FULTON FINANCIAL CORP - FORM 10-Q

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EX-32.2 - SECTION 906 CFO CERTIFICATION - FULTON FINANCIAL CORP	fult33117-exhibit322.htm
EX-32.1 - SECTION 906 CEO CERTIFICATION - FULTON FINANCIAL CORP	fult33117-exhibit321.htm
EX-31.2 - SECTION 302 CFO CERTIFICATION - FULTON FINANCIAL CORP	fult33117-exhibit312.htm
EX-31.1 - SECTION 302 CEO CERTIFICATION - FULTON FINANCIAL CORP	fult33117-exhibit311.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20459

FORM 10-Q

(Mark One)



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

For the quarterly period ended March 31, 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 company in Rule 12b-2 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 shares outstanding as of April 28, 2017.

FULTON FINANCIAL CORPORATION

FORM 10-Q FOR THE THREE MONTHS ENDED MARCH 31, 2017

INDEX



Description		Page

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited):

(a)	Consolidated Balance Sheets - March 31, 2017 and December 31, 2016	3

(b)	Consolidated Statements of Income - Three months ended March 31, 2017 and 2016	4

(c)	Consolidated Statements of Comprehensive Income - Three months ended March 31, 2017 and 2016	5

(d)	Consolidated Statements of Shareholders’ Equity - Three months ended March 31, 2017 and 2016	6

(e)	Consolidated Statements of Cash Flows - Three months ended March 31, 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		38

Item 3. Quantitative and Qualitative Disclosures about Market Risk		58

Item 4. Controls and Procedures		62

PART II. OTHER INFORMATION

Item 1. Legal Proceedings		63

Item 1A. Risk Factors		63

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		63

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		63

Signatures		64

Exhibit Index		65

Item 1. Financial Statements

CONSOLIDATED BALANCE SHEETS

(in thousands, except per-share data)



	March 31, 2017			December 31, 2016
	(unaudited)
ASSETS
Cash and due from banks	$	93,844		$	118,763
Interest-bearing deposits with other banks	284,750			233,763
Federal Reserve Bank and Federal Home Loan Bank stock	65,637			57,489
Loans held for sale	24,783			28,697
Available for sale investment securities	2,506,017			2,559,227
Loans, net of unearned income	14,963,177			14,699,272
Less: Allowance for loan losses	(170,076		)	(168,679		)
Net Loans	14,793,101			14,530,593
Premises and equipment	216,171			217,806
Accrued interest receivable	46,355			46,294
Goodwill and intangible assets	531,556			531,556
Other assets	616,362			620,059
Total Assets	$	19,178,576		$	18,944,247
LIABILITIES
Deposits:
Noninterest-bearing	$	4,417,733		$	4,376,137
Interest-bearing	10,672,611			10,636,727
Total Deposits	15,090,344			15,012,864
Short-term borrowings:
Federal funds purchased	54,421			278,570
Other short-term borrowings	398,896			262,747
Total Short-Term Borrowings	453,317			541,317
Accrued interest payable	12,506			9,632
Other liabilities	329,817			329,916
Federal Home Loan Bank advances and long-term debt	1,137,909			929,403
Total Liabilities	17,023,893			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 2016	550,292			549,707
Additional paid-in capital	1,471,601			1,467,602
Retained earnings	756,305			732,099
Accumulated other comprehensive loss	(34,552		)	(38,449		)
Treasury stock, at cost, 45.8 million shares in 2017 and 2016	(588,963		)	(589,844		)
Total Shareholders’ Equity	2,154,683			2,121,115
Total Liabilities and Shareholders’ Equity	$	19,178,576		$	18,944,247

See Notes to Consolidated Financial Statements

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)



(in thousands, except per-share data)	Three months ended March 31
	2017		2016
INTEREST INCOME
Loans, including fees	$	142,566	$	134,079
Investment securities:
Taxable	11,914		12,003
Tax-exempt	2,849		2,040
Dividends	129		160
Loans held for sale	187		131
Other interest income	842		898
Total Interest Income	158,487		149,311
INTEREST EXPENSE
Deposits	11,801		10,727
Short-term borrowings	855		268
Long-term debt	8,252		9,262
Total Interest Expense	20,908		20,257
Net Interest Income	137,579		129,054
Provision for credit losses	4,800		1,530
Net Interest Income After Provision for Credit Losses	132,779		127,524
NON-INTEREST INCOME
Other service charges and fees	12,437		10,750
Service charges on deposit accounts	12,400		12,558
Investment management and trust services	11,808		10,988
Mortgage banking income	4,596		4,030
Investment securities gains, net	1,106		947
Other	4,326		3,864
Total Non-Interest Income	46,673		43,137
NON-INTEREST EXPENSE
Salaries and employee benefits	69,236		69,372
Net occupancy expense	12,663		12,220
Other outside services	5,546		6,056
Software	4,693		3,921
Data processing	4,286		5,400
Equipment expense	3,359		3,371
Professional fees	2,737		2,333
FDIC insurance expense	2,058		2,949
Marketing	1,986		1,624
Other	15,711		13,167
Total Non-Interest Expense	122,275		120,413
Income Before Income Taxes	57,177		50,248
Income taxes	13,797		11,991
Net Income	$	43,380	$	38,257

PER SHARE:
Net Income (Basic)	$	0.25	$	0.22
Net Income (Diluted)	0.25		0.22
Cash Dividends	0.11		0.09
See Notes to Consolidated Financial Statements

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(in thousands)



	Three months ended March 31
	2017			2016

Net Income	$	43,380		$	38,257
Other Comprehensive Income, net of tax:
Unrealized gain on securities	4,273			17,026
Reclassification adjustment for securities gains included in net income	(719		)	(616		)
Amortization of unrealized loss on derivative financial instruments	—			4
Amortization of net unrecognized pension and postretirement items	343			466
Other Comprehensive Income	3,897			16,880
Total Comprehensive Income	$	47,277		$	55,137

See Notes to Consolidated Financial Statements

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)

THREE MONTHS ENDED MARCH 31, 2017 AND 2016

(in thousands, except per-share data)



	Common Stock						Retained Earnings						Treasury Stock			Total
	Shares Outstanding		Amount		Additional Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total

Balance at December 31, 2016	174,040		$	549,707	$	1,467,602	$	732,099		$	(38,449	)	$	(589,844	)	$	2,121,115
Net income							43,380									43,380
Other comprehensive income										3,897						3,897
Stock issued	303		585		3,265								881			4,731
Stock-based compensation awards					734											734
Common stock cash dividends - $0.11 per share							(19,174		)							(19,174		)
Balance at March 31, 2017	174,343		$	550,292	$	1,471,601	$	756,305		$	(34,552	)	$	(588,963	)	$	2,154,683

Balance at December 31, 2015	174,176		$	547,141	$	1,450,690	$	641,588		$	(22,017	)	$	(575,508	)	$	2,041,894
Net income							38,257									38,257
Other comprehensive loss										16,880						16,880
Stock issued, including related tax benefits	134		121		345								1,181			1,647
Stock-based compensation awards					1,436											1,436
Acquisition of treasury stock	(917	)											(11,196		)	(11,196		)
Common stock cash dividends - $0.09 per share							(15,609		)							(15,609		)
Balance at March 31, 2016	173,393		$	547,262	$	1,452,471	$	664,236		$	(5,137	)	$	(585,523	)	$	2,073,309

See Notes to Consolidated Financial Statements

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)



	Three months ended March 31
	2017			2016
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income	$	43,380		$	38,257
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses	4,800			1,530
Depreciation and amortization of premises and equipment	7,032			6,949
Net amortization of investment securities premiums	2,416			2,055
Investment securities gains, net	(1,106		)	(947		)
Gain on sales of mortgage loans held for sale	(3,074		)	(2,670		)
Proceeds from sales of mortgage loans held for sale	115,417			114,255
Originations of mortgage loans held for sale	(108,429		)	(114,418		)
Amortization of issuance costs on long-term debt	168			154
Stock-based compensation	734			1,436
Excess tax benefits from stock-based compensation	—			(10		)
Increase in accrued interest receivable	(61		)	(1,612		)
Decreases (increase) in other assets	4,614			(4,469		)
Increase in accrued interest payable	2,874			2,843
Decrease in other liabilities	(4,244		)	(9,245		)
Total adjustments	21,141			(4,149		)
Net cash provided by operating activities	64,521			34,108
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale	8,735			46,541
Proceeds from principal repayments and maturities of securities available for sale	98,024			117,221
Purchase of securities available for sale	(49,430		)	(169,436		)
Increase in short-term investments	(59,135		)	(115,544		)
Net increase in loans	(267,383		)	(38,976		)
Net purchases of premises and equipment	(5,397		)	(9,471		)
Net cash used in investing activities	(274,586		)	(169,665		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand and savings deposits	112,348			269,899
Net (decrease) increase in time deposits	(34,868		)	2,064
Decrease in short-term borrowings	(88,000		)	(144,780		)
Additions to long-term debt	223,375			16,000
Repayments of long-term debt	(15,037		)	(42		)
Net proceeds from issuance of common stock	4,731			1,637
Excess tax benefits from stock-based compensation	—			10
Dividends paid	(17,403		)	(15,676		)
Acquisition of treasury stock	—			(11,196		)
Net cash provided by financing activities	185,146			117,916
Net Decrease in Cash and Due From Banks	(24,919		)	(17,641		)
Cash and Due From Banks at Beginning of Period	118,763			101,120
Cash and Due From Banks at End of Period	$	93,844		$	83,479
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest	$	18,034		$	17,414
Income taxes	116			3,972
See Notes to Consolidated Financial Statements

FULTON FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1 – Basis of Presentation

The accompanying unaudited consolidated financial statements of Fulton Financial Corporation (the "Corporation") have been prepared in conformity with U.S. generally accepted accounting principles ("U.S. GAAP") for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the amounts of assets and liabilities as of the date of the financial statements as well as revenues and expenses during the period. Actual results could differ from those estimates. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2016. Operating results for the three months ended March 31, 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, the FASB issued amendments to this standard (ASC Updates 2016-08, 2016-10, 2016-11 and 2016-12). These amendments provide further clarification to the standard. For public business entities, ASC Update 2014-09 is effective for interim and annual reporting periods beginning after December 15, 2017. Early application is not permitted. For the Corporation, this standards update is effective with its March 31, 2018 quarterly report on Form 10-Q. The Corporation is currently evaluating the impact of the adoption of ASC Update 2014-09 on its consolidated financial statements.

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

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

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

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

In August 2016, the FASB issued ASC Update 2016-15, "Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments." This standards update provides guidance regarding the presentation of certain cash receipts and cash payments in the statement of cash flows, addressing eight specific cash flow classification issues, in order to reduce existing diversity in practice. ASC Update 2016-15 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 of the adoption of ASC Update 2017-07 on its consolidated financial statements.

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

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

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 31
	2017	2016
	(in thousands)
Weighted average shares outstanding (basic)	174,150	173,331
Impact of common stock equivalents	1,427	1,085
Weighted average shares outstanding (diluted)	175,577	174,416

For the three months ended March 31, 2016, 885,000 stock options were excluded from the diluted net income per share computation as their effect would have been anti-dilutive. There were no stock options excluded for the three months ended March 31, 2017.

NOTE 3 – Accumulated Other Comprehensive Income

The following table presents changes in other comprehensive income:



	Before-Tax Amount			Tax Effect			Net of Tax Amount
	(in thousands)
Three months ended March 31, 2017
Unrealized gain on securities	$	6,575		$	(2,302	)	$	4,273
Reclassification adjustment for securities gains included in net income ⁽¹⁾	(1,106		)	387			(719		)
Amortization of net unrecognized pension and postretirement items ⁽³⁾	528			(185		)	343
Total Other Comprehensive Income	$	5,997		$	(2,100	)	$	3,897
Three months ended March 31, 2016
Unrealized gain on securities	$	26,193		$	(9,167	)	$	17,026
Reclassification adjustment for securities gains included in net income ⁽¹⁾	(947		)	331			(616		)
Amortization of unrealized loss on derivative financial instruments⁽²⁾	6			(2		)	4
Amortization of net unrecognized pension and postretirement items ⁽³⁾	717			(251		)	466
Total Other Comprehensive Income	$	25,969		$	(9,089	)	$	16,880


(1)	Amounts reclassified out of accumulated other comprehensive income. Before-tax amounts included in "Investment securities gains, net" on the consolidated statements of income. See Note 4, "Investment Securities," for additional details.


(2)	Amounts reclassified out of accumulated other comprehensive income. Before-tax amounts included in "Interest expense" on the consolidated statements of income.


(3)	Amounts reclassified out of accumulated other comprehensive income. Before-tax amounts included in "Salaries and employee benefits" on the consolidated statements of income. See Note 8, "Employee Benefit Plans," for additional details.

The following table presents changes in each component of accumulated other comprehensive income, net of tax:



	Unrealized Gains (Losses) on Investment Securities Not Other-Than-Temporarily Impaired			Unrealized Non-Credit Gains (Losses) on Other-Than-Temporarily Impaired Debt Securities		Unrealized Effective Portions of Losses on Forward-Starting Interest Rate Swaps			Unrecognized Pension and Postretirement Plan Income (Costs)			Total
	(in thousands)
Three months ended March 31, 2017
Balance at December 31, 2016	$	(23,047	)	$	273	$	—		$	(15,675	)	$	(38,449	)
Other comprehensive loss before reclassifications	4,273			—		—			—			4,273
Amounts reclassified from accumulated other comprehensive income (loss)	(719		)	—		—			343			(376		)
Balance at March 31, 2017	$	(19,493	)	$	273	$	—		$	(15,332	)	$	(34,552	)
Three months ended March 31, 2016
Balance at December 31, 2015	$	(6,499	)	$	458	$	(15	)	$	(15,961	)	$	(22,017	)
Other comprehensive income before reclassifications	17,026			—		—			—			17,026
Amounts reclassified from accumulated other comprehensive income (loss)	(616		)	—		4			466			(146		)
Balance at March 31, 2016	$	9,911		$	458	$	(11	)	$	(15,495	)	$	(5,137	)

NOTE 4 – Investment Securities

The following table presents the amortized cost and estimated fair values of investment securities, which were all classified as available for sale:



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(in thousands)
March 31, 2017
U.S. Government sponsored agency securities	$	5,959	$	37	$	—		$	5,996
State and municipal securities	404,125		2,352		(13,853		)	392,624
Corporate debt securities	109,595		2,055		(3,773		)	107,877
Collateralized mortgage obligations	575,596		1,811		(11,521		)	565,886
Mortgage-backed securities	1,321,573		6,155		(14,107		)	1,313,621
Auction rate securities	107,312		—		(9,873		)	97,439
Total debt securities	2,524,160		12,410		(53,127		)	2,483,443
Equity securities	11,416		11,158		—			22,574
Total	$	2,535,576	$	23,568	$	(53,127	)	$	2,506,017



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(in thousands)
December 31, 2016
U.S. Government sponsored agency securities	$	132	$	2	$	—		$	134
State and municipal securities	405,274		2,043		(15,676		)	391,641
Corporate debt securities	112,016		1,978		(4,585		)	109,409
Collateralized mortgage obligations	604,095		1,943		(12,178		)	593,860
Mortgage-backed securities	1,353,292		6,546		(17,437		)	1,342,401
Auction rate securities	107,215		—		(9,959		)	97,256
Total debt securities	2,582,024		12,512		(59,835		)	2,534,701
Equity securities	12,231		12,295		—			24,526
Total	$	2,594,255	$	24,807	$	(59,835	)	$	2,559,227

Securities carried at $1.8 billion as of March 31, 2017 and December 31, 2016 were pledged as collateral to secure public and trust deposits and customer repurchase agreements.

Equity securities include common stocks of financial institutions (estimated fair value of $21.6 million at March 31, 2017 and $23.5 million at December 31, 2016) and other equity investments (estimated fair value of $969,000 at March 31, 2017 and $1.0 million at December 31, 2016).

As of March 31, 2017, the financial institutions stock portfolio had a cost basis of $10.6 million and an estimated fair value of $21.6 million, including an investment in a single financial institution with a cost basis of $5.1 million and an estimated fair value of $9.6 million. The estimated fair value of this investment accounted for 44.6% of the estimated fair value of the Corporation's investments in the common stocks of publicly traded financial institutions. No other investment in a single financial institution in the financial institutions stock portfolio exceeded 10% of the portfolio's estimated fair value.

The amortized cost and estimated fair values of debt securities as of March 31, 2017, 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
	(in thousands)
Due in one year or less		$	53,510	$	53,729
Due from one year to five years		27,178		27,785
Due from five years to ten years		113,529		113,708
Due after ten years		432,774		408,714
		626,991		603,936
Collateralized mortgage obligations		575,596		565,886
Mortgage-backed securities		1,321,573		1,313,621
Total debt securities		$	2,524,160	$	2,483,443

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)
Three months ended March 31, 2017	(in thousands)
Equity securities	$	1,045	$	—	$	1,045
Debt securities	61		—		61
Total	$	1,106	$	—	$	1,106
Three months ended March 31, 2016
Equity securities	$	733	$	—	$	733
Debt securities	214		—		214
Total	$	947	$	—	$	947

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, 2017 and March 31, 2016 was $11.5 million. There were no other-than-temporary impairment charges recognized for the three months ended March 31, 2017 and March 31, 2016.

The following tables present 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, 2017 and December 31, 2016:



	Less than 12 months					12 months or longer					Total
	Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses
March 31, 2017	(in thousands)
State and municipal securities	$	237,313	$	(13,853	)	$	—	$	—		$	237,313	$	(13,853	)
Corporate debt securities	4,020		(11		)	35,364		(3,762		)	39,384		(3,773		)
Collateralized mortgage obligations	145,052		(3,672		)	246,408		(7,849		)	391,460		(11,521		)
Mortgage-backed securities	1,089,397		(14,107		)	—		—			1,089,397		(14,107		)
Auction rate securities	—		—			97,439		(9,873		)	97,439		(9,873		)
Total debt securities	1,475,782		(31,643		)	379,211		(21,484		)	1,854,993		(53,127		)



	Less than 12 months					12 months or longer					Total
	Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses
December 31, 2016	(in thousands)
State and municipal securities	$	247,509	$	(15,676	)	$	—	$	—		$	247,509	$	(15,676	)
Corporate debt securities	11,922		(110		)	34,629		(4,475		)	46,551		(4,585		)
Collateralized mortgage obligations	166,905		(3,899		)	258,237		(8,279		)	425,142		(12,178		)
Mortgage-backed securities	1,137,510		(17,437		)	—		—			1,137,510		(17,437		)
Auction rate securities	—		—			97,256		(9,959		)	97,256		(9,959		)
Total debt securities	1,563,846		(37,122		)	390,122		(22,713		)	1,953,968		(59,835		)

The decline in market 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, therefore the Corporation does not consider these investments to be other-than-temporarily impaired as of March 31, 2017.

As of March 31, 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, 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, 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, 2016
	Amortized cost		Estimated fair value		Amortized cost		Estimated fair value
	(in thousands)
Single-issuer trust preferred securities	$	43,770	$	40,720	$	43,746	$	39,829
Subordinated debt	43,787		44,399		46,231		46,723
Senior debt	18,036		18,334		18,037		18,433
Pooled trust preferred securities	—		422		—		422
Corporate debt securities issued by financial institutions	105,593		103,875		108,014		105,407
Other corporate debt securities	4,002		4,002		4,002		4,002
Available for sale corporate debt securities	$	109,595	$	107,877	$	112,016	$	109,409

Single-issuer trust preferred securities had an unrealized loss of $3.1 million at March 31, 2017. Six of the 19 single-issuer trust preferred securities, with an amortized cost of $11.6 million and an estimated fair value of $10.3 million at March 31, 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, 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, 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, 2016
	(in thousands)
Real-estate - commercial mortgage	$	6,118,533		$	6,018,582
Commercial - industrial, financial and agricultural	4,167,809			4,087,486
Real-estate - residential mortgage	1,665,142			1,601,994
Real-estate - home equity	1,595,901			1,625,115
Real-estate - construction	882,983			843,649
Consumer	288,826			291,470
Leasing and other	262,315			246,704
Overdrafts	3,342			3,662
Loans, gross of unearned income	14,984,851			14,718,662
Unearned income	(21,674		)	(19,390		)
Loans, net of unearned income	$	14,963,177		$	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
	(in thousands)
Allowance for loan losses	$	170,076	$	168,679
Reserve for unfunded lending commitments	2,571		2,646
Allowance for credit losses	$	172,647	$	171,325

The following table presents the activity in the allowance for credit losses:



	Three months ended March 31
	2017			2016
	(in thousands)
Balance at beginning of period	$	171,325		$	171,412
Loans charged off	(9,407		)	(11,155		)
Recoveries of loans previously charged off	5,929			4,278
Net loans charged off	(3,478		)	(6,877		)
Provision for credit losses	4,800			1,530
Balance at end of period	$	172,647		$	166,065

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
	(in thousands)
Three months ended March 31, 2017
Balance at December 31, 2016	$	46,842		$	54,353		$	26,801		$	22,929		$	6,455		$	3,574		$	3,192		$	4,533		$	168,679
Loans charged off	(1,224		)	(5,527		)	(698		)	(216		)	(247		)	(856		)	(639		)	—			(9,407		)
Recoveries of loans previously charged off	450			4,191			137			230			548			236			137			—			5,929
Net loans charged off	(774		)	(1,336		)	(561		)	14			301			(620		)	(502		)	—			(3,478		)
Provision for loan losses (1)	1,305			2,292			(2,419		)	(925		)	745			77			578			3,222			4,875
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 December 31, 2015	$	47,866		$	57,098		$	22,405		$	21,375		$	6,529		$	2,585		$	2,468		$	8,728		$	169,054
Loans charged off	(582		)	(6,188		)	(1,541		)	(1,068		)	(326		)	(1,007		)	(443		)	—			(11,155		)
Recoveries of loans previously charged off	825			2,319			338			136			383			196			81			—			4,278
Net loans charged off	243			(3,869		)	(1,203		)	(932		)	57			(811		)	(362		)	—			(6,877		)
Provision for loan losses (1)	202			1,104			1,322			(515		)	(304		)	550			868			(1,563		)	1,664
Balance at March 31, 2016	$	48,311		$	54,333		$	22,524		$	19,928		$	6,282		$	2,324		$	2,974		$	7,165		$	163,841


(1)	The provision for loan losses excluded a $75,000 and an $134,000 decrease, respectively, in the reserve for unfunded lending commitments for the three months ended March 31, 2017 and 2016.

The following table presents loans, net of unearned income and their related allowance for loan losses, by portfolio segment:



	Real Estate - Commercial Mortgage		Commercial - Industrial, Financial and Agricultural		Real Estate - Home Equity		Real Estate - Residential Mortgage		Real Estate - Construction		Consumer		Leasing, other and overdrafts		Unallocated		Total
	(in thousands)
Allowance for loan losses at March 31, 2017:
Measured for impairment under FASB ASC Subtopic 450-20	$	37,457	$	43,155	$	14,744	$	10,581	$	4,915	$	3,007	$	3,268	$	7,755	$	124,882
Evaluated for impairment under FASB ASC Section 310-10-35	9,916		12,154		9,077		11,437		2,586		24		—		N/A		45,194
	$	47,373	$	55,309	$	23,821	$	22,018	$	7,501	$	3,031	$	3,268	$	7,755	$	170,076

Loans, net of unearned income at March 31, 2017:
Measured for impairment under FASB ASC Subtopic 450-20	$	6,067,492	$	4,119,550	$	1,576,949	$	1,620,302	$	869,225	$	288,789	$	243,983	N/A		$	14,786,290
Evaluated for impairment under FASB ASC Section 310-10-35	51,041		48,259		18,952		44,840		13,758		37		—		N/A		176,887
	$	6,118,533	$	4,167,809	$	1,595,901	$	1,665,142	$	882,983	$	288,826	$	243,983	N/A		$	14,963,177

Allowance for loan losses at March 31, 2016:
Measured for impairment under FASB ASC Subtopic 450-20	$	35,914	$	40,969	$	13,541	$	7,599	$	4,004	$	2,302	$	1,756	$	7,165	$	113,250
Evaluated for impairment under FASB ASC Section 310-10-35	12,397		13,364		8,983		12,329		2,278		22		1,218		N/A		50,591
	$	48,311	$	54,333	$	22,524	$	19,928	$	6,282	$	2,324	$	2,974	$	7,165	$	163,841

Loans, net of unearned income at March 31, 2016:
Measured for impairment under FASB ASC Subtopic 450-20	$	5,499,820	$	3,992,567	$	1,641,457	$	1,329,114	$	797,282	$	263,189	$	164,806	N/A		$	13,688,235
Evaluated for impairment under FASB ASC Section 310-10-35	58,288		42,766		18,024		48,345		13,590		32		1,421		N/A		182,466
	$	5,558,108	$	4,035,333	$	1,659,481	$	1,377,459	$	810,872	$	263,221	$	166,227	N/A		$	13,870,701

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, 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, 2017 and 2016, approximately 67% and 77%, respectively, of impaired loans with principal balances greater than or equal to $1.0 million, whose primary collateral is real estate, were measured at estimated fair value using state certified third-party appraisals that had been updated in the preceding 12 months.

When updated appraisals are not obtained for loans evaluated for impairment under FASB ASC Section 310-10-35 that are secured by real estate, fair values are estimated based on the original appraisal values, as long as the original appraisal indicated an acceptable loan-to-value position and, in the opinion of the Corporation's internal credit administration staff, there has not been a significant deterioration in the collateral value since the original appraisal was performed. Original appraisals are typically used only when the estimated collateral value, as adjusted for the age of the appraisal, results in a current loan-to-value ratio that is lower than the Corporation's loan-to-value requirements for new loans, generally less than 70%.

The following table presents total impaired loans by class segment:



	March 31, 2017						December 31, 2016
	Unpaid Principal Balance		Recorded Investment		Related Allowance		Unpaid Principal Balance		Recorded Investment		Related Allowance
	(in thousands)
With no related allowance recorded:
Real estate - commercial mortgage	$	25,043	$	22,236	$	—	$	28,757	$	25,447	$	—
Commercial - secured	33,791		25,622		—		29,296		25,526		—
Real estate - residential mortgage	4,657		4,657		—		4,689		4,689		—
Construction - commercial residential	6,169		4,692		—		6,271		4,795		—
Construction - commercial	603		603		—		—		—		—
	70,263		57,810				69,013		60,457
With a related allowance recorded:
Real estate - commercial mortgage	37,069		28,805		9,916		37,132		29,446		10,162
Commercial - secured	26,205		21,872		11,739		27,767		22,626		13,198
Commercial - unsecured	1,061		765		415		1,122		823		455
Real estate - home equity	23,351		18,952		9,077		23,971		19,205		9,511
Real estate - residential mortgage	47,442		40,183		11,437		48,885		41,359		11,897
Construction - commercial residential	13,451		7,286		2,134		10,103		4,206		1,300
Construction - commercial	141		81		31		681		435		145
Construction - other	1,096		1,096		421		1,096		1,096		423
Consumer - direct	20		20		14		19		19		12
Consumer - indirect	17		17		10		21		21		14
	149,853		119,077		45,194		150,797		119,236		47,117
Total	$	220,116	$	176,887	$	45,194	$	219,810	$	179,693	$	47,117

As of March 31, 2017 and December 31, 2016, there were $57.8 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 31
	2017				2016
	Average Recorded Investment		Interest Income (1)		Average Recorded Investment		Interest Income (1)
	(in thousands)
With no related allowance recorded:
Real estate - commercial mortgage	$	23,842	$	70	$	22,810	$	69
Commercial - secured	25,574		36		12,964		16
Real estate - residential mortgage	4,673		26		5,501		30
Construction - commercial residential	4,744		2		7,582		19
Construction - commercial	302		—		—		—
	59,135		134		48,857		134
With a related allowance recorded:
Real estate - commercial mortgage	29,126		85		35,482		108
Commercial - secured	22,249		32		31,642		38
Commercial - unsecured	795		—		853		1
Real estate - home equity	19,079		95		16,896		57
Real estate - residential mortgage	40,839		230		43,885		235
Construction - commercial residential	5,746		3		6,189		15
Construction - commercial	258		—		616		—
Construction - other	1,096		—		402		—
Consumer - direct	20		—		17		—
Consumer - indirect	18		—		16		—
Leasing, other and overdrafts	713		—		1,423		—
	119,939		445		137,421		454
Total	$	179,074	$	579	$	186,278	$	588


(1)	All impaired loans, excluding accruing TDRs, were non-accrual loans. Interest income recognized for the three months ended March 31, 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						Total
	March 31, 2017			December 31, 2016			March 31, 2017			December 31, 2016			March 31, 2017			December 31, 2016			March 31, 2017			December 31, 2016
	(dollars in thousands)
Real estate - commercial mortgage	$	5,860,141		$	5,763,122		$	137,643		$	132,484		$	120,749		$	122,976		$	6,118,533		$	6,018,582
Commercial - secured	3,753,918			3,686,152			138,242			128,873			138,757			118,527			4,030,917			3,933,552
Commercial - unsecured	127,858			145,922			6,471			4,481			2,563			3,531			136,892			153,934
Total commercial - industrial, financial and agricultural	3,881,776			3,832,074			144,713			133,354			141,320			122,058			4,167,809			4,087,486
Construction - commercial residential	124,415			113,570			10,677			15,447			16,221			13,172			151,313			142,189
Construction - commercial	674,863			635,963			4,902			3,412			5,363			5,115			685,128			644,490
Total construction (excluding Construction - other)	799,278			749,533			15,579			18,859			21,584			18,287			836,441			786,679
	$	10,541,195		$	10,344,729		$	297,935		$	284,697		$	283,653		$	263,321		$	11,122,783		$	10,892,747
% of Total	94.8		%	95.0		%	2.6		%	2.6		%	2.6		%	2.4		%	100.0		%	100.0		%

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

The 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)						Total
	March 31, 2017			December 31, 2016			March 31, 2017			December 31, 2016			March 31, 2017			December 31, 2016			March 31, 2017			December 31, 2016
	(dollars in thousands)
Real estate - home equity	$	1,576,374		$	1,602,687		$	7,295		$	9,274		$	12,232		$	13,154		$	1,595,901		$	1,625,115
Real estate - residential mortgage	1,624,477			1,557,995			17,068			20,344			23,597			23,655			1,665,142			1,601,994
Construction - other	45,446			55,874			—			—			1,096			1,096			46,542			56,970
Consumer - direct	84,670			93,572			1,383			1,752			1,129			1,563			87,182			96,887
Consumer - indirect	199,542			190,656			2,055			3,599			47			328			201,644			194,583
Total consumer	284,212			284,228			3,438			5,351			1,176			1,891			288,826			291,470
Leasing	242,120			229,591			1,425			1,068			438			317			243,983			230,976
	$	3,772,629		$	3,730,375		$	29,226		$	36,037		$	38,539		$	40,113		$	3,840,394		$	3,806,525
% of Total	98.2		%	98.0		%	0.8		%	0.9		%	1.0		%	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
	(in thousands)
Non-accrual loans	$	117,264	$	120,133
Loans 90 days or more past due and still accruing	14,268		11,505
Total non-performing loans	131,532		131,638
Other real estate owned (OREO)	11,906		12,815
Total non-performing assets	$	143,438	$	144,453

The following table presents past due status and non-accrual loans by portfolio segment and class segment:



	March 31, 2017
	30-59 Days Past Due		60-89 Days Past Due		≥ 90 Days Past Due and Accruing		Non- accrual		Total ≥ 90 Days		Total Past Due		Current		Total
	(in thousands)
Real estate - commercial mortgage	$	9,890	$	971	$	910	$	35,803	$	36,713	$	47,574	$	6,070,959	$	6,118,533
Commercial - secured	4,530		3,179		2,511		40,084		42,595		50,304		3,980,613		4,030,917
Commercial - unsecured	309		54		497		734		1,231		1,594		135,298		136,892
Total commercial - industrial, financial and agricultural	4,839		3,233		3,008		40,818		43,826		51,898		4,115,911		4,167,809
Real estate - home equity	6,181		1,114		2,881		9,351		12,232		19,527		1,576,374		1,595,901
Real estate - residential mortgage	12,829		4,239		5,790		17,807		23,597		40,665		1,624,477		1,665,142
Construction - commercial residential	1,550		801		65		11,705		11,770		14,121		137,192		151,313
Construction - commercial	1,546		142		—		684		684		2,372		682,756		685,128
Construction - other	—		—		—		1,096		1,096		1,096		45,446		46,542
Total real estate - construction	3,096		943		65		13,485		13,550		17,589		865,394		882,983
Consumer - direct	939		444		1,129		—		1,129		2,512		84,670		87,182
Consumer - indirect	1,784		271		47		—		47		2,102		199,542		201,644
Total consumer	2,723		715		1,176		—		1,176		4,614		284,212		288,826
Leasing, other and overdrafts	981		444		438		—		438		1,863		242,120		243,983
Total	$	40,539	$	11,659	$	14,268	$	117,264	$	131,532	$	183,730	$	14,779,447	$	14,963,177



	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 - secured	6,660		2,616		959		41,589		42,548		51,824		3,881,728		3,933,552
Commercial - unsecured	898		35		152		760		912		1,845		152,089		153,934
Total commercial - industrial, financial and agricultural	7,558		2,651		1,111		42,349		43,460		53,669		4,033,817		4,087,486
Real estate - home equity	6,596		2,678		2,543		10,611		13,154		22,428		1,602,687		1,625,115
Real estate - residential mortgage	15,600		4,744		5,224		18,431		23,655		43,999		1,557,995		1,601,994
Construction - commercial residential	233		51		36		8,275		8,311		8,595		133,594		142,189
Construction - commercial	743		—		—		435		435		1,178		643,312		644,490
Construction - other	—		—		—		1,096		1,096		1,096		55,874		56,970
Total real estate - construction	976		51		36		9,806		9,842		10,869		832,780		843,649
Consumer - direct	1,211		541		1,563		—		1,563		3,315		93,572		96,887
Consumer - indirect	3,200		399		328		—		328		3,927		190,656		194,583
Total consumer	4,411		940		1,891		—		1,891		7,242		284,228		291,470
Leasing, other and overdrafts	543		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
	(in thousands)
Real-estate - residential mortgage	$	27,033	$	27,617
Real-estate - commercial mortgage	15,237		15,957
Real estate - home equity	9,601		8,594
Commercial	7,441		6,627
Construction	273		726
Consumer	37		39
Total accruing TDRs	59,622		59,560
Non-accrual TDRs ⁽¹⁾	27,220		27,850
Total TDRs	$	86,842	$	87,410


(1)	Included in non-accrual loans in the preceding table detailing non-performing assets.

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

The following table presents TDRs, by class segment and type of concession for loans that were modified during the three months ended March 31, 2017 and 2016:



		Three months ended March 31
		2017			2016
		Number of Loans	Post-Modification Recorded Investment		Number of Loans	Post-Modification Recorded Investment
		(dollars in thousands)
Real estate – residential mortgage:
	Extend maturity without rate concession	2	$	337	—	$	—
	Bankruptcy	1	178		—	—
Real estate - commercial mortgage:
	Extend maturity without rate concession	1	318		—	—
Real estate - home equity:
	Extend maturity with rate concession	—	—		1	44
	Extend maturity without rate concession	16	1,284		—	—
	Bankruptcy	7	453		37	2,698
Commercial:
	Extend maturity without rate concession	4	3,126		4	933
Consumer:
	Bankruptcy	—	—		1	2

Total		31	$	5,696	43	$	3,677

The following table presents TDRs, by class segment, as of March 31, 2017 and 2016, that were modified in the previous 12 months and had a post-modification payment default during the three months ended March 31, 2017 and 2016. The Corporation defines a payment default as a single missed payment.



	2017			2016
	Number of Loans	Recorded Investment		Number of Loans	Recorded Investment
	(dollars in thousands)
Real estate - residential mortgage	8	$	2,006	3	$	260
Real estate - commercial mortgage	2	430		3	235
Real estate - home equity	14	639		14	1,039
Commercial	6	3,654		1	47
Total	30	$	6,729	21	$	1,581

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 31
	2017			2016
	(in thousands)
Amortized cost:
Balance at beginning of period	$	38,822		$	40,944
Originations of mortgage servicing rights	1,183			920
Amortization	(1,462		)	(1,669		)
Balance at end of period	$	38,543		$	40,195

Valuation Allowance - Balance at end of period	$	(1,291	)	$	—

Net MSRs at end of period	$	37,252		$	40,195

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, 2017. No valuation allowance was determined to be necessary as of March 31, 2016.

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.

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

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

NOTE 8 – Employee Benefit Plans

The net periodic benefit cost for the Corporation’s Defined Benefit Pension Plan ("Pension Plan") consisted of the following components:



	Three months ended March 31
	2017			2016
	(in thousands)
Service cost ⁽¹⁾	$	—		$	150
Interest cost	830			881
Expected return on plan assets	(451		)	(726		)
Net amortization and deferral	663			782
Net periodic benefit cost	$	1,042		$	1,087


(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 31
	2017			2016
	(in thousands)
Interest cost	$	17		$	38
Net accretion and deferral	(141		)	(65		)
Net periodic benefit	$	(124	)	$	(27	)

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, 2016
	Notional Amount		Asset (Liability) Fair Value			Notional Amount		Asset (Liability) Fair Value
	(in thousands)
Interest Rate Locks with Customers
Positive fair values	$	120,577	$	1,509		$	87,119	$	863
Negative fair values	3,761		(28		)	18,239		(227		)
Net interest rate locks with customers			1,481					636
Forward Commitments
Positive fair values	20,362		21			70,031		2,223
Negative fair values	81,615		(289		)	19,964		(112		)
Net forward commitments			(268		)			2,111
Interest Rate Swaps with Customers
Positive fair values	1,024,684		24,810			876,744		24,397
Negative fair values	625,050		(18,226		)	583,060		(16,998		)
Net interest rate swaps with customers			6,584					7,399
Interest Rate Swaps with Dealer Counterparties
Positive fair values	625,050		18,226			583,060		16,998
Negative fair values ⁽¹⁾	1,024,684		(22,624		)	876,744		(24,397		)
Net interest rate swaps with dealer counterparties			(4,398		)			(7,399		)
Foreign Exchange Contracts with Customers
Positive fair values	8,184		428			11,674		504
Negative fair values	5,035		(137		)	4,659		(221		)
Net foreign exchange contracts with customers			291					283
Foreign Exchange Contracts with Correspondent Banks
Positive fair values	9,260		159			7,040		241
Negative fair values	10,198		(402		)	12,869		(447		)
Net foreign exchange contracts with correspondent banks			(243		)			(206		)
Net derivative fair value asset			$	3,447				$	2,824

(1) Includes centrally cleared interest rate swaps with a notional amount of $134.9 million and a fair value of $0 as of March 31, 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 31
	2017			2016
	(in thousands)
Interest rate locks with customers	$	845		$	1,232
Forward commitments	(2,379		)	(1,106		)
Interest rate swaps with customers	(815		)	29,431
Interest rate swaps with dealer counterparties	3,001			(29,431		)
Foreign exchange contracts with customers	8			374
Foreign exchange contracts with correspondent banks	(37		)	(279		)
Net fair value gains on derivative financial instruments	$	623		$	221

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
	(in thousands)
Cost	$	24,255	$	28,708
Fair value	24,783		28,697

During the three months ended March 31, 2017 and 2016, the Corporation recorded gains related to changes in fair values of mortgage loans held for sale of $539,000 and $230,000, 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 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
	Recognized		on the Consolidated
	on the		Balance Sheets
	Consolidated		Financial			Cash			Net
	Balance Sheets		Instruments⁽¹⁾			Collateral ⁽²⁾			Amount
	(in thousands)
March 31, 2017
Interest rate swap derivative assets	$	43,036	$	(17,394	)	$	—		$	25,642
Foreign exchange derivative assets with correspondent banks	159		(159		)	—			—
Total	$	43,195	$	(17,553	)	$	—		$	25,642

Interest rate swap derivative liabilities	$	40,850	$	(17,394	)	$	(2,850	)	$	20,606
Foreign exchange derivative liabilities with correspondent banks	402		(159		)	(200		)	43
Total	$	41,252	$	(17,553	)	$	(3,050	)	$	20,649

December 31, 2016
Interest rate swap derivative assets	$	41,395	$	(15,117	)	$	—		$	26,278
Foreign exchange derivative assets with correspondent banks	241		(241		)	—			—
Total	$	41,636	$	(15,358	)	$	—		$	26,278

Interest rate swap derivative liabilities	$	41,395	$	(15,117	)	$	(4,010	)	$	22,268
Foreign exchange derivative liabilities with correspondent banks	447		(241		)	(206		)	—
Total	$	41,842	$	(15,358	)	$	(4,216	)	$	22,268


(1)	For derivative assets, amounts represent any derivative liability fair values that could be offset in the event of counterparty or customer default. For derivative liabilities, amounts represent any derivative asset fair values that could be offset in the event of counterparty or customer default.


(2)	Amounts represent collateral received from the counterparty or posted by the Corporation.

NOTE 10 – Commitments and Contingencies

Commitments

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

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

The outstanding amounts of commitments to extend credit and letters of credit were as follows:



	March 31, 2017		December 31, 2016
	(in thousands)
Commitments to extend credit	$	6,228,866	$	6,075,567
Standby letters of credit	357,313		356,359
Commercial letters of credit	38,003		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, 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, 2017, the unpaid principal balance of loans sold under the MPF Program was approximately $98 million. As of both March 31, 2017 and December 31, 2016, the reserve for estimated credit losses related to loans sold under the MPF Program was $1.7 million. 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, 2017 and December 31, 2016, the total reserve for losses on residential mortgage loans sold was $2.6 million, 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, 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.

Fair Lending Investigation

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

Agostino, et al. Litigation

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

NOTE 11 – Fair Value Measurements

FASB ASC Topic 820 establishes a fair value hierarchy for the inputs to valuation techniques used to measure assets and liabilities at fair value using the following three categories (from highest to lowest priority):


•	Level 1 – Inputs that represent quoted prices for identical instruments in active markets.


•	Level 2 – Inputs that represent quoted prices for similar instruments in active markets, or quoted prices for identical instruments in non-active markets. Also includes valuation techniques whose inputs are derived principally from observable market data other than quoted prices, such as interest rates or other market-corroborated means.


•	Level 3 – Inputs that are largely unobservable, as little or no market data exists for the instrument being valued.

The Corporation has categorized all assets and liabilities measured at fair value on both a recurring and nonrecurring basis into the above three levels.

The following tables present summaries of the Corporation’s assets and liabilities measured at fair value on a recurring basis and reported on the consolidated balance sheets:



	March 31, 2017
	Level 1		Level 2		Level 3		Total
	(in thousands)
Mortgage loans held for sale	$	—	$	24,783	$	—	$	24,783
Available for sale investment securities:
Equity securities	22,574		—		—		22,574
U.S. Government sponsored agency securities	—		5,996		—		5,996
State and municipal securities	—		392,624		—		392,624
Corporate debt securities	—		104,705		3,172		107,877
Collateralized mortgage obligations	—		565,886		—		565,886
Mortgage-backed securities	—		1,313,621		—		1,313,621
Auction rate securities	—		—		97,439		97,439
Total available for sale investment securities	22,574		2,382,832		100,611		2,506,017
Other assets	18,170		44,567		—		62,737
Total assets	$	40,744	$	2,452,182	$	100,611	$	2,593,537
Other liabilities	$	18,099	$	41,167	$	—	$	59,266



	December 31, 2016
	Level 1		Level 2		Level 3		Total
	(in thousands)
Mortgage loans held for sale	$	—	$	28,697	$	—	$	28,697
Available for sale investment securities:
Equity securities	24,526		—		—		24,526
U.S. Government sponsored agency securities	—		134		—		134
State and municipal securities	—		391,641		—		391,641
Corporate debt securities	—		106,537		2,872		109,409
Collateralized mortgage obligations	—		593,860		—		593,860
Mortgage-backed securities	—		1,342,401		—		1,342,401
Auction rate securities	—		—		97,256		97,256
Total available for sale investment securities	24,526		2,434,573		100,128		2,559,227
Other assets	17,111		44,481		—		61,592
Total assets	$	41,637	$	2,507,751	$	100,128	$	2,649,516
Other liabilities	$	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, 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 ($21.6 million at March 31, 2017 and $23.5 million at December 31, 2016) and other equity investments ($969,000 at March 31, 2017 and $1.0 million at December 31, 2016). These Level 1 investments are measured at fair value based on quoted prices for identical securities in active markets.


•	U.S. Government securities/U.S. Government sponsored agency securities/State and municipal securities/Collateralized mortgage obligations/Mortgage-backed securities – These debt securities are classified as Level 2 investments. Fair values are determined by a third-party pricing service, as detailed above.

•

Corporate debt securities – This category consists of subordinated debt issued by financial institutions ($62.7 million at March 31, 2017 and $65.2 million at December 31, 2016), single-issuer trust preferred securities issued by financial institutions ($40.7 million at March 31, 2017 and $39.8 million at December 31, 2016), pooled trust preferred securities issued by financial institutions ($422,000 at both March 31, 2017 and December 31, 2016) and other corporate debt issued by non-financial institutions ($4.0 million at both March 31, 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 million and $37.3 million of single-issuer trust preferred securities held at March 31, 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, 2017 and December 31, 2016) and certain single-issuer trust preferred securities ($2.8 million at March 31, 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 values are tested by management through the performance of a trend analysis of the market price and discount rate. Changes in the price and discount rates are compared to changes in market data, including bond ratings, parity ratios, balances and delinquency levels.

Other assets – Included in this category are the following:

•

Level 1 assets include mutual funds that are held in trust for employee deferred compensation plans ($17.6 million at March 31, 2017 and $16.4 million at December 31, 2016) and the fair value of foreign currency exchange contracts ($587,000 at March 31, 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 ($1.5 million at March 31, 2017 and $3.1 million at December 31, 2016) and the fair value of interest rate swaps ($43.0 million at March 31, 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 ($17.6 million at March 31, 2017 and $16.4 million at December 31, 2016) and the fair value of foreign currency exchange contracts ($539,000 at March 31, 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 ($317,000 at March 31, 2017 and $339,000 at December 31, 2016) and the fair value of interest rate swaps ($40.9 million at March 31, 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 March 31, 2017
	Pooled Trust Preferred Securities		Single-issuer Trust Preferred Securities			ARCs
	(in thousands)
Balance at December 31, 2016	$	422	$	2,450		$	97,256
Unrealized adjustment to fair value ⁽¹⁾	—		297			86
Discount accretion ⁽²⁾	—		3			97
Balance at March 31, 2017	$	422	$	2,750		$	97,439

	Three months ended March 31, 2016
Balance at December 31, 2015	$	706	$	2,630		$	98,059
Unrealized adjustment to fair value ⁽¹⁾	—		(233		)	(832		)
Discount accretion ⁽²⁾	—		3			99
Balance at March 31, 2016	$	706	$	2,400		$	97,326


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


(2)	Included as a component of net interest income on the consolidated statements of income.

Certain financial assets are not measured at fair value on an ongoing basis, but are subject to fair value measurement in certain circumstances, such as upon their acquisition or when there is evidence of impairment. The following table presents the Corporation’s financial assets measured at fair value on a nonrecurring basis and reported on the Corporation’s consolidated balance sheets:



	March 31, 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		Total
	(in thousands)
Net loans	$	—	$	—	$	132,576	$	132,576
Other financial assets	—		—		50,347		50,347
Total assets	$	—	$	—	$	182,923	$	182,923

The valuation techniques used to measure fair value for the items in the table above are as follows:


•	Net loans – This category consists of loans that were evaluated for impairment under FASB ASC Section 310-10-35 and have been classified as Level 3 assets. The amount shown is the balance of impaired loans, net of the related allowance for loan losses. See Note 5, "Loans and Allowance for Credit Losses," for additional details.


•	Other financial assets – This category includes OREO ($11.9 million at March 31, 2017 and $12.8 million at December 31, 2016) and MSRs ($37.3 million at March 31, 2017 and $37.5 million at December 31, 2016), both classified as Level 3 assets.

Fair values for OREO were based on estimated selling prices less estimated selling costs for similar assets in active markets.

MSRs 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, 2017 valuation were 11.3% and 10.1%, 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, 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, 2016
	Book Value		Estimated Fair Value		Book Value		Estimated Fair Value
	(in thousands)
FINANCIAL ASSETS
Cash and due from banks	$	93,844	$	93,844	$	118,763	$	118,763
Interest-bearing deposits with other banks	284,750		284,750		233,763		233,763
Federal Reserve Bank and Federal Home Loan Bank stock	65,637		65,637		57,489		57,489
Loans held for sale ⁽¹⁾	24,783		24,783		28,697		28,697
Available for sale investment securities ⁽¹⁾	2,506,017		2,506,017		2,559,227		2,559,227
Net Loans ⁽¹⁾	14,793,101		14,592,018		14,530,593		14,387,454
Accrued interest receivable	46,355		46,355		46,294		46,294
Other financial assets ⁽¹⁾	206,555		206,555		206,132		206,132
FINANCIAL LIABILITIES
Demand and savings deposits	$	12,371,970	$	12,371,970	$	12,259,622	$	12,259,622
Time deposits	2,718,374		2,735,944		2,753,242		2,769,757
Short-term borrowings	453,317		453,317		541,317		541,317
Accrued interest payable	12,506		12,506		9,632		9,632
Other financial liabilities ⁽¹⁾	219,600		219,600		216,080		216,080
Federal Home Loan Bank advances and long-term debt	1,137,909		1,132,282		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 and investigations, including potential supervisory actions and the assessment of fines and penalties;


•	the additional time, expense and investment required to comply with, and the restrictions on potential growth and investment activities resulting from, the existing enforcement orders applicable to the Corporation and its bank subsidiaries by federal and state bank regulatory agencies requiring improvement in compliance functions and other remedial actions, or any future enforcement orders;


•	the Corporation’s ability to manage the uncertainty associated with the delay in implementing many of the regulations mandated by the Dodd-Frank Act;


•	the effects of, and uncertainty surrounding, potential changes in legislation, regulation and government policy as a result of the recent change in federal administration;


•	the effects of negative publicity on the Corporation’s reputation;


•	the effects of adverse outcomes in litigation and governmental or administrative proceedings;


•	the potential to incur losses in connection with repurchase and indemnification payments related to sold loans;


•	the Corporation’s ability to successfully transform its business model;


•	the Corporation’s ability to achieve its growth plans;


•	the effects of competition on deposit rates and growth, loan rates and growth and net interest margin;


•	the Corporation’s ability to manage the level of non-interest expenses, including salaries and employee benefits expenses, operating risk losses and goodwill impairment;


•	the effects of changes in accounting policies, standards, and interpretations on the Corporation's financial condition and results of operations;


•	the impact of operational risks, including the risk of human error, inadequate or failed internal processes and systems, computer and telecommunications systems failures, faulty or incomplete data and an inadequate risk management framework;


•	the impact of failures of third parties upon which the Corporation relies to perform in accordance with contractual arrangements;


•	the failure or circumvention of the Corporation’s system of internal controls;


•	the loss of, or failure to safeguard, confidential or proprietary information;


•	the Corporation’s failure to identify and to address cyber-security risks;


•	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
	2017			2016
Net income (in thousands)	$	43,380		$	38,257
Diluted net income per share	$	0.25		$	0.22
Return on average assets	0.92		%	0.86		%
Return on average equity	8.22		%	7.47		%
Return on average tangible equity ⁽¹⁾	10.93		%	10.07		%
Net interest margin ⁽²⁾	3.26		%	3.23		%
Efficiency ratio ⁽¹⁾	64.76		%	68.33		%
Non-performing assets to total assets	0.75		%	0.82		%
Annualized net charge-offs to average loans	0.09		%	0.20		%


(1)	Ratio represents a financial measure derived by methods other than 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" 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 months ended March 31, 2017 increased $5.1 million, or 13.4%, compared to the same period in 2016. The increase was mainly due to higher net interest income and non-interest income, partially offset by increases in the provision for credit losses and non-interest expenses.

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

FTE Net Interest Income and Net Interest Margin - For the three months ended March 31, 2017, FTE net interest income increased $9.2 million, or 6.9%, in comparison to the same period in 2016. This increase was driven by growth in interest-earning assets and a 3 basis point increase in the net interest margin.

Average interest-earning assets increased $1.1 billion, or 6.4%, in the first quarter of 2017 in comparison to the same period in 2016, mainly due to a $1.0 billion, or 7.2%, increase in average loans and a $106.9 million, or 4.4%, increase in average investment securities, 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 support the increase in average interest-earning assets was provided by a $333.8 million, or 8.4%, increase in average noninterest-bearing deposits.

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

Asset Quality - The Corporation recorded a $4.8 million provision for credit losses for the three months ended March 31, 2017, compared to a $1.5 million provision for the same period in 2016. The increase in provision for credit losses in 2017 was largely due to growth in the loan portfolio.

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

Non-interest Income - For the three months ended March 31, 2017, non-interest income, excluding investment securities gains, increased $3.4 million, or 8.0%, in comparison to the same period in 2016. The increase was primarily driven by higher commercial loan interest rate swap fees, investment management and trust income and mortgage banking income.

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

Non-interest Expense - For the three months ended March 31, 2017, non-interest expense increased $1.9 million, or 1.5%, in comparison to the first quarter of 2016. The increase was primarily a result of increases in state taxes, amortization of certain community development investments and software expenses, partially offset by decreases in data processing expense and FDIC insurance 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 months ended March 31:



	As of or for the Three months ended March 31
	2017			2016
	(in thousands)
Return on average tangible equity
Net income - numerator	$	43,380		$	38,257

Average common shareholders' equity	$	2,140,547		$	2,058,799
Less: Average goodwill and intangible assets	(531,556		)	(531,556		)
Average tangible shareholders' equity - denominator	$	1,608,991		$	1,527,243

Return on average tangible equity, annualized	10.93		%	10.07		%

Efficiency ratio
Non-interest expense - numerator	$	122,275		$	120,413

Net interest income (fully taxable equivalent) ⁽¹⁾	$	143,243		$	134,026
Plus: Total Non-interest income	46,673			43,137
Less: Investment securities gains, net	(1,106		)	(947		)
Denominator	$	188,810		$	176,216

Efficiency ratio	64.76		%	68.33		%


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

Quarter Ended March 31, 2017 compared to the Quarter Ended March 31, 2016

Net Interest Income

FTE net interest income increased $9.2 million, to $143.2 million, in the first quarter of 2017, from $134.0 million in the first quarter of 2016. The increase was due to a $1.1 billion, or 6.4%, increase in interest-earning assets and a 3 basis points, or 0.9%, increase in net interest margin, to 3.26%, for the first quarter of 2017 compared to 3.23% for the first 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 31
	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⁾	$	14,857,562		$	146,650		4.00	%	$	13,853,420		$	137,895		4.00	%
Taxable investment securities ⁽³⁾	2,145,656			11,914			2.19		2,180,593			12,003			2.20
Tax-exempt investment securities⁽³⁾	403,856			4,383			4.34		259,396			3,138			4.84
Equity securities ⁽³⁾	11,740			176			6.08		14,386			218			6.10
Total investment securities	2,561,252			16,473			2.57		2,454,375			15,359			2.50
Loans held for sale	15,857			187			4.72		12,252			131			4.28
Other interest-earning assets	312,295			842			1.08		358,562			898			1.00
Total interest-earning assets	17,746,966			164,152			3.74	%	16,678,609			154,283			3.72	%
Noninterest-earning assets:
Cash and due from banks	116,529								98,449
Premises and equipment	217,875								226,284
Other assets	1,149,621								1,137,292
Less: Allowance for loan losses	(170,134		)						(167,372		)
Total Assets	$	19,060,857							$	17,973,262
LIABILITIES AND EQUITY
Interest-bearing liabilities:
Demand deposits	$	3,650,931		$	2,239		0.25	%	$	3,438,355		$	1,494		0.17	%
Savings and money market deposits	4,194,216			2,211			0.21		3,932,824			1,804			0.18
Time deposits	2,739,453			7,351			1.09		2,867,651			7,429			1.04
Total interest-bearing deposits	10,584,600			11,801			0.45		10,238,830			10,727			0.42
Short-term borrowings	712,497			855			0.48		445,402			268			0.24
Federal Home Loan Bank advances and long-term debt	990,044			8,252			3.35		958,213			9,262			3.88
Total interest-bearing liabilities	12,287,141			20,908			0.69	%	11,642,445			20,257			0.70	%
Noninterest-bearing liabilities:
Demand deposits	4,301,727								3,967,887
Other	331,442								304,131
Total Liabilities	16,920,310								15,914,463
Shareholders’ equity	2,140,547								2,058,799
Total Liabilities and Shareholders’ Equity	$	19,060,857							$	17,973,262
Net interest income/net interest margin (FTE)				143,244			3.26	%				134,026			3.23	%
Tax equivalent adjustment				(5,665		)						(4,972		)
Net interest income				$	137,579							$	129,054


(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, 2017 in comparison to the three months ended March 31, 2016:



	2017 vs. 2016 Increase (Decrease) due to change in
	Volume			Rate			Net
	(in thousands)
Interest income on:
Loans, net of unearned income	$	8,772		$	(17	)	$	8,755
Taxable investment securities	(67		)	(22		)	(89		)
Tax-exempt investment securities	1,586			(341		)	1,245
Equity securities	(41		)	(1		)	(42		)
Loans held for sale	42			14			56
Other interest-earning assets	(125		)	69			(56		)
Total interest income	$	10,167		$	(298	)	$	9,869
Interest expense on:
Demand deposits	$	95		$	650		$	745
Savings and money market deposits	120			287			407
Time deposits	(368		)	290			(78		)
Short-term borrowings	224			363			587
Federal Home Loan Bank advances and long-term debt	291			(1,301		)	(1,010		)
Total interest expense	$	362		$	289		$	651

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 first quarter of 2016 resulted in an $10.2 million increase in FTE interest income. This increase was partially offset by a decrease of $298,000 related to rate changes largely within the investment portfolio. The yield on the loan portfolio was unchanged from the first 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, which impacted variable rate loans, adjustable rate loans that repriced in the first quarter of 2017 and new loan originations.

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



	Three months ended March 31								Increase (Decrease) in
	2017				2016				Balance
	Balance		Yield		Balance		Yield		$			%
	(dollars in thousands)
Real estate – commercial mortgage	$	6,039,140	3.98	%	$	5,487,421	4.03	%	$	551,719		10.1	%
Commercial – industrial, financial and agricultural	4,205,070		3.89		4,095,268		3.79		109,802			2.7
Real estate – residential mortgage	1,637,669		3.76		1,381,409		3.78		256,260			18.6
Real estate – home equity	1,613,249		4.18		1,674,032		4.10		(60,783		)	(3.6	)
Real estate – construction	840,968		3.97		792,014		3.82		48,954			6.2
Consumer	284,352		5.26		263,295		5.53		21,057			8.0
Leasing, other and overdrafts	237,114		5.08		159,981		7.46		77,133			48.2
Total	$	14,857,562	4.00	%	$	13,853,420	4.00	%	$	1,004,142		7.2	%

Average loans increased $1.0 billion, or 7.2%, compared to the first 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. The $551.7 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 largely in the Pennsylvania and Maryland markets. The $256.3 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%, 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.

Average total interest-bearing liabilities increased $644.7 million, or 5.5%, compared to the first quarter of 2016. Interest expense increased $651,000, or 3.2%, to $20.9 million in the first 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 Balance
	2017				2016				Increase (Decrease) in Balance
	Balance		Rate		Balance		Rate		$			%
	(dollars in thousands)
Noninterest-bearing demand	$	4,301,727	—	%	$	3,967,887	—	%	$	333,840		8.4	%
Interest-bearing demand	3,650,931		0.25		3,438,355		0.17		212,576			6.2
Savings and money market accounts	4,194,216		0.21		3,932,824		0.18		261,392			6.6
Total demand and savings	12,146,874		0.15		11,339,066		0.12		807,808			7.1
Time deposits	2,739,453		1.09		2,867,651		1.04		(128,198		)	(4.5	)
Total deposits	$	14,886,327	0.32	%	$	14,206,717	0.30	%	$	679,610		4.8	%

The $807.8 million, or 7.1%, increase in total demand and savings accounts was primarily due to a $468.7 million, or 8.9%, increase in personal account balances, a $274.1 million, or 6.7%, increase in business account balances and a $51.9 million, or 2.7%, increase in municipal account balances. The average cost of total deposits increased 2 basis points, to 0.32% in the first quarter of 2017 compared to 0.30% in the first 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 notes	279,388		0.08		245,421		0.09		33,967		13.8
Federal funds purchased	308,220		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 borrowings	712,497		0.48		445,402		0.24		267,095		60.0
Long-term debt:
FHLB advances	605,835		2.36		596,351		3.19		9,484		1.6
Other long-term debt	384,209		4.92		361,862		5.00		22,347		6.2
Total long-term debt	990,044		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

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

Total short-term borrowings increased $267.1 million, or 60.0%, as a result of loan growth out-pacing the increase in deposits.

Average long-term debt increased $31.8 million, or 3.3%, due mainly to the $125 million of senior notes issued in March 2017. The 53 basis point, or 13.7%, decrease 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 million for the first quarter of 2017, an increase of $3.3 million from the first quarter of 2016, driven mainly by loan growth.

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

Non-Interest Income

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



	Three months ended March 31				Increase (Decrease)
	2017		2016		$			%
	(dollars in thousands)
Other service charges and fees:
Merchant fees	$	3,607	$	3,682	$	(75	)	(2.0	)%
Commercial interest rate swap fees	3,058		1,442		1,616			112.1
Debit card income	2,665		2,511		154			6.1
Letter of credit fees	1,200		1,146		54			4.7
Other	1,907		1,969		(62		)	(3.1	)
Total other service charges and fees	12,437		10,750		1,687			15.7
Service charges on deposit accounts:
Overdraft fees	$	5,469	$	5,272	$	197		3.7	%
Cash management fees	3,537		3,466		71			2.0
Other	3,394		3,820		(426		)	(11.2	)
Total service charges on deposit accounts	12,400		12,558		(158		)	(1.3	)
Investment management and trust services	11,808		10,988		820			7.5
Mortgage banking income:
Gains on sales of mortgage loans	3,074		2,670		404			15.1
Mortgage servicing income	1,522		1,360		162			11.9
Total mortgage banking income	4,596		4,030		566			14.0
Credit card income	2,648		2,424		224			9.2
Other income	1,678		1,440		238			16.5
Total, excluding investment securities gains, net	45,567		42,190		3,377			8.0
Investment securities gains, net	1,106		947		159			16.8
Total	$	46,673	$	43,137	$	3,536		8.2	%

Excluding investment securities gains, non-interest income increased $3.4 million, or 8.0%. Other service charges and fees increased $1.7 million, or 15.7%, mainly due to a $1.6 million increase in commercial loan interest rate swap fees, driven by loan growth and a favorable interest rate environment.

Investment management and trust services income increased $820,000, or 7.5%, 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, or 15.1%, compared to the same period in 2016, as pricing spreads increased. Mortgage servicing income increased $162,000, or 11.9%, compared to the first quarter of 2016, due to lower mortgage servicing rights amortization as prepayments slowed.

Other income increased $238,000, or 16.5%, due mainly to higher gains on sales of loans guaranteed by the Small Business Administration.

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

Non-Interest Expense

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



	Three months ended March 31				Increase (Decrease)
	2017		2016		$			%
	(dollars in thousands)
Salaries and employee benefits	$	69,236	$	69,372	$	(136	)	(0.2	)%
Net occupancy expense	12,663		12,220		443			3.6
Other outside services	5,546		6,056		(510		)	(8.4	)
Software	4,693		3,921		772			19.7
Data processing	4,286		5,400		(1,114		)	(20.6	)
Equipment expense	3,359		3,371		(12		)	(0.4	)
Professional fees	2,737		2,333		404			17.3
FDIC insurance expense	2,058		2,949		(891		)	(30.2	)
Marketing	1,986		1,624		362			22.3
Other	15,711		13,167		2,544			19.3
Total	$	122,275	$	120,413	$	1,862		1.5	%

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

Net occupancy expense increased $443,000, 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%, 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 quarter of 2016, due to the timing of various marketing promotions.

Other expense increased $2.5 million, or 19.3%, due to increases in state franchise taxes and amortization of certain community development investments.

Income Taxes

Income tax expense for the first quarter of 2017 was $13.8 million, a $1.8 million, or 15.1%, increase from $12.0 million for the first quarter of 2016.

The Corporation’s effective tax rate was 24.1% in the first quarter of 2017, as compared to 23.9% in the first 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 and credits earned from community development investments in partnerships that generate tax credits under various federal programs.

FINANCIAL CONDITION

The table below presents condensed consolidated ending balance sheets.



					Increase (Decrease)
	March 31, 2017		December 31, 2016		$			%
	(dollars in thousands)
Assets
Cash and due from banks	$	93,844	$	118,763	$	(24,919	)	(21.0	)%
Other interest-earning assets	350,387		291,252		59,135			20.3
Loans held for sale	24,783		28,697		(3,914		)	(13.6	)
Investment securities	2,506,017		2,559,227		(53,210		)	(2.1	)
Loans, net of allowance	14,793,101		14,530,593		262,508			1.8
Premises and equipment	216,171		217,806		(1,635		)	(0.8	)
Goodwill and intangible assets	531,556		531,556		—			—
Other assets	662,717		666,353		(3,636		)	(0.5	)
Total Assets	$	19,178,576	$	18,944,247	$	234,329		1.2	%
Liabilities and Shareholders’ Equity
Deposits	$	15,090,344	$	15,012,864	$	77,480		0.5	%
Short-term borrowings	453,317		541,317		(88,000		)	(16.3	)
Long-term debt	1,137,909		929,403		208,506			22.4
Other liabilities	342,323		339,548		2,775			0.8
Total Liabilities	17,023,893		16,823,132		200,761			1.2
Total Shareholders’ Equity	2,154,683		2,121,115		33,568			1.6
Total Liabilities and Shareholders’ Equity	$	19,178,576	$	18,944,247	$	234,329		1.2	%

Other Interest-earning Assets

The $59.1 million, or 20.3%, increase in other interest-earning assets during the first three months of 2017 resulted from higher balances on deposit with the Federal Reserve Bank due to a temporary increase in item clearing balances.

Investment Securities

The following table presents the carrying amount of investment securities:



					Increase (Decrease)
	March 31, 2017		December 31, 2016		$			%
	(dollars in thousands)
U.S. Government sponsored agency securities	$	5,996	$	134	$	5,862		N/M
State and municipal securities	392,624		391,641		983			0.3
Corporate debt securities	107,877		109,409		(1,532		)	(1.4	)
Collateralized mortgage obligations	565,886		593,860		(27,974		)	(4.7	)
Mortgage-backed securities	1,313,621		1,342,401		(28,780		)	(2.1	)
Auction rate securities	97,439		97,256		183			0.2
Total debt securities	2,483,443		2,534,701		(51,258		)	(2.0	)
Equity securities	22,574		24,526		(1,952		)	(8.0	)
Total	$	2,506,017	$	2,559,227	$	(53,210	)	(2.1	)%

N/M - Not meaningful

U.S. Government sponsored agency securities increased $5.9 million. Collateralized mortgage obligations decreased $28.0 million, or 4.7%, as the Corporation reduced its holdings in corresponding lower coupon investments due to volatility in market pricing. Mortgage-backed securities decreased $28.8 million, or 2.1% as portfolio cash flows were used to partially fund loan growth.

Loans, net of Unearned Income

The following table presents ending balances of loans outstanding, net of unearned income:



					Increase (Decrease)
	March 31, 2017		December 31, 2016		$			%
	(dollars in thousands)
Real estate – commercial mortgage	$	6,118,533	$	6,018,582	$	99,951		1.7	%
Commercial – industrial, financial and agricultural	4,167,809		4,087,486		80,323			2.0
Real estate – residential mortgage	1,665,142		1,601,994		63,148			3.9
Real estate – home equity	1,595,901		1,625,115		(29,214		)	(1.8	)
Real estate – construction	882,983		843,649		39,334			4.7
Consumer	288,826		291,470		(2,644		)	(0.9	)
Leasing, other and overdrafts	243,983		230,976		13,007			5.6
Loans, net of unearned income	$	14,963,177	$	14,699,272	$	263,905		1.8	%

Loans, net of unearned income, increased $263.9 million, or 1.8%, in comparison to December 31, 2016. In general, this growth resulted from improved customer sentiment and a more favorable economic outlook, as well as the addition of commercial relationship managers in 2016. Increases were realized across all of the Corporation's geographic markets. Commercial mortgage loans increased $100.0 million, or 1.7%, in comparison to December 31, 2016, with the growth occurring primarily in the Maryland ($60.4 million, or 9.7%), Pennsylvania ($34.5 million, or 1.1%) and New Jersey ($14.1 million, or 1.0%) markets. Commercial - industrial, financial and agricultural loans increased $80.3 million, or 2.0%, in comparison to December 31, 2016, with the growth occurring primarily in the Pennsylvania ($82.0 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%), New Jersey ($7.5 million, or 3.1%) and Delaware ($2.7 million, or 3.6%) 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 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, 2016
	Balance		Delinquency Rate (1)		% of Total		Balance		Delinquency Rate (1)		% of Total
	(dollars in thousands)
Commercial	$	685,128	0.3	%	77.6	%	$	644,490	0.2	%	76.4	%
Commercial - residential	151,313		9.3		17.1		142,189		6.0		16.9
Other	46,542		2.4		5.3		56,970		1.9		6.7
Total Real estate - construction	$	882,983	2.0	%	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 billion, or 46.8%, of the loan portfolio was in commercial mortgage and construction loans as of March 31, 2017. The Corporation's maximum total lending commitment to an individual borrowing relationship was $50.0 million as of March 31, 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, 2017, the Corporation had 122 individual borrowing relationships with total borrowing commitments between $20.0 million and $50.0 million.

The following table summarizes the industry concentrations within the commercial loan portfolio:



	March 31, 2017		December 31, 2016
Services	22.5	%	21.8	%
Retail	15.3		15.1
Health care	10.2		10.5
Manufacturing	9.0		9.2
Construction ⁽¹⁾	8.4		9.0
Wholesale	7.6		7.0
Real estate ⁽²⁾	6.8		6.7
Agriculture	4.6		5.0
Arts and entertainment	2.5		2.6
Financial services	2.3		2.1
Transportation	2.2		2.3
Other	8.6		8.7
Total	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, 2016
	(in thousands)
Commercial - industrial, financial and agricultural	$	151,840	$	155,353
Real estate - commercial mortgage	83,300		81,573
Total	$	235,140	$	236,926

Total shared national credits decreased $1.8 million, or 0.8%, in comparison to December 31, 2016. The Corporation's shared national credits are to borrowers located in its geographical markets, and are subject to normal lending activities consistent with the Corporation's underwriting policies. None of the shared national credits were past due as of March 31, 2017 or December 31, 2016.

Provision and Allowance for Credit Losses

The following table presents the activity in the allowance for credit losses:



	Three months ended March 31
	2017			2016
	(dollars in thousands)
Average balance of loans, net of unearned income	$	14,857,562		$	13,853,420

Balance of allowance for credit losses at beginning of period	$	171,325		$	171,412
Loans charged off:
Commercial – industrial, financial and agricultural	5,527			6,188
Real estate – residential mortgage	216			1,068
Real estate – home equity	698			1,541
Real estate – commercial mortgage	1,224			582
Consumer	856			1,007
Real estate – construction	247			326
Leasing, other and overdrafts	639			443
Total loans charged off	9,407			11,155
Recoveries of loans previously charged off:
Commercial – industrial, financial and agricultural	4,191			2,319
Real estate – residential mortgage	230			136
Real estate – home equity	137			338
Real estate – commercial mortgage	450			825
Consumer	236			196
Real estate – construction	548			383
Leasing, other and overdrafts	137			81
Total recoveries	5,929			4,278
Net loans charged off	3,478			6,877
Provision for credit losses	4,800			1,530
Balance of allowance for credit losses at end of period	$	172,647		$	166,065

Net charge-offs to average loans (annualized)	0.09		%	0.20		%

The following table presents the components of the allowance for credit losses:



	March 31, 2017			December 31, 2016
	(dollars in thousands)
Allowance for loan losses	$	170,076		$	168,679
Reserve for unfunded lending commitments	2,571			2,646
Allowance for credit losses	$	172,647		$	171,325

Allowance for credit losses to loans outstanding	1.15		%	1.17		%

The provision for credit losses for the three months ended March 31, 2017 was $4.8 million, an increase of $3.3 million in comparison to the same period in 2016. The increase in the provision for credit losses largely reflected loan growth.

Net charge-offs decreased $3.4 million, to $3.5 million for the first quarter of 2017, compared to $6.9 million for the first quarter of 2016. Gross charge-offs decreased by $1.7 million and recoveries increased by $1.7 million. Of the $3.5 million of net charge-offs recorded in the first quarter of 2017, the majority were for loans originated in Pennsylvania ($2.6 million) and New Jersey ($1.0 million), partially offset by net recoveries in Maryland, Virginia and Delaware.

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



	March 31, 2017			March 31, 2016			December 31, 2016
	(dollars in thousands)
Non-accrual loans	$	117,264		$	122,170		$	120,133
Loans 90 days or more past due and still accruing	14,268			15,013			11,505
Total non-performing loans	131,532			137,183			131,638
Other real estate owned (OREO)	11,906			10,946			12,815
Total non-performing assets	$	143,438		$	148,129		$	144,453
Non-accrual loans to total loans	0.78		%	0.88		%	0.82		%
Non-performing assets to total assets	0.75		%	0.82		%	0.76		%
Allowance for credit losses to non-performing loans	131.26		%	121.05		%	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, 2016
	(in thousands)
Real-estate - residential mortgage	$	27,033	$	27,565	$	27,617
Real-estate - commercial mortgage	15,237		17,427		15,957
Real estate - home equity	9,601		6,530		8,594
Commercial	7,441		5,650		6,627
Construction	273		3,092		726
Consumer	37		32		39
Total accruing TDRs	59,622		60,296		59,560
Non-accrual TDRs ⁽¹⁾	27,220		27,277		27,850
Total TDRs	$	86,842	$	87,573	$	87,410

(1) Included with non-accrual loans in the preceding table.

TDRs modified during the first three months of 2017 and still outstanding as of March 31, 2017 totaled $5.7 million. During the first three months of 2017, $6.7 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 months ended March 31, 2017:



	Commercial - Industrial, Financial and Agricultural			Real Estate - Commercial Mortgage			Real Estate - Construction			Real Estate - Residential Mortgage			Real Estate - Home Equity			Consumer			Leasing			Total
	(in thousands)
Balance of non-accrual loans at December 31, 2016	$	42,349		$	38,936		$	9,806		$	18,431		$	10,611		$	—		$	—		$	120,133
Additions	8,013			2,998			5,056			662			1,021			856			263			18,869
Payments	(4,017		)	(3,444		)	(1,130		)	(939		)	(417		)	—			—			(9,947		)
Charge-offs	(5,527		)	(1,224		)	(247		)	(216		)	(698		)	(856		)	(263		)	(9,031		)
Transfers to accrual status	—			(913		)	—			—			(428		)	—			—			(1,341		)
Transfers to OREO	—			(550		)	—			(131		)	(738		)	—			—			(1,419		)
Balance of non-accrual loans at March 31, 2017	$	40,818		$	35,803		$	13,485		$	17,807		$	9,351		$	—		$	—		$	117,264

Non-accrual loans decreased $4.9 million, or 4.0%, and $2.9 million, or 2.4%, in comparison to March 31, 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, 2016
	(in thousands)
Commercial – industrial, financial and agricultural	$	43,826	$	39,140	$	43,460
Real estate – commercial mortgage	36,713		43,132		39,319
Real estate – residential mortgage	23,597		25,182		23,655
Real estate – construction	13,550		12,005		9,842
Real estate – home equity	12,232		14,408		13,154
Consumer	1,176		1,802		1,891
Leasing	438		1,514		317
Total non-performing loans	$	131,532	$	137,183	$	131,638

Non-performing loans decreased $5.7 million, or 4.1%, and $106,000, or 0.1%, in comparison to March 31, 2016 and December 31, 2016, respectively. The decrease in non-performing loans was realized across most loan categories except commercial, which increased $4.7 million, or 12.0%, and $366,000, or 0.8%, in comparison to March 31, 2016 and 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.

The following table summarizes the Corporation’s OREO, by property type, as of the indicated dates:



	March 31, 2017		March 31, 2016		December 31, 2016
	(in thousands)
Residential properties	$	6,112	$	6,235	$	7,655
Commercial properties	3,134		3,101		2,651
Undeveloped land	2,660		1,610		2,509
Total OREO	$	11,906	$	10,946	$	12,815

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

Total internally risk rated loans were $11.1 billion and $10.9 billion as of March 31, 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:



	Special 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, 2016
	(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
Commercial - secured	138,242			128,873			9,369			7.3		138,757			118,527			20,230			17.1		276,999			247,400
Commercial -unsecured	6,471			4,481			1,990			44.4		2,563			3,531			(968		)	(27.4	)	9,034			8,012
Total Commercial - industrial, financial and agricultural	144,713			133,354			11,359			8.5		141,320			122,058			19,262			15.8		286,033			255,412
Construction - commercial residential	10,677			15,447			(4,770		)	(30.9	)	16,221			13,172			3,049			23.1		26,898			28,619
Construction - commercial	4,902			3,412			1,490			43.7		5,363			5,115			248			4.8		10,265			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
Total	$	297,935		$	284,697		$	13,238		4.6	%	$	283,653		$	263,321		$	20,332		7.7	%	$	581,588		$	548,018

% of total risk rated loans	2.6		%	2.6		%						2.6		%	2.4		%						5.2		%	5.0		%

The following table summarizes loan delinquency rates, by type, as of the dates indicated:



	March 31, 2017									March 31, 2016									December 31, 2016
	30-89 Days			≥ 90 Days (1)			Total			30-89 Days			≥ 90 Days (1)			Total			30-89 Days			≥ 90 Days (1)			Total
Real estate – commercial mortgage	0.18		%	0.60		%	0.78		%	0.15		%	0.78		%	0.93		%	0.13		%	0.65		%	0.78		%
Commercial – industrial, financial and agricultural	0.19		%	1.06		%	1.25		%	0.49		%	0.97		%	1.46		%	0.25		%	1.06		%	1.31		%
Real estate – construction	0.46		%	1.53		%	1.99		%	0.52		%	1.48		%	2.00		%	0.12		%	1.17		%	1.29		%
Real estate – residential mortgage	1.03		%	1.41		%	2.44		%	1.27		%	1.83		%	3.10		%	1.27		%	1.48		%	2.75		%
Real estate – home equity	0.46		%	0.76		%	1.22		%	0.54		%	0.87		%	1.41		%	0.57		%	0.81		%	1.38		%
Consumer, leasing and other	0.91		%	0.31		%	1.22		%	0.95		%	0.77		%	1.72		%	1.23		%	0.42		%	1.65		%
Total	0.35		%	0.88		%	1.23		%	0.45		%	0.99		%	1.44		%	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


(1)	Includes non-accrual loans.

Management believes that the allowance for credit losses of $172.6 million as of March 31, 2017 is sufficient to cover incurred losses in the loan portfolio and unfunded lending commitments as of that date and is appropriate based on applicable accounting standards.

Deposits and Borrowings

The following table presents ending deposits, by type:



					Increase (Decrease)
	March 31, 2017		December 31, 2016		$			%
	(dollars in thousands)
Noninterest-bearing demand	$	4,417,733	$	4,376,137	$	41,596		1.0	%
Interest-bearing demand	3,702,663		3,703,712		(1,049		)	—
Savings and money market accounts	4,251,574		4,179,773		71,801			1.7
Total demand and savings	12,371,970		12,259,622		112,348			0.9
Time deposits	2,718,374		2,753,242		(34,868		)	(1.3	)
Total deposits	$	15,090,344	$	15,012,864	$	77,480		0.5	%

Noninterest-bearing demand deposits increased $41.6 million, or 1.0%, primarily as a result of increases in personal account balances of $49.8 million, or 5.7%, and business account balances of $37.9 million, or 1.1%, partially offset by a seasonal decrease in municipal account balances of $38.4 million, or 25.4%.

The $71.8 million, or 1.7%, 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, due to a $53.1 million, or 4.1%, seasonal decrease in municipal account balances, which was mostly offset by a $44.5 million, or 2.1%, increase in personal account balances and a $7.5 million, or 2.3%, increase in business account balances.

The following table presents ending short-term borrowings and long-term debt by type:



					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 notes	87,726		67,013		20,713			30.9
Total short-term customer funding	268,896		262,747		6,149			2.3
Federal funds purchased	54,421		278,570		(224,149		)	(80.5	)
Short-term FHLB advances ⁽¹⁾	130,000		—		130,000			N/M
Total short-term borrowings	453,317		541,317		(88,000		)	(16.3	)
Long-term debt:
FHLB advances	652,209		567,240		84,969			15.0
Other long-term debt	485,700		362,163		123,537			34.1
Total long-term debt	1,137,909		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.

Total borrowings increased $120.5 million, or 8.2%, as a result of a $208.5 million, or 22.4%, increase in long-term debt, partially offset by an $88.0 million, or 16.3%, decrease in short-term borrowings. The increase in long-term debt was primarily the result of the issuance of $125.0 million of senior notes in March 2017 as discussed in the "Results of Operations."

Shareholders' Equity

Total shareholders’ equity increased $33.6 million, or 1.6%, during the first three months of 2017. The increase was due primarily to $43.4 million of net income, $4.7 million of stock issued and a $3.9 million increase in other comprehensive income, partially offset by $19.2 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, 2017, 1.5 million shares were 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, 2017, the Corporation and each of its bank subsidiaries met the minimum requirements of the U.S. Basel III Capital Rules, and each of the Corporation’s bank subsidiaries’ capital ratios exceeded the amounts required to be considered "well capitalized" as defined in the regulations. As of March 31, 2017, 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 Buffers
Total Capital (to Risk-Weighted Assets)	13.2	%	13.2	%	8.0	%	10.5	%
Tier I Capital (to Risk-Weighted Assets)	10.4	%	10.4	%	6.0	%	8.5	%
Common Equity Tier I (to Risk-Weighted Assets)	10.4	%	10.4	%	4.5	%	7.0	%
Tier I Capital (to Average Assets)	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, 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 million	16.8%
+200 bp	+ $67.7 million	11.4%
+100 bp	+ $34.0 million	5.7%
–100 bp	– $49.8 million	– 8.3%


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

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

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

Interest Rate Swaps

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

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

As of March 31, 2017, the Corporation had aggregate availability under federal funds lines of $1.1 billion with $54.4 million borrowed against that amount. A combination of commercial real estate loans, commercial loans and securities are pledged to the Federal Reserve Bank of Philadelphia to provide access to Federal Reserve Bank Discount Window borrowings. As of March 31, 2017, the Corporation had $1.2 billion of collateralized borrowing availability at the Discount Window, and no outstanding borrowings.

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

The Corporation’s sources and uses of funds were discussed in general terms in the "Net Interest Income" section of Management’s Discussion and Analysis. The consolidated statements of cash flows provide additional information. The Corporation’s operating activities during the first three months of 2017 generated $64.5 million of cash, mainly due to net income. Cash used in investing activities was $274.6 million, mainly due to net increases in loans and short-term investments. Net cash provided by financing activities was $185.1 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 in short-term borrowings and cash dividends.

Equity Market Price Risk

Equity market price risk is the risk that changes in the values of equity investments could have a material impact on the financial position or results of operations of the Corporation. As of March 31, 2017, equity investments consisted of $21.6 million of common stocks of publicly traded financial institutions and $969,000 of other equity investments.

The equity investments most susceptible to equity market price risk are the financial institutions stocks, which had a cost basis of approximately $10.6 million and an estimated fair value of $21.6 million at March 31, 2017, including an investment in a single financial institution with a cost basis of $5.1 million and an estimated fair value of $9.6 million. The fair value of this investment accounted for 44.6% of the fair value of the common stocks of publicly traded financial institutions. No other investment in a single financial institution in the financial institutions stock portfolio exceeded 10% of the portfolio's fair value. In total, net unrealized gains in this portfolio were approximately $11.0 million as of March 31, 2017.

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

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

Debt Security Market Price Risk

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

State and Municipal Securities

As of March 31, 2017, the Corporation owned $392.6 million of municipal securities issued by various states or municipalities. Downward pressure on local tax revenues of issuers due to adverse economic conditions could have an adverse impact on the underlying credit quality of issuers. The Corporation evaluates existing and potential holdings primarily based on the creditworthiness of the issuing state or municipality and then, to a lesser extent, on any underlying credit enhancement. State or municipal securities can be supported by the general obligation of the issuing state or municipality, allowing the securities to be repaid by any means available to the issuing municipality. As of March 31, 2017, approximately 98% of state or municipal securities were supported by the general obligation of corresponding states or municipalities. Approximately 59% of these securities were school district issuances, which are also supported by the states of the issuing municipalities.

Auction Rate Securities

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

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

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, 2017	/s/ E. Philip Wenger
		E. Philip Wenger
		Chairman, Chief Executive Officer and President

Date:	May 5, 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




3.1		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.

4.1		Indenture, 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.

4.2		First 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.

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101		Financial statements from the Quarterly Report on Form 10-Q of Fulton Financial Corporation for the period ended March 31, 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.

Large accelerated filer

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.