335
—
 6
 177
Balance at September 30, 2016$706
 $2,435
 $97,726
Balance at June 30, 2016$706
 $2,425
 $97,886
          
Nine months ended September 30, 2015
Balance at December 31, 2014$4,088
 $3,820
 $100,941
Sales(3,633) —
 —
Unrealized adjustment to fair value (1)
190
 (207) (978)
Settlements - calls(117) (970) (2,446)
Discount accretion (2)
2
 7
 356
Balance at September 30, 2015$530
 $2,650
 $97,873
     

(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 financial assets measured at fair value on a nonrecurring basis and reported on the Corporation’s consolidated balance sheets:
September 30, 2016June 30, 2017
Level 1 Level 2 Level 3 TotalLevel 1 Level 2 Level 3 Total
(in thousands)(in thousands)
Net loans$—
 $—
 $140,732
 $140,732
$—
 $—
 $144,256
 $144,256
Other financial assets—
 —
 48,288
 48,288
—
 —
 49,613
 49,613
Total assets$—
 $—
 $189,020
 $189,020
$—
 $—
 $193,869
 $193,869
December 31, 2015December 31, 2016
Level 1 Level 2 Level 3 TotalLevel 1 Level 2 Level 3 Total
(in thousands)(in thousands)
Net loans$—
 $—
 $138,491
 $138,491
$—
 $—
 $132,576
 $132,576
Other financial assets—
 —
 52,043
 52,043
—
 —
 50,347
 50,347
Total assets$—
 $—
 $190,534
 $190,534
$—
 $—
 $182,923
 $182,923
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 evaluatedmeasured for impairment under FASB ASC Section 310-10-35 and have been classified as Level 3 assets. The amount shown is the balance of impaired loans, net of the related allowance for loan losses. See Note 5, "Loans and Allowance for Credit Losses," for additional details.
Other financial assets – This category includes OREO ($12.011.4 million at SeptemberJune 30, 20162017 and $11.1$12.8 million at December 31, 2015)2016) and MSRs ($36.338.2 million at SeptemberJune 30, 20162017 and $40.9$37.5 million at December 31, 2015)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 are initially recorded at fair value upon the sale of residential mortgage loans to secondary market investors. MSRs are amortized as a reduction to servicing income over the estimated lives of the underlying loans. MSRs are stratified and evaluated for impairment by comparing each stratum's carrying amount to its estimated fair value. Fair values are determined at the end of each quarter through a discounted cash flows valuation performed by a third-party valuation expert. Significant inputs to the valuation included expected net servicing income, the discount rate and the expected life of the underlying loans. Expected life is based on the contractual terms of the loans, as adjusted for prepayment projections. The weighted average annual constant prepayment rate and the weighted average discount rate used in the SeptemberJune 30, 20162017 valuation were 14.4%11.8% 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 SeptemberJune 30, 20162017 and December 31, 2015.2016. In addition, a general description of the methods and assumptions used to estimate such fair values is also provided.
September 30, 2016 December 31, 2015June 30, 2017 December 31, 2016
Book Value Estimated
Fair Value		 Book Value Estimated
Fair Value		Book Value Estimated
Fair Value		 Book Value Estimated
Fair Value
(in thousands)(in thousands)
FINANCIAL ASSETS              
Cash and due from banks$86,497
 $86,497
 $101,120
 $101,120
$94,938
 $94,938
 $118,763
 $118,763
Interest-bearing deposits with other banks368,031
 368,031
 230,300
 230,300
322,514
 322,514
 233,763
 233,763
Federal Reserve Bank and Federal Home Loan Bank stock60,935
 60,935
 62,216
 62,216
70,328
 70,328
 57,489
 57,489
Loans held for sale (1)
27,836
 27,836
 16,886
 16,886
62,354
 62,354
 28,697
 28,697
Available for sale investment securities (1)
2,508,068
 2,508,068
 2,484,773
 2,484,773
2,488,699
 2,488,699
 2,559,227
 2,559,227
Net Loans (1)
14,228,712
 14,155,453
 13,669,548
 13,540,903
15,174,275
 15,007,961
 14,530,593
 14,387,454
Accrued interest receivable43,600
 43,600
 42,767
 42,767
47,603
 47,603
 46,294
 46,294
Other financial assets (1)
227,310
 227,310
 166,920
 166,920
212,773
 212,773
 206,132
 206,132
FINANCIAL LIABILITIES              
Demand and savings deposits$12,148,162
 $12,148,162
 $11,267,367
 $11,267,367
$12,610,951
 $12,610,951
 $12,259,622
 $12,259,622
Time deposits2,804,317
 2,824,653
 2,864,950
 2,862,868
2,746,410
 2,758,807
 2,753,242
 2,769,757
Short-term borrowings264,042
 264,042
 497,663
 497,663
694,859
 694,859
 541,317
 541,317
Accrued interest payable13,645
 13,645
 10,724
 10,724
7,804
 7,804
 9,632
 9,632
Other financial liabilities (1)
263,489
 263,489
 190,927
 190,927
252,537
 252,537
 216,080
 216,080
Federal Home Loan Bank advances and long-term debt965,286
 986,323
 949,542
 959,315
Federal Home Loan Bank advances and other long-term debt1,037,961
 1,035,711
 929,403
 928,167
 
(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.
Fair values for loans and time deposits were estimated by discounting future cash flows using the current rates at which similar loans would be made to borrowers and similar deposits would be issued to customers for the same remaining maturities. Fair values estimated in this manner do not fully incorporate an exit price approach to fair value, as defined in FASB ASC Topic 820.

Loans held for sale includes $28.9 million of student loans as of June 30, 2017, carried at the lower of cost or fair value. In June 2017, the Corporation determined to sell this portfolio and began discussions with a potential purchaser of this portfolio, and reclassified these loans from consumer loans to loans held for sale. Fair value is based on the price per the preliminary offer from the potential purchaser. As such, a loss of $440,000 was recorded in the second quarter of 2017 and included in "other expense" on the consolidated statements of income.


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

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 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 5.96%.



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

FORWARD-LOOKING STATEMENTS

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

These forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties, some of which are beyond the Corporation's control and ability to predict, that could cause actual results to differ materially from those expressed in the forward-looking statements. The Corporation undertakes no obligation, other than as required by law, to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Many factors could affect future financial results including, without limitation:

the 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 ability to manage liquidity, both at the holding company level and at its bank subsidiaries;
the impact of increased regulatory scrutiny of the banking industry;
the effects of the increasing amounts of time and expense associated with regulatory compliance and risk management;
the potential for negative consequences from regulatory violations and investigations, including potential supervisory actions and the assessment of fines and penalties;
the additional time, expense and investment required to comply with, and the restrictions on potential growth and investment activities resulting from, the existing enforcement orders applicable to the Corporation and its bank subsidiaries by federal and state bank regulatory agencies requiring improvement in compliance functions and other remedial actions, or any future enforcement orders;
the Corporation’s ability to manage the uncertainty associated with the delay in implementing many of the regulations mandated by the Dodd-Frank Act;
the effects of, and uncertainty surrounding, potential changes in legislation, regulation and government policy as a result of the recent change in federal administration;
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 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 Corporation's consolidated balance sheets and consolidated statements of income;
the impact of operational risks, including the risk of human error, inadequate or failed internal processes and systems, computer and telecommunications systems failures, faulty or incomplete data and an inadequate risk management framework;


the impact of failures of third parties upon which the Corporation relies to perform in accordance with contractual arrangements;
the failure or circumvention of the Corporation’s system of internal controls;
the loss of, or failure to safeguard, confidential or proprietary information;
the Corporation’s failure to identify and to address cyber-security risks;


the Corporation’s ability to keep pace with technological changes;
the Corporation’s ability to attract and retain talented personnel;
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; and
the effects of changes in accounting policies, standards, and interpretations on the Corporation’s financial condition and results of operations.markets.

RESULTS OF OPERATIONS

Overview and Outlook

Fulton Financial 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. 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
September 30		 As of or for the
Nine months ended
September 30		As of or for the
Three months ended
June 30		 As of or for the
Six months ended
June 30
2016 2015 2016 20152017 2016 2017 2016
Net income (in thousands)$41,468
 $34,251
 $119,475
 $110,967
$45,467
 $39,750
 $88,847
 $78,007
Diluted net income per share$0.24
 $0.20
 $0.69
 $0.63
$0.26
 $0.23
 $0.51
 $0.45
Return on average assets0.89% 0.78% 0.87% 0.86%0.94% 0.88% 0.93% 0.87%
Return on average equity7.78% 6.72% 7.64% 7.33%8.36% 7.65% 8.29% 7.56%
Return on average tangible equity (1)
10.38% 9.11% 10.24% 9.96%11.06% 10.26% 11.00% 10.17%
Net interest margin (2)
3.14% 3.18% 3.19% 3.22%3.29% 3.20% 3.28% 3.22%
Efficiency ratio (1)
65.16% 68.82% 67.01% 69.30%65.33% 67.59% 64.80% 67.96%
Non-performing assets to total assets0.80% 0.87% 0.80% 0.87%0.75% 0.76% 0.75% 0.76%
Annualized net charge-offs to average loans0.11% 0.03% 0.14% 0.16%0.11% 0.10% 0.10% 0.15%
 
(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-GAAPnon-U.S. GAAP financial measure to the most comparable U.S. GAAP measure under the heading, "Supplemental Reporting of Non-GAAPNon-U.S.GAAP Based Financial Measures" at the end of this "Overview and Outlook""Overview" section.
(2)Presented on an FTE basis, using a 35% federal tax rate and statutory interest expense disallowances. See also the “Net Interest Income” section of Management’s Discussion.

Net income for the three and ninesix months ended SeptemberJune 30, 20162017 increased $7.2$5.7 million, or 21.1%14.4%, and $8.5$10.8 million, or 7.7%13.9%, respectively, compared to the same periods in 2015. These2016.The increases were mainly due to higher net interest income and non-interest income, excluding investment securities gains, partially offset by increases in the provision for credit losses decreases in investment securities gains and increases in non-interest expenses, excluding the loss on redemption of trust preferred securities that occurred in the third quarter of 2015.







expenses.

The following is a summary of financial highlights for the three and ninesix months ended SeptemberJune 30, 2016:2017:

FTE Net Interest Income and Net Interest Margin - For the three and ninesix months ended SeptemberJune 30, 2016,2017, FTE net interest income increased $5.5$13.5 million, or 4.2%10.1%, and $17.9$22.7 million, or 4.6%8.5%, respectively, in comparison to the same periods in 2015.2016. These increases were


driven by growth in interest-earning assets partially offset byand 9 and 6 basis points increases in the impact of net interest margin compression.during the three and six months ended June 30, 2017, respectively.

Average interest-earning assets increased $940.4 million,$1.2 billion, or 5.8%7.0%, in the thirdsecond quarter of 20162017 in comparison to the same period in 2015,2016, mainly due to a $842.4 million,$1.2 billion, or 6.3%8.3%, increase in average loans and a $71.7$48.7 million, or 3.0%2.0%, increase in average investment securities, andpartially offset by a $24.5$32.5 million, or 5.1%9.1%, increasedecrease in average other interest-earning assets. Average interest-bearing liabilities increased $571.7$747.9 million, or 5.1%6.4%, primarily due to a $501.1$413.1 million, or 5.0%4.0%, increase in average interest-bearing deposits, and a $101.7$229.4 million, or 31.3%56.8%, increase in average short-term borrowings partially offset byand a $31.0$105.3 million, or 3.1%10.9%, decreaseincrease in average FHLBFederal Home Loan Bank ("FHLB") advances and average long-term debt. Additional funding to support the increase in average interest-earning assets was provided by a $323.5$309.9 million, or 8.3%7.6%, increase in average noninterest-bearing deposits.

During the first ninesix months of 2016,2017, average interest-earning assets increased $871.1 million,$1.1 billion, or 5.4%6.7%, comparedin comparison to the same period in 2015,2016, mainly due to a $791.0 million,$1.1 billion, or 6.0%7.8%, increase in average loans and a $140.7$77.6 million, or 6.1%3.2%, increase in average investment securities, partially offset by a $57.4$39.3 million, or 12.4%11.0%, decrease in average other interest-earning assets. Average interest-bearing liabilities increased $522.7$696.6 million, or 4.7%6.0%, the result of $521.2primarily due to a $379.8 million, or 5.3%3.7%, increase in average interest-bearing deposits, and a $87.1$248.0 million, or 25.8%58.4%, increase in average short-term borrowings partially offset byand a $85.6$68.8 million, or 8.2%7.2%, decreaseincrease in average FHLB advances and average long-term debt. Additional funding to support the increase in average interest-earning assets was provided by a $323.6$322.1 million, or 8.6%8.0%, increase in average noninterest-bearing 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 5.96%.

Loan Growth - The $1.2 billion and $1.1 billion growth in average loans for the second quarter and the first six months of 2017, respectively, in comparison to the same periods in 2016, was primarily recognized in the commercial mortgage, residential mortgage and commercial loan portfolios. The growth occurred across all geographic markets, but was predominately attributable to the Pennsylvania and Maryland markets.

Asset Quality - The Corporation recorded a $4.1$6.7 million provision for credit losses for the three months ended SeptemberJune 30, 2016,2017, compared to a $1.0$2.5 million provision for the same period in 2015.2016. For the ninesix months ended SeptemberJune 30, 2016,2017, the Corporation recorded an $8.2$11.5 million provision for credit losses compared to a $500,000 negative$4.0 million provision infor the same period of 2015.in 2016. The increaseincreases in provision for credit losses in 2016 was2017 were largely due to growth in the loan portfolio. In 2015, the negative provision was driven by an improvement in net charge-off levels, particularly among pooled impaired loans across all portfolio, segments.with generally stable credit metrics.

Overall asset quality improved for both the three and nine months ended September 30, 2016 as compared to the same periods of 2015 with the exception of annualized net charge-offs for the third quarter. Annualized net charge-offs to average loans outstanding were 0.11% for the thirdsecond quarter of 2016,2017, compared to 0.03%0.10% for the thirdsecond quarter of 2015. Annualized2016. For the first six months of 2017, annualized net charge-offs to average loans outstanding were 0.14%improved to 0.10%, compared to 0.15% for the first nine monthssame period of 2016, compared to 0.16% for the nine months of 2015. 2016.

Non-performing assets decreased $5.5increased $7.5 million, or 3.5%5.4%, as of SeptemberJune 30, 20162017 compared to SeptemberJune 30, 2015 and were 0.80% and 0.87%2016. However, as a percent of total assets, non-performing assets remained fairly consistent at 0.75% and 0.76%, respectively, as of September 30, 2016 and September 30, 2015, respectively.those dates. The total delinquency rate was 1.38%improved to 1.20% as of SeptemberJune 30, 2016, compared to 1.49%2017, from 1.30% as of SeptemberJune 30, 2015.2016.

Non-interest Income - For the three and ninesix months ended SeptemberJune 30, 2016,2017, non-interest income, excluding investment securities gains, increased $5.1$4.9 million, or 11.9%10.6%, and $8.7$8.3 million, or 6.8%9.3%, respectively, in comparison to the same periods in 2015.2016, respectively. The increase during the third quarter of 2016 wasincreases were primarily the result of increases in commercial loan interest rate swap fees and an increase in mortgage banking income. The increase in year to date results was driven by higher commercial loan interest rate swap fees, investment management and an increase in service charges on deposit accounts, partially offset by a decrease intrust services income and mortgage banking income. DuringMortgage servicing income increased $3.4 million during the first half of 2017 compared to the same period in 2016 $3.0 million of impairment charges on MSRs were recorded as a result of a $1.3 million reduction to the mortgage banking income. See Note 6, "Mortgage Servicing Rights,"servicing rights ("MSRs") valuation allowance during the second quarter of 2017, which was originally established in June 2016 through an impairment charge of $1.7 million. Excluding the Notes to Consolidated Financial Statements for additional details regardingimpact of the impairment charge.MSR valuation allowance adjustments, mortgage servicing income increased $346,000, or 13.6%.

Investment securities gains for the three and ninesix months ended SeptemberJune 30, 20162017 were $2,000$1.4 million and $1.0$2.5 million, respectively, as compared to $1.7 million$76,000 and $8.3$1.0 million for the same periods in 2015.2016, respectively.

Non-interest Expense - For the three and six months ended SeptemberJune 30, 2016,2017, non-interest expense excluding the on loss redemption of trust preferred securities incurred in the third quarter of 2015, increased $585,000, or 0.5%, in comparison to the third quarter of 2015. For the three months ended September 30, 2016, all expense categories were lower with the exception of salaries and employee benefits, net occupancy expense and software.

For the nine months ended September 30, 2016, non-interest expense, excluding the loss on redemption of trust preferred securities incurred in the third quarter of 2015, increased $5.8$11.1 million, or 1.6%9.1%, and $12.9 million, or 5.3%, respectively, in comparison to the same period in 2015. Increases inperiods of 2016. The increases were primarily driven by higher salaries and employee benefits, was the primary driver,amortization of certain tax credit investments, other outside services and software expenses, partially offset by decreases in most otherdata processing expense categories.




2016 Outlook

Originally the Corporation provided its outlook for 2016 results in its Annual Report on Form 10-K for the year ended December 31, 2015. The following outlook for 2016 remains unchanged:

annual mid- to high- single digit growth rate in average loans and deposits;
provision forFDIC insurance expense. Amortization of certain new tax credit losses driven primarily by loan growth;
annual mid- to high- single digit growth rate in non-interest income, excluding the impact of securities gains;
annual low- to mid- single digit growth rateinvestments was classified in non-interest expense (excluding, for comparison purposes, therather than income tax expense in 2017. There was no impact on net income as a result of the loss on redemptiondifferent classifications of Trust Preferred Securities (TruPS) incurredthe amortization for these new tax credit investments as the increases in the third quarter of 2015); and
focus on utilizing capital to support growth and provide appropriate returns to shareholders.

The Corporation's original outlook expected net interest margin to be stable on an annual basis with modest quarterly volatility of plus or minus 0 to 3 basis points. This outlook was updated during the second quarter of 2016 as follows:

absent further market interest rate increases, low-single digit quarterly compressionnon-interest expense were offset by decreases in net interest margin.














































income tax expense.


Supplemental Reporting of Non-GAAPNon-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-GAAPnon-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-GAAPnon-U.S. GAAP financial measures is consistent with how the Corporation evaluates its performance internally, and these non-GAAPnon-U.S. GAAP financial measures are frequently used by securities analysts, investors and other interested parties in the evaluation of companies in the Corporation's industry. Management believes that these non-GAAPnon-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-GAAPnon-U.S. GAAP financial measures might not be comparable to similarly-titled measures of other companies. These non-GAAPnon-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-GAAPnon-U.S. GAAP financial measures to the most directly comparable U.S. GAAP measure as of and for the three and ninesix months ended SeptemberJune 30:
As of or for the
Three months ended
September 30		 As of or for the
Nine months ended
September 30		As of or for the
Three months ended
June 30		 As of or for the
Six months ended
June 30
2016 2015 2016 20152017 2016 2017 2016
(in thousands)(dollars in thousands)
Return on average tangible equity
Net income$41,468
 $34,251
 $119,475
 $110,967
Plus: Intangible amortization, net of tax—
 3
 —
 153
Numerator$41,468
 $34,254
 $119,475
 $111,120
Net income - numerator$45,467
 $39,750
 $88,847
 $78,007
              
Average common shareholders' equity$2,120,596
 $2,022,829
 $2,089,882
 $2,023,552
$2,181,189
 $2,089,915
 $2,160,980
 $2,074,357
Less: Average goodwill and intangible assets(531,556) (531,564) (531,556) (531,638)(531,556) (531,556) (531,556) (531,556)
Average tangible shareholders' equity (denominator)$1,589,040
 $1,491,265
 $1,558,326
 $1,491,914
Average tangible shareholders' equity - denominator$1,649,633
 $1,558,359
 $1,629,424
 $1,542,801
              
Return on average tangible equity, annualized10.38% 9.11% 10.24% 9.96%11.06% 10.26% 11.00% 10.17%
              
Efficiency ratio              
Non-interest expense$119,848
 $124,889
 $361,898
 $361,721
$132,695
 $121,637
 $254,970
 $242,050
Less: Intangible amortization—
 (5) —
 (241)
Less: Loss on redemption of trust preferred securities—
 (5,626) —
 (5,626)
Less: Amortization of tax credit investments (1)
(3,151) —
 (4,149) —
Numerator$119,848
 $119,258
 $361,898
 $355,854
$129,544
 $121,637
 $250,821
 $242,050
              
Net interest income (fully taxable equivalent) (1)
$135,784
 $130,250
 $403,700
 $385,781
Net interest income (fully taxable equivalent) (2)
$147,349
 $133,890
 $290,593
 $267,916
Plus: Total Non-interest income48,149
 44,774
 137,423
 136,000
52,371
 46,137
 99,044
 89,274
Less: Investment securities gains, net(2) (1,730) (1,025) (8,290)(1,436) (76) (2,542) (1,023)
Denominator$183,931
 $173,294
 $540,098
 $513,491
$198,284
 $179,951
 $387,095
 $356,167
              
Efficiency ratio65.16% 68.82% 67.01% 69.30%65.3% 67.6% 64.8% 68.0%

(1)Amortization expense for tax credit investments that are considered to be qualified affordable housing investments under applicable accounting guidance is included in income taxes. Amortization expense for other tax credit investments that are not considered to be affordable housing investments is included in non-interest expense. If amortization expense for all tax credit investments were recorded in income taxes, the effective tax rate for the quarter ended June 30, 2017 would have been 21.2% vs 16.6%.
(2)Presented on an FTE basis, using a 35% federal tax rate and statutory interest expense disallowances. See also the “Net Interest Income” section of Management’s Discussion.



Quarter Ended SeptemberJune 30, 20162017 compared to the Quarter Ended SeptemberJune 30, 20152016

Net Interest Income

FTE net interest income increased $5.5$13.5 million, to $135.8$147.3 million, in the thirdsecond quarter of 2016,2017, from $130.3$133.9 million in the thirdsecond quarter of 2015.2016. The increase was due to a $940.4 million,$1.2 billion, or 5.8%7.0%, increase in interest-earning assets. Theassets and a 9 basis points, or 2.8%, increase in net interest margin, declined 4 basis points, to 3.14%3.29%, for the thirdsecond quarter of 20162017 compared to 3.18%3.20% for the thirdsecond quarter of 2015.2016. The following table provides a comparative average balance sheet and net interest income analysis for those periods. Interest income and yields are presented on an FTE basis, using a 35% federal tax rate and statutory interest expense disallowances. The discussion following this table is based on these FTE amounts.
Three months ended September 30Three months ended June 30
2016 20152017 2016
Average
Balance
 Interest (1) 
Yield/
Rate
 
Average
Balance
 Interest (1) 
Yield/
Rate
Average
Balance
 Interest (1) 
Yield/
Rate
 
Average
Balance
 Interest (1) 
Yield/
Rate
ASSETS(dollars in thousands)(dollars in thousands)
Interest-earning assets:                      
Loans, net of unearned income (2)
$14,212,250
 $140,434
 3.93% $13,369,874
 $135,268
 4.02%$15,127,205
 $152,649
 4.05% $13,966,024
 $138,317
 3.98%
Taxable investment securities (3)
2,110,084
 10,872
 2.06
 2,148,403
 11,252
 2.09
2,090,120
 11,473
 2.12
 2,127,780
 11,159
 2.10
Tax-exempt investment securities (3)
344,231
 3,923
 4.56
 230,178
 2,929
 5.09
404,680
 4,394
 4.34
 314,851
 3,570
 4.54
Equity securities (3)
14,209
 196
 5.50
 18,280
 257
 5.58
10,759
 148
 5.52
 14,220
 185
 5.23
Total investment securities2,468,524
 14,991
 2.43
 2,396,861
 14,438
 2.41
2,505,559
 16,015
 2.56
 2,456,851
 14,914
 2.43
Loans held for sale22,593
 210
 3.72
 20,704
 194
 3.74
19,750
 201
 4.07
 19,449
 188
 3.87
Other interest-earning assets501,666
 1,051
 0.84
 477,145
 884
 0.74
324,719
 802
 0.99
 357,211
 864
 0.96
Total interest-earning assets17,205,033
 156,686
 3.63% 16,264,584
 150,784
 3.68%17,977,233
 169,667
 3.78% 16,799,535
 154,283
 3.69%
Noninterest-earning assets:                      
Cash and due from banks101,927
     104,622
    103,078
     100,860
    
Premises and equipment227,906
     226,446
    218,075
     227,517
    
Other assets1,219,844
     1,097,600
    1,174,745
     1,189,226
    
Less: Allowance for loan losses(163,074)     (168,770)    (172,156)     (164,573)    
Total Assets$18,591,636
     $17,524,482
    $19,300,975
     $18,152,565
    
LIABILITIES AND EQUITY                      
Interest-bearing liabilities:                      
Demand deposits$3,602,448
 $1,706
 0.19% $3,316,532
 $1,122
 0.13%$3,690,059
 $2,780
 0.30% $3,454,031
 $1,527
 0.18%
Savings deposits4,078,942
 2,042
 0.20
 3,714,282
 1,436
 0.15
Savings and money market deposits4,315,495
 2,710
 0.25
 3,989,988
 1,886
 0.19
Time deposits2,814,258
 7,562
 1.07
 2,963,774
 7,659
 1.03
2,696,033
 7,394
 1.10
 2,844,434
 7,474
 1.06
Total interest-bearing deposits10,495,648
 11,310
 0.43
 9,994,588
 10,217
 0.41
10,701,587
 12,884
 0.48
 10,288,453
 10,887
 0.43
Short-term borrowings426,369
 254
 0.23
 324,685
 92
 0.11
633,102
 974
 0.61
 403,669
 217
 0.21
Federal Home Loan Bank advances and long-term debt965,228
 9,338
 3.86
 996,247
 10,225
 4.09
FHLB advances and other long-term debt1,070,845
 8,460
 3.16
 965,526
 9,289
 3.86
Total interest-bearing liabilities11,887,245
 20,902
 0.70% 11,315,520
 20,534
 0.72%12,405,534
 22,318
 0.72% 11,657,648
 20,393
 0.70%
Noninterest-bearing liabilities:
          
          
Demand deposits4,227,639
     3,904,176
    4,387,517
     4,077,642
    
Other356,156
     281,957
    326,735
     327,360
    
Total Liabilities16,471,040
     15,501,653
    17,119,786
     16,062,650
    
Shareholders’ equity2,120,596
     2,022,829
    2,181,189
     2,089,915
    
Total Liabilities and Shareholders’ Equity$18,591,636
     $17,524,482
    $19,300,975
     $18,152,565
    
Net interest income/net interest margin (FTE)  135,784
 3.14%   130,250
 3.18%  147,349
 3.29%   133,890
 3.20%
Tax equivalent adjustment  (5,219)     (4,556)    (5,786)     (4,974)  
Net interest income  $130,565
     $125,694
    $141,563
     $128,916
  
(1)Includes dividends earned on equity securities.
(2)Includes non-performing loans.
(3)Balances include amortized historical cost for available for sale securities; the related unrealized holding gains (losses) are included in other assets.





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 September 30:June 30, 2017 in comparison to the three months ended June 30, 2016:
2016 vs. 2015
Increase (Decrease) due
to change in
2017 vs. 2016
Increase (Decrease) due
to change in
Volume Rate NetVolume Rate Net
(in thousands)(in thousands)
Interest income on:          
Loans, net of unearned income$8,275
 $(3,109) $5,166
$11,969
 $2,363
 $14,332
Taxable investment securities(210) (170) (380)29
 285
 314
Tax-exempt investment securities1,328
 (334) 994
978
 (154) 824
Equity securities(57) (4) (61)(47) 10
 (37)
Loans held for sale17
 (1) 16
3
 10
 13
Other interest-earning assets46
 121
 167
(78) 16
 (62)
Total interest income$9,399
 $(3,497) $5,902
$12,854
 $2,530
 $15,384
Interest expense on:          
Demand deposits$92
 $492
 $584
$112
 $1,141
 $1,253
Savings deposits137
 469
 606
Savings and money market deposits165
 659
 824
Time deposits(392) 295
 (97)(389) 309
 (80)
Short-term borrowings36
 126
 162
177
 580
 757
Federal Home Loan Bank advances and long-term debt(316) (571) (887)
FHLB advances and other long-term debt949
 (1,778) (829)
Total interest expense$(443) $811
 $368
$1,014
 $911
 $1,925
Note: Changes which are partially attributable to both volume and rate are allocated to the volume and rate components presented above based on the percentage of direct changes that are attributable to each component.

As summarized above, the increase in average interest-earning assets, primarily loans, since the second quarter of 2016 resulted in an $9.4a $12.9 million increase in FTE interest income. This was partially offset byThe 9 basis points increase in the impact of a 5 basis point, or 1.4%, decrease in yieldsyield on average interest-earning assets which resulted in a $3.5$2.5 million decreaseincrease in FTE interest income. The yield on the loan portfolio increased 7 basis points, or 1.8%, from the second quarter of 2016, the result of federal funds rate increases that occurred in December 2016 and March 2017, which primarily impacted variable rate loans and adjustable rate loans that repriced in the first half of 2017.

Average loans and average FTE yields, by type, are summarized in the following table:
Three months ended September 30 Increase (Decrease) inThree months ended June 30 Increase (Decrease) in
2016 2015 Balance2017 2016 Balance
Balance Yield Balance Yield $ %Balance Yield Balance Yield $ %
(dollars in thousands)(dollars in thousands)
Real estate – commercial mortgage$5,670,888
 3.99% $5,242,021
 4.09% $428,867
 8.2%$6,163,844
 4.00% $5,557,680
 4.00% $606,164
 10.9%
Commercial – industrial, financial and agricultural4,066,275
 3.76
 3,887,161
 3.78
 179,114
 4.6
4,221,025
 4.00
 4,080,524
 3.81
 140,501
 3.4
Real estate – residential mortgage1,707,929
 3.77
 1,399,851
 3.78
 308,078
 22.0
Real estate – home equity1,640,913
 4.08
 1,692,860
 4.08
 (51,947) (3.1)1,587,680
 4.33
 1,656,140
 4.10
 (68,460) (4.1)
Real estate – residential mortgage1,503,209
 3.76
 1,381,141
 3.78
 122,068
 8.8
Real estate – construction837,920
 3.76
 753,584
 3.88
 84,336
 11.2
897,321
 3.98
 820,881
 3.81
 76,440
 9.3
Consumer281,517
 5.31
 270,391
 5.81
 11,126
 4.1
300,966
 5.03
 272,293
 5.37
 28,673
 10.5
Leasing, other and overdrafts211,528
 4.74
 142,716
 6.79
 68,812
 48.2
248,440
 5.04
 178,655
 6.22
 69,785
 39.1
Total$14,212,250
 3.93% $13,369,874
 4.02% $842,376
 6.3%$15,127,205
 4.05% $13,966,024
 3.98% $1,161,181
 8.3%

Average loans increased $842.4 million,$1.2 billion, or 6.3%8.3%, compared to the thirdsecond quarter of 2015.2016. The increase was driven largely by growth in the commercial mortgage and residential mortgage portfolios, as well as the commercial loan construction and leasing portfolios.portfolio. The $428.9$606.2 million, or 8.2%10.9%, increase in commercial mortgages occurred in both owner-occupied and investment property typesand was primarilyrealized in all geographic markets, but predominately in the Pennsylvania, Maryland and New JerseyDelaware markets. The $122.1$308.1 million, or 8.8%22.0%, increase in the residential mortgages was also experienced across all geographic markets, with the most significant increases occurring in the Maryland, Virginia and Pennsylvania markets. This growth was primarily the result of a strategic decision to retain certain


mortgage loans. The average yield on loans decreased 9 basis points,$140.5 million, or 2.2%3.4%, to 3.93%increase in 2016 from 4.02% in 2015. The decrease in average yields oncommercial loans was attributable to repaymentsspread across a broad range of higher-yielding loans, continued refinancing activity at lower rates,industries and new loan production at rates lower thanconcentrated in the overall portfolio yield.


Pennsylvania market.

Average total interest-bearing liabilities increased $571.7$747.9 million, or 5.1%6.4%, compared to the thirdsecond quarter of 2015.2016. Interest expense increased $368,000,$1.9 million, or 1.8%9.4%, to $20.9$22.3 million in the thirdsecond quarter of 2016 primarily as a result of an increase in rates, largely a result of the Federal Reserve Board's decision to raise the target range for the federal funds rate by 25 basis points in December 2015.2017. Average deposits and average interest rates, by type, are summarized in the following table:
Three months ended September 30 Increase (Decrease) in BalanceThree months ended June 30 Increase (Decrease) in Balance
2016 2015 2017 2016 
Balance Rate Balance Rate $ %Balance Rate Balance Rate $ %
(dollars in thousands)(dollars in thousands)
Noninterest-bearing demand$4,227,639
 —% $3,904,176
 —% $323,463
 8.3%$4,387,517
 —% $4,077,642
 —% $309,875
 7.6%
Interest-bearing demand3,602,448
 0.19
 3,316,532
 0.13
 285,916
 8.6
3,690,059
 0.30
 3,454,031
 0.18
 236,028
 6.8
Savings4,078,942
 0.20
 3,714,282
 0.15
 364,660
 9.8
Savings and money market accounts4,315,495
 0.25
 3,989,988
 0.19
 325,507
 8.2
Total demand and savings11,909,029
 0.13
 10,934,990
 0.09
 974,039
 8.9
12,393,071
 0.18
 11,521,661
 0.12
 871,410
 7.6
Time deposits2,814,258
 1.07
 2,963,774
 1.03
 (149,516) (5.0)2,696,033
 1.10
 2,844,434
 1.06
 (148,401) (5.2)
Total deposits$14,723,287
 0.31% $13,898,764
 0.29% $824,523
 5.9%$15,089,104
 0.34% $14,366,095
 0.30% $723,009
 5.0%

The $974.0$871.4 million, or 8.9%7.6%, increase in total demand and savings accounts was primarily due to a $516.3$487.4 million, or 10.4%9.0%, increase in personal account balances, a $315.8$308.3 million, or 7.9%7.4%, increase in business account balances and a $145.8$65.7 million, or 7.6%3.5%, increase in municipal account balances. The average cost of total deposits increased 24 basis points to 0.31%0.34% in the thirdsecond quarter of 20162017 compared, to 0.29%0.30% in the thirdsecond quarter of 2015.2016.

Average borrowings and interest rates, by type, are summarized in the following table:
Three months ended September 30 Increase (Decrease)Three months ended June 30 Increase
2016 2015 in Balance2017 2016 in Balance
Balance Rate Balance Rate $ %Balance Rate Balance Rate $ %
(dollars in thousands)(dollars in thousands)
Short-term borrowings:                      
Customer repurchase agreements$187,588
 0.10% $149,415
 0.10% $38,173
 25.5 %
Customer short-term promissory notes70,072
 0.04
 79,308
 0.02
 (9,236) (11.6)
Total short-term customer funding257,660
 0.09
 228,723
 0.07
 28,937
 12.7
Customer repurchase agreements and short-term promissory notes$277,211
 0.09% $258,130
 0.09% $19,081
 7.4%
Federal funds purchased148,546
 0.47
 85,092
 0.19
 63,454
 74.6
242,375
 1.03
 138,012
 0.43
 104,363
 75.6
Short-term FHLB advances (1)
20,163
 0.41
 10,870
 0.34
 9,293
 85.5
113,516
 0.99
 7,527
 0.45
 105,989
 N/M
Total short-term borrowings426,369
 0.23
 324,685
 0.11
 101,684
 31.3
633,102
 0.61
 403,669
 0.21
 229,433
 56.8
Long-term debt:    
   
 
    
   
 
FHLB advances603,285
 3.17
 618,010
 3.49
 (14,725) (2.4)652,192
 2.27
 603,700
 3.17
 48,492
 8.0
Other long-term debt361,943
 5.01
 378,237
 5.06
 (16,294) (4.3)418,653
 4.56
 361,826
 5.01
 56,827
 15.7
Total long-term debt965,228
 3.86
 996,247
 4.09
 (31,019) (3.1)1,070,845
 3.16
 965,526
 3.86
 105,319
 10.9
Total borrowings$1,391,597
 2.75% $1,320,932
 3.11% $70,665
 5.3 %$1,703,947
 2.22% $1,369,195
 2.78% $334,752
 24.4%

N/M - Not meaningful
(1) Represents FHLB advances with an original maturity term of less than one year.

TotalAverage total short-term borrowings increased $101.7$229.4 million, or 31.3%56.8%, primarily as a result of increasesaverage loan growth out-pacing the increase in federal funds purchased.average deposits.

Average long-term debt decreased $31.0increased $105.3 million, or 3.1%10.9%, due mainly to FHLB advance maturities and the restructuring$125 million of othersenior notes issued in March 2017, partially offset by the repayment of $100.0 million of 10-year subordinated notes, which matured on May 1, 2017.The 70 basis point, or 18.1%, decrease in the average rate on long-term debt. In the third quarterdebt was primarily a result of 2015, the Corporation executed two transactions to restructure its long-term FHLB advances. First, $200 million of FHLB advances with a weighted average rate of 4.45% and a maturity date in the first quarter of 2017,that were refinanced with new advances maturing from September 2019 to December 2020, at a weighted average rate of 2.95%. This transaction reduced interest expense on a quarterly basis by approximately $750,000, beginning in the fourth quarter of 2015. Second, forward agreements were executed to refinance an additional $200 million of FHLB advances when the advances mature in December 2016. These forward agreements have maturity dates from March 2021 to December 2021 and the refinancing will reduceof 2016, which reduced the weighted average rate on these advances from 4.03% to 2.40% and decrease interest expense on a quarterly basis by approximately $800,000, beginning in the first quarter of 2017.


.

Provision for Credit Losses

The provision for credit losses was $4.1$6.7 million for the thirdsecond quarter of 2017, an increase of $4.2 million from the second quarter of 2016, an increase of $3.1 million from the third quarter of 2015, attributable to continueddriven mainly by loan growth with overall credit metrics stable.and the impact of normal changes in the risk characteristics of the loan 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 September 30 Increase (Decrease)Three months ended June 30 Increase (Decrease)
2016 2015 $ %2017 2016 $ %
(dollars in thousands)(dollars in thousands)
Other service charges and fees:       
Merchant fees$4,531
 $4,252
 $279
 6.6 %
Commercial loan interest rate swap fees3,768
 2,751
 1,017
 37.0
Debit card income2,884
 2,719
 165
 6.1
Letter of credit fees1,109
 1,162
 (53) (4.6)
Other2,050
 2,099
 (49) (2.3)
Total other service charges and fees14,342
 12,983
 1,359
 10.5
Service charges on deposit accounts:              
Overdraft fees$5,770
 $5,652
 $118
 2.1%5,648
 5,384
 264
 4.9
Cash management fees3,605
 3,418
 187
 5.5
3,614
 3,580
 34
 0.9
Other3,703
 3,912
 (209) (5.3)3,652
 3,932
 (280) (7.1)
Total service charges on deposit accounts13,078
 12,982
 96
 0.7
12,914
 12,896
 18
 0.1
Investment management and trust services11,425
 11,237
 188
 1.7
12,132
 11,247
 885
 7.9
Other service charges and fees:       
Commercial interest rate swap fees4,359
 1,251
 3,108
 248.4
Merchant fees4,220
 4,000
 220
 5.5
Debit card income2,718
 2,572
 146
 5.7
Letter of credit fees1,078
 1,143
 (65) (5.7)
Other2,032
 1,999
 33
 1.7
Total other service charges and fees14,407
 10,965
 3,442
 31.4
Mortgage banking income:              
Gains on sales of mortgage loans4,857
 2,627
 2,230
 84.9
3,488
 4,440
 (952) (21.4)
MSR impairment charge(1,280) —
 (1,280) N/M
Mortgage servicing income952
 1,237
 (285) (23.0)2,653
 (543) 3,196
 N/M
Total mortgage banking income4,529
 3,864
 665
 17.2
6,141
 3,897
 2,244
 57.6
Credit card income2,668
 2,548
 120
 4.7
2,666
 2,596
 70
 2.7
Other income2,040
 1,448
 592
 40.9
2,740
 2,442
 298
 12.2
Total, excluding investment securities gains, net48,147
 43,044
 5,103
 11.9
50,935
 46,061
 4,874
 10.6
Investment securities gains, net2
 1,730
 (1,728) (99.9)1,436
 76
 1,360
 N/M
Total$48,149
 $44,774
 $3,375
 7.5%$52,371
 $46,137
 $6,234
 13.5 %
N/M - Not meaningful

Excluding investment securities gains, non-interest income increased $5.1$4.9 million, or 11.9%10.6%. Other service charges and fees increased $3.4$1.4 million, or 31.4%10.5%, driven mainly bydue to a $3.1$1.0 million increase in commercial loan interest rate swap fees, as borrowers executed such swapsdriven by loan growth and a favorable interest rate environment.
Investment management and trust services income increased $885,000, or 7.9%, with growth in both trust commissions and brokerage income, due to lock in fixed rates during the third quarter of 2016,overall market performance and by a $220,000an increase in merchant fee income resulting from higher transaction volumes in the third quarter of 2016.assets under management.
Gains on sales of mortgage loans increased $2.2 million,decreased $952,000, or 84.9%21.4%, compared to the same period in 2015,2016, as both new loan volumes and pricing spreads increased.decreased. Mortgage servicing income recognized in the third quarter of 2016, decreased $285,000, or 23.0%,increased $3.2 million compared to the third quarter of 2015. An $1.3 million impairment charge on MSRs was recorded in the thirdsecond quarter of 2016. See Note 6, "Mortgage Servicing Rights,"The second quarter of 2017 included a $1.3 million reduction to the MSRs valuation allowance, which was originally established in June 2016 through an impairment charge of $1.7 million. Excluding the Notes to Consolidated Financial Statements for additional details regardingimpact of the impairment charge.


OtherMSR valuation allowance adjustments, mortgage servicing income increased $592,000,$196,000, or 40.9%, due mainly to an increase in gains on the sale of loans guaranteed by the Small Business Administration.

16.9%.
Investment securities gains decreased $1.7increased $1.4 million from the thirdsecond quarter of 2015.2016. 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 September 30 Increase (Decrease)Three months ended June 30 Increase (Decrease)
2016 2015 $ %2017 2016 $ %
(dollars in thousands)(dollars in thousands)
Salaries and employee benefits$70,696
 $65,308
 $5,388
 8.3 %$74,496
 $70,029
 $4,467
 6.4%
Net occupancy expense11,782
 10,710
 1,072
 10.0
12,316
 11,811
 505
 4.3
Other outside services5,783
 7,373
 (1,590) (21.6)7,708
 5,508
 2,200
 39.9
Data processing4,610
 5,105
 (495) (9.7)4,619
 5,476
 (857) (15.7)
Software4,117
 3,984
 133
 3.3
4,435
 3,953
 482
 12.2
Amortization of tax credit investments3,151
 —
 3,151
 N/M
Equipment expense3,137
 3,595
 (458) (12.7)3,034
 2,872
 162
 5.6
Supplies and postage2,559
 2,708
 (149) (5.5)
Professional fees2,535
 2,828
 (293) (10.4)2,931
 3,353
 (422) (12.6)
FDIC insurance expense1,791
 2,867
 (1,076) (37.5)2,366
 2,960
 (594) (20.1)
Marketing1,774
 2,102
 (328) (15.6)2,234
 1,916
 318
 16.6
Telecommunications1,411
 1,587
 (176) (11.1)
Other real estate owned and repossession expense742
 1,016
 (274) (27.0)
Operating risk loss556
 1,136
 (580) (51.1)
Loss on redemption of trust preferred securities—
 5,626
 (5,626) (100.0)
Intangible amortization—
 5
 (5) (100.0)
Other8,355
 8,939
 (584) (6.5)15,405
 13,759
 1,646
 12.0
Total$119,848
 $124,889
 $(5,041) (4.0)%$132,695
 $121,637
 $11,058
 9.1%
N/M - Not meaningful

The $5.4 million, or 8.3%, increase in salaries and employee benefits expense was primarily driven entirely by a $3.7 million, or 6.7%, increase in salaries, resulting from higher average salaries per full-time equivalent employee,reflecting normal merit increases and an increase in incentive compensation. Employee benefits expensestaffing levels. Average full-time equivalent employees increased $1.72.1% to 3,564 in 2017, as compared to 3,492 in 2016.
Other outside services increased $2.2 million, or 17.0%39.9%, largely due to higher health care expenses.

Net occupancy expense increased $1.1 million, or 10.0%, as a result of lower than normal expenses recognized in the third quarter of 2015. Outside services include fees paid to consultantspre-bank consolidation efforts and expenses for contracted or outsourced services. Consulting expenses can fluctuate based on the timing and need for such services. The $1.6 million, or 21.6%, decrease in expense in comparison to the third quarter of 2015 was largely due to the timing of expenses relatedfor various engagements.
In 2017, amortization expense on certain new tax credit investments was classified in non-interest expense, rather than income tax expense, as further discussed under income taxes below.
Software expense increased $482,000, or 12.2%, largely due to the Corporation’s BSA/AML compliance program remediation efforts and certain informationinvestments in technology and human resources initiatives.

solutions. Data processing expense decreased $495,000,$857,000, or 9.7%15.7%, due to benefits from renegotiated contracts. Equipment expense decreased $458,000,The $422,000, or 12.7%, primarily due to lower depreciation expense when compared to the third quarter of 2015, as certain assets became fully depreciated. The $293,000, or 10.4%12.6%, decrease in professional fees was driven by lower net legal expenses due to recoveries on settled non-performing loan accounts.expenses. FDIC insurance expense decreased $1.1 million,$594,000, or 37.5%20.1%, as the assessment rates for banks with less than $10 billion in assets decreased withwhen the Deposit Insurance Fund (DIF) exceedingexceeded 1.15% of the deposit base.base in 2016. Marketing expense decreased $328,000,increased $318,000, or 15.6%16.6%, compared to the thirdsecond quarter of 20152016, due to an increase in the timingnumber of various marketing promotions.

Other real estate owned and repossession expense decreased $274,000, or 27.0%, when compared to the third quarter of 2015. This decrease wasexpenses increased $1.6 million due mainly to a $147,000 decrease in net losses$440,000 loss on the salesplanned sale of other real estate properties. This expense category can experience fluctuationsthe student loan portfolio and higher state taxes resulting from period to period based on the timing of sales of properties and payments of expenses, such as real estate taxes.

The $580,000, or 51.1%, decrease in operating risk loss was due to a $426,000 decrease in debit card fraud and $289,000 decrease in losses associated with previously sold mortgages, partially offset bylegislated increases in wire transfer fraudthe Pennsylvania bank shares tax rate, and other categories.



In July 2015, the Corporation redeemed $150.0 million of TruPS. In connection with this redemption, a loss of $5.6 million was
recognized as a component of non-interest expense.certain sales tax liabilities.

Income Taxes

Income tax expense for the thirdsecond quarter of 20162017 was $13.3$9.1 million, a $2.9$2.1 million, or 28.4%18.7%, increasedecrease from $10.3$11.2 million for the thirdsecond quarter of 2015.2016.

The Corporation’s effective tax rate was 24.2%16.6% in the thirdsecond quarter of 2016,2017, as compared to 23.2%21.9% in the thirdsecond quarter of 2015.2016. The The effective tax rate is generally lower than the federal statutory rate of 35% due to tax-exempt interest income earned on loans, investments in tax-free municipal securities, and credits earned from community development investments in partnerships that generate tax credits under various federal programs (Tax Credit Investments)and excess tax benefits realized on stock-based compensation. In 2017, amortization of certain new tax credit investments was included in non-interest expense, rather than as a component of income tax expense. If the amortization had been included as a component of income tax expense, the effective tax rate for the second quarter would have been 21.2%. The increaseIn addition, in the effective rate from the thirdsecond quarter of 2015 was driven by higher income before income taxes and higher state income taxes, partially offset by an increase in net credits on Tax Credit Investments.2017, the Corporation realized $1.6 million of excess tax benefits mainly related to vesting employee stock awards.


Nine




Six Months Ended SeptemberJune 30, 20162017 compared to the NineSix Months Ended SeptemberJune 30, 20152016

Net Interest Income

FTE net interest income increased $17.9$22.7 million, or 4.6%, to $403.7$290.6 million, in the first ninesix months of 20162017, from $385.8$267.9 million in the same period of 2015. Net2016. The increase was due to a $1.1 billion, or 6.7%, increase in interest-earning assets and a 6 basis points, or 1.9%, increase in net interest margin, decreased 3 basis points to 3.19%3.28%, for the first ninesix months of 2016 from2017 compared to 3.22% for the same period of 2015. The increase in FTE net interest income was mainly due to an $871.1 million, or 5.4%, increase in interest earning assets.2016. The following table provides a comparative average balance sheet and net interest income analysis for those periods. Interest income and yields are presented on an FTE basis, using a 35% federal tax rate and statutory interest expense disallowances. The discussion following this table is based on these FTE amounts.

Nine months ended September 30Six months ended June 30
2016 20152017 2016
Average
Balance		 Interest  (1) Yield/
Rate		 Average
Balance		 Interest  (1) Yield/
Rate		Average
Balance		 Interest  (1) Yield/
Rate		 Average
Balance		 Interest  (1) Yield/
Rate
ASSETS(dollars in thousands)(dollars in thousands)
Interest-earning assets:                      
Loans, net of unearned income (2)
$14,011,301
 $416,646
 3.97% $13,220,339
 $401,662
 4.06%$14,993,129
 $299,299
 4.02% $13,909,722
 $276,212
 3.99%
Taxable investment securities (3)
2,139,378
 34,034
 2.12
 2,068,025
 33,478
 2.16
2,117,733
 23,387
 2.16
 2,154,187
 23,162
 2.15
Tax-exempt investment securities (3)
306,298
 10,631
 4.63
 225,209
 9,035
 5.35
404,271
 8,777
 4.34
 287,123
 6,708
 4.67
Equity securities (3)
14,272
 599
 5.60
 25,985
 1,086
 5.59
11,247
 324
 5.81
 14,303
 403
 5.67
Total investment securities2,459,948
 45,264
 2.45
 2,319,219
 43,599
 2.51
2,533,251
 32,488
 2.57
 2,455,613
 30,273
 2.47
Loans held for sale18,114
 529
 3.90
 21,360
 632
 3.94
17,814
 388
 4.36
 15,850
 319
 4.03
Other interest-earning assets406,163
 2,813
 0.92
 463,545
 3,922
 1.13
318,542
 1,644
 1.03
 357,887
 1,762
 0.98
Total interest-earning assets16,895,526
 465,252
 3.68% 16,024,463
 449,815
 3.75%17,862,736
 333,819
 3.76% 16,739,072
 308,566
 3.70%
Noninterest-earning assets:                      
Cash and due from banks100,417
     104,870
    109,766
     99,654
    
Premises and equipment227,237
     226,469
    217,974
     226,901
    
Other assets1,182,260
     1,101,856
    1,162,254
     1,163,259
    
Less: Allowance for loan losses(164,999)     (176,205)    (171,151)     (165,972)    
Total Assets$18,240,441
     $17,281,453
    $19,181,579
     $18,062,914
    
LIABILITIES AND EQUITY                      
Interest-bearing liabilities:                      
Demand deposits$3,498,659
 $4,727
 0.18% $3,202,380
 $3,092
 0.13%$3,670,603
 $5,019
 0.28% $3,446,193
 $3,021
 0.18%
Savings deposits4,000,871
 5,732
 0.19
 3,600,695
 3,802
 0.14
4,255,190
 4,921
 0.23
 3,961,405
 3,690
 0.19
Time deposits2,842,011
 22,465
 1.06
 3,017,271
 23,199
 1.03
2,717,624
 14,745
 1.09
 2,856,044
 14,903
 1.05
Total interest-bearing deposits10,341,541
 32,924
 0.43
 9,820,346
 30,093
 0.41
10,643,417
 24,685
 0.47
 10,263,642
 21,614
 0.42
Short-term borrowings425,151
 739
 0.23
 338,019
 272
 0.11
672,580
 1,829
 0.54
 424,535
 485
 0.23
FHLB advances and long-term debt962,997
 27,889
 3.86
 1,048,634
 33,669
 4.29
FHLB advances and other long-term debt1,030,667
 16,712
 3.25
 961,870
 18,551
 3.87
Total interest-bearing liabilities11,729,689
 61,552
 0.70% 11,206,999
 64,034
 0.76%12,346,664
 43,226
 0.70% 11,650,047
 40,650
 0.70%
Noninterest-bearing liabilities:                      
Demand deposits4,091,555
     3,767,919
    4,344,859
     4,022,764
    
Other329,315
     282,983
    329,076
     315,746
    
Total Liabilities16,150,559
     15,257,901
    17,020,599
     15,988,557
    
Shareholders’ equity2,089,882
     2,023,552
    2,160,980
     2,074,357
    
Total Liabilities and Shareholders’ Equity$18,240,441
     $17,281,453
    $19,181,579
     $18,062,914
    
Net interest income/net interest margin (FTE)  403,700
 3.19%   385,781
 3.22%  290,593
 3.28%   267,916
 3.22%
Tax equivalent adjustment  (15,165)     (13,586)    (11,451)     (9,946)  
Net interest income  $388,535
     $372,195
    $279,142
     $257,970
  
(1)Includes dividends earned on equity securities.
(2)Includes non-performing loans.
(3)Balances include amortized historical cost for available for sale securities; the related unrealized holding gains (losses) are included in other assets.



The following table summarizes the changes in FTE interest income and interest expense for the first nine months of 2016 as compared to the same period in 2015 due toresulting from changes in average balances (volume) and changes in rates:rates for the six months ended June 30, 2017 in comparison to the same period of 2016:

2016 vs. 2015
Increase (Decrease) due
to change in		2017 vs. 2016
Increase (Decrease) due
to change in
Volume Rate NetVolume Rate Net
(in thousands)(in thousands)
Interest income on:          
Loans, net of unearned income$23,932
 $(8,948) $14,984
$21,020
 $2,067
 $23,087
Taxable investment securities1,168
 (612) 556
54
 171
 225
Tax-exempt investment securities2,929
 (1,333) 1,596
2,559
 (490) 2,069
Equity securities(489) 2
 (487)(89) 10
 (79)
Loans held for sale(97) (6) (103)41
 28
 69
Other interest-earning assets(443) (666) (1,109)(203) 85
 (118)
Total interest income$27,000
 $(11,563) $15,437
$23,382
 $1,871
 $25,253
Interest expense on:          
Demand deposits$310
 $1,325
 $1,635
$223
 $1,775
 $1,998
Savings deposits469
 1,461
 1,930
287
 944
 1,231
Time deposits(1,419) 685
 (734)(758) 600
 (158)
Short-term borrowings86
 381
 467
398
 946
 1,344
FHLB advances and long-term debt(2,587) (3,193) (5,780)
FHLB advances and other long-term debt1,245
 (3,084) (1,839)
Total interest expense$(3,141) $659
 $(2,482)$1,395
 $1,181
 $2,576
Note: Changes which are partially attributable to both volume and rate are allocated to the volume and rate components presented above based on the percentage of direct changes that are attributable to each component.

As summarized above, the increase in FTE interest income was the result of an increase in average interest-earning assets, primarily loans, whichin comparison to the first six months of 2016 resulted in a $27.0$23.4 million increase in FTE interest income, partially offset by an $11.6 million decrease due to lower yieldsincome. The 6 basis points increase in the yield on average interest-earning assets.assets resulted in a $1.9 million increase in FTE interest income. The yield on the loan portfolio increased 3 basis points, or 0.8%, from the same period of 2016, the result of federal funds rate increases that occurred in December 2016 and March 2017, which impacted variable rate loans and adjustable rate loans that repriced in the first half of 2017.

Average loans and average FTE yields, by type, are summarized in the following table:

Nine months ended September 30 Increase (Decrease)Six months ended June 30 Increase (Decrease)
2016 2015 in Balance2017 2016 in Balance
Balance Yield Balance Yield $ %Balance Yield Balance Yield $ %
(dollars in thousands)(dollars in thousands)
Real estate – commercial mortgage$5,572,356
 4.01% $5,205,755
 4.15% $366,601
 7.0%$6,101,836
 3.99% $5,522,550
 4.02% $579,286
 10.5%
Commercial – industrial, financial and agricultural4,080,638
 3.79
 3,831,678
 3.81
 248,960
 6.5
4,213,094
 3.95
 4,087,897
 3.80
 125,197
 3.1
Real estate – residential mortgage1,672,994
 3.77
 1,390,631
 3.78
 282,363
 20.3
Real estate – home equity1,656,969
 4.09
 1,703,006
 4.11
 (46,037) (2.7)1,600,394
 4.26
 1,665,086
 4.10
 (64,692) (3.9)
Real estate – residential mortgage1,428,430
 3.77
 1,369,367
 3.81
 59,063
 4.3
Real estate – construction817,014
 3.80
 713,893
 3.93
 103,121
 14.4
869,299
 3.98
 806,448
 3.81
 62,851
 7.8
Consumer272,402
 5.40
 265,002
 5.52
 7,400
 2.8
292,704
 5.14
 267,794
 5.44
 24,910
 9.3
Leasing, other and overdrafts183,492
 6.01
 131,638
 7.33
 51,854
 39.4
242,808
 5.06
 169,316
 6.81
 73,492
 43.4
Total$14,011,301
 3.97% $13,220,339
 4.06% $790,962
 6.0%$14,993,129
 4.02% $13,909,722
 3.99% $1,083,407
 7.8%

Average loans increased $791.0 million,$1.1 billion, or 6.0%7.8%, which contributed $23.9 millioncompared to the increase in FTE interest income. The average yield on loans decreased 9 basis points, or 2.2%, to 3.97% in 2016 from 4.06% in 2015. first six months of 2016.The increase in average loans was driven largely by growth in the commercial mortgage and residential mortgage portfolios, as well as the commercial loan, construction and leasing portfolios. The $579.3 million, or 10.5%, increase in commercial mortgage growthmortgages occurred in both owner-occupied and investment property types and was realized in all geographicalgeographic markets, but predominantly in the Pennsylvania, Maryland and Delaware markets. The decrease$282.4 million, or 20.3%, increase in average yields on loansresidential mortgages was attributablealso experienced across all geographic markets, with the most significant increases occurring in the Maryland and Virginia markets. This growth has been primarily the result of a strategic decision to repayments of higher-yielding loans, continued refinancing activity at lower rates, and new loan production at rates lower than the overall portfolio yield.



Average investment securities increased $140.7retain certain mortgage loans. The $125.2 million, or 6.1%.The yield on average investments decreased 6 basis points,3.1%, increase in commercial loans was spread across a broad range of industries and concentrated in the Pennsylvania market.
Average total interest-bearing liabilities for the first six months of 2017 increased $696.6 million, or 2.4%6.0%, compared to the same period of 2016. Interest expense increased $2.6 million, or 6.3%, to 2.45% in 2016 from 2.51% in 2015. The increase in average investment securities was partially offset by a $57.4 million, or 12.4%, decrease in other interest-earning assets.
Interest expense decreased $2.5 million, or 3.9%, to $61.6$43.2 million in the first nine monthshalf of 2016 from $64.0 million in the first nine months of 2015. Although total average interest-bearing liabilities increased $522.7 million, or 4.7%, compared to the first nine months of 2015, the funding mix became more concentrated in lower-cost2017. Average deposits and short-term borrowings. This shift and the impact of FHLB Advance refinancing activity and the impact of the redemption of TruPs funded with lower-cost subordinated debt resulted in a decrease inaverage interest expense.
Average deposits,rates, by type, are summarized in the following table:
Nine months ended September 30 Increase (Decrease) in BalanceSix months ended June 30 Increase (Decrease) in Balance
2016 2015 2017 2016 
Balance Rate Balance Rate $ %Balance Rate Balance Rate $ %
(dollars in thousands)(dollars in thousands)
Noninterest-bearing demand$4,091,555
 —% $3,767,919
 —% $323,636
 8.6%$4,344,859
 —% $4,022,764
 —% $322,095
 8.0%
Interest-bearing demand3,498,659
 0.18
 3,202,380
 0.13
 296,279
 9.3
3,670,603
 0.28
 3,446,193
 0.18
 224,410
 6.5
Savings4,000,871
 0.19
 3,600,695
 0.14
 400,176
 11.1
4,255,190
 0.23
 3,961,405
 0.19
 293,785
 7.4
Total demand and savings11,591,085
 0.12
 10,570,994
 0.09
 1,020,091
 9.6
12,270,652
 0.16
 11,430,362
 0.12
 840,290
 7.4
Time deposits2,842,011
 1.06
 3,017,271
 1.03
 (175,260) (5.8)2,717,624
 1.09
 2,856,044
 1.05
 (138,420) (4.8)
Total deposits$14,433,096
 0.30% $13,588,265
 0.30% $844,831
 6.2%$14,988,276
 0.33% $14,286,406
 0.30% $701,870
 4.9%

The $1.0 billion,$840.3 million, or 9.6%7.4%, increase in total demand and savings account balancesaccounts was primarily due to a $495.1$478.6 million, or 10.1%8.9%, increase in personal account balances, a $361.7$291.3 million, or 9.4%7.1%, increase in business account balances and a $166.1$55.7 million, or 9.3%3.1%, increase in municipal account balances. While theThe average cost of both demand and savings deposits and timetotal deposits increased the shift3 basis points to a higher concentration of lower-cost demand and savings deposits resulted0.33% in a total cost of interest-bearing deposits of 0.30% for both the first nine monthshalf of 2016 and 2015.2017, compared to 0.30% in the same period in 2016.
The following table summarizes changes in average short-term
Average borrowings and long-term debt,interest rates, by type:type, are summarized in the following table:
 Nine months ended September 30 Increase (Decrease)
 2016 2015 in Balance
 Balance Rate Balance Rate $ %
 (dollars in thousands)
Short-term borrowings:           
Customer repurchase agreements$179,892
 0.11% $167,526
 0.10% $12,366
 7.4%
Customer short-term promissory notes73,859
 0.04
 81,854
 0.02
 (7,995) (9.8)
Total short-term customer funding253,751
 0.09
 249,380
 0.07
 4,371
 1.8
Federal funds purchased156,812
 0.44
 72,961
 0.17
 83,851
 114.9
Short-term FHLB advances (1)
14,588
 0.43
 15,678
 0.31
 (1,090) (7.0)
Total short-term borrowings425,151
 0.23
 338,019
 0.11
 87,132
 25.8
Long-term debt:           
FHLB advances601,120
 3.18
 634,403
 3.50
 (33,283) (5.2)
Other long-term debt361,877
 5.00
 414,231
 5.50
 (52,354) (12.6)
Total long-term debt962,997
 3.86
 1,048,634
 4.29
 (85,637) (8.2)
Total borrowings$1,388,148
 2.75% $1,386,653
 3.27% $1,495
 0.1%
 Six months ended June 30 Increase (Decrease)
 2017 2016 in Balance
 Balance Rate Balance Rate $ %
 (dollars in thousands)
Short-term borrowings:           
Customer repurchase agreements$199,945
 0.10% $176,001
 0.11% $23,944
 13.6%
Customer short-term promissory notes78,348
 0.05
 75,774
 0.04
 2,574
 3.4
Total short-term customer funding278,293
 0.08
 251,775
 0.09
 26,518
 10.5
Federal funds purchased275,116
 0.87
 160,991
 0.42
 114,125
 70.9
Short-term FHLB advances (1)
119,171
 0.87
 11,769
 0.46
 107,402
 N/M
Total short-term borrowings672,580
 0.54
 424,535
 0.23
 248,045
 58.4
Long-term debt:           
FHLB advances629,141
 2.31
 600,026
 3.18
 29,115
 4.9
Other long-term debt401,526
 4.73
 361,844
 5.00
 39,682
 11.0
Total long-term debt1,030,667
 3.25
 961,870
 3.87
 68,797
 7.2
Total borrowings$1,703,247
 2.18% $1,386,405
 2.75% $316,842
 22.9%
N/M - Not meaningful
(1) Represents FHLB advances with an original maturity term of less than one year.

Average total short-term borrowings increased $1.5$248.0 million, during the first nine months of 2016 in comparison to the same period of 2015. The cost of borrowings, however, decreased 52 basis points, or 15.9%58.4%, as a result of lower-cost,loan growth out-pacing the increase in deposits. The increase in average short-term borrowings comprising a larger percentagecontributed $398,000 of total borrowings.additional interest expense while the rate on average short-term borrowings increased 31 basis points, contributing an additional $946,000 to interest expense.

TotalAverage long-term debt decreased $85.6increased $68.8 million, or 8.2%7.2%, primarily as thea result of maturing FHLB advances and the maturity$125 million of senior notes issued in March 2017, partially offset by the repayment of $100.0 million of 10-year subordinated notes, which matured on May 1, 2017.The 62 basis point, or 16.0%, decrease in the average rate on long-term debt in April 2015. In addition, in June 2015, the Corporation issued $150 millionwas primarily a result of subordinated debt at an


effective rate of 4.69%. The proceeds of this issuance were used to redeem $150 million of trust preferred securities, with an effective rate of 6.52%, in July 2015.

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






Provision for Credit Losses

The provision for credit losses was $8.2$11.5 million for the first ninesix months of 2016,2017, an increase of $8.7$7.5 million from the same period of 2016, driven mainly by loan growth and the impact of normal changes in comparison to the first nine monthsrisk characteristics of 2015. In the first nine months of 2015, a negative provision of $500,000 was recorded, primarily due to an improvement in net charge-off levels, particularly among pooled impaired loans. For details related to the Corporation's allowance andloan portfolio.

The provision for credit losses seeis 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."Losses" for details related to the Corporation's allowance and provision for credit losses.

Non-Interest Income

The following table presents the components of non-interest income:

Nine months ended September 30 Increase (Decrease)Six months ended June 30 Increase (Decrease)
2016 2015 $ %2017 2016 $ %
(dollars in thousands)(dollars in thousands)
Other service charges and fees:       
Merchant fees$8,138
 $7,935
 $203
 2.6 %
Commercial loan interest rate swap fees6,826
 4,193
 2,633
 62.8
Debit card income5,549
 5,230
 319
 6.1
Letter of credit fees2,309
 2,308
 1
 —
Other3,957
 4,067
 (110) (2.7)
Total other service charges and fees26,779
 23,733
 3,046
 12.8
Service charges on deposit accounts:              
Overdraft fees$16,426
 $15,806
 $620
 3.9%11,117
 10,656
 461
 4.3
Cash management fees10,651
 10,004
 647
 6.5
7,151
 7,046
 105
 1.5
Other11,455
 11,378
 77
 0.7
7,046
 7,752
 (706) (9.1)
Total service charges on deposit accounts38,532
 37,188
 1,344
 3.6
25,314
 25,454
 (140) (0.6)
Investment management and trust services33,660
 33,137
 523
 1.6
23,940
 22,235
 1,705
 7.7
Other service charges and fees:       
Merchant fees12,155
 11,265
 890
 7.9
Debit card income7,948
 7,587
 361
 4.8
Commercial swap fees8,552
 3,088
 5,464
 176.9
Letter of credit fees3,385
 3,474
 (89) (2.6)
Other6,100
 5,902
 198
 3.4
Total other service charges and fees38,140
 31,316
 6,824
 21.8
Mortgage banking income:              
Gains on sales of mortgage loans11,967
 10,588
 1,379
 13.0
6,562
 7,110
 (548) (7.7)
MSR impairment charge(3,001) —
 (3,001) N/M
Mortgage servicing income3,490
 3,303
 187
 5.7
4,175
 817
 3,358
 N/M
Total mortgage banking income12,456
 13,891
 (1,435) (10.3)10,737
 7,927
 2,810
 35.4
Credit card income7,688
 7,257
 431
 5.9
5,314
 5,020
 294
 5.9
Other income5,922
 4,921
 1,001
 20.3
4,418
 3,882
 536
 13.8
Total, excluding investment securities gains, net136,398
 127,710
 8,688
 6.8
96,502
 88,251
 8,251
 9.3
Investment securities gains, net1,025
 8,290
 (7,265) (87.6)2,542
 1,023
 1,519
 148.5
Total$137,423
 $136,000
 $1,423
 1.0%$99,044
 $89,274
 $9,770
 10.9 %
N/M - Not meaningful

Excluding investment securities gains, non-interest income increased $8.3 million, or 9.3%. Other service charges and fees increased $3.0 million, or 12.8%, mainly due to a $2.6 million increase in commercial loan interest rate swap fees, driven by loan growth and a favorable interest rate environment.

The $620,000,$460,000, or 3.9%4.3%, increase in overdraft fee income during the ninesix months ended SeptemberJune 30, 20162017 in comparison to the same period in 2015during 2016 consisted of a $385,000$315,000 increase in fees assessed on personal accounts and a $235,000$145,000 increase in fees assessed


on commercial accounts, due to higher volumes. CashOther service charges on deposit accounts decreased $705,000, or 9.1%, resulting from changes in customer behavior and the loss of a significant processing customer.



Investment management feesand trust services income increased $647,000,$1.7 million, or 6.5%7.7%, compared to 2015with growth in both trust and brokerage income, due to higher transaction volumesoverall market performance and fee increases in 2016.
The $890,000, or 7.9%, increase in merchant fee income and the $361,000, or 4.8%, increase in debit card income were due to an increase in the volumes of transactions in comparison to 2015. The $5.5 million increase in commercial loan interest rate swap fees was due to growth in commercial loans and the attractiveness of interest rate swaps in the current rate environment.assets under management.

Gains on sales of mortgage loans increased $1.4 million,decreased $548,000, or 13.0%7.7%, due to a 23.3% increase in pricing spreads compared to the prior year, partially offset by a $68.1 million, or 8.3%, decreasesame period in new loan volumes.2016, as volumes decreased while pricing spreads remained flat. Mortgage servicing income increased $187,000,$3.4 million compared to the same period in 2016. 2017 included a $1.3 million reduction to the MSRs valuation allowance, which was originally established in June 2016 through an impairment charge of $1.7 million. Excluding the impact of the MSR valuation allowance adjustments, mortgage servicing income increased $346,000, or 5.7%13.6%. A $3.0 million impairment charges on MSRs was recognized in the first nine months of 2016. See Note 6, "Mortgage Servicing Rights," in the Notes to Consolidated Financial Statements for additional details regarding the impairment charge.

Gains on sales of investment securities decreased $7.3increased $1.5 million compared to the first ninesix months of 2015.2016. 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:

Nine months ended September 30 Increase (Decrease)Six months ended June 30 Increase (Decrease)
2016 2015 $ %2017 2016 $ %
(dollars in thousands)(dollars in thousands)
Salaries and employee benefits$210,097
 $195,365
 $14,732
 7.5 %$143,732
 $139,401
 $4,331
 3.1 %
Net occupancy expense35,813
 36,211
 (398) (1.1)24,979
 24,031
 948
 3.9
Other outside services17,347
 21,248
 (3,901) (18.4)13,254
 11,564
 1,690
 14.6
Data processing15,486
 14,767
 719
 4.9
8,905
 10,876
 (1,971) (18.1)
Software11,991
 10,678
 1,313
 12.3
9,128
 7,874
 1,254
 15.9
Equipment expense9,380
 10,888
 (1,508) (13.9)6,393
 6,243
 150
 2.4
Professional fees8,221
 8,430
 (209) (2.5)5,668
 5,686
 (18) (0.3)
Supplies and postage7,844
 7,803
 41
 0.5
FDIC insurance expense7,700
 8,574
 (874) (10.2)4,424
 5,909
 (1,485) (25.1)
Marketing5,314
 5,570
 (256) (4.6)4,220
 3,540
 680
 19.2
Telecommunications4,358
 4,920
 (562) (11.4)
Operating risk loss2,082
 2,637
 (555) (21.0)
Other real estate owned and repossession expense1,745
 2,507
 (762) (30.4)
Loss on redemption of trust preferred securities—
 5,626
 (5,626) (100.0)
Intangible amortization—
 241
 (241) (100.0)
Amortization of tax credit investments4,149
 —
 4,149
 N/M
Other24,520
 26,256
 (1,736) (6.6)30,118
 26,926
 3,192
 11.9
Total$361,898
 $361,721
 $177
 — %$254,970
 $242,050
 $12,920
 5.3 %
N/M - Not meaningful

The $14.7$4.3 million, or 7.5%3.1%, increase in salaries and employee benefits during the ninesix months ended SeptemberJune 30, 20162017 in comparison to the same period in 2015 wasduring 2016 primarily driven byresulted from a $12.1$4.7 million, or 7.3%4.0%, increase in salaries, resulting from higher average salaries per full-time equivalent employee, normal merit increases and an increase in incentive compensation. The average number ofstaffing levels. Average full-time equivalent employees increased 2.0% to 3,490 for the nine months ended September 30, 2016,3,548 as compared to 3,470 for the nine months ended September 30, 2015. Benefits expenses3,480 in 2016.

Other outside services increased $2.6$1.7 million, or 8.3%14.6%, largely due to pre-bank consolidation efforts and the timing of expenses for various engagements.

Software expense increased $1.3 million, or 15.9%, largely due to investments in technology solutions. Data processing expense decreased $2.0 million, or 18.1%, due to benefits from renegotiated contracts.

FDIC insurance expense decreased $1.5 million, or 25.1%, as the assessment rates for banks decreased when the DIF exceeded 1.15% of the deposit base in 2016.

Marketing expense increased $680,000, or 19.2%, compared to the first six months of 2016, due to an increase in health care expense, 401(k) matching expense, defined benefit plan expense, employee education and other employee benefits.the number of marketing promotions. In 2017, many of these promotions were related to deposit generation.

The $3.9 million, or 18.4%, decreaseIn 2017, amortization expense on certain new tax credit investments is being recognized in other outside services in comparison to the first nine months of 2015 was due to lower expenses associated with the Corporation's BSA/AML compliance program remediation efforts, and lower costs for information technology and human resources initiatives.

The $2.0 million, or 8.0%, combined increase in data processing and software resulted from higher transaction volumes and contractual increases related to core processing systems, and amortization of capitalized software investments.non-interest expense, rather than income taxes.



Equipment expense decreased $1.5 million, or 13.9%, primarily due to lower depreciation expense, as certain assets became fully depreciated. FDIC insurance expense decreased $874,000, or 10.2%, due to a reduction in the assessment rate beginning in the the third quarter of 2016. Other real estate owned and repossession expense decreased $762,000, or 30.4%, when compared to the first nine months of 2015 due to decreases in repossession expense, maintenance expense and insurance expense on other real estate properties. This expense category can experience volatility from period to period based on the timing of foreclosures and sales of properties and payments of expenses, such as real estate taxes.

In July 2015, the Corporation redeemed $150.0 million of TruPS. In connection with this redemption, a loss of $5.6 million was
recognized as a component of non-interest expense.

Other expense decreased $1.7 million, or 6.6%, due to lower state taxes and the timing of certain expense items, which can fluctuate from period to period.

Income Taxes

Income tax expense for the first ninesix months of 20162017 was $36.4$22.9 million, a $396,000,$277,000, or 1.1%1.2%, increasedecrease from $36.0$23.1 million in 2015.

2016.
The Corporation’s effective tax rate was 23.4%20.5% in the first ninesix months of 2016,2017, as compared to 24.5%22.9% in the first ninesix months of 2015.
2016. The effective tax rate is generally lower than the federal statutory rate of 35% due to tax-exempt interest income earned on loans, investments in tax-free municipal securities, and credits earned from Tax Credit Investments. The decreaseinvestments in partnerships that generate tax credits under various federal programs and excess tax benefits realized on stock-based compensation. In 2017, amortization of certain new tax credit investments was recorded in non-interest expense, rather than as a component of income tax expense. If the amortization had been included as a component of income tax expense, the effective tax rate from 2015 was driven by higher net credits from these investments.for the first six months of 2017 would have been 23.3%. In addition, in 2017, the Corporation realized $2.1 million of excess tax benefits mainly related to vesting employee stock awards.

FINANCIAL CONDITION

The table below presents condensed consolidated ending balance sheets.
  Increase (Decrease)  Increase (Decrease)
September 30, 2016 December 31, 2015 $ %June 30, 2017 December 31, 2016 $ %
(dollars in thousands)(dollars in thousands)
Assets              
Cash and due from banks$86,497
 $101,120
 $(14,623) (14.5)%$94,938
 $118,763
 $(23,825) (20.1)%
Other interest-earning assets428,966
 292,516
 136,450
 46.6
392,842
 291,252
 101,590
 34.9
Loans held for sale27,836
 16,886
 10,950
 64.8
62,354
 28,697
 33,657
 117.3
Investment securities2,508,068
 2,484,773
 23,295
 0.9
2,488,699
 2,559,227
 (70,528) (2.8)
Loans, net of allowance14,228,712
 13,669,548
 559,164
 4.1
15,174,275
 14,530,593
 643,682
 4.4
Premises and equipment228,009
 225,535
 2,474
 1.1
217,558
 217,806
 (248) (0.1)
Goodwill and intangible assets531,556
 531,556
 —
 —
531,556
 531,556
 —
 —
Other assets661,418
 592,784
 68,634
 11.6
685,213
 666,353
 18,860
 2.8
Total Assets$18,701,062
 $17,914,718
 $786,344
 4.4 %$19,647,435
 $18,944,247
 $703,188
 3.7 %
Liabilities and Shareholders’ Equity              
Deposits$14,952,479
 $14,132,317
 $820,162
 5.8 %$15,357,361
 $15,012,864
 $344,497
 2.3 %
Short-term borrowings264,042
 497,663
 (233,621) (46.9)694,859
 541,317
 153,542
 28.4
Long-term debt965,286
 949,542
 15,744
 1.7
1,037,961
 929,403
 108,558
 11.7
Other liabilities389,819
 293,302
 96,517
 32.9
365,484
 339,548
 25,936
 7.6
Total Liabilities16,571,626
 15,872,824
 698,802
 4.4
17,455,665
 16,823,132
 632,533
 3.8
Total Shareholders’ Equity2,129,436
 2,041,894
 87,542
 4.3
2,191,770
 2,121,115
 70,655
 3.3
Total Liabilities and Shareholders’ Equity$18,701,062
 $17,914,718
 $786,344
 4.4 %$19,647,435
 $18,944,247
 $703,188
 3.7 %

Other Interest-earning Assets

The $136.5Other interest-earning assets increased $101.6 million, or 46.6%34.9%, increase in other interest-earning assets during the first ninesix months of 2016 resulted from2017 as a result of higher balances on deposit with the Federal Reserve Bank, as funding provided by deposit outpaced the growthprimarily due to a temporary increase in item clearing balances.

Loans Held for Sale

The $33.7 million, or 117.3%, increase in loans held for sale during the first six months of 2017, was mostly due to the reclassification of the student loan portfolio, totaling $28.9 million, from consumer loans. In June 2017, the Corporation determined to sell this portfolio and investments.began discussions with a potential purchaser of this portfolio. The sale is expected to be completed in the third quarter of 2017.







Investment Securities

The following table presents the carrying amount of investment securities:
  Increase (Decrease)  Increase (Decrease)
September 30, 2016 December 31, 2015 $ %June 30, 2017 December 31, 2016 $ %
(dollars in thousands)(dollars in thousands)
U.S. Government sponsored agency securities$140
 $25,136
 $(24,996) (99.4)%$6,054
 $134
 $5,920
 N/M
State and municipal securities401,572
 262,765
 138,807
 52.8
401,636
 391,641
 9,995
 2.6
Corporate debt securities107,241
 96,955
 10,286
 10.6
88,992
 109,409
 (20,417) (18.7)
Collateralized mortgage obligations652,359
 821,509
 (169,150) (20.6)538,507
 593,860
 (55,353) (9.3)
Mortgage-backed securities1,226,547
 1,158,835
 67,712
 5.8
Residential mortgage-backed securities1,213,065
 1,317,838
 (104,773) (8.0)
Commercial mortgage-backed securities121,067
 24,563
 96,504
 N/M
Auction rate securities97,726
 98,059
 (333) (0.3)97,923
 97,256
 667
 0.7
Total debt securities2,485,585
 2,463,259
 22,326
 0.9
2,467,244
 2,534,701
 (67,457) (2.7)
Equity securities22,483
 21,514
 969
 4.5
21,455
 24,526
 (3,071) (12.5)
Total$2,508,068
 $2,484,773
 $23,295
 0.9 %$2,488,699
 $2,559,227
 $(70,528) (2.8)%
N/M - Not meaningful

U.S. Government sponsored agencyCorporate debt securities decreased $25.0$20.4 million, or 99.4%18.7%, as the resultdue to calls and maturities of maturities. The proceeds were generally reinvested in municipal securities, which increased $138.8 million, or 52.8%. These investments have a more attractive yield in the current low interest rate environment.

certain holdings. Collateralized mortgage obligations decreased $169.2$55.4 million, or 20.6%9.3%, as the Corporation reduced its holdings in lower couponlower-coupon investments due to volatility in market pricing. In additionResidential mortgage-backed securities decreased $104.8 million, or 8.0%. Cash flows from both collateralized mortgage obligations and residential mortgage-backed securities were used to state and municipal securities, the proceedspartially fund loan growth or were also reinvested in commercial mortgage-backed securities which increased $67.7 million, or 5.8%.to diversify the portfolio.

Loans, net of Unearned Income

The following table presents ending balances of loans outstanding, net of unearned income:
    Increase (Decrease)    Increase (Decrease)
September 30, 2016 December 31, 2015 $ %June 30, 2017 December 31, 2016 $ %
(dollars in thousands)  (dollars in thousands)  
Real estate – commercial mortgage$5,818,915
 $5,462,330
 $356,585
 6.5 %$6,262,008
 $6,018,582
 $243,426
 4.0 %
Commercial – industrial, financial and agricultural4,024,119
 4,088,962
 (64,843) (1.6)4,245,849
 4,087,486
 158,363
 3.9
Real estate – residential mortgage1,784,712
 1,601,994
 182,718
 11.4
Real estate – home equity1,640,421
 1,684,439
 (44,018) (2.6)1,579,739
 1,625,115
 (45,376) (2.8)
Real estate – residential mortgage1,542,696
 1,376,160
 166,536
 12.1
Real estate – construction861,634
 799,988
 61,646
 7.7
938,900
 843,649
 95,251
 11.3
Consumer283,673
 268,588
 15,085
 5.6
283,156
 291,470
 (8,314) (2.9)
Leasing, other and overdrafts219,780
 158,135
 61,645
 39.0
252,253
 230,976
 21,277
 9.2
Loans, net of unearned income$14,391,238
 $13,838,602
 $552,636
 4.0 %$15,346,617
 $14,699,272
 $647,345
 4.4 %

Loans, net of unearned income, increased $552.6$647.3 million, or 4.4%, in comparison to December 31, 2016. In general, this growth resulted from improved business activity and customer sentiment, as well as the addition of commercial relationship managers in 2016. Increases were realized across all of the Corporation's geographic markets.Commercial mortgage loans increased $243.4 million, or 4.0%, in comparison to December 31, 2015, with the increases realized across all of the Corporation's geographic markets. Commercial mortgage loans increased $356.6 million, or 6.5%, in comparison to December 31, 2015,2016, with the growth occurring primarily in the Pennsylvania ($197.3133.0 million, or 7.1%4.2%), Maryland ($56.563.9 million, or 9.9%10.3%) and New Jersey ($45.438.7 million, or 3.2%2.7%) markets. Residential mortgage loans increased $166.5$182.7 million, or 12.1%11.4%, compared to December 31, 2015,2016, with the growth occurring primarily in the Maryland ($85.372.8 million, or 46.9%24.6%), Virginia ($59.0 million, or 19.1%) and VirginiaPennsylvania ($70.230.0 million, or 31.3%4.4%) markets as the result of new portfolio product offerings that were introduced in 2015. Constructionmarkets.

Commercial loans increased $61.6$158.4 million, or 7.7%3.9%, in comparison to December 31, 2015,2016, with the growth occurring primarily in the MarylandPennsylvania ($24.2164.8 million, or 38.7%), Pennsylvania ($17.5 million, or 3.7%5.5%) and New Jersey ($16.810.4 million, or 10.8%2.0%) markets. Construction loans increased $95.3 million, or 11.3%, in comparison to December 31, 2016, with the growth occurring primarily in the Pennsylvania ($46.1


million, or 9.4%), Maryland ($27.6 million, or 29.7%) and Delaware ($14.2 million, or 26.4%) markets. Leasing, other and overdrafts increased compared to December 31, 20152016 as a result of a $61.6$21.6 million increase in the leasing portfolio.



Construction loans include loans to commercial borrowers secured by commercial real estate, loans to commercial borrowers secured by residential real estate, and other construction loans, which represent loans to individuals secured by residential real estate. The following table presents outstanding construction loans and their delinquency rates by these class segments:
September 30, 2016 December 31, 2015June 30, 2017 December 31, 2016
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$636,892
 0.2% 73.9% $559,991
 0.2% 70.0%$728,649
 0.1% 77.6% $644,490
 0.2% 76.4%
Commercial - residential161,908
 7.2
 18.8
 179,303
 7.3
 22.4
157,291
 9.7
 16.8
 142,189
 6.0
 16.9
Other62,834
 1.7
 7.3
 60,694
 1.1
 7.6
52,960
 2.1
 5.6
 56,970
 1.9
 6.7
Total Real estate - construction$861,634
 1.6% 100.0% $799,988
 1.8% 100.0%$938,900
 1.8% 100.0% $843,649
 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 geographical location. Approximately $6.7$7.2 billion, or 46.4%46.9%, of the loan portfolio was in commercial mortgage and construction loans as of SeptemberJune 30, 2016.2017. The Corporation's maximum total lending commitment to an individual borrowing relationship was $50.0 million as of SeptemberJune 30, 2016.2017. In addition to its policy of limiting the maximum total lending commitment to any individual borrowing relationship to $50.0 million, the Corporation has established lower total lending limits for certain types of lending commitments, and lower total lending limits based on the Corporation's internal risk rating of an individual borrowing relationship at the time the lending commitment is approved. As of SeptemberJune 30, 2016,2017, the Corporation had 115137 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:
September 30,
2016		 December 31, 2015June 30,
2017		 December 31, 2016
Services21.0% 22.6%22.2% 21.8%
Retail15.0
 8.3
16.0
 15.1
Health care10.6
 10.6
10.2
 10.5
Manufacturing9.0
 9.2
Construction (1)
9.5
 9.7
8.4
 9.0
Manufacturing9.3
 11.3
Wholesale7.3
 8.0
7.1
 7.0
Real estate (2)
6.9
 7.3
6.6
 6.7
Agriculture4.7
 5.1
4.7
 5.0
Arts and entertainment2.7
 2.8
2.5
 2.6
Transportation2.4
 2.7
2.4
 2.3
Financial services2.1
 1.7
2.2
 2.1
Other8.5
 9.9
8.7
 8.7
Total100.0% 100.0%100.0% 100.0%

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












Commercial loans and commercial mortgage loans also include shared national credits, which are participations in loans or loan commitments of at least $20.0 million that are shared by three or more banks. Below is a summary of the Corporation's outstanding purchased shared national credits:
September 30, 2016 December 31, 2015June 30, 2017 December 31, 2016
(in thousands)(in thousands)
Commercial - industrial, financial and agricultural$163,452
 $152,830
$166,500
 $155,353
Real estate - commercial mortgage77,977
 96,219
96,076
 81,573
Total$241,429
 $249,049
$262,576
 $236,926
Total shared national credits decreased $7.6increased $25.7 million, or 3.1%10.8%, in comparison to December 31, 2015.2016 as a result of both new relationships and growth in existing relationships. The Corporation's shared national credits are to borrowers located in its geographical markets, and are subject to normal lending activities consistent with the Corporation's underwriting policies. As of September 30, 2016, noneNone of the shared national credits were past due compared to one credit totaling $1.1 million, or 0.4%, of the total balance that was past due as of June 30, 2017 or December 31, 2015.2016.

Provision for Credit Losses and Allowance for Credit Losses

The following table presentsCorporation has historically maintained an unallocated allowance for loan losses for factors and conditions that exist at the activitybalance sheet date, but are not specifically identifiable, and to recognize the inherent imprecision in estimating and measuring loss exposure. During 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:
 Three months ended September 30 Nine months ended September 30
 2016 2015 2016 2015
 (dollars in thousands)
Average balance of loans, net of unearned income$14,212,250
 $13,369,874
 $14,011,301
 $13,220,339
        
Balance of allowance for credit losses at beginning of period$165,108
 $169,453
 $171,412
 $185,931
Loans charged off:       
Commercial – industrial, financial and agricultural3,144
 1,640
 13,957
 14,669
Real estate – residential mortgage802
 1,035
 2,210
 3,099
Real estate – home equity709
 940
 3,295
 2,578
Real estate – commercial mortgage1,350
 660
 3,406
 3,011
Consumer685
 650
 2,261
 1,787
Real estate – construction150
 114
 1,218
 201
Leasing, other and overdrafts832
 522
 3,226
 1,352
Total loans charged off7,672
 5,561
 29,573
 26,697
Recoveries of loans previously charged off:       
Commercial – industrial, financial and agricultural1,539
 1,598
 6,789
 3,855
Real estate – residential mortgage228
 201
 784
 547
Real estate – home equity241
 304
 929
 744
Real estate – commercial mortgage296
 842
 2,488
 1,729
Consumer222
 314
 957
 923
Real estate – construction898
 898
 2,844
 2,276
Leasing, other and overdrafts168
 346
 357
 587
Total recoveries3,592
 4,503
 15,148
 10,661
Net loans charged off4,080
 1,058
 14,425
 16,036
Provision for credit losses4,141
 1,000
 8,182
 (500)
Balance of allowance for credit losses at end of period$165,169
 $169,395
 $165,169
 $169,395
        
Net charge-offs to average loans (annualized)0.11% 0.03% 0.14% 0.16%
loan losses is no longer necessary.




The following table presents the components of the allowance for credit losses:
 September 30,
2016		 December 31,
2015
 (dollars in thousands)
Allowance for loan losses$162,526
 $169,054
Reserve for unfunded lending commitments2,643
 2,358
Allowance for credit losses$165,169
 $171,412
    
Allowance for credit losses to loans outstanding1.15% 1.24%
The provision for credit losses for the three months ended September 30, 2016 was $4.1 million, an increase of $3.1 million in comparison to the same period in 2015. For the nine months ended September 30, 2016, the provision for credit losses was $8.2 million, an increase of $8.7 million in comparison to the first nine months of 2015. The increase in the provision for credit losses was attributable to continued loan growth as overall credit metrics were stable to improving.
Net charge-offs increased $3.0 million, to $4.1 million for the third quarter of 2016, compared to $1.1 million for the third quarter of 2015. Gross charge-offs increased by $2.1 million and recoveries decreased by $911,000. Of the $4.1 million of net charge-offs recorded in the third quarter of 2016, the majority were for loans originated in Pennsylvania ($1.9 million), Maryland ($1.6 million) and New Jersey ($737,000) partially offset by net recoveries in Virginia and Delaware.
During the first nine months of 2016, net charge-offs decreased $1.6 million, or 10.0%, to $14.4 million compared to $16.0 million for the same period of 2015. The decrease in net charge-offs was primarily due to an increase in recoveries during the first nine months of 2016 compared to the same period in the prior year. Of the $14.4 million of net charge-offs recorded in the first nine months of 2016, the majority were for loans originated in Pennsylvania ($9.8 million), New Jersey ($4.4 million) and Maryland ($601,000) partially offset by net recoveries in Virginia and Delaware.

The following table summarizes non-performing assets as of the indicated dates:

 September 30, 2016 September 30, 2015 December 31, 2015
 (dollars in thousands)
Non-accrual loans$124,017
 $132,154
 $129,523
Loans 90 days or more past due and still accruing14,095
 12,867
 15,291
Total non-performing loans138,112
 145,021
 144,814
Other real estate owned (OREO)11,981
 10,561
 11,099
Total non-performing assets$150,093
 $155,582
 $155,913
Non-accrual loans to total loans0.86% 0.98% 0.94%
Non-performing assets to total assets0.80% 0.87% 0.87%
Allowance for credit losses to non-performing loans119.59% 116.81% 118.37%






























The following table presents accruingthe activity in the allowance for credit losses:
 Three months ended June 30 Six months ended June 30
 2017 2016 2017 2016
 (dollars in thousands)
Average balance of loans, net of unearned income$15,127,205
 $13,966,024
 $14,993,129
 $13,909,722
        
Balance of allowance for credit losses at beginning of period$172,647
 $166,065
 $171,325
 $171,412
Loans charged off:       
Commercial – industrial, financial and agricultural5,353
 4,625
 10,880
 10,813
Real estate – residential mortgage124
 340
 340
 1,408
Real estate – home equity592
 1,045
 1,290
 2,586
Real estate – commercial mortgage242
 1,474
 1,466
 2,056
Consumer430
 569
 1,286
 1,576
Real estate – construction774
 742
 1,021
 1,068
Leasing, other and overdrafts1,200
 1,951
 1,839
 2,394
Total loans charged off8,715
 10,746
 18,122
 21,901
Recoveries of loans previously charged off:       
Commercial – industrial, financial and agricultural1,974
 2,931
 6,165
 5,250
Real estate – residential mortgage151
 420
 381
 556
Real estate – home equity215
 350
 352
 688
Real estate – commercial mortgage934
 1,367
 1,384
 2,192
Consumer470
 539
 706
 735
Real estate – construction373
 1,563
 921
 1,946
Leasing, other and overdrafts249
 108
 386
 189
Total recoveries4,366
 7,278
 10,295
 11,556
Net loans charged off4,349
 3,468
 7,827
 10,345
Provision for credit losses6,700
 2,511
 11,500
 4,041
Balance of allowance for credit losses at end of period$174,998
 $165,108
 $174,998
 $165,108
        
Net charge-offs to average loans (annualized)0.11% 0.10% 0.10% 0.15%
The following table presents the components of the allowance for credit losses:
 June 30,
2017		 December 31,
2016
 (dollars in thousands)
Allowance for loan losses$172,342
 $168,679
Reserve for unfunded lending commitments2,656
 2,646
Allowance for credit losses$174,998
 $171,325
    
Allowance for credit losses to loans outstanding1.14% 1.17%
The provision for credit losses for the three months ended June 30, 2017 was $6.7 million, an increase of $4.2 million in comparison to the same period in 2016. For the six months ended June 30, 2017, the provision for credit losses was $11.5 million, an increase of $7.5 million in comparison to the first six months of 2016. The increases in the provision for credit losses largely reflected loan growth.
Net charge-offs increased $881,000, to $4.3 million for the second quarter of 2017, compared to $3.5 million for the second quarter of 2016, as a result of a $2.9 million decrease in recoveries which was partially offset by a $2.0 million decrease in gross charge-offs comparing the same two periods. Of the $4.3 million of net charge-offs recorded in the second quarter of 2017, the majority


were for loans originated in Pennsylvania ($4.9 million) and Maryland ($73,000), partially offset by net recoveries in New Jersey, Virginia and Delaware.
For the first six months of 2017, net charge-offs decreased $2.5 million, to $7.8 million compared to $10.3 million for the same period of 2016 as a result of a $3.8 million decrease in gross charge-offs and an $1.3 million decrease in recoveries comparing the same two periods. Of the $7.8 million of net charge-offs recorded in the first six months of 2017, the majority were for loans originated in Pennsylvania ($7.5 million) and New Jersey ($566,000), partially offset by net recoveries in Virginia, Maryland and Delaware.

The following table summarizes non-performing assets as of the indicated dates:
 June 30, 2017 June 30, 2016 December 31, 2016
 (dollars in thousands)
Non-accrual loans$122,600
 $111,742
 $120,133
Loans 90 days or more past due and still accruing13,143
 15,992
 11,505
Total non-performing loans135,743
 127,734
 131,638
Other real estate owned (OREO)11,432
 11,918
 12,815
Total non-performing assets$147,175
 $139,652
 $144,453
Non-accrual loans to total loans0.80% 0.79% 0.82%
Non-performing assets to total assets0.75% 0.76% 0.76%
Allowance for credit losses to non-performing loans128.92% 129.26% 130.15%

The following table presents loans whose terms have been modified under troubled debt restructurings ("TDRs"), by
type, as of the indicated dates:
 June 30, 2017 June 30, 2016 December 31, 2016
 (in thousands)
Real-estate - residential mortgage$26,368
 $27,324
 $27,617
Real-estate - commercial mortgage13,772
 17,808
 15,957
Real estate - home equity12,031
 7,173
 8,594
Commercial8,086
 5,756
 6,627
Construction1,475
 3,086
 726
Consumer33
 18
 39
Total accruing TDRs61,765
 61,165
 59,560
Non-accrual TDRs (1)
29,373
 24,887
 27,850
Total TDRs$91,138
 $86,052
 $87,410
 September 30, 2016 September 30, 2015 December 31, 2015
 (in thousands)
Real estate – residential mortgage$26,854
 $29,330
 $28,511
Real estate – commercial mortgage16,085
 17,282
 17,563
Real estate – construction843
 4,363
 3,942
Commercial – industrial, financial and agricultural7,488
 7,399
 5,953
Real estate – home equity7,668
 3,954
 4,556
Consumer39
 29
 33
Total accruing TDRs58,977
 62,357
 60,558
Non-accrual TDRs (1)
27,904
 27,618
 31,035
Total TDRs$86,881
 $89,975
 $91,593
(1) Included with non-accrual loans in the preceding table.

TDRs modified during the first ninesix months of 20162017 and still outstanding as of SeptemberJune 30, 20162017 totaled $10.3$13.2 million. During the first ninesix months of 2016, $6.02017, $6.3 million of TDRs that were modified in the previous 12 months had a payment default, which the Corporation defines as a single missed scheduled payment, subsequent to modification.


The following table presents the changes in non-accrual loans for the three and ninesix months ended SeptemberJune 30, 2016:2017:
Commercial -
Industrial,
Financial and
Agricultural		 Real Estate -
Commercial
Mortgage		 Real Estate -
Construction		 Real Estate -
Residential
Mortgage		 Real Estate -
Home
Equity		 Consumer Leasing TotalCommercial -
Industrial,
Financial and
Agricultural		 Real Estate -
Commercial
Mortgage		 Real Estate -
Construction		 Real Estate -
Residential
Mortgage		 Real Estate -
Home
Equity		 Consumer Leasing Total
(in thousands)(in thousands)
Three months ended September 30, 2016              
Balance of non-accrual loans at June 30, 2016$35,538
 $35,512
 $9,420
 $20,569
 $10,703
 $—
 $—
 $111,742
Three months ended June 30, 2017Three months ended June 30, 2017              
Balance of non-accrual loans at March 31, 2017$40,818
 $35,803
 $13,485
 $17,807
 $9,351
 $—
 $—
 $117,264
Additions17,267
 9,573
 2,653
 1,371
 1,907
 685
 381
 33,837
16,388
 4,776
 3,691
 484
 1,678
 430
 855
 28,302
Payments(2,913) (1,844) (801) (476) (527) —
 —
 (6,561)(3,763) (7,537) (667) (311) (241) —
 —
 (12,519)
Charge-offs(3,144) (1,350) (150) (802) (709) (685) (381) (7,221)(5,353) (242) (774) (124) (592) (430) (855) (8,370)
Transfers to accrual status(2,525) (2,543) —
 —
 (23) —
 —
 (5,091)—
 —
 —
 (54) (250) —
 —
 (304)
Transfers to OREO(53) (381) (646) (1,281) (328) —
 —
 (2,689)(3) (533) (149) (862) (226) —
 —
 (1,773)
Balance of non-accrual loans at September 30, 2016$44,170
 $38,967
 $10,476
 $19,381
 $11,023
 $—
 $—
 $124,017
Balance of non-accrual loans at June 30, 2017$48,087
 $32,267
 $15,586
 $16,940
 $9,720
 $—
 $—
 $122,600
                              
Nine months ended September 30, 2016              
Balance of non-accrual loans as of December 31, 2015$42,199
 $40,731
 $12,044
 $21,914
 $11,210
 $—
 $1,425
 $129,523
Six months ended June 30, 2017Six months ended June 30, 2017              
Balance of non-accrual loans at December 31, 2016$42,349
 $38,936
 $9,806
 $18,431
 $10,611
 $—
 $—
 $120,133
Additions30,043
 20,367
 6,503
 4,868
 6,962
 2,264
 673
 71,680
24,401
 7,774
 8,747
 1,146
 2,699
 1,286
 1,118
 47,171
Payments(11,132) (10,537) (5,169) (2,222) (1,979) (1) (24) (31,064)(7,780) (10,981) (1,797) (1,250) (658) —
 —
 (22,466)
Charge-offs(13,957) (3,406) (1,218) (2,210) (3,295) (2,261) (2,074) (28,421)(10,880) (1,466) (1,021) (340) (1,290) (1,286) (1,118) (17,401)
Transfers to accrual status(2,525) (5,692) —
 (310) (904) (2) —
 (9,433)—
 (913) —
 (54) (678) —
 —
 (1,645)
Transfers to OREO(458) (2,496) (1,684) (2,659) (971) —
 —
 (8,268)(3) (1,083) (149) (993) (964) —
 —
 (3,192)
Balance of non-accrual loans at September 30, 2016$44,170
 $38,967
 $10,476
 $19,381
 $11,023
 $—
 $—
 $124,017
Balance of non-accrual loans at June 30, 2017$48,087
 $32,267
 $15,586
 $16,940
 $9,720
 $—
 $—
 $122,600

Non-accrual loans decreased $8.1increased $10.9 million, or 6.2%9.7%, and $5.5$2.5 million, or 4.3%2.1%, in comparison to SeptemberJune 30, 20152016 and December 31, 2015,2016, respectively.





The following table summarizes non-performing loans, by type, as of the indicated dates:
September 30, 2016 September 30, 2015 December 31, 2015June 30, 2017 June 30, 2016 December 31, 2016
(in thousands)(in thousands)
Commercial – industrial, financial and agricultural$51,320
 $38,902
 $43,460
Real estate – commercial mortgage$39,631
 $49,021
 $41,170
32,576
 35,704
 39,319
Commercial – industrial, financial and agricultural47,330
 38,032
 44,071
Real estate – residential mortgage23,451
 27,707
 28,484
21,846
 25,030
 23,655
Real estate – construction16,564
 11,879
 9,842
Real estate – home equity14,260
 13,107
 14,683
11,887
 14,173
 13,154
Real estate – construction11,223
 14,989
 12,460
Consumer2,166
 2,079
 2,440
1,269
 1,888
 1,891
Leasing51
 86
 1,506
281
 158
 317
Total non-performing loans$138,112
 $145,021
 $144,814
$135,743
 $127,734
 $131,638

Non-performing loans decreased $6.9increased $8.0 million, or 4.8%6.3%, and $6.7$4.1 million, or 4.6%3.1%, in comparison to SeptemberJune 30, 20152016 and December 31, 2015,2016, respectively. The decrease in non-performingNon-performing loans to total loans was realized across all loan categories except commercial, which increased $9.3 million, or 24.4%, and $3.3 million, or 7.4%,0.88% in comparison to September0.90% at both June 30, 20152016 and December 31, 2015, respectively, and home equity which increased $1.2 million, or 8.8%, in comparison to September 30, 2015.2016.









The following table summarizes the Corporation’s OREO, by property type, as of the indicated dates:
September 30, 2016 September 30, 2015 December 31, 2015June 30, 2017 June 30, 2016 December 31, 2016
(in thousands)(in thousands)
Residential properties$6,279
 $6,934
 $7,303
$5,035
 $6,098
 $7,655
Commercial properties3,050
 1,584
 2,167
3,670
 3,686
 2,651
Undeveloped land2,652
 2,043
 1,629
2,727
 2,134
 2,509
Total OREO$11,981
 $10,561
 $11,099
$11,432
 $11,918
 $12,815

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 rated loans were $10.6$11.4 billion and $10.3$10.9 billion as of SeptemberJune 30, 20162017 and December 31, 2015,2016, respectively. The following table presents internal risk ratings for commercial loans, commercial mortgages and construction loans to commercial borrowers with internal risk ratings of Special Mention (considered criticized loans) or Substandard or lower (considered classified loans), by class segment:
Special Mention Increase (decrease) Substandard or lower Increase (decrease) Total Criticized and Classified LoansSpecial Mention Increase (Decrease) Substandard or lower Increase (Decrease) Total Criticized and Classified Loans
September 30, 2016 December 31, 2015 $ % September 30, 2016 December 31, 2015 $ % September 30, 2016 December 31, 2015June 30, 2017 December 31, 2016 $ % June 30, 2017 December 31, 2016 $ % June 30, 2017 December 31, 2016
(dollars in thousands)(dollars in thousands)
Real estate - commercial mortgage$131,941
 $102,625
 $29,316
 28.6 % $131,214
 $155,442
 $(24,228) (15.6)% $263,155
 $258,067
$119,534
 $132,484
 $(12,950) (9.8)% $137,516
 $122,976
 $14,540
 11.8 % $257,050
 $255,460
Commercial - secured106,701
 92,711
 13,990
 15.1
 121,611
 136,710
 (15,099) (11.0) 228,312
 229,421
119,119
 128,873
 (9,754) (7.6) 169,602
 118,527
 51,075
 43.1
 288,721
 247,400
Commercial -unsecured5,009
 2,761
 2,248
 81.4
 2,904
 3,346
 (442) (13.2) 7,913
 6,107
6,264
 4,481
 1,783
 39.8
 2,545
 3,531
 (986) (27.9) 8,809
 8,012
Total Commercial - industrial, financial and agricultural111,710
 95,472
 16,238
 17.0
 124,515
 140,056
 (15,541) (11.1) 236,225
 235,528
125,383
 133,354
 (7,971) (6.0) 172,147
 122,058
 50,089
 41.0
 297,530
 255,412
Construction - commercial residential15,853
 17,154
 (1,301) (7.6) 14,180
 21,812
 (7,632) (35.0) 30,033
 38,966
9,789
 15,447
 (5,658) (36.6) 16,387
 13,172
 3,215
 24.4
 26,176
 28,619
Construction - commercial2,530
 3,684
 (1,154) (31.3) 5,048
 3,597
 1,451
 40.3
 7,578
 7,281
4,727
 3,412
 1,315
 38.5
 5,220
 5,115
 105
 2.1
 9,947
 8,527
Total real estate - construction (excluding construction - other)18,383
 20,838
 (2,455) (11.8) 19,228
 25,409
 (6,181) (24.3) 37,611
 46,247
14,516
 18,859
 (4,343) (23.0) 21,607
 18,287
 3,320
 18.2
 36,123
 37,146
Total$262,034
 $218,935
 $43,099
 19.7 % $274,957
 $320,907
 $(45,950) (14.3)% $536,991
 $539,842
$259,433
 $284,697
 $(25,264) (8.9)% $331,270
 $263,321
 $67,949
 25.8 % $590,703
 $548,018
                                      
% of total risk rated loans2.4% 2.1%     2.6% 3.1%     5.0% 5.2%2.3% 2.6%     2.9% 2.4%     5.2% 5.0%















The following table summarizes loan delinquency rates, by type, as of the dates indicated:
September 30, 2016 September 30, 2015 December 31, 2015June 30, 2017 June 30, 2016 December 31, 2016
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% 0.69% 0.87% 0.16% 0.92% 1.08% 0.14% 0.77% 0.91%0.14% 0.52% 0.66% 0.18% 0.63% 0.81% 0.13% 0.65% 0.78%
Commercial – industrial, financial and agricultural0.31% 1.17% 1.48% 0.35% 0.97% 1.32% 0.21% 1.06% 1.27%0.22% 1.21% 1.43% 0.30% 0.95% 1.25% 0.25% 1.06% 1.31%
Real estate – construction0.31% 1.30% 1.61% 0.30% 1.95% 2.25% 0.28% 1.59% 1.87%0.06% 1.76% 1.82% 0.54% 1.39% 1.93% 0.12% 1.17% 1.29%
Real estate – residential mortgage1.15% 1.52% 2.67% 1.27% 2.00% 3.27% 1.33% 2.07% 3.40%0.89% 1.22% 2.11% 0.97% 1.73% 2.70% 1.27% 1.48% 2.75%
Real estate – home equity0.64% 0.87% 1.51% 0.54% 0.77% 1.31% 0.53% 0.87% 1.40%0.65% 0.75% 1.40% 0.61% 0.86% 1.47% 0.57% 0.81% 1.38%
Consumer, leasing and other1.18% 0.44% 1.62% 1.30% 0.51% 1.81% 1.36% 0.92% 2.28%0.37% 0.11% 0.48% 1.03% 0.43% 1.46% 1.23% 0.42% 1.65%
Total0.42% 0.96% 1.38% 0.42% 1.07% 1.49% 0.37% 1.04% 1.41%0.32% 0.88% 1.20% 0.39% 0.91% 1.30% 0.38% 0.89% 1.27%
Total dollars (in thousands)$59,822
 $138,112
 $197,934
 $56,694
 $145,021
 $201,715
 $51,927
 $144,814
 $196,741
$49,532
 $135,743
 $185,275
 $55,744
 $127,734
 $183,478
 $55,149
 $131,638
 $186,787
 
(1)Includes non-accrual loans.
Management believes that the allowance for credit losses of $165.2$175.0 million as of SeptemberJune 30, 20162017 is sufficient to cover incurred losses in the loan and lease portfolio and unfunded lending commitments as of that date and is appropriate based on applicable accounting standards.
Other Assets and Other Liabilities

The $68.6 million, or 11.6%, increase in other assets and the $96.5 million, or 32.9%, increase in other liabilities were primarily driven by higher fair values for derivative financial instruments, mainly commercial loan interest rate swaps. See Note 9, "Derivative Financial Instruments," in the Notes to Consolidated Financial Statements for additional details.



U.S. GAAP.

Deposits and Borrowings

The following table presents ending deposits, by type:type, as of the dates indicated:
    Increase (Decrease)    Increase (Decrease)
September 30, 2016 December 31, 2015 $ %June 30, 2017 December 31, 2016 $ %
(dollars in thousands)(dollars in thousands)
Noninterest-bearing demand$4,210,099
 $3,948,114
 $261,985
 6.6 %$4,574,619
 $4,376,137
 $198,482
 4.5 %
Interest-bearing demand3,703,048
 3,451,207
 251,841
 7.3
3,650,204
 3,703,712
 (53,508) (1.4)
Savings4,235,015
 3,868,046
 366,969
 9.5
Savings and money market accounts4,386,128
 4,179,773
 206,355
 4.9
Total demand and savings12,148,162
 11,267,367
 880,795
 7.8
12,610,951
 12,259,622
 351,329
 2.9
Time deposits2,804,317
 2,864,950
 (60,633) (2.1)2,746,410
 2,753,242
 (6,832) (0.2)
Total deposits$14,952,479
 $14,132,317
 $820,162
 5.8 %$15,357,361
 $15,012,864
 $344,497
 2.3 %

Noninterest-bearing demand deposits increased $262.0$198.5 million, or 6.6%4.5%, primarily as a result of increases in business account balances of $234.9$187.6 million, or 7.9%5.7%, and personal account balances of $36.1 million, or 4.1%, partially offset by a decrease in municipal account balances of $27.0$30.0 million, or 29.4%,19.8%.

Interest-bearing demand accounts decreased $53.5 million, due to seasonality.a $79.5 million, or 6.1%, seasonal decrease in municipal account balances, which was partially offset by a $24.2 million, or 1.2%, increase in personal account balances.

The $367.0$206.4 million, or 4.9%, increase in savings and money market account balances was primarily due to a $265.9 million, or 9.5%, increase in savings account balances was due to a $298.9 million, or 12.0%, increase in personal account balances, partially offset by a $37.9$64.9 million, or 6.6%, increase in municipal account balances due to seasonality, and a $30.2 million, or 6.6%, increase in business account balances. Interest-bearing demand accounts increased $251.8 million, or 7.3%, primarily due to a $294.4 million, or 23.2%11.3%, seasonal increasedecrease in municipal account balances.












The following table summarizespresents ending short-term borrowings and long-term debt by type, as of the changes in ending borrowings, by type:dates indicated:
  Increase (Decrease)  Increase (Decrease)
September 30, 2016 December 31, 2015 $ %June 30, 2017 December 31, 2016 $ %
(dollars in thousands)(dollars in thousands)
Short-term borrowings:              
Customer repurchase agreements$189,727
 $111,496
 $78,231
 70.2 %$174,224
 $195,734
 $(21,510) (11.0)%
Customer short-term promissory notes65,871
 78,932
 (13,061) (16.5)74,366
 67,013
 7,353
 11.0
Total short-term customer funding255,598
 190,428
 65,170
 34.2
248,590
 262,747
 (14,157) (5.4)
Federal funds purchased8,444
 197,235
 (188,791) (95.7)206,269
 278,570
 (72,301) (26.0)
Short-term FHLB advances (1)
—
 110,000
 (110,000) (100.0)240,000
 —
 240,000
 N/M
Total short-term borrowings264,042
 497,663
 (233,621) (46.9)694,859
 541,317
 153,542
 28.4
Long-term debt:              
FHLB advances603,271
 587,756
 15,515
 2.6
652,177
 567,240
 84,937
 15.0
Other long-term debt362,015
 361,786
 229
 0.1
385,784
 362,163
 23,621
 6.5
Total long-term debt965,286
 949,542
 15,744
 1.7
1,037,961
 929,403
 108,558
 11.7
Total borrowings$1,229,328
 $1,447,205
 $(217,877) (15.1)%$1,732,820
 $1,470,720
 $262,100
 17.8 %
              
N/M - Not meaningful
(1) Represents FHLB advances with an original maturity term of less than one year.

The $233.6Total borrowings increased $262.1 million, or 46.9%17.8%, decreaseas a result of a $153.5 million, or 28.4%, increase in total short-term borrowings resulted fromand a $108.6 million, or 11.7%, increase in long-term debt. These increases were primarily the result of additional short-term and long-term FHLB advances used to help fund loan growth as deposit growth exceeding loan growth duringlagged. The increase in other long-term debt was primarily the first nine monthsresult of 2016.the issuance of $125.0 million of senior notes in March 2017, offset by the repayment of the $100.0 million of 10-year subordinated notes, which matured on May 1, 2017, as discussed in the "Results of Operations."

Shareholders' Equity

Total shareholders’ equity increased $87.5$70.7 million, or 4.3%3.3%, during the first ninesix months of 2016.2017. The increase was due primarily to $119.5$88.8 million of net income, $4.9 million of stock issued and a $26.5$13.6 million increase in other comprehensive income, partially offset by $50.2$38.4 million of common stock dividendsdividends.

In November 2016, 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. As of June 30, 2017, 1.5 million shares were repurchased under this program for a total cost of $18.5 million, in treasuryor $12.48 per share. Up to an additional $31.5 million of the Corporation's common stock purchases.


may be repurchased under this program through December 31, 2017.

Regulatory Capital

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

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





The U.S. Basel III Capital Rules require the Corporation and its bank subsidiaries to:
Meet a new minimum Common Equity Tier 1 capital ratio of 4.50% of risk-weighted assets and a Tier 1 capital ratio of 6.00% of risk-weighted assets;
Continue to require the currenta minimum Total capital ratio of 8.00% of risk-weighted assets and thea minimum Tier 1 leverage capital ratio of 4.00% of average assets; and
Comply with a revised definition of capital to improve the ability of regulatory capital instruments to absorb losses. Certain non-qualifying capital instruments, including cumulative preferred stock and TruPS, are beingtrust 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 weights for a variety of asset categories.

As of SeptemberJune 30, 2016,2017, 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 SeptemberJune 30, 2016,2017, the Corporation's capital levels also met the fully-phased in minimum capital requirements, including the capital conservation buffers, as prescribed in the U.S. Basel III Capital Rules.

The following table summarizes the Corporation’s capital ratios in comparison to regulatory requirements:
September 30, 2016 December 31, 2015 Regulatory
Minimum
for Capital
Adequacy		 Fully Phased-in, with Capital Conservation BuffersJune 30, 2017 December 31, 2016 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%12.9% 13.2% 8.0% 10.5%
Tier I Capital (to Risk-Weighted Assets)10.4% 10.2% 6.0% 8.5%10.2% 10.4% 6.0% 8.5%
Common Equity Tier I (to Risk-Weighted Assets)10.4% 10.2% 4.5% 7.0%10.2% 10.4% 4.5% 7.0%
Tier I Capital (to Average Assets)9.1% 9.0% 4.0% 4.0%9.1% 9.0% 4.0% 4.0%




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)("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 on net interest income as of SeptemberJune 30, 20162017 (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+ $84.5$102.5 million 15.4%16.5%
+200 bp+ $56.8$70.1 million 10.3%11.3%
+100 bp+ $26.3$35.6 million 4.8%5.7%
–100 bp– $18.5$52.3 million – 3.4%8.4%

(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 SeptemberJune 30, 2016,2017, 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 that are recorded at their fair value in other assets and liabilities on the consolidated balance sheets. Changes in fair value during the period are recorded in other non-interest expense on the consolidated statements of income.

Liquidity

The Corporation must maintain a sufficient level of liquid assets to meet the cash needs of its customers, who, as depositors, may want to withdraw funds or who, as borrowers, need credit availability. Liquidity is provided on a continuous basis through scheduled and unscheduled principal and interest payments on investments and outstanding loans and through the availability of deposits and borrowings. The Corporation also maintains secondary sources that provide liquidity on a secured and unsecured basis to meet short-term and long-term needs. In addition, the Corporation has filed a shelf registration statement with the Securities and Exchange Commission (SEC) 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, 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 Federal Home Loan BankFHLB 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 SeptemberJune 30, 2016,2017, the Corporation had $603.3$892.2 million of advances outstanding from the FHLB with an additional borrowing capacity of approximately $2.6$3.0 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 SeptemberJune 30, 2016,2017, the Corporation had aggregate availability under federal funds lines of $1.1 billion$932.0 million with $8.4$206.3 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 SeptemberJune 30, 2016,2017, the Corporation had $1.3 billion$933.1 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 adequately capitalized and to meet its cash needs.

The Corporation’s sources and uses of funds were discussed in general terms in the net interest income"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 ninesix months of 20162017 generated $143.8$75.0 million of cash, mainly due to net income. Cash used in investing activities was $698.8$673.3 million, mainly due to net increases in loans and short-term investments. Net cash provided by financing activities was $540.3$574.5 million due mainly to increases in deposits, partially offset by a decrease inlong-term debt and short-term borrowings and cash dividends.borrowings.

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 SeptemberJune 30, 2016,2017, equity investments consisted of $21.6$20.5 million of common stocks of publicly traded financial institutions and $901,000$1.0 million of other equity investments.



The equity investments most susceptible to equity market price risk are the financial institutions stocks, which had a cost basis of approximately $13.4$9.7 million and aan estimated fair value of $21.6$20.5 million at SeptemberJune 30, 2016,2017, including an investment in a single financial institution with a cost basis of $7.4$4.3 million and aan estimated fair value of $11.4$8.8 million. The fair value of this investment accounted for 52.7%42.9% 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 $8.3$10.8 million as of SeptemberJune 30, 2016.2017.

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.

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 SeptemberJune 30, 2016,2017, the Corporation owned $401.6 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. MunicipalState 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 SeptemberJune 30, 2016,2017, approximately 98% of state or municipal securities were supported by the general obligation of corresponding states or municipalities. Approximately 62%60% of these securities were school district issuances, which are also supported by the states of the issuing municipalities.

Auction Rate Securities

As of SeptemberJune 30, 2016,2017, the Corporation’s investments in student loan auction rate certificates (ARC)("ARCs"), a type of auction rate securities,security, had a cost basis of $107.1$107.4 million and a fair value of $97.7$97.9 million.

ARCs are long-term securities that were structured to allow their sale in periodic auctions, resulting in both the treatmentAs of ARCs as short-term instruments in normal market conditions and fair values that could be derived based on periodic auction prices. However, beginning in 2008, market auctions for these securities began to fail due to an insufficient number of buyers, resulting in an illiquid market. Therefore, as of SeptemberJune 30, 2016,2017, the fair values of the ARCs currently in the portfolio were derived using significant unobservable inputs based on an expected cash flows model which produced fair values that were materially different from those that would be expected from settlement of these investments in the current market. The expected cash flows model produced fair values which assumed a return to market liquidity sometime in the next five years. The Corporation believes that the trusts underlying the ARCs will self-liquidate as student loans are repaid.

The credit quality of the underlying debt associated with the ARCs is also a factor in the determination of their estimated fair value. As of SeptemberJune 30, 2016,2017, 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 SeptemberJune 30, 2016,2017, 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 and senior debt.institutions. As of SeptemberJune 30, 2016,2017, these securities had an amortized cost of $109.5$88.9 million and an estimated fair value of $107.2$89.0 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 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, 20152016 and in Part II, Item 1A of the Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 2016..



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

The following table presents
(a)  None. 
(b)  None.
(c)  There were no purchases of equity securities by the Corporation's monthly repurchases of its common stockissuer or any affiliated purchasers during the third quarter of 2016:three months ended June 30, 2017.

Period Total Number of Shares Purchased Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Approximate Dollar Value that May Yet Be Purchased Under the Plans or Programs
         
July 1, 2016 to July 31, 2016 176,161
 $13.00
 176,161
 $31,455,430
August 1, 2016 to August 31, 2016 —
 —
 —
 31,455,430
September 1, 2016 to September 30, 2016 —
 —
 —
 31,455,430

In October, 2015, the Corporation announced that its board of directors had approved a share repurchase program pursuant to which the Corporation is authorized to repurchase up to $50.0 million of its outstanding shares of common stock, or approximately 2.3% of its outstanding shares, through December 31, 2016. Repurchased shares may be added to treasury stock, at cost. As permitted by securities laws and other legal requirements and subject to market conditions and other factors, purchases may be made from time to time in open market or privately negotiated transactions, including without limitation, through accelerated share repurchase transactions. The share repurchase program may be discontinued at any time. During 2016, 1.5 million shares have been repurchased under this program for a total cost of $18.5 million, or $12.48 per share.

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

Item 3. Defaults Upon Senior Securities
Not applicable.

Item 4. Mine Safety Disclosures
Not applicable.

Item 5. Other Information
Not applicable.

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




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: NovemberAugust 4, 20162017 /s/ E. Philip Wenger
    E. Philip Wenger
    Chairman, Chief Executive Officer and President
     
Date: NovemberAugust 4, 20162017 /s/ Patrick S. BarrettPhilmer H. Rohrbaugh
    Patrick S. BarrettPhilmer H. Rohrbaugh
    Senior Executive Vice President, andChief Operating Officer
    and Chief Financial Officer



EXHIBIT INDEX
Exhibits Required Pursuant
to Item 601 of Regulation S-K
 
    
3.1  Articles of Incorporation, as amended and restated, of Fulton Financial Corporation– Incorporated by reference to Exhibit 3.1 of the Fulton Financial Corporation Current Report on Form 8-K dated June 24, 2011. (File No. 0-10587)
    
3.2  Bylaws of Fulton Financial Corporation as amended – Incorporated by reference to Exhibit 3.1 of the Fulton Financial Corporation Current Report on an Amended Form 8-K dated September 23, 2014.
10.1Agreement between Fulton Financial Corporation and Fiserv Solutions, Inc. dated July 11, 2016. Portions of this exhibit have been redacted and are subject to a confidential treatment request filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. The redacted material was filed separately with the Securities and Exchange Commission.
    
31.1  Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
    
31.2  Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
    
32.1  Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
    
32.2  Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
    
101 
Financial statements from the Quarterly Report on Form 10-Q of Fulton Financial Corporation for the period ended SeptemberJune 30, 2016,2017, filed on NovemberAugust 4, 2016,2017, 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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