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

FORM 10-Q

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

For the quarterly period ended March 31,September 30, 2017, or

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

For the transition period from             to              

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

(717) 291-2411
(Registrant’s telephone number, including area code)
 
Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting companycompany. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý  Accelerated filer ¨
Non-accelerated filer ¨  Smaller reporting company ¨
    Emerging growth company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.¨

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
Common Stock, $2.50 Par Value –174,816,000–175,122,000 shares outstanding as of April 28,October 27, 2017.


FULTON FINANCIAL CORPORATION
FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED MARCH 31,SEPTEMBER 30, 2017
INDEX
 
DescriptionPage
   
PART I. FINANCIAL INFORMATION 
   
Item 1. Financial Statements (Unaudited):
 
   
(a)
Consolidated Balance Sheets - March 31,September 30, 2017 and December 31, 2016
3
   
(b)
Consolidated Statements of Income - Three and nine months ended March 31,September 30, 2017 and 2016
4
   
(c)
Consolidated Statements of Comprehensive Income - Three and nine months ended March 31,September 30, 2017 and 2016 
5
   
(d)
Consolidated Statements of Shareholders’ Equity - ThreeNine months ended March 31,September 30, 2017 and 2016 
6
   
(e)
Consolidated Statements of Cash Flows - ThreeNine months ended March 31,September 30, 2017 and 2016 
7
   
(f)
Notes to Consolidated Financial Statements
8
   
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
3841
   
Item 3. Quantitative and Qualitative Disclosures about Market Risk
5867
   
Item 4. Controls and Procedures
6270
   
PART II. OTHER INFORMATION
 
   
Item 1. Legal Proceedings
6371
   
Item 1A. Risk Factors
6371
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
6371
   
Item 3. Defaults Upon Senior Securities - (not applicable)
 
   
Item 4. Mine Safety Disclosures - (not applicable) 
   
Item 5. Other Information - (none to be reported)
 
   
Item 6. Exhibits
6371
   
Signatures
64
Exhibit Index
6572
   





Item 1. Financial Statements
 

CONSOLIDATED BALANCE SHEETS 
 
(in thousands, except per-share data)
March 31,
2017		 December 31,
2016		September 30,
2017		 December 31,
2016
(unaudited) (unaudited) 
ASSETS      
Cash and due from banks$93,844
 $118,763
$99,803
 $118,763
Interest-bearing deposits with other banks284,750
 233,763
582,845
 233,763
Federal Reserve Bank and Federal Home Loan Bank stock65,637
 57,489
62,951
 57,489
Loans held for sale24,783
 28,697
23,049
 28,697
Available for sale investment securities2,506,017
 2,559,227
2,561,516
 2,559,227
Loans, net of unearned income14,963,177
 14,699,272
15,486,899
 14,699,272
Less: Allowance for loan losses(170,076) (168,679)(172,245) (168,679)
Net Loans14,793,101
 14,530,593
15,314,654
 14,530,593
Premises and equipment216,171
 217,806
221,551
 217,806
Accrued interest receivable46,355
 46,294
50,082
 46,294
Goodwill and intangible assets531,556
 531,556
531,556
 531,556
Other assets616,362
 620,059
614,853
 620,059
Total Assets$19,178,576
 $18,944,247
$20,062,860
 $18,944,247
LIABILITIES      
Deposits:      
Noninterest-bearing$4,417,733
 $4,376,137
$4,363,915
 $4,376,137
Interest-bearing10,672,611
 10,636,727
11,777,865
 10,636,727
Total Deposits15,090,344
 15,012,864
16,141,780
 15,012,864
Short-term borrowings:      
Federal funds purchased54,421
 278,570
5,812
 278,570
Other short-term borrowings398,896
 262,747
292,939
 262,747
Total Short-Term Borrowings453,317
 541,317
298,751
 541,317
Accrued interest payable12,506
 9,632
10,568
 9,632
Other liabilities329,817
 329,916
347,816
 329,916
Federal Home Loan Bank advances and long-term debt1,137,909
 929,403
Federal Home Loan Bank advances and other long-term debt1,038,159
 929,403
Total Liabilities17,023,893
 16,823,132
17,837,074
 16,823,132
SHAREHOLDERS’ EQUITY      
Common stock, $2.50 par value, 600 million shares authorized, 220.1 million shares issued in 2017 and 219.9 million shares issued in 2016550,292
 549,707
Common stock, $2.50 par value, 600 million shares authorized, 220.9 million shares issued in 2017 and 219.9 million shares issued in 2016552,153
 549,707
Additional paid-in capital1,471,601
 1,467,602
1,476,150
 1,467,602
Retained earnings756,305
 732,099
812,148
 732,099
Accumulated other comprehensive loss(34,552) (38,449)(24,203) (38,449)
Treasury stock, at cost, 45.8 million shares in 2017 and 2016(588,963) (589,844)(590,462) (589,844)
Total Shareholders’ Equity2,154,683
 2,121,115
2,225,786
 2,121,115
Total Liabilities and Shareholders’ Equity$19,178,576
 $18,944,247
$20,062,860
 $18,944,247
      
See Notes to Consolidated Financial Statements      
 


CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
 
(in thousands, except per-share data)Three months ended March 31Three months ended September 30 Nine months ended September 30
2017 20162017 2016 2017 2016
INTEREST INCOME          
Loans, including fees$142,566
 $134,079
$155,152
 $136,639
 $446,158
 $405,361
Investment securities:          
Taxable11,914
 12,003
11,423
 10,874
 34,811
 34,036
Tax-exempt2,849
 2,040
2,920
 2,550
 8,625
 6,910
Dividends129
 160
105
 143
 343
 438
Loans held for sale187
 131
243
 210
 631
 529
Other interest income842
 898
1,667
 1,052
 3,311
 2,814
Total Interest Income158,487
 149,311
171,510
 151,468
 493,879
 450,088
INTEREST EXPENSE          
Deposits11,801
 10,727
16,023
 11,311
 40,709
 32,925
Short-term borrowings855
 268
578
 254
 2,407
 739
Long-term debt8,252
 9,262
Federal Home Loan Bank advances and other long-term debt8,100
 9,338
 24,812
 27,889
Total Interest Expense20,908
 20,257
24,701
 20,903
 67,928
 61,553
Net Interest Income137,579
 129,054
146,809
 130,565
 425,951
 388,535
Provision for credit losses4,800
 1,530
5,075
 4,141
 16,575
 8,182
Net Interest Income After Provision for Credit Losses132,779
 127,524
141,734
 126,424
 409,376
 380,353
NON-INTEREST INCOME          
Service charges on deposit accounts13,022
 13,078
 38,336
 38,532
Other service charges and fees12,437
 10,750
12,251
 14,407
 39,030
 38,140
Service charges on deposit accounts12,400
 12,558
Investment management and trust services11,808
 10,988
12,157
 11,425
 36,097
 33,660
Mortgage banking income4,596
 4,030
4,805
 4,529
 15,542
 12,456
Investment securities gains, net1,106
 947
4,597
 2
 7,139
 1,025
Other4,326
 3,864
5,142
 4,708
 14,874
 13,610
Total Non-Interest Income46,673
 43,137
51,974
 48,149
 151,018
 137,423
NON-INTEREST EXPENSE          
Salaries and employee benefits69,236
 69,372
72,894
 70,696
 216,626
 210,097
Net occupancy expense12,663
 12,220
12,180
 11,782
 37,159
 35,813
Data processing and software10,301
 8,727
 28,334
 27,477
Other outside services5,546
 6,056
6,582
 5,783
 19,836
 17,347
Software4,693
 3,921
Data processing4,286
 5,400
Amortization of tax credit investments3,503
 —
 7,652
 —
Professional fees3,388
 2,535
 9,056
 8,221
Equipment expense3,359
 3,371
3,298
 3,137
 9,691
 9,380
Professional fees2,737
 2,333
FDIC insurance expense2,058
 2,949
3,007
 1,791
 7,431
 7,700
Marketing1,986
 1,624
2,089
 1,774
 6,309
 5,314
Other15,711
 13,167
14,915
 13,623
 45,033
 40,549
Total Non-Interest Expense122,275
 120,413
132,157
 119,848
 387,127
 361,898
Income Before Income Taxes57,177
 50,248
61,551
 54,725
 173,267
 155,878
Income taxes13,797
 11,991
12,646
 13,257
 35,515
 36,403
Net Income$43,380
 $38,257
$48,905
 $41,468
 $137,752
 $119,475
          
PER SHARE:          
Net Income (Basic)$0.25
 $0.22
$0.28
 $0.24
 $0.79
 $0.69
Net Income (Diluted)0.25
 0.22
0.28
 0.24
 0.78
 0.69
Cash Dividends0.11
 0.09
0.11
 0.10
 0.33
 0.29
See Notes to Consolidated Financial Statements          



CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
 
(in thousands)
Three months ended March 31Three months ended September 30 Nine months ended September 30
2017 20162017 2016 2017 2016
  
Net Income$43,380
 $38,257
$48,905
 $41,468
 $137,752
 $119,475
Other Comprehensive Income, net of tax:   
Unrealized gain on securities4,273
 17,026
Other Comprehensive Income (Loss), net of tax:       
Unrealized gain (loss) on securities3,320
 (3,580) 17,861
 26,285
Reclassification adjustment for securities gains included in net income(719) (616)(2,988) (1) (4,639) (666)
Amortization of unrealized loss on derivative financial instruments—
 4
—
 4
 —
 12
Amortization of net unrecognized pension and postretirement items343
 466
340
 379
 1,024
 877
Other Comprehensive Income3,897
 16,880
Other Comprehensive Income (Loss)672
 (3,198) 14,246
 26,508
Total Comprehensive Income$47,277
 $55,137
$49,577
 $38,270
 $151,998
 $145,983
          
See Notes to Consolidated Financial Statements          




CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)
THREENINE MONTHS ENDED MARCH 31,SEPTEMBER 30, 2017 AND 2016
 
(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, 2016174,040
 $549,707
 $1,467,602
 $732,099
 $(38,449) $(589,844) $2,121,115
174,040
 $549,707
 $1,467,602
 $732,099
 $(38,449) $(589,844) $2,121,115
Net income
 
 
 43,380
 
 
 43,380

 
 
 137,752
 
 
 137,752
Other comprehensive income
 
 
 
 3,897
 
 3,897

 
 
 
 14,246
 
 14,246
Stock issued303
 585
 3,265
 
 
 881
 4,731
1,017
 2,446
 5,209
 
 
 (618) 7,037
Stock-based compensation awards
 
 734
 
 
 
 734

 
 3,339
 
 
 
 3,339
Common stock cash dividends - $0.11 per share
 
 
 (19,174) 
 
 (19,174)
Balance at March 31, 2017174,343
 $550,292
 $1,471,601
 $756,305
 $(34,552) $(588,963) $2,154,683
Common stock cash dividends - $0.33 per share
 
 
 (57,703) 
 
 (57,703)
Balance at September 30, 2017175,057
 $552,153
 $1,476,150
 $812,148
 $(24,203) $(590,462) $2,225,786
                          
Balance at December 31, 2015174,176
 $547,141
 $1,450,690
 $641,588
 $(22,017) $(575,508) $2,041,894
174,176
 $547,141
 $1,450,690
 $641,588
 $(22,017) $(575,508) $2,041,894
Net income
 
 
 38,257
 
 
 38,257

 
 
 119,475
 
 
 119,475
Other comprehensive loss
 
 
 
 16,880
 
 16,880
Other comprehensive income
 
 
 
 26,508
 
 26,508
Stock issued, including related tax benefits134
 121
 345
 
 
 1,181
 1,647
454
 594
 2,099
 
 
 2,833
 5,526
Stock-based compensation awards
 
 1,436
 
 
 
 1,436

 
 4,808
 
 
 
 4,808
Acquisition of treasury stock(917)         (11,196) (11,196)(1,486)         (18,545) (18,545)
Common stock cash dividends - $0.09 per share
 
 
 (15,609) 
 
 (15,609)
Balance at March 31, 2016173,393
 $547,262
 $1,452,471
 $664,236
 $(5,137) $(585,523) $2,073,309
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
                          
See Notes to Consolidated Financial Statements                          
 


CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
(in thousands)
Three months ended March 31Nine months ended September 30
2017 20162017 2016
CASH FLOWS FROM OPERATING ACTIVITIES:      
Net Income$43,380
 $38,257
$137,752
 $119,475
Adjustments to reconcile net income to net cash provided by operating activities:      
Provision for credit losses4,800
 1,530
16,575
 8,182
Depreciation and amortization of premises and equipment7,032
 6,949
21,013
 20,547
Net amortization of investment securities premiums2,416
 2,055
7,412
 7,434
Investment securities gains, net(1,106) (947)(7,139) (1,025)
Gain on sales of mortgage loans held for sale(3,074) (2,670)(10,122) (11,967)
Proceeds from sales of mortgage loans held for sale115,417
 114,255
470,927
 493,457
Originations of mortgage loans held for sale(108,429) (114,418)(455,157) (492,440)
Amortization of issuance costs on long-term debt168
 154
618
 347
Stock-based compensation734
 1,436
3,339
 4,808
Excess tax benefits from stock-based compensation—
 (10)—
 (58)
Increase in accrued interest receivable(61) (1,612)(3,788) (833)
Decreases (increase) in other assets4,614
 (4,469)
Decrease (increase) in other assets38,108
 (9,075)
Increase in accrued interest payable2,874
 2,843
936
 2,921
Decrease in other liabilities(4,244) (9,245)
(Decrease) increase in other liabilities(26,027) 2,061
Total adjustments21,141
 (4,149)56,695
 24,359
Net cash provided by operating activities64,521
 34,108
194,447
 143,834
CASH FLOWS FROM INVESTING ACTIVITIES:      
Proceeds from sales of securities available for sale8,735
 46,541
44,485
 84,978
Proceeds from principal repayments and maturities of securities available for sale98,024
 117,221
321,088
 426,932
Purchase of securities available for sale(49,430) (169,436)(344,569) (484,164)
Increase in short-term investments(59,135) (115,544)(354,544) (136,450)
Net increase in loans(267,383) (38,976)(800,778) (567,061)
Net purchases of premises and equipment(5,397) (9,471)(24,758) (23,021)
Net cash used in investing activities(274,586) (169,665)(1,159,076) (698,786)
CASH FLOWS FROM FINANCING ACTIVITIES:      
Net increase in demand and savings deposits112,348
 269,899
1,014,697
 880,795
Net (decrease) increase in time deposits(34,868) 2,064
Net increase (decrease) in time deposits114,219
 (60,633)
Decrease in short-term borrowings(88,000) (144,780)(242,566) (233,621)
Additions to long-term debt223,375
 16,000
223,251
 16,000
Repayments of long-term debt(15,037) (42)(115,114) (603)
Net proceeds from issuance of common stock4,731
 1,637
7,037
 5,468
Excess tax benefits from stock-based compensation—
 10
—
 58
Dividends paid(17,403) (15,676)(55,855) (48,590)
Acquisition of treasury stock—
 (11,196)—
 (18,545)
Net cash provided by financing activities185,146
 117,916
945,669
 540,329
Net Decrease in Cash and Due From Banks(24,919) (17,641)(18,960) (14,623)
Cash and Due From Banks at Beginning of Period118,763
 101,120
118,763
 101,120
Cash and Due From Banks at End of Period$93,844
 $83,479
$99,803
 $86,497
Supplemental Disclosures of Cash Flow Information:      
Cash paid during the period for:      
Interest$18,034
 $17,414
$66,992
 $58,632
Income taxes116
 3,972
7,881
 9,404
See Notes to Consolidated Financial Statements      
 


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

The accompanying unaudited consolidated financial statements of Fulton Financial Corporation (the "Corporation") have been prepared in conformity with U.S. generally accepted accounting principles ("U.S. GAAP") for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the amounts of assets and liabilities as of the date of the financial statements as well as revenues and expenses during the period. Actual results could differ from those estimates. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company'sCorporation's Annual Report on Form 10-K for the year ended December 31, 2016. Operating results for the threenine months ended March 31,September 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. The Corporation evaluates subsequent events through the date of filing of this Form 10-Q with the Securities and Exchange Commission ("SEC").

Recently Adopted Accounting Standards

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

Recently Issued Accounting Standards

In May 2014, the FASB issued ASC Update 2014-09, "Revenue from Contracts with Customers." This standards update 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, theThe FASB has issued amendments to this standard (ASC Updates 2016-08, 2016-10, 2016-11, 2016-12 and 2016-12)2017-13). 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 evaluatinghas evaluated the impact of the adoption of ASC Update 2014-09 on its consolidated financial statements and has not identified any significant changes in the timing of revenue recognition as a result of this amended guidance at this time. In addition, the Corporation is evaluating the expanded disclosure requirements included in the update. The Corporation plans to adopt this update on January 1, 2018 under the modified retrospective approach and does not expect the adoption of ASC Update 2014-09 to have a material impact 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.Thiselected. 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. In September of 2017, the FASB issued clarifying guidance to this standard (ASC Update 2017-13). For public business entities, ASC Update 2016-02 is effective for interim and annual reporting periods beginning after December 15, 2018. ASC Update 2016-02 mandates a modified retrospective transition for all entities, which requires restatement of all comparative periods in the year of adoption.


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


of operating leases on the consolidated balance sheet is expected to be the most significant impact of the adoption of this standards update.

In June 2016, the FASB issued ASC Update 2016-13, "Financial Instruments - Credit Losses." The new impairment model prescribed by this standards update is a single impairment model for all financial assets (i.e., loans and investments). The recognition of credit losses would be based on an entity’s current estimate of expected losses (referred to as the Current Expected Credit Loss model, or "CECL"), as opposed to recognition of losses only when they are probable under current U.S. GAAP. ASC Update 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019. Early adoption is permitted. The Corporation intends to adopt this standards update effective with its March 31, 2020 quarterly report on Form 10-Q. The Corporation is currently evaluating the impact of the adoption of ASC Update 2016-13 on its consolidated financial statements.

In August 2016, the FASB issued ASC Update 2016-15, "Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments." This standards update provides guidance regarding the presentation of certain cash receipts and cash payments in the statement of cash flows, addressing eight specific cash flow classification issues, in order to reduce existing diversity in practice. ASC Update 2016-15 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 update requires companies to include amounts generally described as restricted cash and restricted cash equivalents, along with cash and cash equivalents, when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. It also requires an entity to disclose the nature of the restrictions on cash and cash equivalents. ASC Update 2016-18 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 ofdoes not expect the adoption of ASC Update 2017-07 to have a material impact 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 2016 consolidated financial statements and notes have been reclassified to conform to the 2017 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 March 31Three months ended September 30 Nine months ended September 30
2017 20162017 2016 2017 2016
(in thousands)(in thousands)
Weighted average shares outstanding (basic)174,150
 173,331
174,991
 173,020
 174,582
 173,248
Impact of common stock equivalents1,427
 1,085
1,225
 1,044
 1,194
 1,017
Weighted average shares outstanding (diluted)175,577
 174,416
176,216
 174,064
 175,776
 174,265
For the three and nine months ended March 31,September 30, 2016, 885,000447,000 and 712,000 stock options, respectively, were excluded from the diluted net income per share computation as their effect would have been anti-dilutive. There were no stock options excluded for the three and nine months ended March 31,September 30, 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 March 31, 2017     
Three months ended September 30, 2017     
Unrealized gain on securities$6,575
 $(2,302) $4,273
$5,109
 $(1,789) $3,320
Reclassification adjustment for securities gains included in net income (1)
(1,106) 387
 (719)(4,597) 1,609
 (2,988)
Amortization of net unrecognized pension and postretirement items (3)
528
 (185) 343
523
 (183) 340
Total Other Comprehensive Income$5,997
 $(2,100) $3,897
$1,035
 $(363) $672
Three months ended March 31, 2016     
Three months ended September 30, 2016     
Unrealized loss on securities$(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)
     
Nine months ended September 30, 2017     
Unrealized gain on securities$27,482
 $(9,621) $17,861
Reclassification adjustment for securities gains included in net income (1)
(7,139) 2,500
 (4,639)
Amortization of net unrecognized pension and postretirement items (3)
1,575
 (551) 1,024
Total Other Comprehensive Income$21,918
 $(7,672) $14,246
     
Nine months ended September 30, 2016     
Unrealized gain on securities$26,193
 $(9,167) $17,026
$40,441
 $(14,156) $26,285
Reclassification adjustment for securities gains included in net income (1)
(947) 331
 (616)(1,025) 359
 (666)
Amortization of unrealized loss on derivative financial instruments(2)
6
 (2) 4
18
 (6) 12
Amortization of net unrecognized pension and postretirement items (3)
717
 (251) 466
1,349
 (472) 877
Total Other Comprehensive Income$25,969
 $(9,089) $16,880
$40,783
 $(14,275) $26,508

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












The following table presents changes in each component of accumulated other comprehensive income (loss), net of tax: 
Unrealized Gains (Losses) on Investment Securities Not Other-Than-Temporarily Impaired Unrealized Non-Credit Gains (Losses) on Other-Than-Temporarily Impaired Debt Securities Unrealized Effective Portions of Losses on Forward-Starting Interest Rate Swaps Unrecognized Pension and Postretirement Plan Income (Costs) TotalUnrealized Gains (Losses) on Investment Securities Not Other-Than-Temporarily Impaired Unrealized Non-Credit Gains (Losses) on Other-Than-Temporarily Impaired Debt Securities Unrealized Effective Portions of Losses on Forward-Starting Interest Rate Swaps Unrecognized Pension and Postretirement Plan Income (Costs) Total
(in thousands)(in thousands)
Three months ended March 31, 2017         
Balance at December 31, 2016$(23,047) $273
 $—
 $(15,675) $(38,449)
Three months ended September 30, 2017         
Balance at June 30, 2017$(10,157) $273
 $—
 $(14,991) $(24,875)
Other comprehensive income before reclassifications3,320
 —
 —
 —
 3,320
Amounts reclassified from accumulated other comprehensive income (loss)(2,988) —
 —
 340
 (2,648)
Balance at September 30, 2017$(9,825) $273
 $—
 $(14,651) $(24,203)
Three months ended September 30, 2016
 
   
 
Balance at June 30, 2016$22,701
 $458
 $(7) $(15,463) $7,689
Other comprehensive loss before reclassifications4,273
 —
 —
 —
 4,273
(3,580)
—
 —
 —
 (3,580)
Amounts reclassified from accumulated other comprehensive income (loss)(719) —
 —
 343
 (376)(1) —
 4
 379
 382
Balance at March 31, 2017$(19,493) $273
 $—
 $(15,332) $(34,552)
Three months ended March 31, 2016
 
   
 
Balance at September 30, 2016$19,120
 $458
 $(3) $(15,084) $4,491
         
Nine months ended September 30, 2017         
Balance at December 31, 2016$(23,047) $273
 $—
 $(15,675) $(38,449)
Other comprehensive income before reclassifications17,861
 —
 —
 —
 17,861
Amounts reclassified from accumulated other comprehensive income (loss)(4,639) —
 —
 1,024
 (3,615)
Balance at September 30, 2017$(9,825) $273
 $—
 $(14,651) $(24,203)
Nine months ended September 30, 2016         
Balance at December 31, 2015$(6,499) $458
 $(15) $(15,961) $(22,017)$(6,499) $458
 $(15) $(15,961) $(22,017)
Other comprehensive income before reclassifications17,026

—
 —
 —
 17,026
26,285
 —
 —
 —
 26,285
Amounts reclassified from accumulated other comprehensive income (loss)(616) —
 4
 466
 (146)(666) —
 12
 877
 223
Balance at March 31, 2016$9,911
 $458
 $(11) $(15,495) $(5,137)
Balance at September 30, 2016$19,120
 $458
 $(3) $(15,084) $4,491



NOTE 4 – Investment Securities

The following table presents the amortized cost and estimated fair values of investment securities, which were all classified as available for sale:
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
(in thousands)(in thousands)
March 31, 2017       
September 30, 2017       
U.S. Government sponsored agency securities$5,959
 $37
 $—
 $5,996
$5,961
 $54
 $—
 $6,015
State and municipal securities404,125
 2,352
 (13,853) 392,624
415,313
 4,005
 (5,405) 413,913
Corporate debt securities109,595
 2,055
 (3,773) 107,877
92,355
 2,578
 (1,956) 92,977
Collateralized mortgage obligations575,596
 1,811
 (11,521) 565,886
601,845
 1,380
 (9,547) 593,678
Mortgage-backed securities1,321,573
 6,155
 (14,107) 1,313,621
Residential mortgage-backed securities1,184,797
 5,850
 (8,561) 1,182,086
Commercial mortgage-backed securities161,960
 299
 (627) 161,632
Auction rate securities107,312
 —
 (9,873) 97,439
107,410
 —
 (9,254) 98,156
Total debt securities2,524,160
 12,410
 (53,127) 2,483,443
2,569,641
 14,166
 (35,350) 2,548,457
Equity securities11,416
 11,158
 —
 22,574
6,560
 6,499
 —
 13,059
Total$2,535,576
 $23,568
 $(53,127) $2,506,017
$2,576,201
 $20,665
 $(35,350) $2,561,516
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
(in thousands)(in thousands)
December 31, 2016              
U.S. Government sponsored agency securities$132
 $2
 $—
 $134
$132
 $2
 $—
 $134
State and municipal securities405,274
 2,043
 (15,676) 391,641
405,274
 2,043
 (15,676) 391,641
Corporate debt securities112,016
 1,978
 (4,585) 109,409
112,016
 1,978
 (4,585) 109,409
Collateralized mortgage obligations604,095
 1,943
 (12,178) 593,860
604,095
 1,943
 (12,178) 593,860
Mortgage-backed securities1,353,292
 6,546
 (17,437) 1,342,401
Residential mortgage-backed securities1,328,192
 6,546
 (16,900) 1,317,838
Commercial mortgage-backed securities25,100
 —
 (537) 24,563
Auction rate securities107,215
 —
 (9,959) 97,256
107,215
 —
 (9,959) 97,256
Total debt securities2,582,024
 12,512
 (59,835) 2,534,701
2,582,024
 12,512
 (59,835) 2,534,701
Equity securities12,231
 12,295
 —
 24,526
12,231
 12,295
 —
 24,526
Total$2,594,255
 $24,807
 $(59,835) $2,559,227
$2,594,255
 $24,807
 $(59,835) $2,559,227
Securities carried at $1.9 billion and $1.8 billion as of March 31,September 30, 2017 and December 31, 2016, 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$12.1 million at March 31,September 30, 2017 and $23.5 million at December 31, 2016) and other equity investments (estimated fair value of $969,000 at March 31, 2017 and $1.0 million at both September 30, 2017 and December 31, 2016).
As of March 31,September 30, 2017, the financial institutions stock portfolio had a cost basis of $10.6$5.8 million and an estimated fair value of $21.6$12.1 million, including an investment in a single financial institution with a cost basis of $5.1$4.2 million and an estimated fair value of $9.6$8.8 million. The estimated fair value of this investment accounted for 44.6%73.4% of the estimated fair value of the Corporation's investments in the common stocks of publicly traded financial institutions. No other investment in a single financial institution in the financial institutions stock portfolio exceeded 10% of the portfolio's estimated fair value.


The amortized cost and estimated fair values of debt securities as of March 31,September 30, 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 $53,510
 $53,729
 $23,940
 $24,118
Due from one year to five years 27,178
 27,785
 30,708
 31,196
Due from five years to ten years 113,529
 113,708
 114,114
 115,336
Due after ten years 432,774
 408,714
 452,277
 440,411
 626,991
 603,936
 621,039
 611,061
Residential mortgage-backed securities 1,184,797
 1,182,086
Commercial mortgage-backed securities 161,960
 161,632
Collateralized mortgage obligations 575,596
 565,886
 601,845
 593,678
Mortgage-backed securities 1,321,573
 1,313,621
Total debt securities $2,524,160
 $2,483,443
 $2,569,641
 $2,548,457
The following table presents information related to the gross realized gains and losses on the sales of equity and debt securities:
Gross
Realized
Gains		 Gross
Realized
Losses		 Net Gains (Losses)Gross
Realized
Gains		 Gross
Realized
Losses		 Net Gains (Losses)
Three months ended March 31, 2017(in thousands)
Three months ended September 30, 2017(in thousands)
Equity securities$1,045
 $—
 $1,045
$4,817
 $—
 $4,817
Debt securities61
 —
 61
12
 (232) (220)
Total$1,106
 $—
 $1,106
$4,829
 $(232) $4,597
Three months ended March 31, 2016     
Three months ended September 30, 2016     
Equity securities$733
 $—
 $733
$2
 $—
 $2
Debt securities214
 —
 214
—
 —
 —
Total$947
 $—
 $947
$2
 $—
 $2
     
Nine months ended September 30, 2017     
Equity securities$7,167
 $—
 $7,167
Debt securities218
 (246) (28)
Total$7,385
 $(246) $7,139
Nine months ended September 30, 2016     
Equity securities$739
 $(10) $729
Debt securities322
 (26) 296
Total$1,061
 $(36) $1,025

The cumulative balance of credit related other-than-temporary impairment charges, previously recognized as components of earnings, for debt securities held by the Corporation at March 31,September 30, 2017 and March 31,September 30, 2016 was $11.5$10.0 million. There were no other-than-temporary impairment charges recognized for the three and nine months ended March 31,September 30, 2017 and March 31,September 30, 2016.






The following tables presenttable presents the gross unrealized losses and estimated fair values of investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at March 31,September 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
March 31, 2017(in thousands)
September 30, 2017(in thousands)
State and municipal securities$237,313
 $(13,853) $—
 $—
 $237,313
 $(13,853)$121,527
 $(1,930) $87,466
 $(3,475) $208,993
 $(5,405)
Corporate debt securities4,020
 (11) 35,364
 (3,762) 39,384
 (3,773)3,570
 (16) 31,533
 (1,940) 35,103
 (1,956)
Collateralized mortgage obligations145,052
 (3,672) 246,408
 (7,849) 391,460
 (11,521)85,335
 (837) 301,009
 (8,710) 386,344
 (9,547)
Mortgage-backed securities1,089,397
 (14,107) —
 —
 1,089,397
 (14,107)
Residential mortgage-backed securities796,019
 (8,359) 5,513
 (202) 801,532
 (8,561)
Commercial mortgage-backed securities87,260
 (627) —
 —
 87,260
 (627)
Auction rate securities—
 —
 97,439
 (9,873) 97,439
 (9,873)—
 —
 98,156
 (9,254) 98,156
 (9,254)
Total debt securities1,475,782
 (31,643) 379,211
 (21,484) 1,854,993
 (53,127)$1,093,711
 $(11,769) $523,677
 $(23,581) $1,617,388
 $(35,350)
Less than 12 months 12 months or longer TotalLess than 12 months 12 months or longer Total
Estimated
Fair Value		 Unrealized
Losses		 Estimated
Fair Value		 Unrealized
Losses		 Estimated
Fair Value		 Unrealized
Losses		Estimated
Fair Value		 Unrealized
Losses		 Estimated
Fair Value		 Unrealized
Losses		 Estimated
Fair Value		 Unrealized
Losses
December 31, 2016(in thousands)(in thousands)
State and municipal securities$247,509
 $(15,676) $—
 $—
 $247,509
 $(15,676)$247,509
 $(15,676) $—
 $—
 $247,509
 $(15,676)
Corporate debt securities11,922
 (110) 34,629
 (4,475) 46,551
 (4,585)11,922
 (110) 34,629
 (4,475) 46,551
 (4,585)
Collateralized mortgage obligations166,905
 (3,899) 258,237
 (8,279) 425,142
 (12,178)166,905
 (3,899) 258,237
 (8,279) 425,142
 (12,178)
Mortgage-backed securities1,137,510
 (17,437) —
 —
 1,137,510
 (17,437)
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)—
 —
 97,256
 (9,959) 97,256
 (9,959)
Total debt securities1,563,846
 (37,122) 390,122
 (22,713) 1,953,968
 (59,835)$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 March 31,September 30, 2017.
As of March 31,September 30, 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 March 31,September 30, 2017, all ARCs were current and making scheduled interest payments, and based on management’s evaluations, were not subject to any other-than-temporary impairment charges as of March 31,for the three and nine months ended September 30, 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.
The majority of the Corporation's available for sale corporate debt securities are issued by financial institutions. The following table presents the amortized cost and estimated fair value of corporate debt securities:
March 31, 2017 December 31, 2016September 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$43,770
 $40,720
 $43,746
 $39,829
$39,186
 $38,251
 $43,746
 $39,829
Subordinated debt43,787
 44,399
 46,231
 46,723
37,147
 37,859
 46,231
 46,723
Senior debt18,036
 18,334
 18,037
 18,433
12,033
 12,456
 18,037
 18,433
Pooled trust preferred securities—
 422
 —
 422
—
 422
 —
 422
Corporate debt securities issued by financial institutions105,593
 103,875
 108,014
 105,407
88,366
 88,988
 108,014
 105,407
Other corporate debt securities4,002
 4,002
 4,002
 4,002
3,989
 3,989
 4,002
 4,002
Available for sale corporate debt securities$109,595
 $107,877
 $112,016
 $109,409
$92,355
 $92,977
 $112,016
 $109,409



Single-issuer trust preferred securities had an unrealized loss of $3.1 million$935,000 at March 31,September 30, 2017. SixFive of the 1918 single-issuer trust preferred securities, with an amortized cost of $11.6$6.9 million and an estimated fair value of $10.3$6.6 million at March 31,September 30, 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 $3.8 million and an estimated fair value of $2.8 million at March 31,September 30, 2017 were not rated by any ratings agency.
Based on management’s evaluations, no corporate debt securities were subject to any other-than-temporary impairment charges as of March 31,for the three and nine months ended September 30, 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:
March 31,
2017		 December 31, 2016September 30,
2017		 December 31, 2016
(in thousands)(in thousands)
Real-estate - commercial mortgage$6,118,533
 $6,018,582
$6,275,140
 $6,018,582
Commercial - industrial, financial and agricultural4,167,809
 4,087,486
4,223,075
 4,087,486
Real-estate - residential mortgage1,665,142
 1,601,994
1,887,907
 1,601,994
Real-estate - home equity1,595,901
 1,625,115
1,567,473
 1,625,115
Real-estate - construction882,983
 843,649
973,108
 843,649
Consumer288,826
 291,470
302,448
 291,470
Leasing and other262,315
 246,704
278,658
 246,704
Overdrafts3,342
 3,662
3,400
 3,662
Loans, gross of unearned income14,984,851
 14,718,662
15,511,209
 14,718,662
Unearned income(21,674) (19,390)(24,310) (19,390)
Loans, net of unearned income$14,963,177
 $14,699,272
$15,486,899
 $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 FASB 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:
March 31,
2017		 December 31,
2016		September 30,
2017		 December 31,
2016
(in thousands)(in thousands)
Allowance for loan losses$170,076
 $168,679
$172,245
 $168,679
Reserve for unfunded lending commitments2,571
 2,646
2,504
 2,646
Allowance for credit losses$172,647
 $171,325
$174,749
 $171,325

The following table presents the activity in the allowance for credit losses:
Three months ended March 31Three months ended September 30 Nine months ended September 30
2017 20162017 2016 2017 2016
(in thousands)(in thousands)
Balance at beginning of period$171,325
 $171,412
$174,998
 $165,108
 $171,325
 $171,412
Loans charged off(9,407) (11,155)(7,795) (7,672) (25,917) (29,573)
Recoveries of loans previously charged off5,929
 4,278
2,471
 3,592
 12,766
 15,148
Net loans charged off(3,478) (6,877)(5,324) (4,080) (13,151) (14,425)
Provision for credit losses4,800
 1,530
5,075
 4,141
 16,575
 8,182
Balance at end of period$172,647
 $166,065
$174,749
 $165,169
 $174,749
 $165,169

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
































The following table presents the activity in the allowance for loan losses by portfolio segment:
Real Estate -
Commercial
Mortgage
 
Commercial -
Industrial,
Financial and
Agricultural
 
Real Estate -
Home
Equity
 
Real Estate -
Residential
Mortgage
 
Real Estate -
Construction
 Consumer 
Leasing, other
and
overdrafts
 Unallocated Total
Real Estate -
Commercial
Mortgage
 
Commercial -
Industrial,
Financial and
Agricultural
 
Real Estate -
Home
Equity
 
Real Estate -
Residential
Mortgage
 
Real Estate -
Construction
 Consumer 
Leasing, other
and
overdrafts
 Unallocated Total
(in thousands)(in thousands)
Three months ended March 31, 2017                 
Three months ended September 30, 2017                 
Balance at June 30, 2017$57,372
 $67,642
 $17,456
 $16,439
 $9,534
 $1,794
 $2,105
 $—
 $172,342
Loans charged off(483) (2,714) (547) (195) (2,744) (373) (739) —
 (7,795)
Recoveries of loans previously charged off106
 665
 252
 219
 629
 193
 407
 —
 2,471
Net loans charged off(377) (2,049) (295) 24
 (2,115) (180) (332) —
 (5,324)
Provision for loan losses (1)(2,008) 5,392
 1,297
 220
 (283) 383
 226
 —
 5,227
Balance at Sept 30, 2017$54,987
 $70,985
 $18,458
 $16,683
 $7,136
 $1,997
 $1,999
 $—
 $172,245
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
Loans charged off(1,350) (3,144) (709) (802) (150) (685) (832) —
 (7,672)
Recoveries of loans previously charged off296
 1,539
 241
 228
 898
 222
 168
 —
 3,592
Net loans charged off(1,054) (1,605) (468) (574) 748
 (463) (664) —
 (4,080)
Provision for loan losses (1)3,171
 (1,871) 1,419
 1,452
 23
 852
 1,075
 (2,061) 4,060
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, 2017                 
Balance at December 31, 2016$46,842
 $54,353
 $26,801
 $22,929
 $6,455
 $3,574
 $3,192
 $4,533
 $168,679
$46,842
 $54,353
 $26,801
 $22,929
 $6,455
 $3,574
 $3,192
 $4,533
 $168,679
Loans charged off(1,224) (5,527) (698) (216) (247) (856) (639) —
 (9,407)(1,949) (13,594) (1,837) (535) (3,765) (1,659) (2,578) —
 (25,917)
Recoveries of loans previously charged off450
 4,191
 137
 230
 548
 236
 137
 —
 5,929
1,490
 6,830
 604
 600
 1,550
 899
 793
 —
 12,766
Net loans charged off(774) (1,336) (561) 14
 301
 (620) (502) —
 (3,478)(459) (6,764) (1,233) 65
 (2,215) (760) (1,785) —
 (13,151)
Provision for loan losses (1)1,305
 2,292
 (2,419) (925) 745
 77
 578
 3,222
 4,875
8,604
 23,396
 (7,110) (6,311) 2,896
 (817) 592
 (4,533) 16,717
Balance at March 31, 2017$47,373
 $55,309
 $23,821
 $22,018
 $7,501
 $3,031
 $3,268
 $7,755
 $170,076
Three months ended March 31, 2016                 
Balance at September 30, 2017$54,987
 $70,985
 $18,458
 $16,683
 $7,136
 $1,997
 $1,999
 $—
 $172,245
Nine months ended September 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(582) (6,188) (1,541) (1,068) (326) (1,007) (443) —
 (11,155)(3,406) (13,957) (3,295) (2,210) (1,218) (2,261) (3,226) —
 (29,573)
Recoveries of loans previously charged off825
 2,319
 338
 136
 383
 196
 81
 —
 4,278
2,488
 6,789
 929
 784
 2,844
 957
 357
 —
 15,148
Net loans charged off243
 (3,869) (1,203) (932) 57
 (811) (362) —
 (6,877)(918) (7,168) (2,366) (1,426) 1,626
 (1,304) (2,869) —
 (14,425)
Provision for loan losses (1)202
 1,104
 1,322
 (515) (304) 550
 868
 (1,563) 1,664
(1,091) (1,651) 7,082
 2,155
 (1,612) 2,092
 3,330
 (2,408) 7,897
Balance at March 31, 2016$48,311
 $54,333
 $22,524
 $19,928
 $6,282
 $2,324
 $2,974
 $7,165
 $163,841
Balance at September 30, 2016$45,857
 $48,279
 $27,121
 $22,104
 $6,543
 $3,373
 $2,929
 $6,320
 $162,526

(1)The provision for loan losses excluded a $75,000decreases of $152,000 and an $134,000 decrease, respectively,$142,000 in the reserve for unfunded lending commitments for the three and nine months ended March 31,September 30, 2017, respectively and 2016.increases of $81,000 and $285,000 in the reserve for unfunded lending commitments for the three and nine months ended September 30, 2016, respectively.


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 March 31, 2017:              
Allowance for loan losses at September 30, 2017:Allowance for loan losses at September 30, 2017:              
Measured for impairment under FASB ASC Subtopic 450-20$37,457
 $43,155
 $14,744
 $10,581
 $4,915
 $3,007
 $3,268
 $7,755
 $124,882
$47,261
 $55,486
 $7,632
 $6,488
 $5,702
 $1,976
 $1,999
 $—
 $126,544
Evaluated for impairment under FASB ASC Section 310-10-359,916
 12,154
 9,077
 11,437
 2,586
 24
 —
 N/A
 45,194
7,726
 15,499
 10,826
 10,195
 1,434
 21
 —
 N/A
 45,701
$47,373
 $55,309
 $23,821
 $22,018
 $7,501
 $3,031
 $3,268
 $7,755
 $170,076
$54,987
 $70,985
 $18,458
 $16,683
 $7,136
 $1,997
 $1,999
 $—
 $172,245
                                  
Loans, net of unearned income at March 31, 2017:              
Loans, net of unearned income at September 30, 2017:Loans, net of unearned income at September 30, 2017:              
Measured for impairment under FASB ASC Subtopic 450-20$6,067,492
 $4,119,550
 $1,576,949
 $1,620,302
 $869,225
 $288,789
 $243,983
 N/A
 $14,786,290
$6,228,935
 $4,162,857
 $1,543,551
 $1,845,329
 $959,584
 $302,415
 $257,748
 N/A
 $15,300,419
Evaluated for impairment under FASB ASC Section 310-10-3551,041
 48,259
 18,952
 44,840
 13,758
 37
 —
 N/A
 176,887
46,205
 60,218
 23,922
 42,578
 13,524
 33
 —
 N/A
 186,480
$6,118,533
 $4,167,809
 $1,595,901
 $1,665,142
 $882,983
 $288,826
 $243,983
 N/A
 $14,963,177
$6,275,140
 $4,223,075
 $1,567,473
 $1,887,907
 $973,108
 $302,448
 $257,748
 N/A
 $15,486,899
                                  
Allowance for loan losses at March 31, 2016:              
Allowance for loan losses at September 30, 2016:Allowance for loan losses at September 30, 2016:              
Measured for impairment under FASB ASC Subtopic 450-20$35,914
 $40,969
 $13,541
 $7,599
 $4,004
 $2,302
 $1,756
 $7,165
 $113,250
$36,151
 $38,858
 $17,828
 $10,410
 $4,422
 $3,346
 $2,929
 $6,320
 $120,264
Evaluated for impairment under FASB ASC Section 310-10-3512,397
 13,364
 8,983
 12,329
 2,278
 22
 1,218
 N/A
 50,591
9,706
 9,421
 9,293
 11,694
 2,121
 27
 —
 N/A
 42,262
$48,311
 $54,333
 $22,524
 $19,928
 $6,282
 $2,324
 $2,974
 $7,165
 $163,841
$45,857
 $48,279
 $27,121
 $22,104
 $6,543
 $3,373
 $2,929
 $6,320
 $162,526
                                  
Loans, net of unearned income at March 31, 2016:              
Loans, net of unearned income at September 30, 2016:Loans, net of unearned income at September 30, 2016:              
Measured for impairment under FASB ASC Subtopic 450-20$5,499,820
 $3,992,567
 $1,641,457
 $1,329,114
 $797,282
 $263,189
 $164,806
 N/A
 $13,688,235
$5,763,863
 $3,972,461
 $1,621,731
 $1,496,461
 $850,315
 $283,633
 $219,780
 N/A
 $14,208,244
Evaluated for impairment under FASB ASC Section 310-10-3558,288
 42,766
 18,024
 48,345
 13,590
 32
 1,421
 N/A
 182,466
55,052
 51,658
 18,690
 46,235
 11,319
 40
 —
 N/A
 182,994
$5,558,108
 $4,035,333
 $1,659,481
 $1,377,459
 $810,872
 $263,221
 $166,227
 N/A
 $13,870,701
$5,818,915
 $4,024,119
 $1,640,421
 $1,542,696
 $861,634
 $283,673
 $219,780
 N/A
 $14,391,238
 
N/A - Not applicable.

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

Based on an evaluation of all relevant credit quality factors, the Corporation recorded a $4.8 million provision for credit losses during the three months ended March 31, 2017, compared to a $1.5 million provision for credit losses for the same period in 2016.
All loans individually evaluated for impairment under FASB ASC Section 310-10-35 are measured for losses on a quarterly basis. As of March 31,September 30, 2017 and December 31, 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 March 31,September 30, 2017 and 2016, approximately 67%95% and 77%73%, 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 appraisals performed by state certified third-party appraisalsappraisers 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:
March 31, 2017 December 31, 2016September 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$25,043
 $22,236
 $—
 $28,757
 $25,447
 $—
$24,722
 $21,000
 $—
 $28,757
 $25,447
 $—
Commercial - secured33,791
 25,622
 —
 29,296
 25,526
 —
32,738
 30,053
 —
 29,296
 25,526
 —
Real estate - residential mortgage4,657
 4,657
 —
 4,689
 4,689
 —
4,603
 4,603
 —
 4,689
 4,689
 —
Construction - commercial residential6,169
 4,692
 —
 6,271
 4,795
 —
14,086
 9,450
 —
 6,271
 4,795
 —
Construction - commercial603
 603
 —
 —
 —
 —
70,263
 57,810
 
 69,013
 60,457
 
76,149
 65,106
 
 69,013
 60,457
 
With a related allowance recorded:With a related allowance recorded:          With a related allowance recorded:          
Real estate - commercial mortgage37,069
 28,805
 9,916
 37,132
 29,446
 10,162
32,770
 25,205
 7,726
 37,132
 29,446
 10,162
Commercial - secured26,205
 21,872
 11,739
 27,767
 22,626
 13,198
33,481
 29,189
 14,974
 27,767
 22,626
 13,198
Commercial - unsecured1,061
 765
 415
 1,122
 823
 455
1,236
 976
 525
 1,122
 823
 455
Real estate - home equity23,351
 18,952
 9,077
 23,971
 19,205
 9,511
27,739
 23,922
 10,826
 23,971
 19,205
 9,511
Real estate - residential mortgage47,442
 40,183
 11,437
 48,885
 41,359
 11,897
43,979
 37,975
 10,195
 48,885
 41,359
 11,897
Construction - commercial residential13,451
 7,286
 2,134
 10,103
 4,206
 1,300
6,119
 2,883
 1,006
 10,103
 4,206
 1,300
Construction - commercial141
 81
 31
 681
 435
 145
186
 100
 36
 681
 435
 145
Construction - other1,096
 1,096
 421
 1,096
 1,096
 423
1,096
 1,091
 392
 1,096
 1,096
 423
Consumer - direct20
 20
 14
 19
 19
 12
24
 19
 13
 21
 21
 14
Consumer - indirect17
 17
 10
 21
 21
 14
14
 14
 8
 19
 19
 12
149,853
 119,077
 45,194
 150,797
 119,236
 47,117
146,644
 121,374
 45,701
 150,797
 119,236
 47,117
Total$220,116
 $176,887
 $45,194
 $219,810
 $179,693
 $47,117
$222,793
 $186,480
 $45,701
 $219,810
 $179,693
 $47,117
As of March 31,September 30, 2017 and December 31, 2016, there were $57.8$65.1 million and $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 March 31Three months ended September 30 Nine months ended September 30
2017 20162017 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)
(in thousands)(in thousands)
With no related allowance recorded:                      
Real estate - commercial mortgage$23,842
 $70
 $22,810
 $69
$21,698
 $72
 $25,048
 $78
 $22,770
 $213
 $23,929
 219
Commercial - secured25,574
 36
 12,964
 16
33,044
 46
 23,836
 32
 29,309
 128
 18,400
 68
Real estate - residential mortgage4,673
 26
 5,501
 30
4,616
 27
 6,151
 33
 4,645
 79
 5,826
 96
Construction - commercial residential4,744
 2
 7,582
 19
8,747
 5
 5,734
 10
 6,745
 11
 6,658
 45
Construction - commercial302
 —
 —
 —
295
 —
 —
 —
 298
 —
 —
 —
59,135
 134
 48,857
 134
68,400
 150
 60,769
 153
 63,767
 431
 54,813
 428
With a related allowance recorded:                      
Real estate - commercial mortgage29,126
 85
 35,482
 108
25,910
 86
 29,139
 91
 27,518
 259
 32,310
 303
Commercial - secured22,249
 32
 31,642
 38
24,334
 33
 21,688
 29
 23,291
 96
 26,665
 100
Commercial - unsecured795
 —
 853
 1
818
 1
 953
 1
 806
 1
 903
 3
Real estate - home equity19,079
 95
 16,896
 57
22,837
 150
 18,283
 76
 20,957
 362
 17,589
 203
Real estate - residential mortgage40,839
 230
 43,885
 235
38,329
 225
 40,913
 221
 39,584
 680
 42,399
 683
Construction - commercial residential5,746
 3
 6,189
 15
5,047
 4
 4,947
 8
 5,397
 11
 5,568
 37
Construction - commercial258
 —
 616
 —
113
 —
 476
 —
 186
 —
 546
 —
Construction - other1,096
 —
 402
 —
1,091
 —
 756
 —
 1,094
 —
 579
 —
Consumer - direct20
 —
 17
 —
19
 —
 19
 —
 19
 —
 17
 1
Consumer - indirect18
 —
 16
 —
15
 —
 11
 —
 17
 —
 14
 —
Leasing, other and overdrafts713
 —
 1,423
 —
—
 —
 —
 —
 356
 —
 712
 —
119,939
 445
 137,421
 454
118,513
 499
 117,185
 426
 119,225
 1,409
 127,302
 1,330
Total$179,074
 $579
 $186,278
 $588
$186,913
 $649
 $177,954
 $579
 $182,992
 $1,840
 $182,115
 1,758
                      
(1)All impaired loans, excluding accruing TDRs, were non-accrual loans. Interest income recognized for the three and nine months ended March 31,September 30, 2017 and 2016 represents amounts earned on accruing TDRs.

Credit Quality Indicators and Non-performing Assets

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













The following table presents internal credit risk ratings for the indicated loan class segments:
Pass Special Mention Substandard or Lower TotalPass Special Mention Substandard or Lower Total
March 31, 2017 December 31, 2016 March 31, 2017 December 31, 2016 March 31, 2017 December 31, 2016 March 31, 2017 December 31, 2016September 30, 2017 December 31, 2016 September 30, 2017 December 31, 2016 September 30, 2017 December 31, 2016 September 30, 2017 December 31, 2016
(dollars in thousands)(dollars in thousands)
Real estate - commercial mortgage$5,860,141
 $5,763,122
 $137,643
 $132,484
 $120,749
 $122,976
 $6,118,533
 $6,018,582
$6,028,523
 $5,763,122
 $118,947
 $132,484
 $127,670
 $122,976
 $6,275,140
 $6,018,582
Commercial - secured3,753,918
 3,686,152
 138,242
 128,873
 138,757
 118,527
 4,030,917
 3,933,552
3,807,138
 3,686,152
 98,639
 128,873
 183,181
 118,527
 4,088,958
 3,933,552
Commercial - unsecured127,858
 145,922
 6,471
 4,481
 2,563
 3,531
 136,892
 153,934
127,561
 145,922
 3,474
 4,481
 3,082
 3,531
 134,117
 153,934
Total commercial - industrial, financial and agricultural3,881,776
 3,832,074
 144,713
 133,354
 141,320
 122,058
 4,167,809
 4,087,486
3,934,699
 3,832,074
 102,113
 133,354
 186,263
 122,058
 4,223,075
 4,087,486
Construction - commercial residential124,415
 113,570
 10,677
 15,447
 16,221
 13,172
 151,313
 142,189
134,786
 113,570
 6,746
 15,447
 14,595
 13,172
 156,127
 142,189
Construction - commercial674,863
 635,963
 4,902
 3,412
 5,363
 5,115
 685,128
 644,490
743,111
 635,963
 4,418
 3,412
 3,869
 5,115
 751,398
 644,490
Total construction (excluding Construction - other)799,278
 749,533
 15,579
 18,859
 21,584
 18,287
 836,441
 786,679
877,897
 749,533
 11,164
 18,859
 18,464
 18,287
 907,525
 786,679
$10,541,195
 $10,344,729
 $297,935
 $284,697
 $283,653
 $263,321
 $11,122,783
 $10,892,747
$10,841,119
 $10,344,729
 $232,224
 $284,697
 $332,397
 $263,321
 $11,405,740
 $10,892,747
% of Total94.8% 95.0% 2.6% 2.6% 2.6% 2.4% 100.0% 100.0%95.1% 95.0% 2.0% 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, delinquent and non-performing loans for the indicated loan class segments:
Performing Delinquent (1) Non-performing (2) TotalPerforming Delinquent (1) Non-performing (2) Total
March 31, 2017 December 31, 2016 March 31, 2017 December 31, 2016 March 31, 2017 December 31, 2016 March 31, 2017 December 31, 2016September 30, 2017 December 31, 2016 September 30, 2017 December 31, 2016 September 30, 2017 December 31, 2016 September 30, 2017 December 31, 2016
(dollars in thousands)(dollars in thousands)
Real estate - home equity$1,576,374
 $1,602,687
 $7,295
 $9,274
 $12,232
 $13,154
 $1,595,901
 $1,625,115
$1,542,289
 $1,602,687
 $12,955
 $9,274
 $12,229
 $13,154
 $1,567,473
 $1,625,115
Real estate - residential mortgage1,624,477
 1,557,995
 17,068
 20,344
 23,597
 23,655
 1,665,142
 1,601,994
1,845,495
 1,557,995
 20,769
 20,344
 21,643
 23,655
 1,887,907
 1,601,994
Construction - other45,446
 55,874
 —
 —
 1,096
 1,096
 46,542
 56,970
64,110
 55,874
 382
 —
 1,091
 1,096
 65,583
 56,970
Consumer - direct84,670
 93,572
 1,383
 1,752
 1,129
 1,563
 87,182
 96,887
55,490
 93,572
 158
 1,752
 63
 1,563
 55,711
 96,887
Consumer - indirect199,542
 190,656
 2,055
 3,599
 47
 328
 201,644
 194,583
243,723
 190,656
 2,834
 3,599
 180
 328
 246,737
 194,583
Total consumer284,212
 284,228
 3,438
 5,351
 1,176
 1,891
 288,826
 291,470
299,213
 284,228
 2,992
 5,351
 243
 1,891
 302,448
 291,470
Leasing242,120
 229,591
 1,425
 1,068
 438
 317
 243,983
 230,976
256,784
 229,591
 884
 1,068
 80
 317
 257,748
 230,976
$3,772,629
 $3,730,375
 $29,226
 $36,037
 $38,539
 $40,113
 $3,840,394
 $3,806,525
$4,007,891
 $3,730,375
 $37,982
 $36,037
 $35,286
 $40,113
 $4,081,159
 $3,806,525
% of Total98.2% 98.0% 0.8% 0.9% 1.0% 1.1% 100.0% 100.0%98.2% 98.0% 0.9% 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:
March 31,
2017		 December 31,
2016		September 30,
2017		 December 31,
2016
(in thousands)(in thousands)
Non-accrual loans$117,264
 $120,133
$123,345
 $120,133
Loans 90 days or more past due and still accruing14,268
 11,505
13,124
 11,505
Total non-performing loans131,532
 131,638
136,469
 131,638
Other real estate owned (OREO)11,906
 12,815
10,542
 12,815
Total non-performing assets$143,438
 $144,453
$147,011
 $144,453

The following table presentstables present past due status and non-accrual loans by portfolio segment and class segment:
March 31, 2017September 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$9,890
 $971
 $910
 $35,803
 $36,713
 $47,574
 $6,070,959
 $6,118,533
$10,276
 $2,297
 $2,884
 $31,766
 $34,650
 $47,223
 $6,227,917
 $6,275,140
Commercial - secured4,530
 3,179
 2,511
 40,084
 42,595
 50,304
 3,980,613
 4,030,917
8,382
 2,378
 1,503
 51,787
 53,290
 64,050
 4,024,908
 4,088,958
Commercial - unsecured309
 54
 497
 734
 1,231
 1,594
 135,298
 136,892
114
 34
 —
 919
 919
 1,067
 133,050
 134,117
Total commercial - industrial, financial and agricultural4,839
 3,233
 3,008
 40,818
 43,826
 51,898
 4,115,911
 4,167,809
8,496
 2,412
 1,503
 52,706
 54,209
 65,117
 4,157,958
 4,223,075
Real estate - home equity6,181
 1,114
 2,881
 9,351
 12,232
 19,527
 1,576,374
 1,595,901
11,192
 1,763
 3,096
 9,133
 12,229
 25,184
 1,542,289
 1,567,473
Real estate - residential mortgage12,829
 4,239
 5,790
 17,807
 23,597
 40,665
 1,624,477
 1,665,142
15,106
 5,663
 5,258
 16,385
 21,643
 42,412
 1,845,495
 1,887,907
Construction - commercial residential1,550
 801
 65
 11,705
 11,770
 14,121
 137,192
 151,313
400
 18
 60
 12,164
 12,224
 12,642
 143,485
 156,127
Construction - commercial1,546
 142
 —
 684
 684
 2,372
 682,756
 685,128
366
 —
 —
 100
 100
 466
 750,932
 751,398
Construction - other—
 —
 —
 1,096
 1,096
 1,096
 45,446
 46,542
382
 —
 —
 1,091
 1,091
 1,473
 64,110
 65,583
Total real estate - construction3,096
 943
 65
 13,485
 13,550
 17,589
 865,394
 882,983
1,148
 18
 60
 13,355
 13,415
 14,581
 958,527
 973,108
Consumer - direct939
 444
 1,129
 —
 1,129
 2,512
 84,670
 87,182
118
 40
 63
 —
 63
 221
 55,490
 55,711
Consumer - indirect1,784
 271
 47
 —
 47
 2,102
 199,542
 201,644
2,393
 441
 180
 —
 180
 3,014
 243,723
 246,737
Total consumer2,723
 715
 1,176
 —
 1,176
 4,614
 284,212
 288,826
2,511
 481
 243
 —
 243
 3,235
 299,213
 302,448
Leasing, other and overdrafts981
 444
 438
 —
 438
 1,863
 242,120
 243,983
764
 120
 80
 —
 80
 964
 256,784
 257,748
Total$40,539
 $11,659
 $14,268
 $117,264
 $131,532
 $183,730
 $14,779,447
 $14,963,177
$49,493
 $12,754
 $13,124
 $123,345
 $136,469
 $198,716
 $15,288,183
 $15,486,899


 December 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
 (in thousands)
Real estate - commercial mortgage$6,254
 $1,622
 $383
 $38,936
 $39,319
 $47,195
 $5,971,387
 $6,018,582
Commercial - secured6,660
 2,616
 959
 41,589
 42,548
 51,824
 3,881,728
 3,933,552
Commercial - unsecured898
 35
 152
 760
 912
 1,845
 152,089
 153,934
Total commercial - industrial, financial and agricultural7,558
 2,651
 1,111
 42,349
 43,460
 53,669
 4,033,817
 4,087,486
Real estate - home equity6,596
 2,678
 2,543
 10,611
 13,154
 22,428
 1,602,687
 1,625,115
Real estate - residential mortgage15,600
 4,744
 5,224
 18,431
 23,655
 43,999
 1,557,995
 1,601,994
Construction - commercial residential233
 51
 36
 8,275
 8,311
 8,595
 133,594
 142,189
Construction - commercial743
 —
 —
 435
 435
 1,178
 643,312
 644,490
Construction - other—
 —
 —
 1,096
 1,096
 1,096
 55,874
 56,970
Total real estate - construction976
 51
 36
 9,806
 9,842
 10,869
 832,780
 843,649
Consumer - direct1,211
 541
 1,563
 —
 1,563
 3,315
 93,572
 96,887
Consumer - indirect3,200
 399
 328
 —
 328
 3,927
 190,656
 194,583
Total consumer4,411
 940
 1,891
 —
 1,891
 7,242
 284,228
 291,470
Leasing, other and overdrafts543
 525
 317
 —
 317
 1,385
 229,591
 230,976
Total$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:
March 31,
2017		 December 31,
2016		September 30,
2017		 December 31,
2016
(in thousands)(in thousands)
Real-estate - residential mortgage$27,033
 $27,617
$26,193
 $27,617
Real-estate - commercial mortgage15,237
 15,957
14,439
 15,957
Real estate - home equity9,601
 8,594
14,789
 8,594
Commercial7,441
 6,627
7,512
 6,627
Construction273
 726
169
 726
Consumer37
 39
33
 39
Total accruing TDRs59,622
 59,560
63,135
 59,560
Non-accrual TDRs (1)
27,220
 27,850
28,742
 27,850
Total TDRs$86,842
 $87,410
$91,877
 $87,410
 
(1)Included in non-accrual loans in the preceding table detailing non-performing assets.

As of both March 31,September 30, 2017 and December 31, 2016, there were $3.8 million and $3.6 million 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 nine months ended March 31,September 30, 2017 and 2016:
 Three months ended March 31 Three months ended September 30 Nine months ended September 30
2017 2016 2017 2016 2017 2016
Number of Loans Post-Modification Recorded Investment Number of Loans Post-Modification Recorded InvestmentNumber of Loans Post-Modification Recorded Investment Number of Loans Post-Modification Recorded Investment Number of Loans Post-Modification Recorded Investment Number of Loans Post-Modification Recorded Investment
(dollars in thousands) (dollars in thousands)
Real estate – residential mortgage:Real estate – residential mortgage:       Real estate – residential mortgage:               
Extend maturity without rate concession2
 $337
 —
 $—
Extend maturity with rate concession2
 $468
 —
 $—
 2
 $468
 —
 $—
Bankruptcy1
 178
 —
 —
Extend maturity without rate concession2
 151
 —
 —
 4
 488
 2
 $315
Bankruptcy—
 —
 2
 350
 2
 335
 3
 723
Real estate - commercial mortgage:Real estate - commercial mortgage:       Real estate - commercial mortgage:               
Extend maturity without rate concession2
 1,247
 —
 —
 6
 2,228
 —
 $—
Extend maturity without rate concession1
 318
 —
 —
Bankruptcy—
 —
 —
 —
 1
 12
 —
 $—
Real estate - home equity:Real estate - home equity:       Real estate - home equity:               
Extend maturity with rate concession—
 —
 1
 44
Extend maturity without rate concession14
 1,315
 24
 1,063
 47
 3,874
 63
 $3,058
Extend maturity without rate concession16
 1,284
 —
 —
Bankruptcy6
 127
 11
 563
 23
 1,643
 33
 $2,279
Bankruptcy7
 453
 37
 2,698
Commercial:Commercial:       Commercial:               
Extend maturity without rate concession4
 3,126
 4
 933
Extend maturity without rate concession1
 160
 4
 1,826
 9
 5,853
 10
 3,802
Consumer:       
Bankruptcy—
 —
 —
 —
 1
 490
 —
 —
Commercial – unsecured:Commercial – unsecured:               
Extend maturity without rate concession—
 —
 —
 —
 1
 33
 2
 103
Construction - commercial residential:Construction - commercial residential:               
Extend maturity without rate concession—
 —
 —
 —
 1
 1,204
 —
 —
Consumer - direct:Consumer - direct:               
Bankruptcy—
 —
 —
 —
 —
 —
 1
 2
Consumer - indirect:Consumer - indirect:               
Bankruptcy—
 —
 1
 2
Bankruptcy—
 —
 1
 21
 —
 —
 1
 21
                        
TotalTotal31
 $5,696
 43
 $3,677
Total27
 $3,468
 42
 $3,823
 97
 $16,628
 115
 $10,303
                        

The following table presents TDRs, by class segment, as of March 31,September 30, 2017 and 2016, that were modified in the previous 12 months and had a post-modification payment default during the threenine months ended March 31,September 30, 2017 and 2016. The Corporation defines a payment default as a single missed payment.
2017 20162017 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)
Real estate - residential mortgage8
 $2,006
 3
 $260
5
 $1,321
 7
 $1,395
Real estate - commercial mortgage2
 430
 3
 235
3
 653
 2
 129
Real estate - home equity14
 639
 14
 1,039
27
 1,598
 29
 1,902
Commercial6
 3,654
 1
 47
2
 264
 6
 2,593
Commercial - unsecured—
 —
 1
 26
Construction - commercial residential1
 1,198
 —
 —
Construction - other1
 411
 —
 —
Total30
 $6,729
 21
 $1,581
39
 $5,445
 45
 $6,045



NOTE 6 – Mortgage Servicing Rights

The following table summarizes the changes in mortgage servicing rights ("MSRs"), which are included in other assets on the consolidated balance sheets:
Three months ended March 31Three months ended September 30 Nine months ended September 30
2017 20162017 2016 2017 2016
(in thousands)(in thousands)
Amortized cost:          
Balance at beginning of period$38,822
 $40,944
$38,180
 $39,874
 $38,822
 $40,944
Originations of mortgage servicing rights1,183
 920
1,333
 1,499
 3,719
 3,927
Amortization(1,462) (1,669)(1,639) (2,064) (4,667) (5,562)
Balance at end of period$38,543
 $40,195
$37,874
 $39,309
 $37,874
 $39,309
          
Valuation Allowance - Balance at end of period$(1,291) $—
Valuation allowance:       
Balance at beginning of period$—
 $(1,721) $(1,291) $—
(Additions) reductions to valuation allowance—
 (1,280) 1,291
 (3,001)
Balance at end of period$—
 $(3,001) $—
 $(3,001)
          
Net MSRs at end of period$37,252
 $40,195
$37,874
 $36,308
 $37,874
 $36,308

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 no adjustment to the valuation allowance was necessary for the three months ended March 31,September 30, 2017, while a reduction of $1.3 million was required for the nine months ended September 30, 2017. NoAdditions to the valuation allowance was determinedof $1.3 million and $3.0 million were necessary for the three and nine months ended September 30, 2016, respectively. Additions and reductions to be necessarythe valuation allowance are recorded as decreases and increases, respectively, to "mortgage banking income" on the consolidated statements of March 31, 2016.

income.

NOTE 7 – Stock-Based Compensation

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

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

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



The following table presents compensation (benefit) expense and the related tax benefits for equity awards recognized in the consolidated statements of income:
 Three months ended March 31
 2017 2016
 (in thousands)
Stock-based compensation expense$734
 $1,436
Tax benefit(744) (433)
Stock-based compensation expense, net of tax benefit$(10) $1,003

For the quarter ended March 31, 2017, the tax benefit exceeded the stock-based compensation expense as a result of excess tax benefits related to stock option exercises during the quarter, which were recorded as a reduction to income tax expense as required under ASU 2016-09.
 Three months ended September 30 Nine months ended September 30
 2017 2016 2017 2016
 (in thousands)
Stock-based compensation expense$1,570
 $1,552
 $3,339
 $4,808
Tax benefit(628) (536) (3,312) (1,611)
Stock-based compensation expense, net of tax benefit$942
 $1,016
 $27
 $3,197

Stock option fair values are estimated through the use of the Black-Scholes valuation methodology as of the date of grant. Stock options carry terms of up to ten years. Fair values for restricted stock, RSUs and a majority of PSUs are based on the trading price of the Corporation’s stock on the date of grant and earn dividends or dividend equivalents during the vesting period, which are forfeitable if the awards do not vest. The fair value of certain PSUs are estimated through the use of the Monte Carlo valuation methodology as of the date of grant.

As of March 31,September 30, 2017, the Employee Equity Plan had 11.511.1 million shares reserved for future grants through 2023, and the Directors’ Plan had approximately 371,000360,000 shares reserved for future grants through 2021.

NOTE 8 – Employee Benefit Plans

The net periodic benefit cost for the Corporation’s Defined Benefit Pension Plan ("Pension Plan") consisted of the following components:
Three months ended March 31Three months ended September 30 Nine months ended September 30
2017 20162017 2016 2017 2016
(in thousands)(in thousands)
Service cost (1)
$—
 $150
$—
 $172
 $—
 $516
Interest cost830
 881
830
 880
 2,490
 2,640
Expected return on plan assets(451) (726)(451) (580) (1,353) (1,739)
Net amortization and deferral663
 782
663
 605
 1,989
 1,815
Net periodic benefit cost$1,042
 $1,087
$1,042
 $1,077
 $3,126
 $3,232

(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 net periodic benefit of the Corporation’s Postretirement Benefits Plan ("Postretirement Plan") consisted of the following components:
Three months ended March 31Three months ended September 30 Nine months ended September 30
2017 20162017 2016 2017 2016
(in thousands)(in thousands)
Interest cost$17
 $38
$17
 $21
 $51
 $64
Expected return on plan assets—
 —
 —
 (1)
Net accretion and deferral(141) (65)(141) (138) (423) (413)
Net periodic benefit$(124) $(27)$(124) $(117) $(372) $(350)

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:
March 31, 2017 December 31, 2016September 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$120,577
 $1,509
 $87,119
 $863
$141,250
 $1,283
 $87,119
 $863
Negative fair values3,761
 (28) 18,239
 (227)5,530
 (16) 18,239
 (227)
Net interest rate locks with customers
 1,481
 
 636

 1,267
 
 636
Forward Commitments              
Positive fair values20,362
 21
 70,031
 2,223
27,562
 48
 70,031
 2,223
Negative fair values81,615
 (289) 19,964
 (112)77,000
 (207) 19,964
 (112)
Net forward commitments  (268)   2,111
  (159)   2,111
Interest Rate Swaps with Customers              
Positive fair values1,024,684
 24,810
 876,744
 24,397
1,329,394
 34,028
 876,744
 24,397
Negative fair values625,050
 (18,226) 583,060
 (16,998)578,120
 (13,682) 583,060
 (16,998)
Net interest rate swaps with customers  6,584
   7,399
  20,346
   7,399
Interest Rate Swaps with Dealer Counterparties              
Positive fair values625,050
 18,226
 583,060
 16,998
578,120
 13,682
 583,060
 16,998
Negative fair values (1)
1,024,684
 (22,624) 876,744
 (24,397)1,329,394
 (27,663) 876,744
 (24,397)
Net interest rate swaps with dealer counterparties  (4,398)   (7,399)  (13,981)   (7,399)
Foreign Exchange Contracts with Customers              
Positive fair values8,184
 428
 11,674
 504
5,912
 332
 11,674
 504
Negative fair values5,035
 (137) 4,659
 (221)5,473
 (226) 4,659
 (221)
Net foreign exchange contracts with customers  291
   283
  106
   283
Foreign Exchange Contracts with Correspondent Banks              
Positive fair values9,260
 159
 7,040
 241
8,978
 293
 7,040
 241
Negative fair values10,198
 (402) 12,869
 (447)4,420
 (280) 12,869
 (447)
Net foreign exchange contracts with correspondent banks  (243)   (206)  13
   (206)
Net derivative fair value asset  $3,447
   $2,824
  $7,592
   $2,824

(1) Includes centrally cleared interest rate swaps with a notional amount of $134.9$324.3 million and a fair value of $0 as of March 31,September 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 March 31Three months ended September 30 Nine months ended September 30
2017 20162017 2016 2017 2016
(in thousands)(in thousands)
Interest rate locks with customers$845
 $1,232
$(59) $178
 $631
 $1,922
Forward commitments(2,379) (1,106)(48) 970
 (2,270) (1,042)
Interest rate swaps with customers(815) 29,431
(47) (1,948) 12,947
 48,052
Interest rate swaps with dealer counterparties3,001
 (29,431)1,248
 1,948
 (6,582) (48,052)
Foreign exchange contracts with customers8
 374
140
 47
 (177) 502
Foreign exchange contracts with correspondent banks(37) (279)(111) (266) 219
 (613)
Net fair value gains on derivative financial instruments$623
 $221
$1,123
 $929
 $4,768
 $769

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:
March 31,
2017		 December 31,
2016		September 30,
2017		 December 31,
2016
(in thousands)(in thousands)
Cost$24,255
 $28,708
$22,615
 $28,708
Fair value24,783
 28,697
23,049
 28,697

During the three months ended March 31,September 30, 2017 and 2016, the Corporation recorded losses related to changes in fair values of mortgage loans held for sale of $120,000 and $360,000, respectively. During the nine months ended September 30, 2017 and 2016, the Corporation recorded gains related to changes in fair values of mortgage loans held for sale of $539,000$445,000 and $230,000,$504,000, 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)
March 31, 2017       
September 30, 2017       
Interest rate swap derivative assets$43,036
 $(17,394) $—
 $25,642
$47,710
 $(14,163) $—
 $33,547
Foreign exchange derivative assets with correspondent banks159
 (159) —
 —
293
 (280) —
 13
Total$43,195
 $(17,553) $—
 $25,642
$48,003
 $(14,443) $—
 $33,560
              
Interest rate swap derivative liabilities$40,850
 $(17,394) $(2,850) $20,606
$41,345
 $(14,163) $(15,520) $11,662
Foreign exchange derivative liabilities with correspondent banks402
 (159) (200) 43
280
 (280) —
 —
Total$41,252
 $(17,553) $(3,050) $20,649
$41,625
 $(14,443) $(15,520) $11,662
              
December 31, 2016              
Interest rate swap derivative assets$41,395
 $(15,117) $—
 $26,278
$41,395
 $(15,117) $—
 $26,278
Foreign exchange derivative assets with correspondent banks241
 (241) —
 —
241
 (241) —
 —
Total$41,636
 $(15,358) $—
 $26,278
$41,636
 $(15,358) $—
 $26,278
              
Interest rate swap derivative liabilities$41,395
 $(15,117) $(4,010) $22,268
$41,395
 $(15,117) $(4,010) $22,268
Foreign exchange derivative liabilities with correspondent banks447
 (241) (206) —
447
 (241) (206) —
Total$41,842
 $(15,358) $(4,216) $22,268
$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(posted by the Corporation.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 were as follows:
March 31,
2017		 December 31, 2016September 30,
2017		 December 31, 2016
(in thousands)(in thousands)
Commitments to extend credit$6,228,866
 $6,075,567
$6,418,318
 $6,075,567
Standby letters of credit357,313
 356,359
331,096
 356,359
Commercial letters of credit38,003
 38,901
41,819
 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 March 31,September 30, 2017 and December 31, 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 March 31,September 30, 2017, the unpaid principal balance of loans sold under the MPF Program was approximately $98$89 million. As of both March 31,September 30, 2017 and December 31, 2016, the reserve for estimated credit losses related to loans sold under the MPF Program was $1.3 million and $1.7 million.million, respectively. Required reserves are calculated based on delinquency status and estimated loss rates established through the Corporation's existing allowance for credit losses methodology for residential mortgage loans.

As of both March 31,September 30, 2017 and December 31, 2016, the total reserve for losses on residential mortgage loans sold was $2.6$2.1 million and $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 March 31,September 30, 2017 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.

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

Fair Lending Investigation

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

Agostino, et al. Litigation

Fulton Bank, N.A. (the "Bank"), the Corporation’s largest bank subsidiary, and two unrelated, third-party defendants, Ameriprise Financial Services, Inc. (“Ameriprise”) and Riverview Bank (“Riverview”), have been named as defendants in a lawsuit brought on behalf of a group of 67 plaintiffs filed on March 31, 2016, in the Court of Common Pleas for Dauphin County, Pennsylvania (Agostino, et al. v. Ameriprise Financial Services, Inc., et al., No. 2016-CV-2048-CV). The plaintiffs in this action, who are individuals, trustees of certain irrevocable trusts, or the executors of the estates of deceased individuals, were clients of Jeffrey M. Mottern, a now-deceased attorney, who is alleged to have operated a fraud scheme over a period of years through the sale of fictitious high-yield investments or by otherwise misappropriating funds entrusted to Mr. Mottern. Mr. Mottern is alleged to have used the proceeds of these activities to engage in speculative securities trading through defendant Ameriprise, which caused significant losses, and for Mr. Mottern’s personal expenses. The allegations against the Bank relate to a commercial checking account at the Bank maintained by Mr. Mottern in connection with Mr. Mottern’s law practice. The lawsuit alleges that the Bank is liable to the plaintiffs for failing to properly monitor Mr. Mottern’s checking account and detect Mr. Mottern’s fraudulent activity, and specifically alleges that the Bank aided and abetted Mr. Mottern’s: (1) fraud; (2) breach of fiduciary duty; (3) violations of the Pennsylvania Unfair Trade Practices and Consumer Protection Law; and (4) conversion. Similar claims have been asserted against Ameriprise and Riverview, which allegedly maintained a personal brokerage account and a trust account for client or other third-party funds, respectively, for Mr. Mottern. The lawsuit seeks damages from the defendants, including the Bank, alleged to be in excess of $11.3 million, treble damages and attorneys’ fees with respect to alleged violations of the Pennsylvania Unfair Trade Practices and Consumer Protection Law, punitive damages, plus interest and costs. On April 29, 2016, the Bank filed a Notice of Removal to remove this lawsuit to the United States District Court for the Middle District of Pennsylvania. On May 31, 2016, the plaintiffs filed a motion to remand the lawsuit to the Court of Common Pleas for Dauphin County, Pennsylvania. On October 24, 2016, the District Court granted the plaintiffs' motion and the lawsuit was remanded back to the Court of Common Pleas for Dauphin County. All defendants subsequently filed preliminary objections to the Complaint, including objections that, if granted, would result in dismissal of the case. On April 17,May 26, 2017, the Court of Common Pleas for Dauphin County heard oral arguments concerning thedenied 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 Complaint.Motion and the Answer.

In October 2017, the Bank and the plaintiffs agreed to settle the lawsuit. The plaintiffs' Steering Committee, which represents the interests of the 67 plaintiffs, approved the specific terms of the settlement on October 26,2017 and recommended that each plaintiff execute the settlement agreement. The settlement involves the Bank making an aggregate payment to the plaintiffs' attorney on their behalf, in exchange for the plaintiffs' agreement to dismiss the claims against the Bank and any related matters with prejudice. The material terms of the settlement will become effective upon the dismissal of the claims against the Bank by the court, which the plaintiffs have agreed to pursue. The Corporation’s insurance carrier has informed the Corporation that it will reimburse the Corporation for the full amount of the Bank's agreed upon settlement payment, and, as a result, any further financial impact to the Corporation is expected to be immaterial.



NOTE 11 – Fair Value Measurements

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

The following tables present summaries of the Corporation’s assets and liabilities measured at fair value on a recurring basis and reported on the consolidated balance sheets:
March 31, 2017September 30, 2017
Level 1 Level 2 Level 3 TotalLevel 1 Level 2 Level 3 Total
(in thousands)(in thousands)
Mortgage loans held for sale$—
 $24,783
 $—
 $24,783
$—
 $23,049
 $—
 $23,049
Available for sale investment securities:              
Equity securities22,574
 —
 —
 22,574
13,059
 —
 —
 13,059
U.S. Government sponsored agency securities—
 5,996
 —
 5,996
—
 6,015
 —
 6,015
State and municipal securities—
 392,624
 —
 392,624
—
 413,913
 —
 413,913
Corporate debt securities—
 104,705
 3,172
 107,877
—
 89,755
 3,222
 92,977
Collateralized mortgage obligations—
 565,886
 —
 565,886
—
 593,678
 —
 593,678
Mortgage-backed securities—
 1,313,621
 —
 1,313,621
Residential mortgage-backed securities—
 1,182,086
 —
 1,182,086
Commercial mortgage-backed securities—
 161,632
 —
 161,632
Auction rate securities—
 —
 97,439
 97,439
—
 —
 98,156
 98,156
Total available for sale investment securities22,574
 2,382,832
 100,611
 2,506,017
13,059
 2,447,079
 101,378
 2,561,516
Other assets18,170
 44,567
 —
 62,737
18,742
 49,041
 —
 67,783
Total assets$40,744
 $2,452,182
 $100,611
 $2,593,537
$31,801
 $2,519,169
 $101,378
 $2,652,348
Other liabilities$18,099
 $41,167
 $—
 $59,266
$18,607
 $41,569
 $—
 $60,176
December 31, 2016December 31, 2016
Level 1 Level 2 Level 3 TotalLevel 1 Level 2 Level 3 Total
(in thousands)(in thousands)
Mortgage loans held for sale$—
 $28,697
 $—
 $28,697
$—
 $28,697
 $—
 $28,697
Available for sale investment securities:              
Equity securities24,526
 —
 —
 24,526
24,526
 —
 —
 24,526
U.S. Government sponsored agency securities—
 134
 —
 134
—
 134
 —
 134
State and municipal securities—
 391,641
 —
 391,641
—
 391,641
 —
 391,641
Corporate debt securities—
 106,537
 2,872
 109,409
—
 106,537
 2,872
 109,409
Collateralized mortgage obligations—
 593,860
 —
 593,860
—
 593,860
 —
 593,860
Mortgage-backed securities—
 1,342,401
 —
 1,342,401
Residential mortgage-backed securities—
 1,317,838
 —
 1,317,838
Commercial mortgage-backed securities—
 24,563
 —
 24,563
Auction rate securities—
 —
 97,256
 97,256
—
 —
 97,256
 97,256
Total available for sale investment securities24,526
 2,434,573
 100,128
 2,559,227
24,526
 2,434,573
 100,128
 2,559,227
Other assets17,111
 44,481
 —
 61,592
17,111
 44,481
 —
 61,592
Total assets$41,637
 $2,507,751
 $100,128
 $2,649,516
$41,637
 $2,507,751
 $100,128
 $2,649,516
Other liabilities$17,032
 $41,734
 $—
 $58,766
$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 March 31,September 30, 2017 and December 31, 2016 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 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 ($21.612.1 million at March 31,September 30, 2017 and $23.5 million at December 31, 2016) and other equity investments ($969,0001.0 million at March 31,September 30, 2017 and $1.0 million at December 31, 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 ($62.750.3 million at March 31,September 30, 2017 and $65.2 million at December 31, 2016), single-issuer trust preferred securities issued by financial institutions ($40.738.3 million at March 31,September 30, 2017 and $39.8 million at December 31, 2016), pooled trust preferred securities issued by financial institutions ($422,000 at both March 31,September 30, 2017 and December 31, 2016) and other corporate debt issued by non-financial institutions ($4.0 million at both March 31,September 30, 2017 and December 31, 2016).
Level 2 investments include the Corporation’s holdings of subordinated debt, other corporate debt issued by non-financial institutions and $38.0$35.5 million and $37.3 million of single-issuer trust preferred securities held at March 31,September 30, 2017 and December 31, 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 ($422,000 at both March 31,September 30, 2017 and December 31, 2016) and certain single-issuer trust preferred securities ($2.8 million at March 31,September 30, 2017 and $2.5 million at December 31, 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 valuesare tested by management through the performance of a trend analysis of the market price and discount rate.


Changes in the price and discount rates are compared to changes in market data, including bond ratings, parity ratios, balances and delinquency levels.


Other assets – Included in this category are the following:
Level 1 assets include mutual funds that are held in trust for employee deferred compensation plans ($17.618.1 million at March 31,September 30, 2017 and $16.4 million at December 31, 2016) and the fair value of foreign currency exchange contracts ($587,000625,000 at March 31,September 30, 2017 and $745,000 at December 31, 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 ($1.51.3 million at March 31,September 30, 2017 and $3.1 million at December 31, 2016) and the fair value of interest rate swaps ($43.047.7 million at March 31,September 30, 2017 and $41.4 million at December 31, 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 ($17.618.1 million at March 31,September 30, 2017 and $16.4 million at December 31, 2016) and the fair value of foreign currency exchange contracts ($539,000506,000 at March 31,September 30, 2017 and $668,000 at December 31, 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 ($317,000223,000 at March 31,September 30, 2017 and $339,000 at December 31, 2016) and the fair value of interest rate swaps ($40.941.3 million at March 31,September 30, 2017 and $41.4 million at December 31, 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, 2017
Pooled Trust
Preferred
Securities		 Single-issuer
Trust Preferred
Securities		 ARCs
(in thousands)
Balance at June 30, 2017$422
 $2,775
 $97,923
Unrealized adjustment to fair value (1)
—
 (28) 233
Discount accretion (2)
—
 3
 —
Balance at September 30, 2017$422
 $2,750
 $98,156
     
Three months ended September 30, 2016
Balance at June 30, 2016$706
 $2,425
 $97,886
Unrealized adjustment to fair value (1)
—
 7
 (318)
Discount accretion (2)
—
 3
 158
Balance at September 30, 2016$706
 $2,435
 $97,726
     
Three months ended March 31, 2017Nine months ended September 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 December 31, 2016$422
 $2,450
 $97,256
$422
 $2,450
 $97,256
Unrealized adjustment to fair value (1)
—
 297
 86
—
 291
 705
Discount accretion (2)
—
 3
 97
—
 9
 195
Balance at March 31, 2017$422
 $2,750
 $97,439
Balance at September 30, 2017$422
 $2,750
 $98,156
          
Three months ended March 31, 2016Nine months ended September 30, 2016
Balance at December 31, 2015$706
 $2,630
 $98,059
$706
 $2,630
 $98,059
Unrealized adjustment to fair value (1)
—
 (233) (832)—
 (204) (668)
Discount accretion (2)
—
 3
 99
—
 9
 335
Balance at March 31, 2016$706
 $2,400
 $97,326
Balance at September 30, 2016$706
 $2,435
 $97,726
     

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





Certain financial assets are not measured at fair value on an ongoing basis, but are subject to fair value measurement in certain circumstances, such as upon their acquisition or when there is evidence of impairment. The following table presents the Corporation’s Level 3 financial assets measured at fair value on a nonrecurring basis and reported on the Corporation’s consolidated balance sheets:
 March 31, 2017
 Level 1 Level 2 Level 3 Total
 (in thousands)
Net loans$—
 $—
 $131,693
 $131,693
Other financial assets—
 —
 49,158
 49,158
Total assets$—
 $—
 $180,851
 $180,851
December 31, 2016
Level 1 Level 2 Level 3 TotalSeptember 30, 2017 December 31, 2016
(in thousands)(in thousands)
Net loans$—
 $—
 $132,576
 $132,576
$140,779
 $132,576
Other financial assets—
 —
 50,347
 50,347
OREO10,542
 12,815
MSRs37,874
 37,532
Total assets$—
 $—
 $182,923
 $182,923
$189,195
 $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 assetsOREO – This category includes OREO ($11.910.5 million at March 31,September 30, 2017 and $12.8 million at December 31, 2016) and MSRs ($37.3 million at March 31, 2017 and $37.5 million at December 31, 2016), both classified as Level 3 assets.
Fair values for OREO were based on estimated selling prices less estimated selling costs for similar assets in active markets.
MSRs – This category includes MSRs ($37.9 million at September 30, 2017 and $37.5 million at December 31, 2016), classified as Level 3 assets. MSRs are initially recorded at fair value upon the sale of residential mortgage loans to secondary market investors. MSRs are amortized as a reduction to servicing income over the estimated lives of the underlying loans. MSRs are stratified and evaluated for impairment by comparing each stratum's carrying amount to its estimated fair value. Fair values are determined at the end of each quarter through a discounted cash flows valuation performed by a third-party valuation expert. Significant inputs to the valuation included expected net servicing income, the discount rate and the expected life of the underlying loans. Expected life is based on the contractual terms of the loans, as adjusted for prepayment projections. The weighted average annual constant prepayment rate and the weighted average discount rate used in the March 31,September 30, 2017 valuation were 11.3%12.4% and 10.1%9.5%, respectively. Management tests the reasonableness of the significant inputs to the third-party valuation in comparison to market data.











As required by FASB ASC Section 825-10-50, the following table details the book values and estimated fair values of the Corporation’s financial instruments as of March 31,September 30, 2017 and December 31, 2016. In addition, a general description of the methods and assumptions used to estimate such fair values is also provided.
March 31, 2017 December 31, 2016September 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$93,844
 $93,844
 $118,763
 $118,763
$99,803
 $99,803
 $118,763
 $118,763
Interest-bearing deposits with other banks284,750
 284,750
 233,763
 233,763
582,845
 582,845
 233,763
 233,763
Federal Reserve Bank and Federal Home Loan Bank stock65,637
 65,637
 57,489
 57,489
62,951
 62,951
 57,489
 57,489
Loans held for sale (1)
24,783
 24,783
 28,697
 28,697
23,049
 23,049
 28,697
 28,697
Available for sale investment securities (1)
2,506,017
 2,506,017
 2,559,227
 2,559,227
2,561,516
 2,561,516
 2,559,227
 2,559,227
Net Loans (1)
14,793,101
 14,592,018
 14,530,593
 14,387,454
15,314,654
 15,086,654
 14,530,593
 14,387,454
Accrued interest receivable46,355
 46,355
 46,294
 46,294
50,082
 50,082
 46,294
 46,294
Other financial assets (1)
206,555
 206,555
 206,132
 206,132
219,434
 219,434
 206,132
 206,132
FINANCIAL LIABILITIES          
    
Demand and savings deposits$12,371,970
 $12,371,970
 $12,259,622
 $12,259,622
$13,274,319
 $13,274,319
 $12,259,622
 $12,259,622
Brokered Deposits109,936
 109,936
 —
 —
Time deposits2,718,374
 2,735,944
 2,753,242
 2,769,757
2,757,525
 2,759,913
 2,753,242
 2,769,757
Short-term borrowings453,317
 453,317
 541,317
 541,317
298,751
 298,751
 541,317
 541,317
Accrued interest payable12,506
 12,506
 9,632
 9,632
10,568
 10,568
 9,632
 9,632
Other financial liabilities (1)
219,600
 219,600
 216,080
 216,080
234,160
 234,160
 216,080
 216,080
Federal Home Loan Bank advances and long-term debt1,137,909
 1,132,282
 929,403
 928,167
Federal Home Loan Bank advances and other long-term debt1,038,159
 1,035,053
 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.

The fair values of FHLB advances and long-term debt were estimated by discounting the remaining contractual cash flows using a rate at which the Corporation could issue debt with similar remaining maturities as of the balance sheet date. These borrowings would be categorized in Level 2 liabilities under FASB ASC Topic 820.




NOTE 12 – Long-Term Debt and Subsequent Event

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



Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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.  

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, investigations and investigations,examinations, including potential supervisory actions and the assessment of fines and penalties;
the additional time, expense and investment required to comply with, and the restrictions on potential growth and investment activities resulting from, the existing enforcement orders applicable to the Corporation and 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 actions by the federal government, including those of the Federal Reserve Board and other government agencies, that impact money supply and market interest rates;
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 financial conditionconsolidated balance sheets and resultsconsolidated statements of operations;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;risks, including data breaches or cyberattacks;
the Corporation’s ability to keep pace with technological changes;
the Corporation’s ability to attract and retain talented personnel;
capital and liquidity strategies, including the Corporation’s ability to comply with applicable capital and liquidity requirements, and the Corporation’s ability to generate capital internally or raise capital on favorable terms;
the Corporation’s reliance on its subsidiaries for substantially all of its revenues and its ability to pay dividends or other distributions; and
the effects of any downgrade in the Corporation’s credit ratings on its borrowing costs or access to capital markets.

RESULTS OF OPERATIONS

Overview

Fulton 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
March 31		As of or for the
Three months ended
September 30		 As of or for the
Nine months ended
September 30
2017 20162017 2016 2017 2016
Net income (in thousands)$43,380
 $38,257
$48,905
 $41,468
 $137,752
 $119,475
Diluted net income per share$0.25
 $0.22
$0.28
 $0.24
 $0.78
 $0.69
Return on average assets0.92% 0.86%0.98% 0.89% 0.95% 0.87%
Return on average equity8.22% 7.47%8.76% 7.78% 8.45% 7.64%
Return on average tangible equity (1)
10.93% 10.07%11.52% 10.38% 11.18% 10.24%
Net interest margin (2)
3.26% 3.23%3.27% 3.14% 3.27% 3.19%
Efficiency ratio (1)
64.76% 68.33%64.3% 65.2% 64.6% 67.0%
Non-performing assets to total assets0.75% 0.82%0.73% 0.80% 0.73% 0.80%
Annualized net charge-offs to average loans0.09% 0.20%0.14% 0.11% 0.12% 0.14%
 
(1)Ratio represents a financial measure derived by methods other than U.S. Generally Accepted Accounting Principles ("U.S. GAAP"). See reconciliation of this non-U.S. GAAP financial measure to the most comparable U.S. GAAP measure under the heading, "Supplemental Reporting of Non-U.S.GAAP Based Financial Measures" at the end of this "Overview and Outlook""Overview" section.
(2)Presented on an FTE basis, using a 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 nine months ended March 31,September 30, 2017 increased $5.1$7.4 million, or 13.4%17.9%, and $18.3 million, or 15.3%, respectively, compared to the same periodperiods in 2016.The increase was mainly due to higher net interest income and non-interest income, partially offset by increases in the provision for credit losses and non-interest expenses.



The following is a summary of financial highlights for the three and nine months ended March 31,September 30, 2017:

FTE Net Interest Income and Net Interest Margin - For the three and nine months ended March 31,September 30, 2017, FTE net interest income increased $9.2$16.9 million, or 6.9%12.5%, and $39.6 million, or 9.8%, in comparison to the same periodperiods in 2016. This increase wasThese increases were driven by growth in interest-earning assets and a 3 basis point increaseimprovements in the net interest margin.


Averagemargin, resulting from increases in yields on interest-earning assets increased $1.1 billion, or 6.4%,exceeding increases in costs of interest-bearing liabilities. The growth in interest-earning assets accounted for approximately 70% and 87% of the first quarter ofFTE net interest income growth for the three and nine months ended September 30, 2017, in comparison to the same period in 2016, mainly due to a $1.0 billion, or 7.2%, increase in average loans and a $106.9 million, or 4.4%, increase in average investment securities, partially offset by a $46.3 million, or 12.9%, decrease in average other interest-earning assets. Average interest-bearing liabilities increased $644.7 million, or 5.5%, primarily due to a $345.8 million, or 3.4%, increase in average interest-bearing deposits, a $267.1 million, or 60.0%, increase in average short-term borrowings and a $31.8 million, or 3.3%, increase in average FHLB advances and long-term debt. Additional funding to supportrespectively, while the increase in average interest-earning assets was provided by a $333.8 million, or 8.4%, increasenet interest margin accounted for the remaining 30% and 13% growth 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 approximately 5.96%. The net impact of these transactions will be a decrease in interest expense of approximately $300,000 per quarter, which will be fully realized beginning in the third quarter of 2017.periods, respectively.

Asset Quality - The Corporation recorded a $4.8 million provision for credit losses for the three months ended March 31,September 30, 2017 was $5.1 million , compared to a $1.5$4.1 million provision for the same period in 2016. For the nine months ended September 30, 2017, the provision for credit losses was $16.6 million, compared to an $8.2 million provision for the same period in 2016. The increaseincreases in provision for credit losses inthe 2017 wasperiods were largely due to growth in the loan portfolio.portfolio, as credit metrics were generally stable.

Asset quality improved for the three months ended March 31, 2017 as compared to the same period of 2016. Annualized net charge-offs to average loans outstanding were 0.09%0.14% for the firstthird quarter of 2017, compared to 0.20%0.11% for the firstthird quarter of 2016. For the first nine months of 2017, annualized net charge-offs to average loans outstanding improved to 0.12%, compared to 0.14% for the same period of 2016.

Non-performing assets decreased $4.7$3.1 million, or 3.2%2.1%, as of March 31,September 30, 2017 comparedin comparison to March 31,September 30, 2016 and were 0.75% and 0.82%decreased to 0.73% as a percentage of total assets, compared to 0.80% as of March 31, 2017 and March 31, 2016, respectively.September 30, 2016. The total delinquency rate was 1.23%improved to 1.28% as of March 31,September 30, 2017, compared to 1.44%from 1.38% as of March 31,September 30, 2016.

Non-interest Income - For the three and nine months ended March 31,September 30, 2017, non-interest income, excluding investment securities gains, increased $3.4$770,000, or 1.6%, and $7.5 million, or 8.0%5.5%, in comparison to the same periodperiods in 2016.2016, respectively. The increase wasincreases were primarily driven by higher commercial loan interest rate swap fees, investment management and trust services income and mortgage banking income. Improvements in mortgage banking income were largely due to changes in the MSR valuation allowance. See further discussion under non-interest income in "Results of Operations."

Investment securities gains for the three and nine months ended March 31,September 30, 2017 were $1.1$4.6 million and $7.1 million, respectively, as compared to $947,000$2,000 and $1.0 million for the same periodperiods in 2016.2016, respectively.

Non-interest Expense - For the three and nine months ended March 31,September 30, 2017, non-interest expense increased $1.9$12.3 million, or 1.5%10.3%, and $25.2 million, or 7.0%, respectively, in comparison to the first quartersame periods of 2016. The increaseincreases were primarily driven by higher salaries and employee benefits, amortization of certain tax credit investments, other outside services and net occupancy expenses. Amortization of certain new tax credit investments was primarilyclassified in non-interest expense rather than income tax expense in 2017. There was no impact on net income as a result of the different classifications of the amortization for these new tax credit investments as the increases in state taxes, amortization of certain community development investments and software expenses, partiallynon-interest expense were offset by decreases in data processing expense and FDIC insuranceincome tax expense.


























Supplemental Reporting of Non-U.S. GAAP Based Financial Measures
This Quarterly Report on Form 10-Q contains supplemental financial information, as detailed below, which has been derived by methods other than U.S. GAAP. The Corporation has presented these non-U.S. GAAP financial measures because it believes that these measures provide useful and comparative information to assess trends in the Corporation's results of operations. Presentation of these non-U.S. GAAP financial measures is consistent with how the Corporation evaluates its performance internally, and these non-U.S. GAAP financial measures are frequently used by securities analysts, investors and other interested parties in the evaluation of companies in the Corporation's industry. Management believes that these non-U.S. GAAP financial measures, in addition to U.S. GAAP measures, are also useful to investors to evaluate the Corporation's results. Investors should recognize that the Corporation's presentation of these non-U.S. GAAP financial measures might not be comparable to similarly-titled measures of other companies. These non-U.S. GAAP financial measures should not be considered a substitute for U.S. GAAP basis measures, and the Corporation strongly encourages a review of its consolidated financial statements in their entirety. Following are reconciliations of these non-U.S. GAAP financial measures to the most directly comparable U.S. GAAP measure as of and for the three and nine months ended March 31:September 30:
As of or for the
Three months ended
March 31		As of or for the
Three months ended
September 30		 As of or for the
Nine months ended
September 30
2017 20162017 2016 2017 2016
(in thousands)(dollars in thousands)
Return on average tangible equity
Net income - numerator$43,380
 $38,257
$48,905
 $41,468
 $137,752
 $119,475
          
Average common shareholders' equity$2,140,547
 $2,058,799
$2,215,389
 $2,120,596
 $2,179,316
 $2,089,882
Less: Average goodwill and intangible assets(531,556) (531,556)(531,556) (531,556) (531,556) (531,556)
Average tangible shareholders' equity - denominator$1,608,991
 $1,527,243
$1,683,833
 $1,589,040
 $1,647,760
 $1,558,326
          
Return on average tangible equity, annualized10.93% 10.07%11.52% 10.38% 11.18% 10.24%
          
Efficiency ratio          
Non-interest expense - numerator$122,275
 $120,413
Non-interest expense$132,157
 $119,848
 $387,127
 $361,898
Less: Amortization of tax credit investments (1)
(3,503) —
 (7,652) —
Numerator$128,654
 $119,848
 $379,475
 $361,898
          
Net interest income (fully taxable equivalent) (1)
$143,243
 $134,026
Net interest income (fully taxable equivalent) (2)
$152,721
 $135,784
 $443,313
 $403,700
Plus: Total Non-interest income46,673
 43,137
51,974
 48,149
 151,018
 137,423
Less: Investment securities gains, net(1,106) (947)(4,597) (2) (7,139) (1,025)
Denominator$188,810
 $176,216
$200,098
 $183,931
 $587,192
 $540,098
          
Efficiency ratio64.76% 68.33%64.3% 65.2% 64.6% 67.0%

(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 September 30, 2017 would have been 24.8% vs 20.5%.
(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 March 31,September 30, 2017 compared to the Quarter Ended March 31,September 30, 2016

Net Interest Income

FTE net interest income increased $9.2$16.9 million, to $143.2$152.7 million, in the firstthird quarter of 2017, from $134.0$135.8 million in the firstthird quarter of 2016. The increase was due to a $1.1$1.3 billion, or 6.4%7.8%, increase in interest-earning assets and a 313 basis points, or 0.9%4.1%, increase in net interest margin, to 3.26%3.27%, for the firstthird quarter of 2017 compared to 3.23%3.14% for the firstthird quarter of 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 March 31Three months ended September 30
2017 20162017 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)
$14,857,562
 $146,650
 4.00% $13,853,420
 $137,895
 4.00%$15,392,067
 $159,454
 4.12% $14,212,250
 $140,434
 3.93%
Taxable investment securities (3)
2,145,656
 11,914
 2.19
 2,180,593
 12,003
 2.20
2,115,931
 11,423
 2.16
 2,110,084
 10,872
 2.06
Tax-exempt investment securities (3)
403,856
 4,383
 4.34
 259,396
 3,138
 4.84
408,594
 4,492
 4.40
 344,231
 3,923
 4.56
Equity securities (3)
11,740
 176
 6.08
 14,386
 218
 6.10
8,709
 143
 6.52
 14,209
 196
 5.50
Total investment securities2,561,252
 16,473
 2.57
 2,454,375
 15,359
 2.50
2,533,234
 16,058
 2.53
 2,468,524
 14,991
 2.43
Loans held for sale15,857
 187
 4.72
 12,252
 131
 4.28
22,456
 243
 4.33
 22,593
 210
 3.72
Other interest-earning assets312,295
 842
 1.08
 358,562
 898
 1.00
590,676
 1,667
 1.12
 501,666
 1,051
 0.84
Total interest-earning assets17,746,966
 164,152
 3.74% 16,678,609
 154,283
 3.72%18,538,433
 177,422
 3.80% 17,205,033
 156,686
 3.63%
Noninterest-earning assets:                      
Cash and due from banks116,529
     98,449
    101,643
     101,927
    
Premises and equipment217,875
     226,284
    220,129
     227,906
    
Other assets1,149,621
     1,137,292
    1,186,622
     1,219,844
    
Less: Allowance for loan losses(170,134)     (167,372)    (174,101)     (163,074)    
Total Assets$19,060,857
     $17,973,262
    $19,872,726
     $18,591,636
    
LIABILITIES AND EQUITY                      
Interest-bearing liabilities:                      
Demand deposits$3,650,931
 $2,239
 0.25% $3,438,355
 $1,494
 0.17%$3,943,118
 $3,847
 0.39% $3,602,448
 $1,706
 0.19%
Savings and money market deposits4,194,216
 2,211
 0.21
 3,932,824
 1,804
 0.18
4,603,155
 3,962
 0.34
 4,078,942
 2,042
 0.20
Brokered deposits89,767
 277
 1.23
 —
 —
 —
Time deposits2,739,453
 7,351
 1.09
 2,867,651
 7,429
 1.04
2,744,532
 7,937
 1.15
 2,814,258
 7,562
 1.07
Total interest-bearing deposits10,584,600
 11,801
 0.45
 10,238,830
 10,727
 0.42
11,380,572
 16,023
 0.56
 10,495,648
 11,310
 0.43
Short-term borrowings712,497
 855
 0.48
 445,402
 268
 0.24
402,341
 578
 0.57
 426,369
 254
 0.23
Federal Home Loan Bank advances and long-term debt990,044
 8,252
 3.35
 958,213
 9,262
 3.88
FHLB advances and other long-term debt1,038,062
 8,100
 3.11
 965,228
 9,338
 3.86
Total interest-bearing liabilities12,287,141
 20,908
 0.69% 11,642,445
 20,257
 0.70%12,820,975
 24,701
 0.77% 11,887,245
 20,902
 0.70%
Noninterest-bearing liabilities:
          
          
Demand deposits4,301,727
     3,967,887
    4,494,897
     4,227,639
    
Other331,442
     304,131
    341,465
     356,156
    
Total Liabilities16,920,310
     15,914,463
    17,657,337
     16,471,040
    
Shareholders’ equity2,140,547
     2,058,799
    2,215,389
     2,120,596
    
Total Liabilities and Shareholders’ Equity$19,060,857
     $17,973,262
    $19,872,726
     $18,591,636
    
Net interest income/net interest margin (FTE)  143,244
 3.26%   134,026
 3.23%  152,721
 3.27%   135,784
 3.14%
Tax equivalent adjustment  (5,665)     (4,972)    (5,912)     (5,219)  
Net interest income  $137,579
     $129,054
    $146,809
     $130,565
  
(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 March 31,September 30, 2017 in comparison to the three months ended March 31,September 30, 2016:
2017 vs. 2016
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$8,772
 $(17) $8,755
$12,223
 $6,797
 $19,020
Taxable investment securities(67) (22) (89)30
 521
 551
Tax-exempt investment securities1,586
 (341) 1,245
714
 (145) 569
Equity securities(41) (1) (42)(86) 33
 (53)
Loans held for sale42
 14
 56
(1) 34
 33
Other interest-earning assets(125) 69
 (56)212
 404
 616
Total interest income$10,167
 $(298) $9,869
$13,092
 $7,644
 $20,736
Interest expense on:          
Demand deposits$95
 $650
 $745
$177
 $1,964
 $2,141
Savings and money market deposits120
 287
 407
293
 1,627
 1,920
Brokered deposits277
 —
 277
Time deposits(368) 290
 (78)(186) 561
 375
Short-term borrowings224
 363
 587
(15) 339
 324
Federal Home Loan Bank advances and long-term debt291
 (1,301) (1,010)
FHLB advances and other long-term debt674
 (1,912) (1,238)
Total interest expense$362
 $289
 $651
$1,220
 $2,579
 $3,799
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 firstthird quarter of 2016 resulted in an $10.2a $13.1 million increase in FTE interest income. ThisThe 17 basis points increase was partially offset byin the yield on average interest-earning assets resulted in a decrease of $298,000 related to rate changes largely within the investment portfolio.$7.6 million increase in FTE interest income. The yield on the loan portfolio was unchangedincreased 19 basis points, or 4.8%, from the firstthird quarter of 2016, the net result of maturing, refinanced or adjustable rate loans originated in earlier periods at higher rates and originations of new loans or loans that repriced at lower current rates, offset by the impact of increases in rates for certain variable rate loans related to increases in the federal fund rate.

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

















Interest expense increased $3.8 million primarily due to the 20 and 14 basis points increases in the rate on average interest-bearing demand deposits and savings and money market deposits, as a result of the federal funds rate increases. These basis points increases contributed $2.0 million and $1.6 million to the increase in FTE interest expense, respectively. These increases were partially offset by a 75 basis points decrease in the rate on average FHLB advances and other long-term debt, which lowered FTE interest expense by $1.2 million.

Average loans and average FTE yields, by type, are summarized in the following table:
Three months ended March 31 Increase (Decrease) inThree months ended September 30 Increase (Decrease) in
2017 2016 Balance2017 2016 Balance
Balance Yield Balance Yield $ %Balance Yield Balance Yield $ %
(dollars in thousands)(dollars in thousands)
Real estate – commercial mortgage$6,039,140
 3.98% $5,487,421
 4.03% $551,719
 10.1%$6,208,630
 4.07% $5,670,888
 3.99% $537,742
 9.5%
Commercial – industrial, financial and agricultural4,205,070
 3.89
 4,095,268
 3.79
 109,802
 2.7
4,257,075
 4.08
 4,066,275
 3.76
 190,800
 4.7
Real estate – residential mortgage1,637,669
 3.76
 1,381,409
 3.78
 256,260
 18.6
1,841,559
 3.83
 1,503,209
 3.76
 338,350
 22.5
Real estate – home equity1,613,249
 4.18
 1,674,032
 4.10
 (60,783) (3.6)1,569,898
 4.48
 1,640,913
 4.08
 (71,015) (4.3)
Real estate – construction840,968
 3.97
 792,014
 3.82
 48,954
 6.2
943,029
 4.05
 837,920
 3.76
 105,109
 12.5
Consumer284,352
 5.26
 263,295
 5.53
 21,057
 8.0
318,546
 4.94
 281,517
 5.31
 37,029
 13.2
Leasing, other and overdrafts237,114
 5.08
 159,981
 7.46
 77,133
 48.2
253,330
 4.91
 211,528
 4.74
 41,802
 19.8
Total$14,857,562
 4.00% $13,853,420
 4.00% $1,004,142
 7.2%$15,392,067
 4.12% $14,212,250
 3.93% $1,179,817
 8.3%


Average loans increased $1.0$1.2 billion, or 7.2%8.3%, compared to the firstthird quarter of 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 $551.7$537.7 million, or 10.1%9.5%, increase in commercial mortgages occurred in both owner-occupied and investment property types and was realized across most geographic markets. The $338.4 million, or 22.5%, increase in residential mortgages was also experienced across all geographic markets, but largelywith the most significant increases occurring in the PennsylvaniaMaryland, Virginia and Maryland markets.Pennsylvania. This growth was in part related to new product offerings and marketing efforts targeting specific customer segments, including loans to low- to moderate-income and minority borrowers and loans in low- to moderate-income and majority-minority geographies. The $256.3$190.8 million, or 18.6%, increase in the residential mortgages was primarily the result of a strategic decision to retain certain mortgage loans. The $109.8 million, or 2.7%4.7%, increase in commercial loans was spread across a broad range of industries and concentrated in the Pennsylvania market. The average yield on loans remained unchanged, at 4.00% in both 2017 and 2016.Pennsylvania.

Average total interest-bearing liabilities increased $644.7$933.7 million, or 5.5%7.9%, compared to the firstthird quarter of 2016. Interest expense increased $651,000,$3.8 million, or 3.2%18.2%, to $20.9$24.7 million in the firstthird quarter of 2017. Average deposits and average interest rates, by type, are summarized in the following table:
Three months ended March 31 Increase (Decrease) in BalanceThree months ended September 30 Increase (Decrease) in Balance
2017 2016 2017 2016 
Balance Rate Balance Rate $ %Balance Rate Balance Rate $ %
(dollars in thousands)(dollars in thousands)
Noninterest-bearing demand$4,301,727
 —% $3,967,887
 —% $333,840
 8.4%$4,494,897
 —% $4,227,639
 —% $267,258
 6.3%
Interest-bearing demand3,650,931
 0.25
 3,438,355
 0.17
 212,576
 6.2
3,943,118
 0.39
 3,602,448
 0.19
 340,670
 9.5
Savings and money market accounts4,194,216
 0.21
 3,932,824
 0.18
 261,392
 6.6
4,603,155
 0.34
 4,078,942
 0.20
 524,213
 12.9
Total demand and savings12,146,874
 0.15
 11,339,066
 0.12
 807,808
 7.1
13,041,170
 0.24
 11,909,029
 0.13
 1,132,141
 9.5
Brokered deposits89,767
 1.23
 —
 —
 89,767
 N/M
Time deposits2,739,453
 1.09
 2,867,651
 1.04
 (128,198) (4.5)2,744,532
 1.15
 2,814,258
 1.07
 (69,726) (2.5)
Total deposits$14,886,327
 0.32% $14,206,717
 0.30% $679,610
 4.8%$15,875,469
 0.40% $14,723,287
 0.31% $1,152,182
 7.8%
N/M - Not meaningful

The $807.8 million,$1.1 billion, or 7.1%9.5%, increase in total demand and savings accounts was primarily due to a $468.7$623.2 million, or 8.9%11.3%, increase in personal account balances, a $274.1$276.4 million, or 6.7%6.4%, increase in business account balances and a $51.9$221.2 million, or 2.7%10.7%, increase in municipal account balances.

During the third quarter of 2017, the Corporation began accepting deposits under an agreement with a non-bank third party pursuant to which excess cash in the accounts of customers of the third party is swept on a collective basis, as frequently as every business day, by the third party, into omnibus deposit accounts maintained by one of the Corporation’s subsidiary banks. Under the agreement with the third party, generally, no more than $250 million of excess cash in accounts of customers of the third party may be swept into the omnibus deposit accounts. The average balance in the omnibus accounts during the third quarter of 2017 was $89.8 million and is shown as “brokered deposits” in the above table. This source of funding is considered to be both geographically diverse and relatively stable, with balances in the omnibus deposit accounts bearing interest at a rate based on the federal funds rate.
The average cost of total deposits increased 29 basis points to 0.32%0.40% in the firstthird quarter of 2017, compared to 0.30%0.31% in the firstthird quarter of 2016.



















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

 Three months ended September 30 Increase (Decrease)
 2017 2016 in Balance
 Balance Rate Balance Rate $ %
 (dollars in thousands)
Short-term borrowings:           
Customer repurchase agreements and short-term promissory notes$256,562
 0.19% $257,659
 0.09% $(1,097) (0.4)%
Federal funds purchased90,453
 1.21
 148,546
 0.47
 (58,093) (39.1)
Short-term FHLB advances (1)
55,326
 1.24
 20,163
 0.41
 35,163
 174.4
Total short-term borrowings402,341
 0.57
 426,368
 0.23
 (24,027) (5.6)
Long-term debt:    
   
 
FHLB advances652,160
 2.30
 603,285
 3.17
 48,875
 8.1
Other long-term debt385,902
 4.48
 361,943
 5.01
 23,959
 6.6
Total long-term debt1,038,062
 3.11
 965,228
 3.86
 72,834
 7.5
Total borrowings$1,440,403
 2.40% $1,391,596
 2.75% $48,807
 3.5 %
(1) Represents FHLB advances with an original maturity term of less than one year.

TotalAverage total short-term borrowings increased $267.1decreased $24.0 million, or 60.0%5.6%, as a resultportion of loanthese borrowings were repaid with funds provided by the strong growth out-pacingin deposits during the increase in deposits.third quarter of 2017.

The increase of $48.9 million, or 8.1%, in average long-term FHLB advances provided additional funding to support loan growth. Average long-term debt increased $31.8$72.8 million, or 3.3%7.5%, due mainly to the issuance of $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 5375 basis point, or 13.7%19.4%, decrease in the average rate on long-term debt was primarily a result of $200 million of FHLB advances that were refinanced in December of 2016, which reduced the weighted average rate on these advances from 4.03% to 2.40%.

Provision for Credit Losses

The provision for credit losses was $4.8$5.1 million for the firstthird quarter of 2017, an increase of $3.3 million$934,000 from the firstthird quarter of 2016, driven mainly by loan growth.growth 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 and Allowance for Credit Losses" for details related to the Corporation's provision and allowance for credit losses.



















Non-Interest Income

The following table presents the components of non-interest income:
 Three months ended September 30 Increase (Decrease)
 2017 2016 $ %
 (dollars in thousands)
Service charges on deposit accounts:       
Overdraft fees$5,844
 $5,770
 $74
 1.3 %
Cash management fees3,624
 3,605
 19
 0.5 %
Other3,554
 3,703
 (149) (4.0)%
         Total service charges on deposit accounts13,022
 13,078
 (56) (0.4)%
Other service charges and fees:       
Merchant fees4,398
 4,220
 178
 4.2
Debit card income2,830
 2,718
 112
 4.1
Commercial loan interest rate swap fees1,954
 4,359
 (2,405) (55.2)
Letter of credit fees1,056
 1,078
 (22) (2.0)
Other2,013
 2,032
 (19) (0.9)
        Total other service charges and fees12,251
 14,407
 (2,156) (15.0)
Investment management and trust services12,157
 11,425
 732
 6.4
Mortgage banking income:       
Gains on sales of mortgage loans3,560
 4,857
 (1,297) (26.7)
Mortgage servicing income1,245
 (328) 1,573
 N/M
        Total mortgage banking income4,805
 4,529
 276
 6.1
Credit card income2,829
 2,668
 161
 6.0
Other income2,313
 2,040
 273
 13.4
        Total, excluding investment securities gains, net47,377
 48,147
 (770) (1.6)
Investment securities gains, net4,597
 2
 4,595
 N/M
              Total$51,974
 $48,149
 $3,825
 7.9 %
N/M - Not meaningful

Excluding investment securities gains, non-interest income decreased $770,000, or 1.6%, in the third quarter of 2017 as compared to the same period in 2016. Other service charges and fees decreased $2.2 million, or 15.0%, primarily due to a $2.4 million decrease in commercial loan interest rate swap fees, mainly as a result of lower commercial loan originations during the third quarter of 2017.
Investment management and trust services income increased $732,000, or 6.4%, in the third quarter of 2017 as compared to the same period in 2016, with growth in both trust commissions and brokerage income, due to overall market performance and an increase in assets under management.
Gains on sales of mortgage loans decreased $1.3 million, or 26.7%, in the third quarter of 2017 compared to the same period in 2016, as both volumes and pricing spreads decreased. Mortgage servicing income increased $1.6 million as the third quarter of 2016 included an MSR impairment charge of $1.3 million. Excluding this charge, mortgage servicing income increased $293,000, or 30.8%. For more information, see Note 6, "Mortgage Servicing Rights," in the Notes to Consolidated Financial Statements for additional details.
Investment securities gains increased $4.6 million from the third quarter of 2016. The increase resulted from sales of financial institution common stocks. See Note 4, "Investment Securities," in the Notes to Consolidated Financial Statements for additional details.


Non-Interest Expense

The following table presents the components of non-interest expense:
 Three months ended September 30 Increase 
 2017 2016 $ %
 (dollars in thousands)
Salaries and employee benefits$72,894
 $70,696
 $2,198
 3.1%
Net occupancy expense12,180
 11,782
 398
 3.4
Data processing and software10,301
 8,727
 1,574
 18.0
Other outside services6,582
 5,783
 799
 13.8
Amortization of tax credit investments3,503
 —
 3,503
 N/M
Professional fees3,388
 2,535
 853
 33.6
Equipment expense3,298
 3,137
 161
 5.1
FDIC insurance expense3,007
 1,791
 1,216
 67.9
Marketing2,089
 1,774
 315
 17.8
Other14,915
 13,623
 1,292
 9.5
Total$132,157
 $119,848
 $12,309
 10.3%
N/M - Not meaningful

The increase in salaries and employee benefits expense was driven entirely by salaries, reflecting annual merit increases and an increase in staffing levels. Average full-time equivalent employees increased 2.2%, to 3,582 in 2017, as compared to 3,504 in 2016.
Data processing and software expense increased $1.6 million, or 18.0%, reflecting higher transaction volumes and new processing platforms.
Other outside services increased $799,000, or 13.8%, largely due to consulting services related to pre-bank consolidation efforts and technology initiatives.
In 2017, amortization of certain new tax credit investments was classified in non-interest expense, rather than income tax expense, as further discussed under income taxes below.
The $853,000, or 33.6%, increase in professional fees was driven by higher legal expenses. FDIC insurance expense increased $1.2 million, or 67.9%, reflecting the Corporation's largest banking subsidiary exceeding $10 billion in assets and becoming subject to the 'large bank' premium assessments and balance sheet growth. Marketing expense increased $315,000, or 17.8%, compared to the third quarter of 2016, due to an increase in the number of marketing promotions.

Other expenses increased $1.3 million, or 9.5%, due to higher state taxes resulting from legislated increases in the Pennsylvania bank shares tax rate, and certain sales tax liabilities.

Income Taxes

Income tax expense for the third quarter of 2017 was $12.6 million, a $611,000, or 4.6%, decrease from $13.3 million for the third quarter of 2016.

The Corporation’s effective tax rate was 20.5% in the third quarter of 2017, as compared to 24.2% in the third quarter of 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, credits earned from community development investments 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 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 third quarter of 2017 would have been 24.8%.






Nine Months Ended September 30, 2017 compared to the Nine Months Ended September 30, 2016

Net Interest Income

FTE net interest income increased $39.6 million, to $443.3 million, in the first nine months of 2017, from $403.7 million in the same period of 2016. The increase was due to a $1.2 billion, or 7.1%, increase in interest-earning assets and an 8 basis points, or 2.5%, increase in net interest margin, to 3.27%, for the first nine months of 2017 compared to 3.19% for the same period in 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 30
 2017 2016
 Average
Balance		 Interest  (1) Yield/
Rate		 Average
Balance		 Interest  (1) Yield/
Rate
ASSETS(dollars in thousands)
Interest-earning assets:           
Loans, net of unearned income (2)
$15,127,569
 $458,753
 4.05% $14,011,301
 $416,646
 3.97%
Taxable investment securities (3)
2,117,127
 34,811
 2.19
 2,139,378
 34,034
 2.12
Tax-exempt investment securities (3)
405,728
 13,268
 4.36
 306,298
 10,631
 4.63
Equity securities (3)
10,391
 467
 6.01
 14,272
 599
 5.60
Total investment securities2,533,246
 48,546
 2.56
 2,459,948
 45,264
 2.45
Loans held for sale19,378
 631
 4.34
 18,114
 529
 3.90
Other interest-earning assets410,250
 3,311
 1.08
 406,163
 2,813
 0.92
Total interest-earning assets18,090,443
 511,241
 3.78% 16,895,526
 465,252
 3.68%
Noninterest-earning assets:           
Cash and due from banks107,029
     100,417
    
Premises and equipment218,700
     227,237
    
Other assets1,170,466
     1,182,260
    
Less: Allowance for loan losses(172,145)     (164,999)    
Total Assets$19,414,493
     $18,240,441
    
LIABILITIES AND EQUITY           
Interest-bearing liabilities:           
Demand deposits$3,762,439
 $8,865
 0.32% $3,498,659
 $4,727
 0.18%
Savings deposits4,372,453
 8,883
 0.27
 4,000,871
 5,732
 0.19
Brokered deposits30,251
 277
 1.23
 —
 —
 —
Time deposits2,726,693
 22,684
 1.11
 2,842,011
 22,465
 1.06
Total interest-bearing deposits10,891,836
 40,709
 0.50
 10,341,541
 32,924
 0.43
Short-term borrowings581,511
 2,407
 0.55
 425,151
 739
 0.23
FHLB advances and other long-term debt1,033,159
 24,812
 3.21
 962,997
 27,889
 3.86
Total interest-bearing liabilities12,506,506
 67,928
 0.73% 11,729,689
 61,552
 0.70%
Noninterest-bearing liabilities:           
Demand deposits4,395,421
     4,091,555
    
Other333,250
     329,315
    
Total Liabilities17,235,177
     16,150,559
    
Shareholders’ equity2,179,316
     2,089,882
    
Total Liabilities and Shareholders’ Equity$19,414,493
     $18,240,441
    
Net interest income/net interest margin (FTE)  443,313
 3.27%   403,700
 3.19%
Tax equivalent adjustment  (17,362)     (15,165)  
Net interest income  $425,951
     $388,535
  
(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 nine months ended September 30, 2017 in comparison to the same period of 2016:
 2017 vs. 2016
Increase (Decrease) due
to change in
 Volume Rate Net
 (in thousands)
Interest income on:     
Loans, net of unearned income$33,471
 $8,636
 $42,107
Taxable investment securities(355) 1,132
 777
Tax-exempt investment securities3,277
 (640) 2,637
Equity securities(172) 40
 (132)
Loans held for sale39
 63
 102
Other interest-earning assets28
 470
 498
Total interest income$36,288
 $9,701
 $45,989
Interest expense on:     
Demand deposits$381
 $3,757
 $4,138
Savings and money market deposits573
 2,578
 3,151
Brokered deposits277
 —
 277
Time deposits(939) 1,158
 219
Short-term borrowings349
 1,319
 1,668
FHLB advances and other long-term debt1,916
 (4,993) (3,077)
Total interest expense$2,557
 $3,819
 $6,376
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, in comparison to the first nine months of 2016, resulted in a $36.3 million increase in FTE interest income. The 10 basis points increase in the yield on average interest-earning assets resulted in a $9.7 million increase in FTE interest income. The yield on the loan portfolio increased 8 basis points, or 2.0%, from the same period of 2016, the result of federal funds rate increases that occurred in December 2016, March 2017 and June 2017, which impacted variable rate loans and adjustable rate loans that repriced in the first nine months of 2017.

Interest expense increased $6.4 million primarily due to the 14 and 8 basis points increases in the rate on average interest-bearing demand deposits and savings and money market deposits, as a result of the federal funds rate increases. These basis points increases contributed $3.8 million and $2.6 million to the increase in FTE interest expense, respectively. In addition, a 32 basis points increase in short-term borrowings contributed $1.3 million to the increase in FTE interest expense. These increases were partially offset by a 65 basis points decrease in the rate on average FHLB advances and other long-term debt, which lowered FTE interest expense by $5.0 million.

Average loans and average FTE yields, by type, are summarized in the following table:
 Nine months ended September 30 Increase (Decrease)
 2017 2016 in Balance
 Balance Yield Balance Yield $ %
 (dollars in thousands)
Real estate – commercial mortgage$6,137,824
 4.02% $5,572,356
 4.01% $565,468
 10.1%
Commercial – industrial, financial and agricultural4,227,918
 3.99
 4,080,638
 3.79
 147,280
 3.6
Real estate – residential mortgage1,729,799
 3.79
 1,428,430
 3.77
 301,369
 21.1
Real estate – home equity1,590,117
 4.33
 1,656,969
 4.09
 (66,852) (4.0)
Real estate – construction894,146
 4.00
 817,014
 3.80
 77,132
 9.4
Consumer301,414
 5.07
 272,402
 5.40
 29,012
 10.7
Leasing, other and overdrafts246,351
 5.00
 183,492
 6.01
 62,859
 34.3
Total$15,127,569
 4.05% $14,011,301
 3.97% $1,116,268
 8.0%


Average loans increased $1.1 billion, or 8.0%, compared to the first nine months of 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. The $565.5 million, or 10.1%, increase in commercial mortgages occurred in both owner-occupied and investment property types and was realized in all geographic markets, but predominantly in Pennsylvania, Maryland and Delaware.The $301.4 million, or 21.1%, increase in residential mortgages was also experienced across all geographic markets, with the most significant increases occurring in Maryland and Virginia. This growth was in part related to new product offerings and marketing efforts targeting specific customer segments, including loans to low- to moderate-income and minority borrowers and loans in low- to moderate-income and majority-minority geographies. The $147.3 million, or 3.6%, increase in commercial loans was spread across a broad range of industries and concentrated in Pennsylvania.

Average total interest-bearing liabilities for the first nine months of 2017 increased $776.8 million, or 6.6%, compared to the same period of 2016. Interest expense increased $6.4 million, or 10.4%, to $67.9 million in the first nine months of 2017. Average deposits and average interest rates, by type, are summarized in the following table:
 Nine months ended September 30 Increase (Decrease) in Balance
 2017 2016 
 Balance Rate Balance Rate $ %
 (dollars in thousands)
Noninterest-bearing demand$4,395,421
 —% $4,091,555
 —% $303,866
 7.4%
Interest-bearing demand3,762,439
 0.32
 3,498,659
 0.18
 263,780
 7.5
Savings4,372,453
 0.27
 4,000,871
 0.19
 371,582
 9.3
Total demand and savings12,530,313
 0.19
 11,591,085
 0.12
 939,228
 8.1
Brokered deposits30,251
 1.23
 —
 —
 30,251
 N/M
Time deposits2,726,693
 1.11
 2,842,011
 1.06
 (115,318) (4.1)
Total deposits$15,287,257
 0.36% $14,433,096
 0.30% $854,161
 5.9%
N/M - Not meaningful

The $939.2 million, or 8.1%, increase in total demand and savings accounts was primarily due to a $527.5 million, or 9.8%, increase in personal account balances, a $286.5 million, or 6.8%, increase in business account balances and an $113.7 million, or 5.8%, increase in municipal account balances.

During the third quarter of 2017, the Corporation began accepting deposits under an agreement with a non-bank third party pursuant to which excess cash in the accounts of customers of the third party is swept on a collective basis, as frequently as every business day, by the third party, into omnibus deposit accounts maintained by one of the Corporation’s subsidiary banks. Under the agreement with the third party, generally, no more than $250 million of excess cash in accounts of customers of the third party may be swept into the omnibus deposit accounts. The average balance in the omnibus accounts during the nine months ended September 30, 2017 was $30.3 million and is shown as “brokered deposits” in the above table. This source of funding is considered to be both geographically diverse and relatively stable, with balances in the omnibus deposit accounts bearing interest at a rate based on the federal funds rate.

The average cost of total deposits increased 6 basis points to 0.36% in the first nine months of 2017, compared to 0.30% in the same period in 2016.


















Average borrowings and interest rates, by type, are summarized in the following table:
 Nine months ended September 30 Increase
 2017 2016 in Balance
 Balance Rate Balance Rate $ %
 (dollars in thousands)
Short-term borrowings:           
Customer repurchase agreements$191,740
 0.11% $179,892
 0.11% $11,848
 6.6%
Customer short-term promissory notes79,230
 0.13
 73,859
 0.04
 5,371
 7.3
Total short-term customer funding270,970
 0.12
 253,751
 0.09
 17,219
 6.8
Federal funds purchased212,885
 0.92
 156,812
 0.44
 56,073
 35.8
Short-term FHLB advances (1)
97,656
 0.94
 14,588
 0.43
 83,068
 N/M
Total short-term borrowings581,511
 0.55
 425,151
 0.23
 156,360
 36.8
Long-term debt:           
FHLB advances636,898
 2.31
 601,120
 3.18
 35,778
 6.0
Other long-term debt396,261
 4.65
 361,877
 5.00
 34,384
 9.5
Total long-term debt1,033,159
 3.21
 962,997
 3.86
 70,162
 7.3
Total borrowings$1,614,670
 2.25% $1,388,148
 2.75% $226,522
 16.3%
N/M - Not meaningful
(1) Represents FHLB advances with an original maturity term of less than one year.

Average total short-term borrowings increased $156.4 million, or 36.8%, as a result of loan growth out-pacing the increase in deposits. Interest expense on average short-term borrowings increased by $1.7 million, mainly driven by the 32 basis points increase in the rate, contributing $1.3 million to interest expense.

The increase of $35.8 million, or 6.0%, in average long-term FHLB advances provided additional funding to support loan growth. Average long-term debt increased $70.2 million, or 7.3%, primarily as a result of the $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 65 basis point, or 16.8%, decrease in the average rate on long-term debt was primarily a result of $200 million of FHLB advances that were refinanced in December of 2016, which reduced the weighted average rate on these advances from 4.03% to 2.40%.

Provision for Credit Losses

The provision for credit losses was $16.6 million for the first nine months of 2017, an increase of $8.4 million from the same period of 2016, driven mainly by loan growth 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 and Allowance for Credit 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:
Three months ended March 31 Increase (Decrease)Nine months ended September 30 Increase (Decrease)
2017 2016 $ %2017 2016 $ %
(dollars in thousands)(dollars in thousands)
Other service charges and fees:       
Merchant fees$3,607
 $3,682
 $(75) (2.0)%
Commercial interest rate swap fees3,058
 1,442
 1,616
 112.1
Debit card income2,665
 2,511
 154
 6.1
Letter of credit fees1,200
 1,146
 54
 4.7
Other1,907
 1,969
 (62) (3.1)
Total other service charges and fees12,437
 10,750
 1,687
 15.7
Service charges on deposit accounts:              
Overdraft fees$5,469
 $5,272
 $197
 3.7 %$16,961
 $16,426
 $535
 3.3 %
Cash management fees3,537
 3,466
 71
 2.0
10,775
 10,651
 124
 1.2
Other3,394
 3,820
 (426) (11.2)10,600
 11,455
 (855) (7.5)
Total service charges on deposit accounts12,400
 12,558
 (158) (1.3)38,336
 38,532
 (196) (0.5)
Other service charges and fees:       
Merchant fees12,536
 12,155
 381
 3.1 %
Commercial loan interest rate swap fees8,780
 8,552
 228
 2.7
Debit card income8,379
 7,948
 431
 5.4
Letter of credit fees3,366
 3,385
 (19) (0.6)
Other5,969
 6,100
 (131) (2.1)
Total other service charges and fees39,030
 38,140
 890
 2.3
Investment management and trust services11,808
 10,988
 820
 7.5
36,097
 33,660
 2,437
 7.2
Mortgage banking income:              
Gains on sales of mortgage loans3,074
 2,670
 404
 15.1
10,122
 11,967
 (1,845) (15.4)
Mortgage servicing income1,522
 1,360
 162
 11.9
5,420
 489
 4,931
 N/M
Total mortgage banking income4,596
 4,030
 566
 14.0
15,542
 12,456
 3,086
 24.8
Credit card income2,648
 2,424
 224
 9.2
8,143
 7,688
 455
 5.9
Other income1,678
 1,440
 238
 16.5
6,731
 5,922
 809
 13.7
Total, excluding investment securities gains, net45,567
 42,190
 3,377
 8.0
143,879
 136,398
 7,481
 5.5
Investment securities gains, net1,106
 947
 159
 16.8
7,139
 1,025
 6,114
 N/M
Total$46,673
 $43,137
 $3,536
 8.2 %$151,018
 $137,423
 $13,595
 9.9 %
N/M - Not meaningful

Excluding investment securities gains, non-interest income increased $3.4$7.5 million, or 8.0%.5.5%, for the first nine months of 2017, as compared to the same period in 2016. Other service charges and fees increased $1.7 million,$890,000, or 15.7%2.3%, mainly due to a $1.6 million increaseincreases in merchant fees, debit card income and commercial loan interest rate swap fees.

The $534,000, or 3.3%, increase in overdraft fee income during the nine months ended September 30, 2017, in comparison to the same period during 2016, consisted of a $358,000 increase in fees driven by loan growthassessed on personal accounts and a favorable interest rate environment.$176,000 increase in fees assessed on commercial accounts, due to higher transaction volumes. Other service charges on deposit accounts decreased $854,000, or 7.5%, resulting from changes in customer behavior and the loss of a significant processing customer.

Investment management and trust services income increased $820,000,$2.4 million, or 7.5%7.2%, with growth in both trust and brokerage income, due to overall market performance and an increase in assets under management.

Gains on sales of mortgage loans increased $404,000,decreased $1.8 million, or 15.1%15.4%, compared to the same period in 2016, as both volumes and pricing spreads increased.decreased. Mortgage servicing income increased $162,000,$4.9 million compared to the same period in 2016 due to a $1.3 million reduction to the MSRs valuation allowance in 2017, which was originally established in 2016 through impairment charges of $3.0 million. Excluding the impact of the MSR valuation allowance adjustments, mortgage servicing income increased $639,000, or 11.9%,18.3%. For more information, see Note 6, "Mortgage Servicing Rights," in the Notes to Consolidated Financial Statements for additional details.

Gains on sales of investment securities increased $6.1 million compared to the first quarternine months of 2016, due to lower mortgage servicing rights amortization as prepayments slowed.
Other income increased $238,000, or 16.5%, due mainly to higher gains on2016. The increase resulted from sales of loans guaranteed by the Small Business Administration.

Investment securities gains increased $159,000 from the first quarter of 2016.financial institution common stocks. See Note 4, "Investment Securities," in the Notes to Consolidated Financial Statements for additional details.











Non-Interest Expense

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

Three months ended March 31 Increase (Decrease)Nine months ended September 30 Increase (Decrease)
2017 2016 $ %2017 2016 $ %
(dollars in thousands)(dollars in thousands)
Salaries and employee benefits$69,236
 $69,372
 $(136) (0.2)%$216,626
 $210,097
 $6,529
 3.1 %
Net occupancy expense12,663
 12,220
 443
 3.6
37,159
 35,813
 1,346
 3.8
Data processing and software28,334
 27,477
 857
 3.1
Other outside services5,546
 6,056
 (510) (8.4)19,836
 17,347
 2,489
 14.3
Software4,693
 3,921
 772
 19.7
Data processing4,286
 5,400
 (1,114) (20.6)
Equipment expense3,359
 3,371
 (12) (0.4)9,691
 9,380
 311
 3.3
Professional fees2,737
 2,333
 404
 17.3
9,056
 8,221
 835
 10.2
Amortization of tax credit investments7,652
 —
 7,652
 100.0
FDIC insurance expense2,058
 2,949
 (891) (30.2)7,431
 7,700
 (269) (3.5)
Marketing1,986
 1,624
 362
 22.3
6,309
 5,314
 995
 18.7
Other15,711
 13,167
 2,544
 19.3
45,033
 40,549
 4,484
 11.1
Total$122,275
 $120,413
 $1,862
 1.5 %$387,127
 $361,898
 $25,229
 7.0 %

The decrease$6.5 million, or 3.1%, increase in salaries and employee benefits expense reflects higher salary expense deferrals, driven by anduring the nine months ended September 30, 2017, in comparison to the same period during 2016, primarily resulted from a $7.7 million, or 4.4%, increase in loan origination volumes in this quarter,salaries, resulting from annual merit increases and lower severance costs, partially offset by the net impact of an increase in staffing levels and salary rates.levels. Average full-time equivalent employees increased 1.9%, to 3,559, in 2017, as compared to 3,492 in 2016.

Net occupancyOther outside services increased $2.5 million, or 14.3%, largely due to consulting services related to pre-bank consolidation efforts and technology initiatives.

As previously mentioned, in 2017 amortization of certain new tax credit investments was classified in non-interest expense, rather than income taxes.

Marketing expense increased $443,000,$995,000, or 3.6%, as a result of higher rent expense and maintenance costs. Outside services, which include fees paid to consultants and expenses for contracted or outsourced services, decreased $510,000, or 8.4%18.7%, compared to the first quarter of 2016. These costs can fluctuate based on the timing and need for such services.

Software expense increased $772,000, or 19.7%, largely due to investments in cloud based technology solutions. Data processing expense decreased $1.1 million, or 20.6%, due to benefits from renegotiated contracts. The $404,000, or 17.3%, increase in professional fees was driven by higher legal expenses. FDIC insurance expense decreased $891,000, or 30.2% as the assessment rates for banks with less than $10 billion in assets decreased when the Deposit Insurance Fund (DIF) exceeded 1.15% of the deposit base in 2016. Marketing expense increased $362,000, or 22.3%, compared to the first quarternine months of 2016, due to an increase in the timingnumber of various marketing promotions. In 2017, many of these promotions were focused on deposit generation.

Other expenseexpenses increased $2.5$4.5 million, or 19.3%11.1%, due to higher state taxes resulting from legislated increases in state franchise taxesthe Pennsylvania bank shares tax rate, certain sales tax liabilities, and amortization of certain community development investments.higher operating risk loss expense.

Income Taxes

Income tax expense for the first quarternine months of 2017 was $13.8$35.5 million, a $1.8an $888,000, or 2.4%, decrease from $36.4 million or 15.1%, increase from $12.0 million for the first quarter ofin 2016.

The Corporation’s effective tax rate was 24.1%20.5% in the first quarternine months of 2017, as compared to 23.9%23.4% in the first quartersame period of 2016.Theeffective 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.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 for the first nine months of 2017 would have been 23.9%.



FINANCIAL CONDITION

The table below presents condensed consolidated ending balance sheets.
  Increase (Decrease)  Increase (Decrease)
March 31, 2017 December 31, 2016 $ %September 30, 2017 December 31, 2016 $ %
(dollars in thousands)(dollars in thousands)
Assets              
Cash and due from banks$93,844
 $118,763
 $(24,919) (21.0)%$99,803
 $118,763
 $(18,960) (16.0)%
Other interest-earning assets350,387
 291,252
 59,135
 20.3
645,796
 291,252
 354,544
 121.7
Loans held for sale24,783
 28,697
 (3,914) (13.6)23,049
 28,697
 (5,648) (19.7)
Investment securities2,506,017
 2,559,227
 (53,210) (2.1)2,561,516
 2,559,227
 2,289
 0.1
Loans, net of allowance14,793,101
 14,530,593
 262,508
 1.8
15,314,654
 14,530,593
 784,061
 5.4
Premises and equipment216,171
 217,806
 (1,635) (0.8)221,551
 217,806
 3,745
 1.7
Goodwill and intangible assets531,556
 531,556
 —
 —
531,556
 531,556
 —
 —
Other assets662,717
 666,353
 (3,636) (0.5)664,935
 666,353
 (1,418) (0.2)
Total Assets$19,178,576
 $18,944,247
 $234,329
 1.2 %$20,062,860
 $18,944,247
 $1,118,613
 5.9 %
Liabilities and Shareholders’ Equity              
Deposits$15,090,344
 $15,012,864
 $77,480
 0.5 %$16,141,780
 $15,012,864
 $1,128,916
 7.5 %
Short-term borrowings453,317
 541,317
 (88,000) (16.3)298,751
 541,317
 (242,566) (44.8)
Long-term debt1,137,909
 929,403
 208,506
 22.4
1,038,159
 929,403
 108,756
 11.7
Other liabilities342,323
 339,548
 2,775
 0.8
358,384
 339,548
 18,836
 5.5
Total Liabilities17,023,893
 16,823,132
 200,761
 1.2
17,837,074
 16,823,132
 1,013,942
 6.0
Total Shareholders’ Equity2,154,683
 2,121,115
 33,568
 1.6
2,225,786
 2,121,115
 104,671
 4.9
Total Liabilities and Shareholders’ Equity$19,178,576
 $18,944,247
 $234,329
 1.2 %$20,062,860
 $18,944,247
 $1,118,613
 5.9 %

Other Interest-earning Assets

The $59.1Other interest-earning assets increased $354.5 million, or 20.3%121.7%, increase in other interest-earning assets during the first threenine months of 2017 resulted fromas a result of higher balances on deposit with the Federal Reserve Bank, due to a temporarydeposit growth in excess of loan growth during the period driven mainly by an increase in item clearing balances.municipal deposits.

Investment Securities

The following table presents the carrying amount of investment securities:
  Increase (Decrease)  Increase (Decrease)
March 31, 2017 December 31, 2016 $ %September 30, 2017 December 31, 2016 $ %
(dollars in thousands)(dollars in thousands)
U.S. Government sponsored agency securities$5,996
 $134
 $5,862
 N/M
$6,015
 $134
 $5,881
 N/M
State and municipal securities392,624
 391,641
 983
 0.3
413,913
 391,641
 22,272
 5.7
Corporate debt securities107,877
 109,409
 (1,532) (1.4)92,977
 109,409
 (16,432) (15.0)
Collateralized mortgage obligations565,886
 593,860
 (27,974) (4.7)593,678
 593,860
 (182) —
Mortgage-backed securities1,313,621
 1,342,401
 (28,780) (2.1)
Residential mortgage-backed securities1,182,086
 1,317,838
 (135,752) (10.3)
Commercial mortgage-backed securities161,632
 24,563
 137,069
 N/M
Auction rate securities97,439
 97,256
 183
 0.2
98,156
 97,256
 900
 0.9
Total debt securities2,483,443
 2,534,701
 (51,258) (2.0)2,548,457
 2,534,701
 13,756
 0.5
Equity securities22,574
 24,526
 (1,952) (8.0)13,059
 24,526
 (11,467) (46.8)
Total$2,506,017
 $2,559,227
 $(53,210) (2.1)%$2,561,516
 $2,559,227
 $2,289
 0.1 %
N/M - Not meaningful





U.S. Government sponsored agencyCommercial mortgage-backed securities increased $5.9 million. Collateralized mortgage obligations$137.1 million, while residential mortgage-backed securities decreased $28.0$135.8 million, or 4.7%10.3%, as the Corporation reduced its holdings in corresponding lower coupon investments due to volatility in market pricing. Mortgage-backedresidential mortgage backed securities decreased $28.8 million, or 2.1% as portfolio cash flows were usedreinvested in commercial mortgage-backed securities to partially fund loan growth.diversify the portfolio into securities with a shorter average life.

Loans, net of Unearned Income

The following table presents ending balances of loans outstanding, net of unearned income:
    Increase (Decrease)    Increase (Decrease)
March 31, 2017 December 31, 2016 $ %September 30, 2017 December 31, 2016 $ %
(dollars in thousands)  (dollars in thousands)  
Real estate – commercial mortgage$6,118,533
 $6,018,582
 $99,951
 1.7 %$6,275,140
 $6,018,582
 $256,558
 4.3 %
Commercial – industrial, financial and agricultural4,167,809
 4,087,486
 80,323
 2.0
4,223,075
 4,087,486
 135,589
 3.3
Real estate – residential mortgage1,665,142
 1,601,994
 63,148
 3.9
1,887,907
 1,601,994
 285,913
 17.8
Real estate – home equity1,595,901
 1,625,115
 (29,214) (1.8)1,567,473
 1,625,115
 (57,642) (3.5)
Real estate – construction882,983
 843,649
 39,334
 4.7
973,108
 843,649
 129,459
 15.3
Consumer288,826
 291,470
 (2,644) (0.9)302,448
 291,470
 10,978
 3.8
Leasing, other and overdrafts243,983
 230,976
 13,007
 5.6
257,748
 230,976
 26,772
 11.6
Loans, net of unearned income$14,963,177
 $14,699,272
 $263,905
 1.8 %$15,486,899
 $14,699,272
 $787,627
 5.4 %

Loans, net of unearned income, increased $263.9$787.6 million, or 1.8%5.4%, in comparison to December 31, 2016. In general, this growth resulted from improved business activity and customer sentiment and a more favorable economic outlook, as well asduring the additionfirst half of commercial relationship managers2017, which was tempered somewhat in 2016.the third quarter of 2017. Increases were realized across all ofmainly in Pennsylvania, Maryland and Virginia.

Residential mortgage loans increased $285.9 million, or 17.8%, compared to December 31, 2016, with the Corporation's geographic markets.growth occurring primarily in Maryland ($110.1 million, or 37.2%), Virginia ($97.0 million, or 31.4%) and Pennsylvania ($52.4 million, or 7.7%).

Commercial mortgage loans increased $100.0$256.6 million, or 1.7%4.3%, in comparison to December 31, 2016, with the growth occurring largely in Pennsylvania ($122.2 million, or 3.9%), Maryland ($65.8 million, or 10.6%) and Virginia ($30.0 million, or 6.0%).

Commercial loans increased $135.6 million, or 3.3%, in comparison to December 31, 2016, with the growth occurring primarily in the MarylandPennsylvania ($60.4140.7 million, or 9.7%), Pennsylvania ($34.5 million, or 1.1%4.7%) and New Jersey ($14.115.6 million, or 1.0%3.0%) markets. Commercial - industrial, financial and agricultural. Construction loans increased $80.3$129.5 million, or 2.0%15.3%, in comparison to December 31, 2016, with the growth occurring primarily in the PennsylvaniaMaryland ($82.048.4 million, or 2.7%), Virginia ($3.7 million, or 3.5%) and New Jersey ($1.8 million, or 0.3%) markets.

Residential mortgage loans increased $63.1 million, or 3.9%, compared to December 31, 2016, with the growth occurring primarily in the Maryland ($30.6 million, or 10.4%), Virginia ($26.1 million, or 8.4%52.0%), New Jersey ($7.524.9 million, or 3.1%16.7%), Pennsylvania ($23.6 million, or 4.8%), and Delaware ($2.722.6 million, or 3.6%42.6%) markets.Construction loans increased $39.3 million, or 4.7%, in comparison to December 31, 2016, with the growth occurring primarily in the Maryland ($16.3 million, or 17.5%), Delaware ($10.4 million, or 19.4%) and Pennsylvania ($6.8 million, or 1.4%) markets.. Leasing, other and overdrafts increased compared to December 31, 2016 as a result of a $15.6$28.3 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:
March 31, 2017 December 31, 2016September 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$685,128
 0.3% 77.6% $644,490
 0.2% 76.4%$751,398
 0.1% 77.3% $644,490
 0.2% 76.4%
Commercial - residential151,313
 9.3
 17.1
 142,189
 6.0
 16.9
156,127
 8.1
 16.0
 142,189
 6.0
 16.9
Other46,542
 2.4
 5.3
 56,970
 1.9
 6.7
65,583
 2.2
 6.7
 56,970
 1.9
 6.7
Total Real estate - construction$882,983
 2.0% 100.0% $843,649
 1.3% 100.0%$973,108
 1.5% 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 $7.0$7.2 billion, or 46.8%, of the loan portfolio was in commercial mortgage and construction loans as of March 31,September 30, 2017. The Corporation's maximum total lending commitment to an individual borrowing relationship was $50.0 million as of March 31,September 30, 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 March 31,September 30, 2017, the Corporation had 122143 individual borrowing relationships with total borrowing commitments between $20.0 million and $50.0 million.

The following table summarizes the industry concentrations within the commercial loan portfolio:
March 31,
2017		 December 31, 2016September 30,
2017		 December 31, 2016
Services22.5% 21.8%22.1% 21.8%
Retail15.3
 15.1
15.6
 15.1
Manufacturing9.9
 9.2
Health care10.2
 10.5
9.7
 10.5
Manufacturing9.0
 9.2
Construction (1)
8.4
 9.0
8.6
 9.0
Wholesale7.6
 7.0
6.8
 7.0
Real estate (2)
6.8
 6.7
6.4
 6.7
Agriculture4.6
 5.0
4.9
 5.0
Arts and entertainment2.5
 2.6
2.5
 2.6
Transportation2.3
 2.3
Financial services2.3
 2.1
2.1
 2.1
Transportation2.2
 2.3
Other8.6
 8.7
9.1
 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 - industrial, financial and agricultural loans and commercial mortgage loans also include shared national credits, which are participations in loans or loan commitments of at least $20.0 million that are shared by three or more banks. Below is a summary of the Corporation's outstanding purchased shared national credits:
March 31, 2017 December 31, 2016September 30, 2017 December 31, 2016
(in thousands)(in thousands)
Commercial - industrial, financial and agricultural$151,840
 $155,353
$161,619
 $155,353
Real estate - commercial mortgage83,300
 81,573
102,160
 81,573
Total$235,140
 $236,926
$263,779
 $236,926
Total shared national credits decreased $1.8increased $26.9 million, or 0.8%11.3%, in comparison to December 31, 2016.2016 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 granted subject to normal lending activities consistent with the Corporation's standard underwriting policies. None of the shared national credits were past due as of March 31,September 30, 2017 or December 31, 2016.
















Provision and Allowance for Credit Losses

The Corporation has historically maintained an unallocated allowance for loan losses for factors and conditions that exist at the balance sheet date, but are not specifically identifiable, and to recognize the inherent imprecision in estimating and measuring loss exposure. In 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 loan losses is no longer necessary.


The following table presents the activity in the allowance for credit losses:
Three months ended March 31Three months ended September 30 Nine months ended September 30
2017 20162017 2016 2017 2016
(dollars in thousands)(dollars in thousands)
Average balance of loans, net of unearned income$14,857,562
 $13,853,420
$15,392,067
 $14,212,250
 $15,127,569
 $14,011,301
          
Balance of allowance for credit losses at beginning of period$171,325
 $171,412
$174,998
 $165,108
 $171,325
 $171,412
Loans charged off:          
Real estate – commercial mortgage483
 1,350
 1,949
 3,406
Commercial – industrial, financial and agricultural5,527
 6,188
2,714
 3,144
 13,594
 13,957
Real estate – residential mortgage216
 1,068
195
 802
 535
 2,210
Real estate – home equity698
 1,541
547
 709
 1,837
 3,295
Real estate – commercial mortgage1,224
 582
Real estate – construction2,744
 150
 3,765
 1,218
Consumer856
 1,007
373
 685
 1,659
 2,261
Real estate – construction247
 326
Leasing, other and overdrafts639
 443
739
 832
 2,578
 3,226
Total loans charged off9,407
 11,155
7,795
 7,672
 25,917
 29,573
Recoveries of loans previously charged off:          
Real estate – commercial mortgage106
 296
 1,490
 2,488
Commercial – industrial, financial and agricultural4,191
 2,319
665
 1,539
 6,830
 6,789
Real estate – residential mortgage230
 136
219
 228
 600
 784
Real estate – home equity137
 338
252
 241
 604
 929
Real estate – commercial mortgage450
 825
Real estate – construction629
 898
 1,550
 2,844
Consumer236
 196
193
 222
 899
 957
Real estate – construction548
 383
Leasing, other and overdrafts137
 81
407
 168
 793
 357
Total recoveries5,929
 4,278
2,471
 3,592
 12,766
 15,148
Net loans charged off3,478
 6,877
5,324
 4,080
 13,151
 14,425
Provision for credit losses4,800
 1,530
5,075
 4,141
 16,575
 8,182
Balance of allowance for credit losses at end of period$172,647
 $166,065
$174,749
 $165,169
 $174,749
 $165,169
          
Net charge-offs to average loans (annualized)0.09% 0.20%0.14% 0.11% 0.12% 0.14%
The following table presents the components of the allowance for credit losses:
March 31,
2017		 December 31,
2016		September 30,
2017		 December 31,
2016
(dollars in thousands)(dollars in thousands)
Allowance for loan losses$170,076
 $168,679
$172,245
 $168,679
Reserve for unfunded lending commitments2,571
 2,646
2,504
 2,646
Allowance for credit losses$172,647
 $171,325
$174,749
 $171,325
      
Allowance for credit losses to loans outstanding1.15% 1.17%1.13% 1.17%
The provision for credit losses for the three months ended March 31,September 30, 2017 was $4.8$5.1 million, an increase of $3.3 million$934,000 in comparison to the same period in 2016. For the nine months ended September 30, 2017, the provision for credit losses was $16.6 million, an increase of $8.4 million in comparison to the first nine months of 2016. The increaseincreases in the provision for credit losses largely reflected growth in the loan growth.portfolio.
Net charge-offs decreased $3.4increased $1.2 million, to $3.5$5.3 million for the firstthird quarter of 2017, compared to $6.9$4.1 million for the firstthird quarter of 2016. Gross charge-offs decreased by $1.7 million andThis increase resulted from a decrease in recoveries increased by $1.7 million.of loans previously charged off. Of the $3.5$5.3 million of net charge-offs recorded in the firstthird quarter of 2017, the majority were for loans originated in Pennsylvania ($2.64.4 million) and, New Jersey ($1.0 million)638,000) and Maryland ($406,000), partially offset by net recoveries in Maryland, Virginia and Delaware.


For the first nine months of 2017, net charge-offs decreased $1.3 million, to $13.2 million compared to $14.4 million for the same period of 2016. A $3.7 million decrease in gross charge-offs was partially offset by a $2.4 million decrease in recoveries. Of the $13.2 million of net charge-offs recorded in the first nine months of 2017, the majority were for loans originated in Pennsylvania ($11.9 million), New Jersey ($1.2 million) and Maryland ($349,000), partially offset by net recoveries in Virginia and Delaware.

The following table summarizes non-performing assets as of the indicated dates:
March 31, 2017 March 31, 2016 December 31, 2016September 30, 2017 September 30, 2016 December 31, 2016
(dollars in thousands)(dollars in thousands)
Non-accrual loans$117,264
 $122,170
 $120,133
$123,345
 $124,017
 $120,133
Loans 90 days or more past due and still accruing14,268
 15,013
 11,505
13,124
 14,095
 11,505
Total non-performing loans131,532
 137,183
 131,638
136,469
 138,112
 131,638
Other real estate owned (OREO)11,906
 10,946
 12,815
10,542
 11,981
 12,815
Total non-performing assets$143,438
 $148,129
 $144,453
$147,011
 $150,093
 $144,453
Non-accrual loans to total loans0.78% 0.88% 0.82%0.80% 0.86% 0.82%
Non-performing assets to total assets0.75% 0.82% 0.76%0.73% 0.80% 0.76%
Allowance for credit losses to non-performing loans131.26% 121.05% 130.15%128.05% 119.59% 130.15%

The following table presents accruing loans whose terms have been modified under troubled debt restructurings ("TDRs"), by
type, as of the indicated dates:
March 31, 2017 March 31, 2016 December 31, 2016September 30, 2017 September 30, 2016 December 31, 2016
(in thousands)(in thousands)
Real-estate - residential mortgage$27,033
 $27,565
 $27,617
$26,193
 $26,854
 $27,617
Real-estate - commercial mortgage15,237
 17,427
 15,957
14,439
 16,085
 15,957
Real estate - home equity9,601
 6,530
 8,594
14,789
 7,668
 8,594
Commercial7,441
 5,650
 6,627
7,512
 7,488
 6,627
Construction273
 3,092
 726
169
 843
 726
Consumer37
 32
 39
33
 39
 39
Total accruing TDRs59,622
 60,296
 59,560
63,135
 58,977
 59,560
Non-accrual TDRs (1)
27,220
 27,277
 27,850
28,742
 27,904
 27,850
Total TDRs$86,842
 $87,573
 $87,410
$91,877
 $86,881
 $87,410
(1) Included with non-accrual loans in the preceding table.

TDRs modified during the first threenine months of 2017 and still outstanding as of March 31,September 30, 2017 totaled $5.7$16.6 million. During the first threenine months of 2017, $6.7$5.4 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 nine months ended March 31,September 30, 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, 2017Three months ended September 30, 2017              
Balance of non-accrual loans at June 30, 2017$48,087
 $32,267
 $15,586
 $16,940
 $9,720
 $—
 $—
 $122,600
Additions16,107
 6,281
 1,512
 1,399
 995
 373
 325
 26,992
Payments(8,774) (5,974) (999) (891) (483) —
 —
 (17,121)
Charge-offs(2,714) (483) (2,744) (195) (547) (373) (325) (7,381)
Transfers to OREO—
 (325) —
 (868) (552) —
 —
 (1,745)
Balance of non-accrual loans at September 30, 2017$52,706
 $31,766
 $13,355
 $16,385
 $9,133
 $—
 $—
 $123,345
               
Nine months ended September 30, 2017Nine months ended September 30, 2017              
Balance of non-accrual loans at December 31, 2016$42,349
 $38,936
 $9,806
 $18,431
 $10,611
 $—
 $—
 $120,133
$42,349
 $38,936
 $9,806
 $18,431
 $10,611
 $—
 $—
 $120,133
Additions8,013
 2,998
 5,056
 662
 1,021
 856
 263
 18,869
40,508
 14,055
 10,259
 2,545
 3,694
 1,659
 1,443
 74,163
Payments(4,017) (3,444) (1,130) (939) (417) —
 —
 (9,947)(16,554) (16,955) (2,796) (2,141) (1,141) —
 —
 (39,587)
Charge-offs(5,527) (1,224) (247) (216) (698) (856) (263) (9,031)(13,594) (1,949) (3,765) (535) (1,837) (1,659) (1,443) (24,782)
Transfers to accrual status—
 (913) —
 —
 (428) —
 —
 (1,341)—
 (913) —
 (54) (678) —
 —
 (1,645)
Transfers to OREO—
 (550) —
 (131) (738) —
 —
 (1,419)(3) (1,408) (149) (1,861) (1,516) —
 —
 (4,937)
Balance of non-accrual loans at March 31, 2017$40,818
 $35,803
 $13,485
 $17,807
 $9,351
 $—
 $—
 $117,264
Balance of non-accrual loans at September 30, 2017$52,706
 $31,766
 $13,355
 $16,385
 $9,133
 $—
 $—
 $123,345

Non-accrual loans decreased $4.9increased $672,000, or 0.5%, and $3.2 million, or 4.0%, and $2.9 million, or 2.4%2.7%, in comparison to March 31,September 30, 2016 and December 31, 2016, respectively.




The following table summarizes non-performing loans, by type, as of the indicated dates:
March 31, 2017 March 31, 2016 December 31, 2016September 30, 2017 September 30, 2016 December 31, 2016
(in thousands)(in thousands)
Commercial – industrial, financial and agricultural$43,826
 $39,140
 $43,460
$54,209
 $47,330
 $43,460
Real estate – commercial mortgage36,713
 43,132
 39,319
34,650
 39,631
 39,319
Real estate – residential mortgage23,597
 25,182
 23,655
21,643
 23,451
 23,655
Real estate – construction13,550
 12,005
 9,842
13,415
 11,223
 9,842
Real estate – home equity12,232
 14,408
 13,154
12,229
 14,260
 13,154
Consumer1,176
 1,802
 1,891
243
 2,166
 1,891
Leasing438
 1,514
 317
80
 51
 317
Total non-performing loans$131,532
 $137,183
 $131,638
$136,469
 $138,112
 $131,638

Non-performing loans decreased $5.7$1.6 million, or 4.1%1.2%, and $106,000,increased $4.8 million, or 0.1%3.7%, in comparison to March 31,September 30, 2016 and December 31, 2016, respectively. The decrease in non-performingNon-performing loans to total loans was realized across most loan categories except commercial, which increased $4.7 million, or 12.0%, and $366,000, or 0.8%,0.88% at September 30, 2017 in comparison to March 31,0.96% at September 30, 2016 and 0.90% at December 31, 2016, respectively, and real estate - construction loans, which increased $1.5 million, or 12.9%, and $3.7 million, or 37.7% in comparison to March 31, 2016 and December 31, 2016, respectively.2016.










The following table summarizes the Corporation’s OREO, by property type, as of the indicated dates:
March 31, 2017 March 31, 2016 December 31, 2016September 30, 2017 September 30, 2016 December 31, 2016
(in thousands)(in thousands)
Residential properties$6,112
 $6,235
 $7,655
$4,223
 $6,279
 $7,655
Commercial properties3,134
 3,101
 2,651
3,709
 3,050
 2,651
Undeveloped land2,660
 1,610
 2,509
2,610
 2,652
 2,509
Total OREO$11,906
 $10,946
 $12,815
$10,542
 $11,981
 $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 ratedrisk-rated loans were $11.1$11.4 billion and $10.9 billion as of March 31,September 30, 2017 and December 31, 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:segment. The shift from special mention to substandard or lower from December 31, 2016 to September 30, 2017 was primarily the result of downgrades of three large relationships to substandard during the first nine months of 2017. 
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
March 31, 2017 December 31, 2016 $ % March 31, 2017 December 31, 2016 $ % March 31, 2017 December 31, 2016September 30, 2017 December 31, 2016 $ % September 30, 2017 December 31, 2016 $ % September 30, 2017 December 31, 2016
(dollars in thousands)(dollars in thousands)
Real estate - commercial mortgage$137,643
 $132,484
 $5,159
 3.9 % $120,749
 $122,976
 $(2,227) (1.8)% $258,392
 $255,460
$118,947
 $132,484
 $(13,537) (10.2)% $127,670
 $122,976
 $4,694
 3.8 % $246,617
 $255,460
Commercial - secured138,242
 128,873
 9,369
 7.3
 138,757
 118,527
 20,230
 17.1
 276,999
 247,400
98,639
 128,873
 (30,234) (23.5) 183,181
 118,527
 64,654
 54.5
 281,820
 247,400
Commercial -unsecured6,471
 4,481
 1,990
 44.4
 2,563
 3,531
 (968) (27.4) 9,034
 8,012
3,474
 4,481
 (1,007) (22.5) 3,082
 3,531
 (449) (12.7) 6,556
 8,012
Total Commercial - industrial, financial and agricultural144,713
 133,354
 11,359
 8.5
 141,320
 122,058
 19,262
 15.8
 286,033
 255,412
102,113
 133,354
 (31,241) (23.4) 186,263
 122,058
 64,205
 52.6
 288,376
 255,412
Construction - commercial residential10,677
 15,447
 (4,770) (30.9) 16,221
 13,172
 3,049
 23.1
 26,898
 28,619
6,746
 15,447
 (8,701) (56.3) 14,595
 13,172
 1,423
 10.8
 21,341
 28,619
Construction - commercial4,902
 3,412
 1,490
 43.7
 5,363
 5,115
 248
 4.8
 10,265
 8,527
4,418
 3,412
 1,006
 29.5
 3,869
 5,115
 (1,246) (24.4) 8,287
 8,527
Total real estate - construction (excluding construction - other)15,579
 18,859
 (3,280) (17.4) 21,584
 18,287
 3,297
 18.0
 37,163
 37,146
11,164
 18,859
 (7,695) (40.8) 18,464
 18,287
 177
 1.0
 29,628
 37,146
Total$297,935
 $284,697
 $13,238
 4.6 % $283,653
 $263,321
 $20,332
 7.7 % $581,588
 $548,018
$232,224
 $284,697
 $(52,473) (18.4)% $332,397
 $263,321
 $69,076
 26.2 % $564,621
 $548,018
                                      
% of total risk rated loans2.6% 2.6%     2.6% 2.4%     5.2% 5.0%
% of total risk-rated loans2.0% 2.6%     2.9% 2.4%     5.0% 5.0%















The following table summarizes loan delinquency rates, by type, as of the dates indicated:
March 31, 2017 March 31, 2016 December 31, 2016September 30, 2017 September 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% 0.60% 0.78% 0.15% 0.78% 0.93% 0.13% 0.65% 0.78%0.20% 0.55% 0.75% 0.18% 0.69% 0.87% 0.13% 0.65% 0.78%
Commercial – industrial, financial and agricultural0.19% 1.06% 1.25% 0.49% 0.97% 1.46% 0.25% 1.06% 1.31%0.26% 1.28% 1.54% 0.31% 1.17% 1.48% 0.25% 1.06% 1.31%
Real estate – construction0.46% 1.53% 1.99% 0.52% 1.48% 2.00% 0.12% 1.17% 1.29%0.12% 1.38% 1.50% 0.31% 1.30% 1.61% 0.12% 1.17% 1.29%
Real estate – residential mortgage1.03% 1.41% 2.44% 1.27% 1.83% 3.10% 1.27% 1.48% 2.75%1.10% 1.15% 2.25% 1.15% 1.52% 2.67% 1.27% 1.48% 2.75%
Real estate – home equity0.46% 0.76% 1.22% 0.54% 0.87% 1.41% 0.57% 0.81% 1.38%0.83% 0.78% 1.61% 0.64% 0.87% 1.51% 0.57% 0.81% 1.38%
Consumer, leasing and other0.91% 0.31% 1.22% 0.95% 0.77% 1.72% 1.23% 0.42% 1.65%0.69% 0.06% 0.75% 1.18% 0.44% 1.62% 1.23% 0.42% 1.65%
Total0.35% 0.88% 1.23% 0.45% 0.99% 1.44% 0.38% 0.89% 1.27%0.40% 0.88% 1.28% 0.42% 0.96% 1.38% 0.38% 0.89% 1.27%
Total dollars (in thousands)$52,198
 $131,532
 $183,730
 $62,922
 $137,183
 $200,105
 $55,149
 $131,638
 $186,787
$62,247
 $136,469
 $198,716
 $59,822
 $138,112
 $197,934
 $55,149
 $131,638
 $186,787
 
(1)Includes non-accrual loans.
Management believes that the allowance for credit losses of $172.6$174.7 million as of March 31,September 30, 2017 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.









U.S. GAAP.

Deposits and Borrowings

The following table presents ending deposits, by type:type, as of the dates indicated:
    Increase (Decrease)    Increase (Decrease)
March 31, 2017 December 31, 2016 $ %September 30, 2017 December 31, 2016 $ %
(dollars in thousands)(dollars in thousands)
Noninterest-bearing demand$4,417,733
 $4,376,137
 $41,596
 1.0 %$4,363,915
 $4,376,137
 $(12,222) (0.3)%
Interest-bearing demand3,702,663
 3,703,712
 (1,049) —
4,119,419
 3,703,712
 415,707
 11.2
Savings and money market accounts4,251,574
 4,179,773
 71,801
 1.7
4,790,985
 4,179,773
 611,212
 14.6
Total demand and savings12,371,970
 12,259,622
 112,348
 0.9
13,274,319
 12,259,622
 1,014,697
 8.3
Brokered deposits109,936
 —
 109,936
 N/M
Time deposits2,718,374
 2,753,242
 (34,868) (1.3)2,757,525
 2,753,242
 4,283
 0.2
Total deposits$15,090,344
 $15,012,864
 $77,480
 0.5 %$16,141,780
 $15,012,864
 $1,128,916
 7.5 %
N/M - Not meaningful

Noninterest-bearingInterest-bearing demand depositsaccounts increased $41.6$415.7 million, or 1.0%11.2%, primarily asdue to a result of increases$401.4 million, or 30.8%, seasonal increase in personalmunicipal account balances of $49.8and a $25.3 million, or 5.7%7.8%, andincrease in business account balances of $37.9 million, or 1.1%,accounts, which was partially offset by a seasonal$10.1 million, or 0.5%, decrease in municipalpersonal account balances of $38.4 million, or 25.4%.balances.

The $71.8$611.2 million, or 1.7%14.6%, increase in savings and money market account balances was due to an $82.9 million, or 3.0%, increase in personal account balances, a $18.9 million, or 2.4%, increase in business account balances, partially offset by a $29.9 million, or 5.2%, seasonal decrease in municipal account balances. Interest-bearing demand accounts decreased $1.0 million,primarily due to a $53.1$449.1 million, or 4.1%, seasonal decrease in municipal account balances, which was mostly offset by a $44.5 million, or 2.1%16.0%, increase in personal account balances and a $7.5an $83.3 million, or 2.3%10.5%, increase in business account balances.balances as a result of certain promotions that occurred during the year. In addition, municipal account balances experienced seasonal increases of $78.8 million, or 13.7%.

Brokered deposits totaled $109.9 million as of September 30, 2017. As previously noted, during the third quarter of 2017, the Corporation began accepting deposits pursuant to an agreement with a non-bank third party, which are considered to be brokered deposits.








The following table presents ending short-term borrowings and long-term debt by type:type, as of the dates indicated:
   Increase (Decrease)
 March 31, 2017 December 31, 2016 $ %
 (dollars in thousands)
Short-term borrowings:       
Customer repurchase agreements$181,170
 $195,734
 $(14,564) (7.4)%
Customer short-term promissory notes87,726
 67,013
 20,713
 30.9
Total short-term customer funding268,896
 262,747
 6,149
 2.3
Federal funds purchased54,421
 278,570
 (224,149) (80.5)
Short-term FHLB advances (1)
130,000
 —
 130,000
 N/M
Total short-term borrowings453,317
 541,317
 (88,000) (16.3)
Long-term debt:       
FHLB advances652,209
 567,240
 84,969
 15.0
Other long-term debt485,700
 362,163
 123,537
 34.1
Total long-term debt1,137,909
 929,403
 208,506
 22.4
Total borrowings$1,591,226
 $1,470,720
 $120,506
 8.2 %
        
N/M - Not meaningful
(1) Represents FHLB advances with an original maturity term of less than one year.
   Increase (Decrease)
 September 30, 2017 December 31, 2016 $ %
 (dollars in thousands)
Short-term borrowings:       
Customer repurchase agreements$185,945
 $195,734
 $(9,789) (5.0)%
Customer short-term promissory notes106,994
 67,013
 39,981
 59.7
Total short-term customer funding292,939
 262,747
 30,192
 11.5
Federal funds purchased5,812
 278,570
 (272,758) (97.9)
Total short-term borrowings298,751
 541,317
 (242,566) (44.8)
Long-term debt:       
FHLB advances652,145
 567,240
 84,905
 15.0
Other long-term debt386,014
 362,163
 23,851
 6.6
Total long-term debt1,038,159
 929,403
 108,756
 11.7
Total borrowings$1,336,910
 $1,470,720
 $(133,810) (9.1)%
        


Total borrowings increased $120.5decreased $133.8 million, or 8.2%9.1%, asdue to a result of a $208.5$242.6 million, or 22.4%44.8%, decrease in short-term borrowings, partially offset by an $108.8 million, or 11.7%, increase in long-term debt, partially offset by an $88.0 million, or 16.3%,debt. The decrease in short-term borrowings.borrowings was mainly in federal funds purchased as borrowings were reduced with funding provided by deposit growth. The increase of $84.9 million, or 15.0%, in long-term FHLB advances provided additional funding to support loan growth. The increase in other long-term debt was primarily the result of the issuance of $125.0 million of senior notes in March 2017, as discussed inoffset by the "Resultsrepayment of Operations."






the $100.0 million of 10-year subordinated notes, which matured on May 1, 2017.

Shareholders' Equity

Total shareholders’ equity increased $33.6$104.7 million, or 1.6%4.9%, during the first threenine months of 2017. The increase was due primarily to $43.4$137.8 million of net income, $4.7$7.0 million of stock issued and a $3.9$14.2 million increase in other comprehensive income, partially offset by $19.2$57.7 million of common stock dividends.

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 March 31,September 30, 2017, 1.5 million shares werehad been repurchased under this program for a total cost of $18.5 million, or $12.48 per share. Up to an additional $31.5 million of the Corporation's common stock may be repurchased under this program through December 31, 2017.

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



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

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

As of March 31,September 30, 2017, the Corporation and each of its bank subsidiaries met the minimum requirements of the U.S. Basel III Capital Rules, and each of the Corporation’s bank subsidiaries’ capital ratios exceeded the amounts required to be considered "well capitalized" as defined in the regulations. As of March 31,September 30, 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:
March 31, 2017 December 31, 2016 Regulatory
Minimum
for Capital
Adequacy		 Fully Phased-in, with Capital Conservation BuffersSeptember 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%13.1% 13.2% 8.0% 10.5%
Tier I Capital (to Risk-Weighted Assets)10.4% 10.4% 6.0% 8.5%10.4% 10.4% 6.0% 8.5%
Common Equity Tier I (to Risk-Weighted Assets)10.4% 10.4% 4.5% 7.0%10.4% 10.4% 4.5% 7.0%
Tier I Capital (to Average Assets)9.0% 9.0% 4.0% 4.0%9.0% 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") 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 March 31,September 30, 2017 (due to the current level of interest rates, the 200 and 300 basis point downward shock scenarios are not shown):
Rate Shock (1)
Annual change
in net interest income
 % Change in net interest income
+300 bp+ $100.0$93.9 million 16.8%15.5%
+200 bp+ $67.7$64.5 million 11.4%10.6%
+100 bp+ $34.0$32.9 million 5.7%5.4%
–100 bp– $49.8$49.0 million – 8.3%8.1%

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

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


point shock. As of March 31,September 30, 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 under which the Corporation may, from time to time subject to then current market conditions, offer various types of debt and equity securities.

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

Each of the Corporation’s subsidiary banks is a member of the FHLB and has access to FHLB overnight and term credit facilities. As of March 31,September 30, 2017, the Corporation had $652.2$652.1 million of advances outstanding from the FHLB with an additional borrowing capacity of approximately $3.1$3.2 billion under these facilities. Advances from the FHLB are secured by qualifying commercial real estate and residential mortgage loans, investments and other assets.

As of March 31,September 30, 2017, the Corporation had aggregate availability under federal funds lines of $1.1 billion with $54.4$5.8 million borrowed against that amount. A combination of commercial real estate loans, commercial loans and securities are pledged to the Federal Reserve Bank of Philadelphia to provide access to Federal Reserve Bank Discount Window borrowings. As of March 31,September 30, 2017, the Corporation had $1.2 billion$908.5 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" section of Management’s Discussion and Analysis. The consolidated statements of cash flows provide additional information. The Corporation’s operating activities during the first threenine months of 2017 generated $64.5$194.4 million of cash, mainly due to net income. Cash used in investing activities was $274.6 million,$1.2 billion, mainly due to net increases in loans and short-term investments. Net cash provided by financing activities was $185.1$945.7 million due mainly to an increase in long-term debt, driven by the impact of the $125 million issuance of senior debt, increases in deposits, partially offset by a decrease inlong-term debt and short-term borrowings and cash dividends.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 March 31,September 30, 2017, equity investments consisted of $21.6$12.1 million of common stocks of publicly traded financial institutions and $969,000$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 $10.6$5.8 million and an estimated fair value of $21.6$12.1 million at March 31,September 30, 2017, including an investment in a single financial institution with a cost basis of $5.1$4.2 million and an estimated fair value of $9.6$8.8 million. The fair value of this investment


accounted for 44.6%73.4% of the fair value of the common stocks of publicly traded financial institutions. No other investment in a single financial institution in the financial institutions stock portfolio exceeded 10% of the portfolio's fair value. In total, net unrealized gains in this portfolio were approximately $11.0$6.3 million as of March 31,September 30, 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 March 31,September 30, 2017, the Corporation owned $392.6$413.9 million of municipal securities issued by various states or municipalities. Downward pressure on local tax revenues of issuers due to adverse economic conditions could have an adverse impact on the underlying credit quality of issuers. The Corporation evaluates existing and potential holdings primarily based on the creditworthiness of the issuing state or municipality and then, to a lesser extent, on any underlying credit enhancement. State or municipal securities can be supported by the general obligation of the issuing state or municipality, allowing the securities to be repaid by any means available to the issuing municipality. As of March 31,September 30, 2017, approximately 98% of state or municipal securities were supported by the general obligation of corresponding states or municipalities. Approximately 59%60% of these securities were school district issuances, which are also supported by the states of the issuing municipalities.

Auction Rate Securities

As of March 31,September 30, 2017, the Corporation’s investments in student loan auction rate certificates ("ARCs"), a type of auction rate security, had a cost basis of $107.3$107.4 million and a fair value of $97.4$98.2 million.

As of March 31,September 30, 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 March 31,September 30, 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 March 31,September 30, 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. As of March 31,September 30, 2017, these securities had an amortized cost of $109.6$92.4 million and an estimated fair value of $107.9$93.0 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, 2016.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
(a)  None. 
(b)  None.
(c)  There were no purchases of equity securities by the issuer or any affiliated purchasers during the three months ended March 31,September 30, 2017.


Item 6. Exhibits
See Exhibit Index for a list of the exhibits required by Item 601 of Regulation S-K and filed as part of this report.
3.1
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.

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 September 30, 2017, filed on November 3, 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.





FULTON FINANCIAL CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
FULTON FINANCIAL CORPORATION  
     
Date: May 5,November 3, 2017 /s/ E. Philip Wenger
    E. Philip Wenger
    Chairman, Chief Executive Officer and President
     
Date: May 5,November 3, 2017 /s/ Philmer H. Rohrbaugh
    Philmer H. Rohrbaugh
    Senior Executive Vice President, Chief Operating Officer
    and Chief Financial Officer



EXHIBIT INDEX
Exhibits Required Pursuant
to Item 601 of Regulation S-K
3.1Articles of Incorporation, as amended and restated, of Fulton Financial Corporation– Incorporated by reference to Exhibit 3.1 of the Fulton Financial Corporation Current Report on Form 8-K dated June 24, 2011. (File No. 0-10587)
3.2Bylaws of Fulton Financial Corporation as amended – Incorporated by reference to Exhibit 3.1 of the Fulton Financial Corporation Current Report on an Amended Form 8-K dated September 23, 2014.
4.1Indenture, dated March 16, 2017, between Fulton Financial Corporation and Wilmington Trust, National Association - Incorporated by reference to Exhibit 4.1 of the Fulton Financial Corporation Current Report on Form 8-K dated March 16, 2017.
4.2First Supplemental Indenture, dated March 16, 2017, between Fulton Financial Corporation and Wilmington Trust, National Association - Incorporated by reference to Exhibit 4.2 of the Fulton Financial Corporation Current Report on Form 8-K dated March 16, 2017.
31.1Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101
Financial statements from the Quarterly Report on Form 10-Q of Fulton Financial Corporation for the period ended March 31, 2017, filed on May 5, 2017, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income (iv) the Consolidated Statements of Shareholders' Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to Consolidated Financial Statements - filed herewith.



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