Edgar Filing: FULTON FINANCIAL CORP

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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 June 30, 2016, 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 –173,060,000 shares outstanding as of July 29, 2016.

FULTON FINANCIAL CORPORATION

FORM 10-Q FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2016

INDEX



Description		Page

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited):

(a)	Consolidated Balance Sheets - June 30, 2016 and December 31, 2015	3

(b)	Consolidated Statements of Income - Three and six months ended June 30, 2016 and 2015	4

(c)	Consolidated Statements of Comprehensive Income - Three and six months ended June 30, 2016 and 2015	5

(d)	Consolidated Statements of Shareholders’ Equity - Six months ended June 30, 2016 and 2015	6

(e)	Consolidated Statements of Cash Flows - Six months ended June 30, 2016 and 2015	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		62

Item 4. Controls and Procedures		66

PART II. OTHER INFORMATION

Item 1. Legal Proceedings		67

Item 1A. Risk Factors		67

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		68

Item 3. Defaults Upon Senior Securities		68

Item 4. Mine Safety Disclosures		68

Item 5. Other Information		68

Item 6. Exhibits		68

Signatures		69

Exhibit Index		70

Item 1. Financial Statements

CONSOLIDATED BALANCE SHEETS

(in thousands, except per-share data)



	June 30, 2016			December 31, 2015
	(unaudited)
ASSETS
Cash and due from banks	$	84,647		$	101,120
Interest-bearing deposits with other banks	348,232			230,300
Federal Reserve Bank and Federal Home Loan Bank stock	59,854			62,216
Loans held for sale	34,330			16,886
Available for sale investment securities	2,529,724			2,484,773
Loans, net of unearned income	14,155,159			13,838,602
Less: Allowance for loan losses	(162,546		)	(169,054		)
Net Loans	13,992,613			13,669,548
Premises and equipment	228,861			225,535
Accrued interest receivable	43,316			42,767
Goodwill and intangible assets	531,556			531,556
Other assets	626,902			550,017
Total Assets	$	18,480,035		$	17,914,718
LIABILITIES
Deposits:
Noninterest-bearing	$	4,125,375		$	3,948,114
Interest-bearing	10,167,189			10,184,203
Total Deposits	14,292,564			14,132,317
Short-term borrowings:
Federal funds purchased	449,184			197,235
Other short-term borrowings	273,030			300,428
Total Short-Term Borrowings	722,214			497,663
Accrued interest payable	8,336			10,724
Other liabilities	384,372			282,578
Federal Home Loan Bank advances and long-term debt	965,552			949,542
Total Liabilities	16,373,038			15,872,824
SHAREHOLDERS’ EQUITY
Common stock, $2.50 par value, 600 million shares authorized, 219.0 million shares issued in 2016 and 218.9 million shares issued in 2015	547,530			547,141
Additional paid-in capital	1,455,351			1,450,690
Retained earnings	686,635			641,588
Accumulated other comprehensive income (loss)	7,689			(22,017		)
Treasury stock, at cost, 45.9 million shares in 2016 and 44.7 million shares in 2015	(590,208		)	(575,508		)
Total Shareholders’ Equity	2,106,997			2,041,894
Total Liabilities and Shareholders’ Equity	$	18,480,035		$	17,914,718

See Notes to Consolidated Financial Statements

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)



(in thousands, except per-share data)	Three months ended June 30				Six months ended June 30
	2016		2015		2016		2015
INTEREST INCOME
Loans, including fees	$	134,643	$	129,910	$	268,722	$	259,687
Investment securities:
Taxable	11,159		10,944		23,162		22,226
Tax-exempt	2,320		1,881		4,360		3,968
Dividends	135		296		295		644
Loans held for sale	188		265		319		438
Other interest income	864		933		1,762		3,038
Total Interest Income	149,309		144,229		298,620		290,001
INTEREST EXPENSE
Deposits	10,887		10,053		21,614		19,876
Short-term borrowings	217		103		485		180
Long-term debt	9,289		11,153		18,551		23,444
Total Interest Expense	20,393		21,309		40,650		43,500
Net Interest Income	128,916		122,920		257,970		246,501
Provision for credit losses	2,511		2,200		4,041		(1,500		)
Net Interest Income After Provision for Credit Losses	126,405		120,720		253,929		248,001
NON-INTEREST INCOME
Other service charges and fees	12,983		10,988		23,733		20,351
Service charges on deposit accounts	12,896		12,637		25,454		24,206
Investment management and trust services	11,247		11,011		22,235		21,900
Mortgage banking income	3,897		5,339		7,927		10,027
Investment securities gains, net	76		2,415		1,023		6,560
Other	5,038		4,099		8,902		8,182
Total Non-Interest Income	46,137		46,489		89,274		91,226
NON-INTEREST EXPENSE
Salaries and employee benefits	70,029		65,067		139,401		130,057
Net occupancy expense	11,811		11,809		24,031		25,501
Other outside services	5,508		8,125		11,564		13,875
Data processing	5,476		4,894		10,876		9,662
Software	3,953		3,376		7,874		6,694
Professional fees	3,353		2,731		5,686		5,602
FDIC insurance expense	2,960		2,885		5,909		5,707
Equipment expense	2,872		3,335		6,243		7,293
Supplies and postage	2,706		2,726		5,285		5,095
Marketing	1,916		2,235		3,540		3,468
Telecommunications	1,459		1,617		2,947		3,333
Operating risk loss	986		674		1,526		1,501
Other real estate owned and repossession expense	365		129		1,003		1,491
Intangible amortization	—		106		—		236
Other	8,243		8,645		16,165		17,317
Total Non-Interest Expense	121,637		118,354		242,050		236,832
Income Before Income Taxes	50,905		48,855		101,153		102,395
Income taxes	11,155		12,175		23,146		25,679
Net Income	$	39,750	$	36,680	$	78,007	$	76,716

PER SHARE:
Net Income (Basic)	$	0.23	$	0.21	$	0.45	$	0.43
Net Income (Diluted)	0.23		0.21		0.45		0.43
Cash Dividends	0.10		0.09		0.19		0.18
See Notes to Consolidated Financial Statements

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(in thousands)



	Three months ended June 30						Six months ended June 30
	2016			2015			2016			2015

Net Income	$	39,750		$	36,680		$	78,007		$	76,716
Other Comprehensive Income (Loss), net of tax:
Unrealized gain (loss) on securities	12,839			(12,008		)	29,865			(2,016		)
Reclassification adjustment for securities gains included in net income	(49		)	(1,569		)	(665		)	(4,264		)
Non-credit related unrealized gain on other-than-temporarily impaired debt securities	—			—			—			125
Amortization of unrealized loss on derivative financial instruments	4			34			8			68
Amortization of net unrecognized pension and postretirement items	32			466			498			932
Other Comprehensive Income (Loss)	12,826			(13,077		)	29,706			(5,155		)
Total Comprehensive Income	$	52,576		$	23,603		$	107,713		$	71,561

See Notes to Consolidated Financial Statements

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)

SIX MONTHS ENDED JUNE 30, 2016 AND 2015

(in thousands, except per-share data)



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

Balance at December 31, 2015	174,176		$	547,141	$	1,450,690	$	641,588		$	(22,017	)		$	(575,508	)	$	2,041,894
Net income							78,007										78,007
Other comprehensive income										29,706							29,706
Stock issued, including related tax benefits	273		389		1,405									1,554			3,348
Stock-based compensation awards					3,256												3,256
Acquisition of treasury stock	(1,310	)												(16,254		)	(16,254		)
Common stock cash dividends - $0.19 per share							(32,960		)								(32,960		)
Balance at June 30, 2016	173,139		$	547,530	$	1,455,351	$	686,635		$	7,689			$	(590,208	)	$	2,106,997

Balance at December 31, 2014	178,924		$	545,555	$	1,420,523	$	558,810		$	(17,722	)		$	(510,501	)	$	1,996,665
Net income							76,716										76,716
Other comprehensive loss										(5,155		)					(5,155		)
Stock issued, including related tax benefits	423		664		1,954									2,077			4,695
Stock-based compensation awards					2,838												2,838
Acquisition of treasury stock	(1,538	)												(19,013		)	(19,013		)
Settlement of accelerated stock repurchase agreement	(1,790	)			20,000								—	(20,000		)	—
Common stock cash dividends - $0.18 per share							(31,929		)								(31,929		)
Balance at June 30, 2015	176,019		$	546,219	$	1,445,315	$	603,597		$	(22,877	)		$	(547,437	)	$	2,024,817

See Notes to Consolidated Financial Statements

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)



	Six months ended June 30
	2016			2015
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income	$	78,007		$	76,716
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses	4,041			(1,500		)
Depreciation and amortization of premises and equipment	13,804			13,920
Net amortization of investment securities premiums	4,647			3,288
Investment securities gains, net	(1,023		)	(6,560		)
Gain on sales of mortgage loans held for sale	(7,110		)	(7,961		)
Proceeds from sales of mortgage loans held for sale	304,516			406,703
Originations of mortgage loans held for sale	(314,850		)	(415,200		)
Amortization of intangible assets	—			236
Amortization of issuance costs on long-term debt	193			279
Stock-based compensation	3,256			2,838
Excess tax benefits from stock-based compensation	(28		)	(63		)
(Increase) decrease in accrued interest receivable	(549		)	625
(Increase) decrease in other assets	(18,268		)	10,181
Decrease in accrued interest payable	(2,388		)	(2,873		)
Increase (decrease) in other liabilities	9,866			(3,322		)
Total adjustments	(3,893		)	591
Net cash provided by operating activities	74,114			77,307
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale	84,972			18,815
Proceeds from maturities of securities available for sale	282,832			205,620
Purchase of securities available for sale	(355,220		)	(346,322		)
(Increase) decrease in short-term investments	(115,570		)	35,759
Net increase in loans	(326,902		)	(147,492		)
Net purchases of premises and equipment	(17,130		)	(14,687		)
Net cash used in investing activities	(447,018		)	(248,307		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand and savings deposits	202,552			205,901
Net decrease in time deposits	(42,305		)	(67,698		)
Increase in short-term borrowings	224,551			79,316
Additions to long-term debt	16,000			148,099
Repayments of long-term debt	(183		)	(155,150		)
Net proceeds from issuance of common stock	3,320			4,632
Excess tax benefits from stock-based compensation	28			63
Dividends paid	(31,278		)	(30,397		)
Acquisition of treasury stock	(16,254		)	(19,013		)
Net cash provided by financing activities	356,431			165,753
Net Decrease in Cash and Due From Banks	(16,473		)	(5,247		)
Cash and Due From Banks at Beginning of Period	101,120			105,702
Cash and Due From Banks at End of Period	$	84,647		$	100,455
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest	$	43,038		$	46,373
Income taxes	9,087			11,051
See Notes to Consolidated Financial Statements

FULTON FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1 – Basis of Presentation

The accompanying unaudited consolidated financial statements of Fulton Financial Corporation (the "Corporation") have been prepared in conformity with U.S. generally accepted accounting principles ("U.S. GAAP") for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the amounts of assets and liabilities as of the date of the financial statements as well as revenues and expenses during the period. Actual results could differ from those estimates. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2015. Operating results for the three and six months ended June 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016. The Corporation evaluates subsequent events through the date of filing of this Form 10-Q with the Securities and Exchange Commission ("SEC").

Recently Issued Accounting Standards

In May 2014, the Financial Accounting Standards Board ("FASB") 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 the first half of 2016, the FASB issued amendments to this standard (ASC Updates 2016-08, 2016-10, 2016-11 and 2016-12). These amendments provide further clarification to the standard. For public business entities, ASC Update 2014-09 is effective for interim and annual reporting 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. 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. Early application 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.

In March 2016, the FASB issued ASC Update 2016-09, "Stock Compensation: Improvements to Employee Share-Based Payment Accounting." The purpose of this standards update is to simplify several aspects of the accounting for 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 is effective for interim and annual reporting periods beginning after December 15, 2016. Early application is permitted. For the Corporation, this standards update is effective with its March 31, 2017 quarterly report on Form 10-Q. The Corporation is currently evaluating the impact of the adoption of ASC Update 2016-09 on its consolidated financial statements.

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

Reclassifications

Certain amounts in the 2015 consolidated financial statements and notes have been reclassified to conform to the 2016 presentation.

NOTE 2 – Net Income Per Share

Basic net income per share is calculated as net income divided by the weighted average number of shares outstanding.

Diluted net income per share is calculated as net income divided by the weighted average number of shares outstanding plus the incremental number of shares added as a result of converting common stock equivalents, calculated using the treasury stock method. The Corporation’s common stock equivalents consist of outstanding stock options, restricted stock, restricted stock units ("RSUs") and performance-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 June 30		Six months ended June 30
	2016	2015	2016	2015
	(in thousands)
Weighted average shares outstanding (basic)	173,394	176,433	173,363	177,446
Impact of common stock equivalents	924	1,098	1,004	1,042
Weighted average shares outstanding (diluted)	174,318	177,531	174,367	178,488

For the three and six months ended June 30, 2016, 802,000 and 844,000 stock options, respectively, were excluded from the diluted net income per share computation as their effect would have been anti-dilutive. For the three and six months ended June 30, 2015, 1.8 million and 2.0 million stock options, respectively, were excluded from the diluted net income per share computation as their effect would have been anti-dilutive.

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 June 30, 2016
Unrealized gain on securities	$	19,753		$	(6,914	)	$	12,839
Reclassification adjustment for securities gains included in net income ⁽¹⁾	(76		)	27			(49		)
Amortization of unrealized loss on derivative financial instruments ⁽²⁾	6			(2		)	4
Amortization of net unrecognized pension and postretirement items ⁽³⁾	49			(17		)	32
Total Other Comprehensive Income	$	19,732		$	(6,906	)	$	12,826
Three months ended June 30, 2015
Unrealized loss on securities	$	(18,474	)	$	6,466		$	(12,008	)
Reclassification adjustment for securities gains included in net income ⁽¹⁾	(2,413		)	844			(1,569		)
Amortization of unrealized loss on derivative financial instruments⁽²⁾	52			(18		)	34
Amortization of net unrecognized pension and postretirement items ⁽³⁾	717			(251		)	466
Total Other Comprehensive Loss	$	(20,118	)	$	7,041		$	(13,077	)

Six months ended June 30, 2016
Unrealized gain on securities	$	45,946		$	(16,081	)	$	29,865
Reclassification adjustment for securities gains included in net income ⁽¹⁾	(1,023		)	358			(665		)
Amortization of unrealized loss on derivative financial instruments ⁽²⁾	12			(4		)	8
Amortization of net unrecognized pension and postretirement items ⁽³⁾	766			(268		)	498
Total Other Comprehensive Income	$	45,701		$	(15,995	)	$	29,706

Six months ended June 30, 2015
Unrealized loss on securities	$	(3,103	)	$	1,087		$	(2,016	)
Reclassification adjustment for securities gains included in net income ⁽¹⁾	(6,558		)	2,294			(4,264		)
Non-credit related unrealized gains on other-than-temporarily impaired debt securities	192			(67		)	125
Amortization of unrealized loss on derivative financial instruments ⁽²⁾	104			(36		)	68
Amortization of net unrecognized pension and postretirement items ⁽³⁾	1,434			(502		)	932
Total Other Comprehensive Loss	$	(7,931	)	$	2,776		$	(5,155	)


(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 June 30, 2016
Balance at March 31, 2016	$	9,911		$	458		$	(11	)	$	(15,495	)	$	(5,137	)
Other comprehensive income before reclassifications	12,839			—			—			—			12,839
Amounts reclassified from accumulated other comprehensive income (loss)	(49		)	—			4			32			(13		)
Balance at June 30, 2016	$	22,701		$	458		$	(7	)	$	(15,463	)	$	7,689
Three months ended June 30, 2015
Balance at March 31, 2015	$	14,311		$	440		$	(2,512	)	$	(22,039	)	$	(9,800	)
Other comprehensive income before reclassifications	(12,008		)	—			—			—			(12,008		)
Amounts reclassified from accumulated other comprehensive income (loss)	(1,473		)	(96		)	34			466			(1,069		)
Balance at June 30, 2015	$	830		$	344		$	(2,478	)	$	(21,573	)	$	(22,877	)

Six months ended June 30, 2016
Balance at December 31, 2015	$	(6,499	)	$	458		$	(15	)	$	(15,961	)	$	(22,017	)
Other comprehensive income before reclassifications	29,865			—			—			—			29,865
Amounts reclassified from accumulated other comprehensive income (loss)	(665		)	—			8			498			(159		)
Balance at June 30, 2016	$	22,701		$	458		$	(7	)	$	(15,463	)	$	7,689
Six months ended June 30, 2015
Balance at December 31, 2014	$	5,980		$	1,349		$	(2,546	)	$	(22,505	)	$	(17,722	)
Other comprehensive income before reclassifications	(2,016		)	125			—			—			(1,891		)
Amounts reclassified from accumulated other comprehensive income (loss)	(3,134		)	(1,130		)	68			932			(3,264		)
Balance at June 30, 2015	$	830		$	344		$	(2,478	)	$	(21,573	)	$	(22,877	)

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)
June 30, 2016
U.S. Government sponsored agency securities	$	143	$	3	$	—		$	146
State and municipal securities	333,246		12,101		—			345,347
Corporate debt securities	95,419		3,001		(6,873		)	91,547
Collateralized mortgage obligations	701,853		5,951		(1,458		)	706,346
Mortgage-backed securities	1,242,267		25,501		(5		)	1,267,763
Auction rate securities	106,949		—		(9,063		)	97,886
Total debt securities	2,479,877		46,557		(17,399		)	2,509,035
Equity securities	14,210		6,493		(14		)	20,689
Total	$	2,494,087	$	53,050	$	(17,413	)	$	2,529,724



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(in thousands)
December 31, 2015
U.S. Government sponsored agency securities	$	25,154	$	35	$	(53	)	$	25,136
State and municipal securities	256,746		6,019		—			262,765
Corporate debt securities	100,336		2,695		(6,076		)	96,955
Collateralized mortgage obligations	835,439		3,042		(16,972		)	821,509
Mortgage-backed securities	1,154,935		10,104		(6,204		)	1,158,835
Auction rate securities	106,772		—		(8,713		)	98,059
Total debt securities	2,479,382		21,895		(38,018		)	2,463,259
Equity securities	14,677		6,845		(8		)	21,514
Total	$	2,494,059	$	28,740	$	(38,026	)	$	2,484,773

Securities carried at $1.7 billion as of June 30, 2016 and December 31, 2015 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 $19.8 million at June 30, 2016 and $20.6 million at December 31, 2015) and other equity investments (estimated fair value of $895,000 at June 30, 2016 and $914,000 at December 31, 2015).

As of June 30, 2016, the financial institutions stock portfolio had a cost basis of $13.4 million and an estimated fair value of $19.8 million, including an investment in a single financial institution with a cost basis of $7.4 million and an estimated fair value of $10.4 million. The estimated fair value of this investment accounted for 52.5% 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 June 30, 2016, by contractual maturity, are shown in the following table. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.



		Amortized Cost		Estimated Fair Value
	(in thousands)
Due in one year or less		$	55,965	$	56,628
Due from one year to five years		44,833		46,408
Due from five years to ten years		94,787		97,933
Due after ten years		340,172		333,957
		535,757		534,926
Collateralized mortgage obligations		701,853		706,346
Mortgage-backed securities		1,242,267		1,267,763
Total debt securities		$	2,479,877	$	2,509,035

The following table presents information related to the gross realized gains and losses on the sales of equity and debt securities:



	Gross Realized Gains		Gross Realized Losses			Net Gains (Losses)
Three months ended June 30, 2016	(in thousands)
Equity securities	$	4	$	(10	)	$	(6	)
Debt securities	108		(26		)	82
Total	$	112	$	(36	)	$	76
Three months ended June 30, 2015
Equity securities	$	2,290	$	—		$	2,290
Debt securities	125		—			125
Total	$	2,415	$	—		$	2,415

Six months ended June 30, 2016
Equity securities	$	737	$	(10	)	$	727
Debt securities	322		(26		)	296
Total	$	1,059	$	(36	)	$	1,023
Six months ended June 30, 2015
Equity securities	$	4,260	$	—		$	4,260
Debt securities	2,300		—			2,300
Total	$	6,560	$	—		$	6,560

The following table presents a summary of the cumulative credit related other-than-temporary impairment charges, recognized as components of earnings, for debt securities held by the Corporation at June 30, 2016 and 2015:



	Three months ended June 30						Six months ended June 30
	2016			2015			2016			2015
	(in thousands)
Balance of cumulative credit losses on debt securities, beginning of period	$	(11,510	)	$	(12,302	)	$	(11,510	)	$	(16,242	)
Reductions for securities sold during the period	—			792			—			4,730
Reductions for increases in cash flows expected to be collected that are recognized over the remaining life of the security	—			—			—			2
Balance of cumulative credit losses on debt securities, end of period	$	(11,510	)	$	(11,510	)	$	(11,510	)	$	(11,510	)

The following table presents the gross unrealized losses and estimated fair values of investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 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
	(in thousands)
Corporate debt securities	$	—	$	—		$	32,186	$	(6,873	)	$	32,186	$	(6,873	)
Collateralized mortgage obligations	21,695		(17		)	292,954		(1,441		)	314,649		(1,458		)
Mortgage-backed securities	—		—			11,569		(5		)	11,569		(5		)
Auction rate securities	—		—			97,886		(9,063		)	97,886		(9,063		)
Total debt securities	21,695		(17		)	434,595		(17,382		)	456,290		(17,399		)
Equity securities	681		(14		)	—		—			681		(14		)
	$	22,376	$	(31	)	$	434,595	$	(17,382	)	$	456,971	$	(17,413	)

The Corporation’s collateralized mortgage obligations and mortgage-backed securities have contractual terms that generally do not permit the issuer to settle the securities at a price less than the amortized cost of the investment. Because the decline in market value of these securities is attributable to changes in interest rates and not credit quality, and because the Corporation does not have the intent to sell and does not believe it will more likely than not be required to sell any of these securities prior to a recovery of their fair value to amortized cost, the Corporation does not consider these investments to be other-than-temporarily impaired as of June 30, 2016.

As of June 30, 2016, 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 June 30, 2016, all ARCs were current and making scheduled interest payments. Based on management’s evaluations, ARCs with an estimated fair value of $97.9 million were not subject to any other-than-temporary impairment charges as of June 30, 2016. The Corporation does not have the intent to sell and does not believe it will more likely than not be required to sell any of these securities prior to a recovery of their fair value to amortized cost, which may be at maturity.

For its investments in equity securities, particularly its investments in stocks of financial institutions, management evaluates the near-term prospects of the issuers in relation to the severity and duration of the impairment. Based on that evaluation and the Corporation’s ability and intent to hold those investments for a reasonable period of time sufficient for a recovery of fair value, the Corporation does not consider those investments with unrealized holding losses as of June 30, 2016 to be other-than-temporarily impaired.

The majority of the Corporation's available for sale corporate debt securities are issued by financial institutions. The following table presents the amortized cost and estimated fair value of corporate debt securities:



	June 30, 2016				December 31, 2015
	Amortized cost		Estimated fair value		Amortized cost		Estimated fair value
	(in thousands)
Single-issuer trust preferred securities	$	43,697	$	37,461	$	44,648	$	39,106
Subordinated debt	29,662		30,708		39,610		40,779
Senior debt	18,040		18,652		12,043		12,329
Pooled trust preferred securities	—		706		—		706
Corporate debt securities issued by financial institutions	91,399		87,527		96,301		92,920
Other corporate debt securities	4,020		4,020		4,035		4,035
Available for sale corporate debt securities	$	95,419	$	91,547	$	100,336	$	96,955

Single-issuer trust preferred securities had an unrealized loss of $6.2 million at June 30, 2016. Six of the 19 single-issuer trust preferred securities were rated below investment grade by at least one ratings agency, with an amortized cost of $11.5 million and an estimated fair value of $9.5 million at June 30, 2016. All of the single-issuer trust preferred securities rated below investment grade were rated "BB" or "Ba". Two single-issuer trust preferred securities with an amortized cost of $3.7 million and an estimated fair value of $2.4 million at June 30, 2016 were not rated by any ratings agency.

Based on management’s evaluations, corporate debt securities with a fair value of $91.5 million were not subject to any other-than-temporary impairment charges as of June 30, 2016. The Corporation does not have the intent to sell and does not believe it will more likely than not be required to sell any of these securities prior to a recovery of their fair value to amortized cost, which may be at maturity.

NOTE 5 – Loans and Allowance for Credit Losses

Loans, Net of Unearned Income

Loans, net of unearned income are summarized as follows:



	June 30, 2016			December 31, 2015
	(in thousands)
Real-estate - commercial mortgage	$	5,635,347		$	5,462,330
Commercial - industrial, financial and agricultural	4,099,177			4,088,962
Real-estate - home equity	1,647,319			1,684,439
Real-estate - residential mortgage	1,447,292			1,376,160
Real-estate - construction	853,699			799,988
Consumer	278,071			268,588
Leasing and other	208,602			170,914
Overdrafts	3,214			2,737
Loans, gross of unearned income	14,172,721			13,854,118
Unearned income	(17,562		)	(15,516		)
Loans, net of unearned income	$	14,155,159		$	13,838,602

Allowance for Credit Losses

The allowance for credit losses consists of the allowance for loan losses and the reserve for unfunded lending commitments. The allowance for loan losses represents management’s estimate of incurred losses in the loan portfolio as of the balance sheet date and is recorded as a reduction to loans. The reserve for unfunded lending commitments represents management’s estimate of incurred losses in its unfunded loan commitments and is recorded in other liabilities on the consolidated balance sheets. The allowance for credit losses is increased by charges to expense, through the provision for credit losses, and decreased by charge-offs, net of recoveries.

The Corporation’s allowance for credit losses includes: (1) specific allowances allocated to loans evaluated for impairment under the FASB's ASC Section 310-10-35; and (2) allowances calculated for pools of loans measured for impairment under FASB ASC Subtopic 450-20.

The Corporation segments its loan portfolio by general loan type, or "portfolio segments," as presented in the table under the heading, "Loans, Net of Unearned Income," above. Certain portfolio segments are further disaggregated and evaluated collectively for impairment based on "class segments," which are largely based on the type of collateral underlying each loan. Commercial loans include loans secured by collateral and unsecured loans. Construction loan class segments include loans secured by commercial real estate, loans to commercial borrowers secured by residential real estate and loans to individuals secured by residential real estate. Consumer loan class segments include direct consumer installment loans and indirect automobile loans.

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



	June 30, 2016		December 31, 2015
	(in thousands)
Allowance for loan losses	$	162,546	$	169,054
Reserve for unfunded lending commitments	2,562		2,358
Allowance for credit losses	$	165,108	$	171,412

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



	Three months ended June 30						Six months ended June 30
	2016			2015			2016			2015
	(in thousands)
Balance at beginning of period	$	166,065		$	179,658		$	171,412		$	185,931
Loans charged off	(10,746		)	(15,372		)	(21,901		)	(21,136		)
Recoveries of loans previously charged off	7,278			2,967			11,556			6,158
Net loans charged off	(3,468		)	(12,405		)	(10,345		)	(14,978		)
Provision for credit losses	2,511			2,200			4,041			(1,500		)
Balance at end of period	$	165,108		$	169,453		$	165,108		$	169,453

The following table presents the activity in the allowance for loan losses by portfolio segment:



	Real Estate - Commercial Mortgage			Commercial - Industrial, Financial and Agricultural			Real Estate - Home Equity			Real Estate - Residential Mortgage			Real Estate - Construction			Consumer			Leasing, other and overdrafts			Unallocated			Total
	(in thousands)
Three months ended June 30, 2016
Balance at March 31, 2016	$	48,311		$	54,333		$	22,524		$	19,928		$	6,282		$	2,324		$	2,974		$	7,165		$	163,841
Loans charged off	(1,474		)	(4,625		)	(1,045		)	(340		)	(742		)	(569		)	(1,951		)	—			(10,746		)
Recoveries of loans previously charged off	1,367			2,931			350			420			1,563			539			108			—			7,278
Net loans charged off	(107		)	(1,694		)	(695		)	80			821			(30		)	(1,843		)	—			(3,468		)
Provision for loan losses (1)	(4,464		)	(884		)	4,341			1,218			(1,331		)	690			1,387			1,216			2,173
Balance at June 30, 2016	$	43,740		$	51,755		$	26,170		$	21,226		$	5,772		$	2,984		$	2,518		$	8,381		$	162,546
Three months ended June 30, 2015
Balance at March 31, 2015	$	52,860		$	57,150		$	23,481		$	23,235		$	8,487		$	2,527		$	1,653		$	8,308		$	177,701
Loans charged off	(1,642		)	(11,166		)	(870		)	(783		)	(87		)	(357		)	(467		)	—			(15,372		)
Recoveries of loans previously charged off	451			1,471			189			187			231			368			70			—			2,967
Net loans charged off	(1,191		)	(9,695		)	(681		)	(596		)	144			11			(397		)	—			(12,405		)
Provision for loan losses (1)	(989		)	1,715			(294		)	148			(882		)	70			359			2,062			2,189
Balance at June 30, 2015	$	50,680		$	49,170		$	22,506		$	22,787		$	7,749		$	2,608		$	1,615		$	10,370		$	167,485
Six months ended June 30, 2016
Balance at December 31, 2015	$	47,866		$	57,098		$	22,405		$	21,375		$	6,529		$	2,585		$	2,468		$	8,728		$	169,054
Loans charged off	(2,056		)	(10,813		)	(2,586		)	(1,408		)	(1,068		)	(1,576		)	(2,394		)	—			(21,901		)
Recoveries of loans previously charged off	2,192			5,250			688			556			1,946			735			189			—			11,556
Net loans charged off	136			(5,563		)	(1,898		)	(852		)	878			(841		)	(2,205		)	—			(10,345		)
Provision for loan losses (1)	(4,262		)	220			5,663			703			(1,635		)	1,240			2,255			(347		)	3,837
Balance at June 30, 2016	$	43,740		$	51,755		$	26,170		$	21,226		$	5,772		$	2,984		$	2,518		$	8,381		$	162,546
Six months ended June 30, 2015
Balance at December 31, 2014	$	53,493		$	51,378		$	28,271		$	29,072		$	9,756		$	3,015		$	1,799		$	7,360		$	184,144
Loans charged off	(2,351		)	(13,029		)	(1,638		)	(2,064		)	(87		)	(1,137		)	(830		)	—			(21,136		)
Recoveries of loans previously charged off	887			2,257			440			346			1,378			609			241			—			6,158
Net loans charged off	(1,464		)	(10,772		)	(1,198		)	(1,718		)	1,291			(528		)	(589		)	—			(14,978		)
Provision for loan losses (1)	(1,349		)	8,564			(4,567		)	(4,567		)	(3,298		)	121			405			3,010			(1,681		)
Balance at June 30, 2015	$	50,680		$	49,170		$	22,506		$	22,787		$	7,749		$	2,608		$	1,615		$	10,370		$	167,485

(1)

The provision for loan losses excluded a $338,000 and $204,000 increase, respectively, in the reserve for unfunded lending commitments for the three and six months ended June 30, 2016 and an $11,000 and $181,000 increase, respectively, in the reserve for unfunded lending commitments for the three and six months ended June 30, 2015. The total provision for credit losses, comprised of allocations for both funded and unfunded loans, was $2.5 million and $4.0 million for the three and six months ended June 30, 2016, respectively, and $2.2 million and a negative $1.5 million for the three and six months ended June 30, 2015.

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 (1)		Total
	(in thousands)
Allowance for loan losses at June 30, 2016:
Measured for impairment under FASB ASC Subtopic 450-20	$	32,861	$	40,945	$	17,089	$	9,044	$	4,004	$	2,971	$	2,518	$	8,381	$	117,813
Evaluated for impairment under FASB ASC Section 310-10-35	10,879		10,810		9,081		12,182		1,768		13		—		N/A		44,733
	$	43,740	$	51,755	$	26,170	$	21,226	$	5,772	$	2,984	$	2,518	$	8,381	$	162,546

Loans, net of unearned income at June 30, 2016:
Measured for impairment under FASB ASC Subtopic 450-20	$	5,582,027	$	4,057,883	$	1,629,443	$	1,399,399	$	841,193	$	278,053	$	194,254	N/A		$	13,982,252
Evaluated for impairment under FASB ASC Section 310-10-35	53,320		41,294		17,876		47,893		12,506		18		—		N/A		172,907
	$	5,635,347	$	4,099,177	$	1,647,319	$	1,447,292	$	853,699	$	278,071	$	194,254	N/A		$	14,155,159

Allowance for loan losses at June 30, 2015:
Measured for impairment under FASB ASC Subtopic 450-20	$	37,228	$	38,090	$	15,838	$	8,763	$	5,430	$	2,588	$	1,615	$	10,370	$	119,922
Evaluated for impairment under FASB ASC Section 310-10-35	13,452		11,080		6,668		14,024		2,319		20		—		N/A		47,563
	$	50,680	$	49,170	$	22,506	$	22,787	$	7,749	$	2,608	$	1,615	$	10,370	$	167,485

Loans, net of unearned income at June 30, 2015:
Measured for impairment under FASB ASC Subtopic 450-20	$	5,172,333	$	3,764,999	$	1,676,410	$	1,315,908	$	712,975	$	272,463	$	136,521	N/A		$	13,051,609
Evaluated for impairment under FASB ASC Section 310-10-35	65,467		41,700		13,278		53,195		18,950		31		—		N/A		192,621
	$	5,237,800	$	3,806,699	$	1,689,688	$	1,369,103	$	731,925	$	272,494	$	136,521	N/A		$	13,244,230


(1)	The unallocated allowance, which was approximately 5% and 6% of the total allowance for credit losses, respectively, as of June 30, 2016 and 2015, was, in the opinion of management, reasonable and appropriate given that the estimates used in the allocation process are inherently imprecise.

N/A - Not applicable.

Impaired Loans

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

Based on an evaluation of all relevant credit quality factors, the Corporation recorded a $2.5 million provision for credit losses during the three months ended June 30, 2016, compared to a $2.2 million provision for credit losses for the same period in 2015.

All loans individually evaluated for impairment under FASB ASC Section 310-10-35 are measured for losses on a quarterly basis.

As of June 30, 2016 and December 31, 2015, substantially all of the Corporation’s individually evaluated impaired loans with total outstanding balances greater than or equal to $1.0 million were measured based on the estimated fair value of each loan’s collateral. Collateral could be in the form of real estate, in the case of impaired commercial mortgages and construction loans, or business assets, such as accounts receivable or inventory, in the case of commercial and industrial loans. Commercial and industrial loans may also be secured by real property.

As of June 30, 2016 and 2015, approximately 89% and 72%, respectively, of impaired loans with principal balances greater than or equal to $1.0 million, whose primary collateral is real estate, were measured at estimated fair value using state certified third-party appraisals that had been updated 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:



	June 30, 2016						December 31, 2015
	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	$	25,452	$	22,501	$	—	$	27,872	$	22,596	$	—
Commercial - secured	21,458		18,137		—		18,012		13,702		—
Real estate - residential mortgage	6,353		6,171		—		4,790		4,790		—
Construction - commercial residential	7,743		6,543		—		9,916		8,865		—
	61,006		53,352				60,590		49,953
With a related allowance recorded:
Real estate - commercial mortgage	41,420		30,819		10,879		45,189		35,698		12,471
Commercial - secured	27,349		22,183		10,230		39,659		33,629		14,085
Commercial - unsecured	1,182		974		580		971		821		498
Real estate - home equity	22,944		17,876		9,081		20,347		15,766		7,993
Real estate - residential mortgage	49,976		41,722		12,182		55,242		45,635		13,422
Construction - commercial residential	8,610		5,043		1,447		9,949		6,290		2,110
Construction - commercial	731		504		166		820		638		217
Construction - other	416		416		155		331		193		68
Consumer - direct	18		18		13		19		19		14
Consumer - indirect	—		—		—		14		14		8
Leasing, other and overdrafts	—		—		—		1,658		1,425		704
	152,646		119,555		44,733		174,199		140,128		51,590
Total	$	213,652	$	172,907	$	44,733	$	234,789	$	190,081	$	51,590

As of June 30, 2016 and December 31, 2015, there were $53.4 million and $50.0 million, respectively, of impaired loans that did not have a related allowance for loan loss. The estimated fair values of the collateral securing these loans exceeded their carrying amount, or they were previously charged down to realizable collateral values. Accordingly, no specific valuation allowance was considered to be necessary.

The following table presents average impaired loans by class segment:



	Three months ended June 30								Six months ended June 30
	2016				2015				2016				2015
	Average Recorded Investment		Interest Income (1)		Average Recorded Investment		Interest Income (1)		Average Recorded Investment		Interest Income (1)		Average Recorded Investment		Interest Income (1)
	(in thousands)
With no related allowance recorded:
Real estate - commercial mortgage	$	22,762	$	72	$	27,410	$	87	$	22,707	$	141	$	26,018	178
Commercial - secured	15,182		20		16,163		24		14,688		36		15,636		45
Real estate - residential mortgage	6,191		33		5,541		32		5,724		63		5,318		60
Construction - commercial residential	6,421		16		12,171		40		7,236		35		13,048		95
Construction - commercial	—		—		925		—		—		—		1,144		—
	50,556		141		62,210		183		50,355		275		61,164		378
With a related allowance recorded:
Real estate - commercial mortgage	33,042		104		40,204		126		33,927		212		40,143		259
Commercial - secured	25,919		33		25,902		38		28,489		71		23,713		74
Commercial - unsecured	929		1		2,082		2		893		2		1,751		3
Real estate - home equity	17,950		70		13,016		33		17,222		127		13,163		64
Real estate - residential mortgage	41,928		226		47,020		270		43,164		461		46,839		543
Construction - commercial residential	5,566		14		6,031		21		5,807		29		6,655		49
Construction - commercial	548		—		960		—		578		—		981		—
Construction - other	513		—		281		—		406		—		281		—
Consumer - direct	10		—		17		—		16		—		18		—
Consumer - indirect	15		—		17		—		11		—		17		—
Leasing, other and overdrafts	711		—		—		—		949		—		—		—
	127,131		448		135,530		490		131,462		902		133,561		992
Total	$	177,687	$	589	$	197,740	$	673	$	181,817	$	1,177	$	194,725	1,370


(1)	All impaired loans, excluding accruing TDRs, were non-accrual loans. Interest income recognized for the three and six months ended June 30, 2016 and 2015 represents amounts earned on accruing TDRs.

Credit Quality Indicators and Non-performing Assets

The following table presents internal credit risk ratings for real estate - commercial mortgages, commercial - secured loans, commercial - unsecured loans, construction - commercial residential loans and construction - commercial loans:



	Pass						Special Mention						Substandard or Lower						Total
	June 30, 2016			December 31, 2015			June 30, 2016			December 31, 2015			June 30, 2016			December 31, 2015			June 30, 2016			December 31, 2015
	(dollars in thousands)
Real estate - commercial mortgage	$	5,371,366		$	5,204,263		$	141,417		$	102,625		$	122,564		$	155,442		$	5,635,347		$	5,462,330
Commercial - secured	3,718,231			3,696,692			95,330			92,711			130,180			136,710			3,943,741			3,926,113
Commercial - unsecured	149,548			156,742			2,467			2,761			3,421			3,346			155,436			162,849
Total commercial - industrial, financial and agricultural	3,867,779			3,853,434			97,797			95,472			133,601			140,056			4,099,177			4,088,962
Construction - commercial residential	151,817			140,337			17,012			17,154			14,838			21,812			183,667			179,303
Construction - commercial	596,971			552,710			2,548			3,684			4,594			3,597			604,113			559,991
Total construction (excluding Construction - other)	748,788			693,047			19,560			20,838			19,432			25,409			787,780			739,294
	$	9,987,933		$	9,750,744		$	258,774		$	218,935		$	275,597		$	320,907		$	10,522,304		$	10,290,586
% of Total	94.9		%	94.8		%	2.5		%	2.1		%	2.6		%	3.1		%	100.0		%	100.0		%

The following is a summary of the Corporation's internal risk rating categories:


•	Pass: These loans do not currently pose undue credit risk and can range from the highest to average quality, depending on the degree of potential risk.


•	Special Mention: These loans constitute an undue and unwarranted credit risk, but not to a point of justifying a classification of substandard. Loans in this category are currently acceptable, but are nevertheless potentially weak.


•	Substandard or Lower: These loans are inadequately protected by current sound worth and paying capacity of the borrower. There exists a well-defined weakness or weaknesses that jeopardize the normal repayment of the debt.

The risk rating process allows management to identify 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, delinquency and non-performing status for home equity, real estate - residential mortgages, construction loans to individuals and consumer, leasing and other loans by class segment:



	Performing						Delinquent (1)						Non-performing (2)						Total
	June 30, 2016			December 31, 2015			June 30, 2016			December 31, 2015			June 30, 2016			December 31, 2015			June 30, 2016			December 31, 2015
	(dollars in thousands)
Real estate - home equity	$	1,623,095		$	1,660,773		$	10,051		$	8,983		$	14,173		$	14,683		$	1,647,319		$	1,684,439
Real estate - residential mortgage	1,408,244			1,329,371			14,018			18,305			25,030			28,484			1,447,292			1,376,160
Construction - other	63,404			59,997			1,416			88			1,099			609			65,919			60,694
Consumer - direct	92,906			94,262			1,860			2,254			1,695			2,203			96,461			98,719
Consumer - indirect	179,293			166,823			2,124			2,809			193			237			181,610			169,869
Total consumer	272,199			261,085			3,984			5,063			1,888			2,440			278,071			268,588
Leasing, other and overdrafts	193,233			155,870			863			759			158			1,506			194,254			158,135
	$	3,560,175		$	3,467,096		$	30,332		$	33,198		$	42,348		$	47,722		$	3,632,855		$	3,548,016
% of Total	98.0		%	97.7		%	0.8		%	1.0		%	1.2		%	1.3		%	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:



	June 30, 2016		December 31, 2015
	(in thousands)
Non-accrual loans	$	111,742	$	129,523
Loans 90 days or more past due and still accruing	15,992		15,291
Total non-performing loans	127,734		144,814
Other real estate owned (OREO)	11,918		11,099
Total non-performing assets	$	139,652	$	155,913

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



	June 30, 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	$	7,813	$	2,288	$	192	$	35,512	$	35,704	$	45,805	$	5,589,542	$	5,635,347
Commercial - secured	4,532		7,207		2,997		34,675		37,672		49,411		3,894,330		3,943,741
Commercial - unsecured	372		43		367		863		1,230		1,645		153,791		155,436
Total commercial - industrial, financial and agricultural	4,904		7,250		3,364		35,538		38,902		51,056		4,048,121		4,099,177
Real estate - home equity	7,600		2,451		3,470		10,703		14,173		24,224		1,623,095		1,647,319
Real estate - residential mortgage	10,356		3,662		4,461		20,569		25,030		39,048		1,408,244		1,447,292
Construction - commercial residential	—		541		—		8,499		8,499		9,040		174,627		183,667
Construction - commercial	1,482		1,134		1,777		504		2,281		4,897		599,216		604,113
Construction - other	1,416		—		682		417		1,099		2,515		63,404		65,919
Total real estate - construction	2,898		1,675		2,459		9,420		11,879		16,452		837,247		853,699
Consumer - direct	1,169		691		1,695		—		1,695		3,555		92,906		96,461
Consumer - indirect	1,734		390		193		—		193		2,317		179,293		181,610
Total consumer	2,903		1,081		1,888		—		1,888		5,872		272,199		278,071
Leasing, other and overdrafts	400		463		158		—		158		1,021		193,233		194,254
Total	$	36,874	$	18,870	$	15,992	$	111,742	$	127,734	$	183,478	$	13,971,681	$	14,155,159



	December 31, 2015
	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	$	6,469	$	1,312	$	439	$	40,731	$	41,170	$	48,951	$	5,413,379	$	5,462,330
Commercial - secured	5,654		2,615		1,853		41,498		43,351		51,620		3,874,493		3,926,113
Commercial - unsecured	510		83		19		701		720		1,313		161,536		162,849
Total commercial - industrial, financial and agricultural	6,164		2,698		1,872		42,199		44,071		52,933		4,036,029		4,088,962
Real estate - home equity	6,438		2,545		3,473		11,210		14,683		23,666		1,660,773		1,684,439
Real estate - residential mortgage	15,141		3,164		6,570		21,914		28,484		46,789		1,329,371		1,376,160
Construction - commercial residential	1,366		494		—		11,213		11,213		13,073		166,230		179,303
Construction - commercial	50		176		—		638		638		864		559,127		559,991
Construction - other	88		—		416		193		609		697		59,997		60,694
Total real estate - construction	1,504		670		416		12,044		12,460		14,634		785,354		799,988
Consumer - direct	1,687		567		2,203		—		2,203		4,457		94,262		98,719
Consumer - indirect	2,308		501		237		—		237		3,046		166,823		169,869
Total consumer	3,995		1,068		2,440		—		2,440		7,503		261,085		268,588
Leasing, other and overdrafts	483		276		81		1,425		1,506		2,265		155,870		158,135
Total	$	40,194	$	11,733	$	15,291	$	129,523	$	144,814	$	196,741	$	13,641,861	$	13,838,602

The following table presents TDRs, by class segment:



	June 30, 2016		December 31, 2015
	(in thousands)
Real-estate - residential mortgage	$	27,324	$	28,511
Real-estate - commercial mortgage	17,808		17,563
Commercial - secured	5,645		5,833
Construction - commercial residential	3,086		3,942
Real estate - home equity	7,173		4,556
Commercial - unsecured	111		120
Consumer - indirect	—		14
Consumer - direct	18		19
Total accruing TDRs	61,165		60,558
Non-accrual TDRs ⁽¹⁾	24,887		31,035
Total TDRs	$	86,052	$	91,593


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

As of June 30, 2016 and December 31, 2015, there were $3.8 million and $5.3 million, respectively, of commitments to lend additional funds to borrowers whose loans were modified under TDRs.

The following table presents TDRs, by class segment as of June 30, 2016 and 2015, that were modified during the three and six months ended June 30, 2016 and 2015:



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

Total		30	$	2,803	23	$	2,374	73	$	6,480	51	$	13,691

The following table presents TDRs, by class segment, as of June 30, 2016 and 2015, that were modified in the previous 12 months and had a post-modification payment default during the six months ended June 30, 2016 and 2015. The Corporation defines a payment default as a single missed payment.



	2016			2015
	Number of Loans	Recorded Investment		Number of Loans	Recorded Investment
	(dollars in thousands)
Real estate - home equity	22	$	1,448	7	$	614
Real estate - residential mortgage	5	972		6	652
Commercial - secured	4	1,096		8	4,779
Real estate - commercial mortgage	2	132		2	191
Commercial - unsecured	1	27		—	—
Total	34	$	3,675	23	$	6,236

NOTE 6 – Mortgage Servicing Rights

The following table summarizes the changes in mortgage servicing rights ("MSRs"), which are included in other assets on the consolidated balance sheets:



	Three months ended June 30						Six months ended June 30
	2016			2015			2016			2015
	(in thousands)
Amortized cost:
Balance at beginning of period	$	40,195		$	41,803		$	40,944		$	42,148
Originations of mortgage servicing rights	1,508			1,956			2,428			3,513
Amortization	(1,829		)	(2,161		)	(3,498		)	(4,063		)
Balance at end of period	$	39,874		$	41,598		$	39,874		$	41,598

Valuation allowance:
Balance at beginning of period	$	—		$	—		$	—		$	—
Additions	(1,721		)	—			(1,721		)	—
Balance at end of period	$	(1,721	)	$	—		$	(1,721	)	$	—

Net MSRs at end of period	$	38,153		$	41,598		$	38,153		$	41,598

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

The fair value of MSRs is estimated by discounting the estimated cash flows from servicing income, net of expense, over the expected life of the underlying loans at a discount rate commensurate with the risk associated with these assets. Expected life is based on the contractual terms of the loans, as adjusted for prepayment projections. Based on its fair value analysis, the Corporation determined that an addition to the valuation allowance of $1.7 million was necessary as of June 30, 2016. No valuation allowance was necessary as of June 30, 2015.

NOTE 7 – Stock-Based Compensation

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

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

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

The following table presents compensation expense and the related tax benefits for equity awards recognized in the consolidated statements of income:



	Three months ended June 30						Six months ended June 30
	2016			2015			2016			2015
	(in thousands)
Stock-based compensation expense	$	1,820		$	1,767		$	3,256		$	2,838
Tax benefit	(642		)	(622		)	(1,075		)	(914		)
Stock-based compensation expense, net of tax	$	1,178		$	1,145		$	2,181		$	1,924

Stock option fair values are estimated through the use of the Black-Scholes valuation methodology as of the date of grant. Stock options carry terms of up to ten years. Fair values for restricted stock, RSUs and a majority of PSUs are based on the trading price of the Corporation’s stock on the date of grant and earn dividends during the vesting period, which are forfeitable if the awards 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 June 30, 2016, the Employee Equity Plan had 11.5 million shares reserved for future grants through 2023, and the Directors’ Plan had approximately 384,000 shares reserved for future grants through 2021. On May 1, 2016, the Corporation granted approximately 356,000 PSUs and 163,000 RSUs under the Employee Equity Plan. On June 1, 2016, the Corporation granted approximately 12,000 shares of common stock to its directors. Total expense of $175,000 was recognized in other expense for this grant.

NOTE 8 – Employee Benefit Plans

The Corporation maintains a defined benefit pension plan ("Pension Plan") for certain employees, which was curtailed in 2008. Contributions to the Pension Plan are actuarially determined and funded annually, if required. Pension Plan assets are invested in: money markets; fixed income securities, including corporate bonds, U.S. Treasury securities and common trust funds; and equity securities, including common stocks and common stock mutual funds.

The net periodic benefit cost for the Corporation’s Pension Plan consisted of the following components:



	Three months ended June 30						Six months ended June 30
	2016			2015			2016			2015
	(in thousands)
Service cost ⁽¹⁾	$	194		$	145		$	344		$	290
Interest cost	879			851			1,760			1,702
Expected return on plan assets	(433		)	(752		)	(1,159		)	(1,504		)
Net amortization and deferral	428			782			1,210			1,564
Net periodic benefit cost	$	1,068		$	1,026		$	2,155		$	2,052


(1)	Service cost was related to administrative costs associated with the plan and was not due to the accrual of additional participant benefits.

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

The net periodic cost (benefit) of the Corporation’s Postretirement Plan consisted of the following components:



	Three months ended June 30						Six months ended June 30
	2016			2015			2016			2015
	(in thousands)
Interest cost	5			52			43			104
Expected return on plan assets	(1		)	—			(1		)	—
Net accretion and deferral	(210		)	(65		)	(275		)	(130		)
Net periodic benefit	$	(206	)	$	(13	)	$	(233	)	$	(26	)

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 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 that are recorded at their fair value in other assets and other liabilities on the consolidated balance sheets, with changes in fair value during the period recorded in other non-interest expense on the consolidated statements of income.

Foreign Exchange Contracts

The Corporation enters into foreign exchange contracts to accommodate the needs of its customers. Foreign exchange contracts are commitments to buy or sell foreign currency on a future date at a contractual price. The Corporation offsets its foreign exchange contract exposure with customers by entering into contracts with third-party correspondent financial institutions to mitigate its exposure to fluctuations in foreign currency exchange rates. The Corporation also holds certain amounts of foreign currency with international correspondent banks. The Corporation's policy limits the total net foreign currency open positions, which includes all outstanding contracts and foreign account balances, to $500,000. Gross derivative assets and liabilities are recorded in other assets and other liabilities, respectively, on the consolidated balance sheets, with changes in fair values during the period recorded within other service charges and fees on the consolidated statements of income.

The following table presents a summary of the notional amounts and fair values of derivative financial instruments:



	June 30, 2016					December 31, 2015
	Notional Amount		Asset (Liability) Fair Value			Notional Amount		Asset (Liability) Fair Value
	(in thousands)
Interest Rate Locks with Customers
Positive fair values	$	159,646	$	3,023		$	87,781	$	1,291
Negative fair values	414		(4		)	267		(16		)
Net interest rate locks with customers			3,019					1,275
Forward Commitments
Positive fair values	—		—			69,045		205
Negative fair values	137,811		(1,831		)	16,193		(24		)
Net forward commitments			(1,831		)			181
Interest Rate Swaps with Customers
Positive fair values	1,098,942		82,874			846,490		32,915
Negative fair values	8,000		(14		)	8,757		(55		)
Net interest rate swaps with customers			82,860					32,860
Interest Rate Swaps with Dealer Counterparties
Positive fair values	8,000		14			8,757		55
Negative fair values	1,098,942		(82,874		)	846,490		(32,915		)
Net interest rate swaps with dealer counterparties			(82,860		)			(32,860		)
Foreign Exchange Contracts with Customers
Positive fair values	11,577		479			4,897		114
Negative fair values	6,268		(94		)	8,050		(184		)
Net foreign exchange contracts with customers			385					(70		)
Foreign Exchange Contracts with Correspondent Banks
Positive fair values	9,595		377			9,728		428
Negative fair values	15,231		(443		)	6,899		(147		)
Net foreign exchange contracts with correspondent banks			(66		)			281
Net derivative fair value asset			$	1,507				$	1,667

The following table presents a summary of the fair value gains and losses on derivative financial instruments:



	Three months ended June 30						Six months ended June 30
	2016			2015			2016			2015
	(in thousands)
Interest rate locks with customers	$	512		$	(1,287	)	$	1,744		$	(165	)
Forward commitments	(906		)	2,291			(2,012		)	2,845
Interest rate swaps with customers	20,569			(9,839		)	50,000			(435		)
Interest rate swaps with dealer counterparties	(20,569		)	9,839			(50,000		)	435
Foreign exchange contracts with customers	81			(748		)	455			(181		)
Foreign exchange contracts with correspondent banks	(68		)	711			(347		)	387
Net fair value gains (losses) on derivative financial instruments	$	(381	)	$	967		$	(160	)	$	2,886

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:



	June 30, 2016		December 31, 2015
	(in thousands)
Cost	$	33,164	$	16,584
Fair value	34,330		16,886

During the three and six months ended June 30, 2016, the Corporation recorded gains related to changes in fair values of mortgage loans held for sale of $634,000 and $864,000, respectively. During the three and six months ended June 30, 2015, the Corporation recorded losses related to changes in fair values of mortgage loans held for sale of $483,000 and $222,000, 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.

The Corporation is also a party to foreign currency exchange contracts with financial institution counterparties, under which the Corporation has the right to net-settle multiple contracts with the same counterparty in the event of default on, or termination of, any one contract. As with interest rate swap contracts, cash collateral is posted by the party with a net liability position in accordance with contract thresholds and can be used to settle the fair value of the foreign currency exchange contracts in the event of default.

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)
June 30, 2016
Interest rate swap derivative assets	$	82,888	$	(14	)	$	—		$	82,874
Foreign exchange derivative assets with correspondent banks	377		(359		)	(18		)	—
Total	$	83,265	$	(373	)	$	(18	)	$	82,874

Interest rate swap derivative liabilities	$	82,888	$	(14	)	$	(82,510	)	$	364
Foreign exchange derivative liabilities with correspondent banks	443		(359		)	—			84
Total	$	83,331	$	(373	)	$	(82,510	)	$	448

December 31, 2015
Interest rate swap derivative assets	$	32,970	$	(55	)	$	—		$	32,915
Foreign exchange derivative assets with correspondent banks	428		(147		)	—			281
Total	$	33,398	$	(202	)	$	—		$	33,196

Interest rate swap derivative liabilities	$	32,970	$	(55	)	$	(31,130	)	$	1,785
Foreign exchange derivative liabilities with correspondent banks	147		(147		)	—			—
Total	$	33,117	$	(202	)	$	(31,130	)	$	1,785


(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 cash collateral received from the counterparty or posted by the Corporation.

NOTE 10 – Commitments and Contingencies

Commitments

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

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

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



	June 30, 2016		December 31, 2015
	(in thousands)
Commitments to extend credit	$	5,898,623	$	5,784,138
Standby letters of credit	362,506		374,729
Commercial letters of credit	37,836		39,529

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

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 June 30, 2016 and December 31, 2015, 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 June 30, 2016, the unpaid principal balance of loans sold under the MPF Program was approximately $114 million. As of June 30, 2016 and December 31, 2015, the reserve for estimated credit losses related to loans sold under the MPF Program was $2.1 million and $1.8 million, respectively. Required reserves are calculated based on delinquency status and estimated loss rates established through the Corporation's existing allowance for credit losses methodology for residential mortgage loans.

As of June 30, 2016 and December 31, 2015, the total reserve for losses on residential mortgage loans sold was $2.8 million and $2.6 million, respectively, including both reserves for credit losses under the MPF Program and reserves for representation and warranty exposures. Management believes that the reserves recorded as of June 30, 2016 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. In addition to requiring strengthening and enhancement of the BSA/AML Compliance Program, while the Consent Orders remain in effect, the Corporation is subject to certain restrictions on expansion activities of the Corporation and its bank subsidiaries. Further, any failure to comply with the requirements of any of the Consent Orders involving the Corporation or its bank subsidiaries could result in further enforcement actions, the imposition of material restrictions on the activities of the Corporation or its bank subsidiaries, or the assessment of fines or penalties.

Fair Lending Investigation

During the second quarter of 2015, Fulton Bank, N.A. (the "Bank"), the Corporation’s largest bank subsidiary, received a letter from the U.S. Department of Justice (the "Department") indicating that the Department had initiated an investigation regarding potential violations of fair lending laws by the Bank in certain of its geographies. The Bank is cooperating with the Department and responding to the Department’s requests for information. Although the Corporation is not able to predict the outcome of the Department’s investigation, it could result in legal proceedings the resolution of which could potentially involve a settlement, fines or other remedial actions.

Agostino, et al. Litigation

Fulton Bank, N.A. (the "Bank"), the Corporation’s largest bank subsidiary, and two unrelated, third-party defendants, Ameriprise Financial Services, Inc. and Riverview Bank, have been named as defendants in a lawsuit brought on behalf of a group of 58 plaintiffs filed on March 31, 2016 in the Court of Common Pleas for Dauphin County, Pennsylvania (Agostino, et al. v. Ameriprise Financial Services, Inc., et al., No. 2016-CV-2048-CV). The plaintiffs in this action, who are individuals, trustees of certain irrevocable trusts or the executors of the estates of deceased individuals, were clients of Jeffrey M. Mottern, a now deceased attorney, who is alleged to have operated a Ponzi scheme which defrauded the plaintiffs over a period of years through the sale of fictitious, high-yielding investments or by otherwise misappropriating funds entrusted to Mr. Mottern. Mr. Mottern is alleged to have used the proceeds of these activities to engage in speculative securities trading, which incurred significant losses, and for Mr. Mottern’s personal expenses. The allegations against the Bank relate to a commercial checking account at the Bank maintained by Mr. Mottern in connection with Mr. Mottern’s law practice. The lawsuit alleges that the Bank is liable to the plaintiffs for failing to properly monitor Mr. Mottern’s checking account and detect Mr. Mottern’s fraudulent activity, and specifically alleges that the Bank aided and abetted Mr. Mottern’s: (1) fraud; (2) breach of fiduciary duty; (3) violations of the Pennsylvania Unfair Trade Practices and Consumer Protection Law; and (4) conversion. Similar claims have been asserted against Ameriprise Financial Services, Inc. and Riverview Bank, which allegedly maintained a personal brokerage account and a trust account for client or other third-party funds, respectively, for Mr. Mottern. The lawsuit seeks damages from the defendants, including the Bank, alleged to be in excess of $11.3 million, treble damages and attorneys’ fees with respect to alleged violations of the Pennsylvania Unfair Trade Practices and Consumer Protection Law, punitive damages, plus interest and costs. On April 29, 2016, the Bank filed a Notice of Removal to remove this lawsuit to the United States District Court for the Middle District of Pennsylvania. On May 25, 2016, the Bank filed a motion to dismiss the lawsuit for failure to state a claim. On May 31, 2016, the plaintiffs filed a motion to remand the lawsuit to the Court of Common Pleas for Dauphin County, Pennsylvania. On June 17, 2016, the Bank filed a brief opposing the motion to remand. The motion to remand is pending before the District Court and further briefing on the motion to dismiss has been stayed pending resolution of the motion to remand.

NOTE 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:



	June 30, 2016
	Level 1		Level 2		Level 3		Total
	(in thousands)
Mortgage loans held for sale	$	—	$	34,330	$	—	$	34,330
Available for sale investment securities:
Equity securities	20,689		—		—		20,689
U.S. Government sponsored agency securities	—		146		—		146
State and municipal securities	—		345,347		—		345,347
Corporate debt securities	—		88,416		3,131		91,547
Collateralized mortgage obligations	—		706,346		—		706,346
Mortgage-backed securities	—		1,267,763		—		1,267,763
Auction rate securities	—		—		97,886		97,886
Total available for sale investment securities	20,689		2,408,018		101,017		2,529,724
Other assets	16,873		85,911		—		102,784
Total assets	$	37,562	$	2,528,259	$	101,017	$	2,666,838
Other liabilities	$	16,541	$	84,722	$	—	$	101,263



	December 31, 2015
	Level 1		Level 2		Level 3		Total
	(in thousands)
Mortgage loans held for sale	$	—	$	16,886	$	—	$	16,886
Available for sale investment securities:
Equity securities	21,514		—		—		21,514
U.S. Government sponsored agency securities	—		25,136		—		25,136
State and municipal securities	—		262,765		—		262,765
Corporate debt securities	—		93,619		3,336		96,955
Collateralized mortgage obligations	—		821,509		—		821,509
Mortgage-backed securities	—		1,158,835		—		1,158,835
Auction rate securities	—		—		98,059		98,059
Total available for sale investment securities	21,514		2,361,864		101,395		2,484,773
Other assets	16,129		34,465		—		50,594
Total assets	$	37,643	$	2,413,215	$	101,395	$	2,552,253
Other liabilities	$	15,914	$	33,010	$	—	$	48,924

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

•

Mortgage loans held for sale – This category consists of mortgage loans held for sale that the Corporation has elected to measure at fair value. Fair values as of June 30, 2016 and December 31, 2015 were measured based on the price that secondary market investors were offering for loans with similar characteristics. See Note 9, "Derivative Financial Instruments" for details related to the Corporation’s election to measure assets and liabilities at fair value.

•

Available for sale investment securities – Included in this asset category are both equity and debt securities. Level 2 available for sale debt securities are valued by a third-party pricing service commonly used in the banking industry. The pricing service uses pricing models that vary based on asset class and incorporate available market information, including quoted prices of investment securities with similar characteristics. Because many fixed income securities do not trade on a daily basis, pricing models use available information, as applicable, through processes such as benchmark yield curves, benchmarking of like securities, sector groupings, and matrix pricing.

Standard market inputs include: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data, including market research publications. For certain security types, additional inputs may be used, or some of the standard market inputs may not be applicable.

Management tests the values provided by the pricing service by obtaining securities prices from an alternative third-party source and comparing the results. This test is done for approximately 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 ($19.8 million at June 30, 2016 and $20.6 million at December 31, 2015) and other equity investments ($895,000 at June 30, 2016 and $914,000 at December 31, 2015). These Level 1 investments are measured at fair value based on quoted prices for identical securities in active markets.


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

•

Corporate debt securities – This category consists of subordinated debt issued by financial institutions ($30.7 million at June 30, 2016 and $40.8 million at December 31, 2015), senior debt ($18.7 million at June 30, 2016 and $12.3 million at December 31, 2015), single-issuer trust preferred securities issued by financial institutions ($37.4 million at June 30, 2016 and $39.1 million at December 31, 2015), pooled trust preferred securities issued by financial institutions ($706,000 at both June 30, 2016 and December 31, 2015) and other corporate debt issued by non-financial institutions ($4.0 million at both June 30, 2016 and December 31, 2015).

Level 2 investments include the Corporation’s holdings of subordinated debt, other corporate debt issued by non-financial institutions and $35.0 million and $36.5 million of single-issuer trust preferred securities held at June 30, 2016 and December 31, 2015, respectively. The fair values for these corporate debt securities are determined by a third-party pricing service, as detailed above.

Level 3 investments include the Corporation’s investments in pooled trust preferred securities ($706,000 at both June 30, 2016 and December 31, 2015) and certain single-issuer trust preferred securities ($2.4 million at June 30, 2016 and $2.6 million at December 31, 2015). The fair values of these securities were determined based on quotes provided by third-party brokers who determined fair values based predominantly on internal valuation models which were not indicative prices or binding offers. The Corporation’s third-party pricing service cannot derive fair values for these securities primarily due to inactive markets for similar investments. Level 3 values are tested by management primarily through trend analysis, by comparing current values to those reported at the end of the preceding calendar quarter, and determining if they are reasonable based on price and spread movements for this asset class.

•

Auction rate securities – Due to their illiquidity, ARCs are classified as Level 3 investments and are valued through the use of an expected cash flows model prepared by a third-party valuation expert. The assumptions used in preparing the expected cash flows model include estimates for coupon rates, time to maturity and market rates of return. The most significant unobservable input to the expected cash flows model is an assumed return to market liquidity sometime in the next five years. If the assumed return to market liquidity was lengthened beyond the next five years, this would result in a decrease in the fair value of these ARCs. The Corporation believes that the trusts underlying the ARCs will self-liquidate as student loans are repaid. Level 3 fair values are tested by management through the performance of a trend analysis of the market price and discount rate. Changes in the price and discount rates are compared to changes in market data, including bond ratings, parity ratios, balances and delinquency levels.

Other assets – Included in this category are the following:

•

Level 1 assets include mutual funds that are held in trust for employee deferred compensation plans ($16.0 million at June 30, 2016 and $15.6 million at December 31, 2015) and the fair value of foreign currency exchange contracts ($868,000 at June 30, 2016 and $547,000 at December 31, 2015). The mutual funds and foreign exchange prices used to measure these items at fair value are based on quoted prices for identical instruments in active markets.

•

Level 2 assets include the fair value of mortgage banking derivatives in the form of interest rate locks and forward commitments with secondary market investors ($3.0 million at June 30, 2016 and $1.5 million at December 31, 2015) and the fair value of interest rate swaps ($82.9 million at June 30, 2016 and $33.0 million at December 31, 2015). The fair values of the Corporation’s interest rate locks, forward commitments and interest rate swaps represent the amounts that would be required to settle the derivative financial instruments at the balance sheet date. See Note 9, "Derivative Financial Instruments," for additional information.

Other liabilities – Included in this category are the following:

•

Level 1 liabilities include employee deferred compensation liabilities which represent amounts due to employees under deferred compensation plans ($16.0 million at June 30, 2016 and $15.6 million at December 31, 2015) and the fair value of foreign currency exchange contracts ($537,000 at June 30, 2016 and $331,000 at December 31, 2015). The fair value of these liabilities are determined in the same manner as the related assets, as described under the heading "Other assets" above.

•

Level 2 liabilities include the fair value of mortgage banking derivatives in the form of interest rate locks and forward commitments with secondary market investors ($1.8 million at June 30, 2016 and $40,000 at December 31, 2015) and the fair value of interest rate swaps ($82.9 million at June 30, 2016 and $33.0 million at December 31, 2015). The fair values of these liabilities are determined in the same manner as the related assets, as described under the heading "Other assets" above.

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 June 30, 2016
	Pooled Trust Preferred Securities			Single-issuer Trust Preferred Securities			ARCs
	(in thousands)
Balance at March 31, 2016	$	706		$	2,400		$	97,326
Unrealized adjustment to fair value ⁽¹⁾	—			22			482
Discount accretion ⁽²⁾	—			3			78
Balance at June 30, 2016	$	706		$	2,425		$	97,886

	Three months ended June 30, 2015
Balance at March 31, 2015	$	1,084		$	3,820		$	98,932
Sales	(554		)	—			—
Unrealized adjustment to fair value ⁽¹⁾	—			(2		)	(420		)
Discount accretion ⁽²⁾	—			2			94
Balance at June 30, 2015	$	530		$	3,820		$	98,606

	Six months ended June 30, 2016
	Pooled Trust Preferred Securities			Single-issuer Trust Preferred Securities			ARCs
	(in thousands)
Balance at December 31, 2015	$	706		$	2,630		$	98,059
Unrealized adjustment to fair value ⁽¹⁾	—			(211		)	(350		)
Discount accretion ⁽²⁾	—			6			177
Balance at June 30, 2016	$	706		$	2,425		$	97,886

	Six months ended June 30, 2015
Balance at December 31, 2014	$	4,088		$	3,820		$	100,941
Sales	(3,633		)	—			—
Unrealized adjustment to fair value ⁽¹⁾	190			(4		)	(88		)
Settlements - calls	(117		)	—			(2,446		)
Discount accretion ⁽²⁾	2			4			199
Balance at June 30, 2015	$	530		$	3,820		$	98,606


(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:



	June 30, 2016
	Level 1		Level 2		Level 3		Total
	(in thousands)
Net loans	$	—	$	—	$	128,174	$	128,174
Other financial assets	—		—		50,071		50,071
Total assets	$	—	$	—	$	178,245	$	178,245



	December 31, 2015
	Level 1		Level 2		Level 3		Total
	(in thousands)
Net loans	$	—	$	—	$	138,491	$	138,491
Other financial assets	—		—		52,043		52,043
Total assets	$	—	$	—	$	190,534	$	190,534

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


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


•	Other financial assets – This category includes OREO ($11.9 million at June 30, 2016 and $11.1 million at December 31, 2015) and MSRs ($38.2 million at June 30, 2016 and $40.9 million at December 31, 2015), both classified as Level 3 assets.

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

MSRs are initially recorded at fair value upon the sale of residential mortgage loans to secondary market investors. MSRs are amortized as a reduction to servicing income over the estimated lives of the underlying loans. MSRs are stratified and evaluated for impairment by comparing each stratum's carrying amount to its estimated fair value. Fair values are determined at the end of each quarter through a discounted cash flows valuation performed by a third-party valuation expert. Significant inputs to the valuation included expected net servicing income, the discount rate and the expected life of the underlying loans. Expected life is based on the contractual terms of the loans, as adjusted for prepayment projections. The weighted average annual constant prepayment rate and the weighted average discount rate used in the June 30, 2016 valuation were 13.7% 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 June 30, 2016 and December 31, 2015. In addition, a general description of the methods and assumptions used to estimate such fair values is also provided.



	June 30, 2016				December 31, 2015
	Book Value		Estimated Fair Value		Book Value		Estimated Fair Value
	(in thousands)
FINANCIAL ASSETS
Cash and due from banks	$	84,647	$	84,647	$	101,120	$	101,120
Interest-bearing deposits with other banks	348,232		348,232		230,300		230,300
Federal Reserve Bank and Federal Home Loan Bank stock	59,854		59,854		62,216		62,216
Loans held for sale ⁽¹⁾	34,330		34,330		16,886		16,886
Available for sale investment securities ⁽¹⁾	2,529,724		2,529,724		2,484,773		2,484,773
Net Loans ⁽¹⁾	13,992,613		13,950,868		13,669,548		13,540,903
Accrued interest receivable	43,316		43,316		42,767		42,767
Other financial assets ⁽¹⁾	226,808		226,808		166,920		166,920
FINANCIAL LIABILITIES
Demand and savings deposits	$	11,469,919	$	11,469,919	$	11,267,367	$	11,267,367
Time deposits	2,822,645		2,973,640		2,864,950		2,862,868
Short-term borrowings	722,214		722,214		497,663		497,663
Accrued interest payable	8,336		8,336		10,724		10,724
Other financial liabilities ⁽¹⁾	274,104		274,104		190,927		190,927
Federal Home Loan Bank advances and long-term debt	965,552		993,194		949,542		959,315


(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.

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

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

FORWARD-LOOKING STATEMENTS

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

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


•	the impact of adverse conditions in the economy and capital markets on the performance of the Corporation’s loan portfolio and demand for the Corporation’s products and services;


•	increases in non-performing assets, which may require the Corporation to increase the allowance for credit losses, charge off loans and incur elevated collection and carrying costs related to such non-performing assets;


•	investment securities gains and losses, including other-than-temporary declines in the value of securities which may result in charges to earnings;


•	the effects of market interest rates, and the relative balances of rate-sensitive assets to rate-sensitive liabilities, on net interest margin and net interest income;


•	the effects of changes in interest rates on demand for the Corporation’s products and services;


•	the effects of changes in interest rates or disruptions in liquidity markets on the Corporation’s sources of funding;


•	the Corporation’s ability to manage liquidity, both at the holding company level and at its bank subsidiaries;


•	the impact of increased regulatory scrutiny of the banking industry;


•	the effects of the increasing amounts of time and expense associated with regulatory compliance and risk management;


•	the potential for negative consequences from regulatory violations, including potential supervisory actions and the assessment of fines and penalties;


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


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


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


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


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


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


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


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


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


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


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


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


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


•	the Corporation’s ability to keep pace with technological changes;


•	the Corporation’s ability to attract and retain talented personnel;


•	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;


•	the effects of any downgrade in the Corporation’s credit ratings on its borrowing costs or access to capital markets; and


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

RESULTS OF OPERATIONS

Overview and Outlook

Fulton Financial Corporation is a financial holding company comprised of six wholly owned banking subsidiaries which provide a full range of retail and commercial financial services in Pennsylvania, Delaware, Maryland, New Jersey and Virginia. The Corporation generates the majority of its revenue through net interest income, or the difference between interest earned on loans, investments and 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 June 30						As of or for the Six months ended June 30
	2016			2015			2016				2015
Net income (in thousands)	$	39,750		$	36,680		$	78,007			$	76,716
Diluted net income per share	$	0.23		$	0.21		$	0.45			$	0.43
Return on average assets	0.88		%	0.86		%	0.87		%		0.90		%
Return on average equity	7.65		%	7.24		%	7.56		%		7.64		%
Return on average tangible equity ⁽¹⁾	10.26		%	9.83		%	10.17		%	0.1039	10.39		%
Net interest margin ⁽²⁾	3.20		%	3.20		%	3.22		%		3.24		%
Efficiency ratio ⁽¹⁾	67.59		%	68.94		%	67.96		%		69.55		%
Non-performing assets to total assets	0.76		%	0.93		%	0.76		%		0.93		%
Annualized net charge-offs to average loans	0.10		%	0.38		%	0.15		%		0.23		%


(1)	Ratio represents a financial measure derived by methods other than Generally Accepted Accounting Principles ("GAAP"). See reconciliation of this non-GAAP financial measure to the most comparable GAAP measure under the heading, "Supplemental Reporting of Non-GAAP Based Financial Measures" at the end of this "Overview and Outlook" section.


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

Net income for the three and six months ended June 30, 2016 increased $3.1 million, or 8.4%, and $1.3 million, or 1.7%, respectively compared to the same periods in 2015, mainly due to increases in net interest income and non-interest income, excluding investment securities gains, partially offset by increases in the provision for credit losses, decreases in investment securities gains and increases in non-interest expense.

The following is a summary of financial highlights for the three and six months ended June 30, 2016:

FTE Net Interest Income and Net Interest Margin - For the three and six months ended June 30, 2016, FTE net interest income increased $6.4 million, or 5.1%, and $12.4 million, or 4.8%, respectively, in comparison to the same periods in 2015. These increases were driven by growth in interest-earning assets, as net interest margin was generally stable.

Average interest-earning assets increased $848.6 million, or 5.3%, in the second quarter of 2016 in comparison to the same period in 2015, mainly due to a $773.4 million, or 5.9%, increase in average loans and a $164.3 million, or 7.2%, increase in average investment securities, partially offset by a $82.2 million, or 18.7%, decrease in average other interest-earning assets. Average interest-bearing liabilities increased $501.9 million, or 4.5%, primarily due to a $539.7 million, or 5.5%, increase in average interest-bearing deposits and a $23.7 million, or 6.2%, increase in average short-term borrowings, partially offset by a $61.5 million, or 6.0%, decrease in average FHLB advances and average long-term debt. Additional funding to support the increase in average interest-earning assets was provided by a $342.8 million, or 9.2%, increase in average noninterest-bearing deposits.

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

Asset Quality - The Corporation recorded a $2.5 million provision for credit losses for the three months ended June 30, 2016, compared to a $2.2 million provision for the same period in 2015. For the six months ended June 30, 2016, the Corporation recorded a $4.0 million provision for credit losses compared to a $1.5 million negative provision in the same period of 2015. The negative provision in 2015 was driven by an improvement in net charge-off levels, particularly among pooled impaired loans across all portfolio segments.

Annualized net charge-offs to average loans outstanding were 0.10% for the second quarter of 2016, compared to 0.38% for the second quarter of 2015. Annualized net charge-offs to average loans outstanding were 0.15% for the first half of 2016, compared to 0.23% for the first half of 2015. Non-performing assets decreased $22.6 million, or 13.9%, as of June 30, 2016 compared to June 30, 2015 and were 0.76% and 0.93% of total assets as of June 30, 2016 and June 30, 2015, respectively. The total delinquency rate was 1.30% as of June 30, 2016, compared to 1.60% as of June 30, 2015.

Non-interest Income - For the three and six months ended June 30, 2016, non-interest income, excluding investment securities gains, increased $2.0 million, or 4.5%, and $3.6 million, or 4.2%, respectively, in comparison to the same periods in 2015. The increases in both periods were primarily the result of increases in commercial interest rate swap fees and higher service charges on deposit accounts, partially offset by decreases in mortgage banking income resulting primarily from of a $1.7 million impairment charge on MSRs during the second quarter of 2016. See Note 6, "Mortgage Servicing Rights," in the Notes to Consolidated Financial Statements for additional details regarding the impairment charge.

Investment securities gains for the three and six months ended June 30, 2016 were $76,000 and $1.0 million, respectively, as compared to $2.4 million and $6.6 million for the same periods in 2015.

Non-interest Expense - For the three and six months ended June 30, 2016, non-interest expense increased $3.3 million, or 2.8%, and $5.2 million, or 2.2%, respectively, in comparison to the same periods in 2015. The primary drivers of the net increases were higher salaries and employee benefits, partially offset by decreases in other expense categories, most notably other outside services.

2016 Outlook

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


•	annual mid- to high- single digit growth rate in average loans and deposits;


•	provision for credit losses driven primarily by loan growth;


•	annual mid- to high- single digit growth rate in non-interest income, excluding the impact of securities gains;


•	annual low- to mid- single digit growth rate in non-interest expense (excluding, for comparison purposes, the impact of the loss on redemption of Trust Preferred Securities (TruPS) incurred in the third quarter of 2015); and


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

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


•	absent further market interest rate increases, low-single digit quarterly compression in net interest margin.

Supplemental Reporting of Non-GAAP Based Financial Measures

This Quarterly Report on Form 10-Q contains supplemental financial information, as detailed below, which has been derived by methods other than GAAP. The Corporation has presented these non-GAAP financial measures because it believes that these measures provide useful and comparative information to assess trends in the Corporation's results of operations. Presentation of these non-GAAP financial measures is consistent with how the Corporation evaluates its performance internally, and these non-GAAP financial measures are frequently used by securities analysts, investors and other interested parties in the evaluation of companies in the Corporation's industry. Management believes that these non-GAAP financial measures, in addition to GAAP measures, are also useful to investors to evaluate the Corporation's results. Investors should recognize that the Corporation's presentation of these non-GAAP financial measures might not be comparable to similarly-titled measures of other companies. These non-GAAP financial measures should not be considered a substitute for GAAP basis measures, and the Corporation strongly encourages a review of its consolidated financial statements in their entirety. Following are reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measure as of and for the quarter and year to date ended June 30:



	As of or for the Three months ended June 30						As of or for the Six months ended June 30
	2016			2015			2016			2015
	(in thousands)
Return on average tangible equity
Net income	$	39,750		$	36,680		$	78,007		$	76,716
Plus: Intangible amortization, net of tax	—			69			—			153
Numerator	$	39,750		$	36,749		$	78,007		$	76,869

Average common shareholders' equity	$	2,089,915		$	2,031,788		$	2,074,357		$	2,023,919
Less: Average goodwill and intangible assets	(531,556		)	(531,618		)	(561,556		)	(531,675		)
Average tangible shareholders' equity (denominator)	$	1,558,359		$	1,500,170		$	1,512,801		$	1,492,244

Return on average tangible equity, annualized	10.26		%	9.83		%	10.17		%	10.39		%

Efficiency ratio
Non-interest expense	$	121,637		$	118,354		$	242,050		$	236,832
Less: Intangible amortization	—			(106		)	—			(236		)
Numerator	$	121,637		$	118,248		$	242,050		$	236,596

Net interest income (fully taxable equivalent) ⁽¹⁾	$	133,890		$	127,445		$	267,916		$	255,531
Plus: Total Non-interest income	46,137			46,489			89,274			91,226
Less: Investment securities gains, net	(76		)	(2,415		)	(1,023		)	(6,560		)
Denominator	$	179,951		$	171,519		$	356,167		$	340,197

Efficiency ratio	67.59		%	68.94		%	67.96		%	69.55		%


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

Quarter Ended June 30, 2016 compared to the Quarter Ended June 30, 2015

Net Interest Income

FTE net interest income increased $6.4 million, to $133.9 million, in the second quarter of 2016, from $127.4 million in the second quarter of 2015. This increase was due to an $848.6 million, or 5.3%, increase in interest-earning assets. The net interest margin of 3.20% for the second quarter of 2016 was flat compared to the second quarter of 2015. 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 June 30
	2016								2015
	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⁾	$	13,966,024		$	138,317		3.98	%	$	13,192,600		$	133,339		4.05	%
Taxable investment securities ⁽³⁾	2,127,780			11,159			2.10		2,048,558			10,944			2.14
Tax-exempt investment securities⁽³⁾	314,851			3,570			4.54		216,355			2,894			5.35
Equity securities ⁽³⁾	14,220			185			5.23		27,618			379			5.50
Total investment securities	2,456,851			14,914			2.43		2,292,531			14,217			2.48
Loans held for sale	19,449			188			3.87		26,335			265			4.03
Other interest-earning assets	357,211			864			0.96		439,425			933			0.85
Total interest-earning assets	16,799,535			154,283			3.69	%	15,950,891			148,754			3.74	%
Noninterest-earning assets:
Cash and due from banks	100,860								104,723
Premises and equipment	227,517								226,569
Other assets	1,189,226								1,094,071
Less: Allowance for loan losses	(164,573		)						(176,085		)
Total Assets	$	18,152,565							$	17,200,169
LIABILITIES AND EQUITY
Interest-bearing liabilities:
Demand deposits	$	3,454,031		$	1,527		0.18	%	$	3,152,697		$	987		0.13	%
Savings deposits	3,989,988			1,886			0.19		3,568,579			1,247			0.14
Time deposits	2,844,434			7,474			1.06		3,027,520			7,819			1.04
Total interest-bearing deposits	10,288,453			10,887			0.43		9,748,796			10,053			0.41
Short-term borrowings	403,669			217			0.21		379,988			103			0.11
Federal Home Loan Bank advances and long-term debt	965,526			9,289			3.86		1,026,987			11,153			4.35
Total interest-bearing liabilities	11,657,648			20,393			0.70	%	11,155,771			21,309			0.77	%
Noninterest-bearing liabilities:
Demand deposits	4,077,642								3,734,880
Other	327,360								277,730
Total Liabilities	16,062,650								15,168,381
Shareholders’ equity	2,089,915								2,031,788
Total Liabilities and Shareholders’ Equity	$	18,152,565							$	17,200,169
Net interest income/net interest margin (FTE)				133,890			3.20	%				127,445			3.20	%
Tax equivalent adjustment				(4,974		)						(4,525		)
Net interest income				$	128,916							$	122,920


(1)	Includes dividends earned on equity securities.


(2)	Includes non-performing loans.


(3)	Balances include amortized historical cost for available for sale securities; the related unrealized holding gains (losses) are included in other assets.

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 June 30:



	2016 vs. 2015 Increase (Decrease) due to change in
	Volume			Rate			Net
	(in thousands)
Interest income on:
Loans, net of unearned income	$	7,400		$	(2,422	)	$	4,978
Taxable investment securities	420			(205		)	215
Tax-exempt investment securities	1,163			(487		)	676
Equity securities	(176		)	(18		)	(194		)
Loans held for sale	(66		)	(11		)	(77		)
Other interest-earning assets	(183		)	114			(69		)
Total interest income	$	8,558		$	(3,029	)	$	5,529
Interest expense on:
Demand deposits	$	108		$	432		$	540
Savings deposits	159			480			639
Time deposits	(491		)	146			(345		)
Short-term borrowings	7			107			114
Federal Home Loan Bank advances and long-term debt	(647		)	(1,217		)	(1,864		)
Total interest expense	$	(864	)	$	(52	)	$	(916	)

Note: Changes which are partially attributable to both volume and rate are allocated to the volume and rate components presented above based on the percentage of direct changes that are attributable to each component.

As summarized above, the increase in average interest-earning assets, primarily loans, resulted in an $8.6 million increase in FTE interest income. This was partially offset by the impact of a 5 basis point, or 1.3%, decrease in yields on average interest-earning assets, which resulted in a $3.0 million decrease in FTE interest income.

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



	Three months ended June 30								Increase (Decrease) in
	2016				2015				Balance
	Balance		Yield		Balance		Yield		$			%
	(dollars in thousands)
Real estate – commercial mortgage	$	5,557,680	4.00	%	$	5,210,540	4.15	%	$	347,140		6.7	%
Commercial – industrial, financial and agricultural	4,080,524		3.81		3,836,397		3.79		244,127			6.4
Real estate – home equity	1,656,140		4.10		1,695,171		4.11		(39,031		)	(2.3	)
Real estate – residential mortgage	1,399,851		3.78		1,356,464		3.82		43,387			3.2
Real estate – construction	820,881		3.81		698,685		3.97		122,196			17.5
Consumer	272,293		5.37		265,354		5.48		6,939			2.6
Leasing, other and overdrafts	178,655		6.22		129,989		6.94		48,666			37.4
Total	$	13,966,024	3.98	%	$	13,192,600	4.05	%	$	773,424		5.9	%

Average loans increased $773.4 million, or 5.9%, compared to the second quarter of 2015, the increase was mainly in commercial mortgage, commercial loans, construction loans and leasing, other and overdrafts. The average yield on loans decreased 7 basis points, or 1.7%, to 3.98% in 2016 from 4.05% in 2015. The growth in the loan portfolio was spread across a broad range of industries, largely in Pennsylvania markets and, to a lesser extent, the New Jersey market. The decrease in average yields on loans was attributable to repayments of higher-yielding loans, continued refinancing activity at lower rates, and new loan production at rates lower than the overall portfolio yield.

Average total interest-bearing liabilities increased $501.9 million, or 4.5%, compared to the second quarter of 2015. Interest expense decreased $916,000, or 4.3%, to $20.4 million in the second quarter of 2016 primarily as a result of a change in the mix from higher cost time deposits and long-term debt to lower-cost deposits, as well as the refinancing of certain long-term debt. Average deposits and average interest rates, by type, are summarized in the following table:



	Three months ended June 30								Increase (Decrease) in Balance
	2016				2015				Increase (Decrease) in Balance
	Balance		Rate		Balance		Rate		$			%
	(dollars in thousands)
Noninterest-bearing demand	$	4,077,642	—	%	$	3,734,880	—	%	$	342,762		9.2	%
Interest-bearing demand	3,454,031		0.18		3,152,697		0.13		301,334			9.6
Savings	3,989,988		0.19		3,568,579		0.14		421,409			11.8
Total demand and savings	11,521,661		0.12		10,456,156		0.09		1,065,505			10.2
Time deposits	2,844,434		1.06		3,027,520		1.04		(183,086		)	(6.0	)
Total deposits	$	14,366,095	0.30	%	$	13,483,676	0.30	%	$	882,419		6.5	%

The $1.1 billion, or 10.2%, increase in total demand and savings accounts was primarily due to a $505.3 million, or 10.2%, increase in personal account balances, a $375.5 million, or 10.2%, increase in business account balances and a $189.2 million, or 10.6%, increase in municipal account balances. The cost of both demand and savings deposits and time deposits increased, however, due to a shift to lower-cost demand and savings deposits, the total cost of interest-bearing deposits remained unchanged at 0.30% in the second quarter of 2016 compared to the second quarter of 2015.

Average borrowings and interest rates, by type, are summarized in the following table:



	Three months ended June 30								Increase (Decrease)
	2016				2015				in Balance
	Balance		Rate		Balance		Rate		$			%
	(dollars in thousands)
Short-term borrowings:
Customer repurchase agreements	$	180,595	0.11	%	$	179,804	0.10	%	$	791		0.4	%
Customer short-term promissory notes	77,535		0.04		80,073		—		(2,538		)	(3.2	)
Total short-term customer funding	258,130		0.09		259,877		0.07		(1,747		)	(0.7	)
Federal funds purchased	138,012		0.43		108,078		0.17		29,934			27.7
Short-term FHLB advances ⁽¹⁾	7,527		0.45		12,033		0.34		(4,506		)	(37.4	)
Total short-term borrowings	403,669		0.21		379,988		0.11		23,681			6.2
Long-term debt:
FHLB advances	603,700		3.17		627,939		3.51		(24,239		)	(3.9	)
Other long-term debt	361,826		5.01		399,048		5.67		(37,222		)	(9.3	)
Total long-term debt	965,526		3.86		1,026,987		4.35		(61,461		)	(6.0	)
Total borrowings	$	1,369,195	2.78	%	$	1,406,975	3.20	%	$	(37,780	)	(2.7	)%

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

Total short-term borrowings increased $23.7 million, or 6.2%, as a result of increases in federal funds purchased. Average long-term debt decreased $61.5 million, or 6.0%, partially due to FHLB advance maturities. In addition, in June 2015, the Corporation issued $150 million of subordinated debt at an effective rate of 4.69%. The proceeds of this issuance were used to redeem $150 million of trust preferred securities, with an effective rate of 6.52%, in July 2015. The net effect of these transactions was a $37.2 million decrease in average balances and a 0.66% decrease in the average rate on other long-term debt.

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

Provision for Credit Losses

The provision for credit losses was $2.5 million for the second quarter of 2016, an increase of $311,000 from the second quarter of 2015.

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

Non-Interest Income

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



	Three months ended June 30					Increase (Decrease)
	2016			2015		$			%
	(dollars in thousands)
Service charges on deposit accounts:
Overdraft fees	$	5,384		$	5,353	$	31		0.6	%
Cash management fees	3,580			3,369		211			6.3
Other	3,932			3,915		17			0.4
Total service charges on deposit accounts	12,896			12,637		259			2.0
Investment management and trust services	11,247			11,011		236			2.1
Other service charges and fees:
Merchant fees	4,252			4,088		164			4.0
Commercial interest rate swap fees	2,751			1,026		1,725			168.1
Debit card income	2,719			2,626		93			3.5
Letter of credit fees	1,162			1,174		(12		)	(1.0	)
Other	2,099			2,074		25			1.2
Total other service charges and fees	12,983			10,988		1,995			18.2
Mortgage banking income:
Gains on sales of mortgage loans	4,440			4,428		12			0.3
Mortgage servicing income	(543		)	911		(1,454		)	(159.6	)
Total mortgage banking income	3,897			5,339		(1,442		)	(27.0	)
Credit card income	2,596			2,474		122			4.9
Other income	2,442			1,625		817			50.3
Total, excluding investment securities gains, net	46,061			44,074		1,987			4.5
Investment securities gains, net	76			2,415		(2,339		)	(96.9	)
Total	$	46,137		$	46,489	$	(352	)	(0.8	)%

Excluding investment securities gains, non-interest income increased $2.0 million, or 4.5%. Other service charges and fees increased $2.0 million, or 18.2%, driven mainly by a $1.7 million increase in commercial interest rate swap fees, as a larger portion of new loan originations were in loan types that were conducive to interest rate swaps during the second quarter of 2016, and by a $164,000 increase in merchant fee income resulting from higher transaction volumes in the second quarter of 2016. Service charges on deposits increased $259,000, or 2.0%, primarily due to higher cash management fees.

Investment management and trust services increased $236,000, or 2.1%, due to an increase in trust income partially offset by a decrease in brokerage revenue.

Gains on sales of mortgage loans were flat compared to the same period in 2015, as both new loan commitments and pricing spreads were fairly stable. Mortgage servicing income, excluding a $1.7 million impairment charge on MSRs recognized in the second quarter of 2016, increased $265,000, or 29.1%, compared to the second quarter of 2015. See Note 6, "Mortgage Servicing Rights," in the Notes to Consolidated Financial Statements for additional details regarding the impairment charge.

Investment securities gains decreased $2.3 million from the second quarter of 2015. 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 June 30				Increase (Decrease)
	2016		2015		$			%
	(dollars in thousands)
Salaries and employee benefits	$	70,029	$	65,067	$	4,962		7.6	%
Net occupancy expense	11,811		11,809		2			—
Other outside services	5,508		8,125		(2,617		)	(32.2	)
Data processing	5,476		4,894		582			11.9
Software	3,953		3,376		577			17.1
Professional fees	3,353		2,731		622			22.8
FDIC insurance expense	2,960		2,885		75			2.6
Equipment expense	2,872		3,335		(463		)	(13.9	)
Supplies and postage	2,706		2,726		(20		)	(0.7	)
Marketing	1,916		2,235		(319		)	(14.3	)
Telecommunications	1,459		1,617		(158		)	(9.8	)
Operating risk loss	986		674		312			46.3
Other real estate owned and repossession expense	365		129		236			182.9
Intangible amortization	—		106		(106		)	(100.0	)
Other	8,243		8,645		(402		)	(4.7	)
Total	$	121,637	$	118,354	$	3,283		2.8	%

The $5.0 million, or 7.6%, increase in salaries and employee benefits primarily resulted from a $4.2 million, or 7.6%, increase in salaries, resulting from higher average salaries per full-time equivalent (FTE) employee, normal merit increases and an increase in incentive compensation.

Outside services include fees paid to consultants and expenses for contracted or outsourced services. Consulting expenses can fluctuate based on the timing and need for such services. The $2.6 million, or 32.2%, decrease in expense in comparison to the second quarter of 2015 was largely due to the timing of expenses related to the Corporation’s BSA/AML compliance program remediation efforts and certain information technology and human resources initiatives.

The $1.2 million, or 14.0%, combined increase in data processing and software resulted from higher transaction volumes and contractual increases related to core processing systems, and the amortization of capitalized software investments.

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

The $312,000, or 46.3%, increase in operating risk loss was due to a $425,000 increase in losses associated with previously sold mortgages, partially offset by a $152,000 decrease in check card fraud losses.

Other real estate owned and repossession expense increased $236,000, or 182.9%, when compared to the second quarter of 2015. This increase was due to a $445,000 decrease in net gains on the sales of other real estate properties. This expense category can experience fluctuations from period to period based on the timing of sales of properties and payments of expenses, such as real estate taxes.

Income Taxes

Income tax expense for the second quarter of 2016 was $11.2 million, a $1.0 million, or 8.4%, decrease from $12.2 million for the second quarter of 2015.

The Corporation’s effective tax rate was 21.9% in the second quarter of 2016, as compared to 24.9% in the second quarter of 2015. 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 investments in partnerships that generate tax credits under various federal programs. The decrease in the effective rate from the second quarter of 2015 was driven by higher net low-income housing tax credits.

Six Months Ended June 30, 2016 compared to the Six Months Ended June 30, 2015

Net Interest Income

FTE net interest income increased $12.4 million, or 4.8%, to $267.9 million in the first six months of 2016 from $255.5 million in the same period of 2015. Net interest margin decreased 2 basis points to 3.22% for the first six months of 2016 from 3.24% for the first six months of 2015. The increase in FTE net interest income was due to an $836.7 million, or 5.3%, increase in interest earning assets. The following table provides a comparative average balance sheet and net interest income analysis for those periods. Interest income and yields are presented on an FTE basis, using a 35% federal tax rate and statutory interest expense disallowances. The discussion following this table is based on these FTE amounts.



	Six months ended June 30
	2016								2015
	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⁾	$	13,909,722		$	276,212		3.99	%	$	13,144,332		$	266,394		4.08	%
Taxable investment securities ⁽³⁾	2,154,187			23,162			2.15		2,027,170			22,226			2.19
Tax-exempt investment securities ⁽³⁾	287,123			6,708			4.67		222,684			6,106			5.48
Equity securities ⁽³⁾	14,303			403			5.67		29,901			829			5.58
Total investment securities	2,455,613			30,273			2.47		2,279,755			29,161			2.56
Loans held for sale	15,850			319			4.03		21,694			438			4.04
Other interest-earning assets	357,887			1,762			0.98		456,633			3,038			1.33
Total interest-earning assets	16,739,072			308,566			3.70	%	15,902,414			299,031			3.79	%
Noninterest-earning assets:
Cash and due from banks	99,654								104,996
Premises and equipment	226,901								226,480
Other assets	1,163,259								1,104,019
Less: Allowance for loan losses	(165,972		)						(179,985		)
Total Assets	$	18,062,914							$	17,157,924
LIABILITIES AND EQUITY
Interest-bearing liabilities:
Demand deposits	$	3,446,193		$	3,021		0.18	%	$	3,144,358		$	1,970		0.13	%
Savings deposits	3,961,405			3,690			0.19		3,542,960			2,366			0.13
Time deposits	2,856,044			14,903			1.05		3,044,463			15,540			1.03
Total interest-bearing deposits	10,263,642			21,614			0.42		9,731,781			19,876			0.41
Short-term borrowings	424,535			485			0.23		344,797			180			0.10
FHLB advances and long-term debt	961,870			18,551			3.87		1,075,262			23,444			4.38
Total interest-bearing liabilities	11,650,047			40,650			0.70	%	11,151,840			43,500			0.78	%
Noninterest-bearing liabilities:
Demand deposits	4,022,764								3,698,661
Other	315,746								283,504
Total Liabilities	15,988,557								15,134,005
Shareholders’ equity	2,074,357								2,023,919
Total Liabilities and Shareholders’ Equity	$	18,062,914							$	17,157,924
Net interest income/net interest margin (FTE)				267,916			3.22	%				255,531			3.24	%
Tax equivalent adjustment				(9,946		)						(9,030		)
Net interest income				$	257,970							$	246,501


(1)	Includes dividends earned on equity securities.


(2)	Includes non-performing loans.


(3)	Balances include amortized historical cost for available for sale securities; the related unrealized holding gains (losses) are included in other assets.

The following table summarizes the changes in FTE interest income and expense for the first six months of 2016 as compared to the same period in 2015 due to changes in average balances (volume) and changes in rates:



	2016 vs. 2015 Increase (Decrease) due to change in
	Volume			Rate			Net
	(in thousands)
Interest income on:
Loans, net of unearned income	$	15,654		$	(5,836	)	$	9,818
Taxable investment securities	1,349			(413		)	936
Tax-exempt investment securities	1,586			(984		)	602
Equity securities	(439		)	13			(426		)
Loans held for sale	(118		)	(1		)	(119		)
Other interest-earning assets	(575		)	(701		)	(1,276		)
Total interest income	$	17,457		$	(7,922	)	$	9,535
Interest expense on:
Demand deposits	$	194		$	857		$	1,051
Savings deposits	295			1,029			1,324
Time deposits	(953		)	316			(637		)
Short-term borrowings	46			259			305
FHLB advances and long-term debt	(2,326		)	(2,567		)	(4,893		)
Total interest expense	$	(2,744	)	$	(106	)	$	(2,850	)

As summarized above, the increase in FTE interest income was the result of an increase in average interest-earning assets, primarily loans, which resulted in a $17.5 million increase in FTE interest income, partially offset by a $7.9 million decrease due to lower yields on average interest-earning assets.

Average loans, by type, are summarized in the following table:



	Six months ended June 30								Increase (Decrease)
	2016				2015				in Balance
	Balance		Yield		Balance		Yield		$			%
	(dollars in thousands)
Real estate – commercial mortgage	$	5,522,550	4.02	%	$	5,187,322	4.19	%	$	335,228		6.5	%
Commercial – industrial, financial and agricultural	4,087,897		3.80		3,803,475		3.83		284,422			7.5
Real estate – home equity	1,665,086		4.10		1,708,163		4.13		(43,077		)	(2.5	)
Real estate – residential mortgage	1,390,631		3.78		1,363,382		3.83		27,249			2.0
Real estate – construction	806,448		3.81		693,715		3.95		112,733			16.3
Consumer	267,794		5.44		262,265		5.37		5,529			2.1
Leasing, other and overdrafts	169,316		6.81		126,010		7.64		43,306			34.4
Total	$	13,909,722	3.99	%	$	13,144,332	4.08	%	$	765,390		5.8	%

Average loans increased $765.4 million, or 5.8%, which contributed $15.7 million to the increase in FTE interest income. The average yield on loans decreased 9 basis points, or 2.2%, to 3.99% in 2016 from 4.08% in 2015. The growth in the loan portfolio was primarily driven by the commercial mortgage and commercial portfolios, and was spread across a broad range of industries, largely in Pennsylvania markets and, to a lesser extent, the New Jersey market. The decrease in average yields on loans was attributable to repayments of higher-yielding loans, continued refinancing activity at lower rates, and new loan production at rates lower than the overall portfolio yield.

Average investment securities increased $175.9 million, or 7.7%. The yield on average investments decreased 9 basis points, or 3.5%, to 2.47% in 2016 from 2.56% in 2015. The increase in average investment securities was partially offset by a $98.7 million, or 21.6%, decrease in other interest-earning assets.

Interest expense decreased $2.9 million, or 6.6%, to $40.7 million in the first six months of 2016 from $43.5 million in the first six months of 2015. Although total average interest-bearing liabilities increased $498.2 million, or 4.5%, compared to the first six months of 2015, the funding mix became more concentrated in lower cost deposits and short-term borrowings. This shift and the impact of certain refinancing activities for FHLB advances and long-term debt drove the decrease in interest expense.

Average deposits, by type, are summarized in the following table:



	Six months ended June 30								Increase (Decrease) in Balance
	2016				2015				Increase (Decrease) in Balance
	Balance		Rate		Balance		Rate		$			%
	(dollars in thousands)
Noninterest-bearing demand	$	4,022,764	—	%	$	3,698,661	—	%	$	324,103		8.8	%
Interest-bearing demand	3,446,193		0.18		3,144,358		0.13		301,835			9.6
Savings	3,961,405		0.19		3,542,960		0.13		418,445			11.8
Total demand and savings	11,430,362		0.12		10,385,979		0.08		1,044,383			10.1
Time deposits	2,856,044		1.05		3,044,463		1.03		(188,419		)	(6.2	)
Total deposits	$	14,286,406	0.30	%	$	13,430,442	0.30	%	$	855,964		6.4	%

The $1.0 billion, or 10.1%, increase in total demand and savings account balances was primarily due to a $485.1 million, or 10.0%, increase in personal account balances, a $385.3 million, or 10.3%, increase in business account balances and a $176.7 million, or 10.2%, increase in municipal account balances. While the cost of both demand and savings deposits and time deposits increased, the shift to a higher concentration of lower-cost demand and savings deposits resulted in a total cost of interest-bearing deposits of 0.30% for both the first six months of 2016 and 2015.

The following table summarizes changes in average short-term borrowings and long-term debt, by type:



	Six months ended June 30								Increase (Decrease)
	2016				2015				in Balance
	Balance		Rate		Balance		Rate		$			%
	(dollars in thousands)
Short-term borrowings:
Customer repurchase agreements	$	176,001	0.11	%	$	176,732	0.10	%	$	(731	)	(0.4	)%
Customer short-term promissory notes	75,774		0.04		83,148		0.02		(7,374		)	(8.9	)
Total short-term customer funding	251,775		0.09		259,880		0.07		(8,105		)	(3.1	)
Federal funds purchased	160,991		0.42		66,795		0.17		94,196			141.0
Short-term FHLB advances ⁽¹⁾	11,769		0.46		18,122		0.30		(6,353		)	(35.1	)
Total short-term borrowings	424,535		0.23		344,797		0.10		79,738			23.1
Long-term debt:
FHLB advances	600,026		3.18		642,736		3.50		(42,710		)	(6.6	)
Other long-term debt	361,844		5.00		432,526		5.68		(70,682		)	(16.3	)
Total long-term debt	961,870		3.87		1,075,262		4.38		(113,392		)	(10.5	)
Total borrowings	$	1,386,405	2.75	%	$	1,420,059	3.34	%	$	(33,654	)	(2.4	)%

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

Total borrowings decreased $33.7 million, or 2.4%. The cost of borrowings decreased 59 basis points, or 17.7%, as a result of lower-cost, short-term borrowings comprising a larger percentage of total borrowings.

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

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

Provision for Credit Losses

The provision for credit losses was $4.0 million for the first six months of 2016, an increase of $5.5 million in comparison to the first six months of 2015. In the first six months of 2015, a negative provision of $1.5 million was recorded, primarily due to an improvement in net charge-off levels, particularly among pooled impaired loans. For details related to the Corporation's allowance and provision for credit losses, see the "Financial Condition" section of Management's Discussion under the heading "Provision for Credit Losses and Allowance for Credit Losses."

Non-Interest Income

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



	Six months ended June 30				Increase (Decrease)
	2016		2015		$			%
	(dollars in thousands)
Service charges on deposit accounts:
Overdraft fees	$	10,656	$	10,154	$	502		4.9	%
Cash management fees	7,046		6,586		460			7.0
Other	7,752		7,466		286			3.8
Total service charges on deposit accounts	25,454		24,206		1,248			5.2
Investment management and trust services	22,235		21,900		335			1.5
Other service charges and fees:
Merchant fees	7,935		7,265		670			9.2
Debit card income	5,230		5,015		215			4.3
Commercial swap fees	4,193		1,837		2,356			128.3
Letter of credit fees	2,308		2,331		(23		)	(1.0	)
Other	4,067		3,903		164			4.2
Total other service charges and fees	23,733		20,351		3,382			16.6
Mortgage banking income:
Gains on sales of mortgage loans	7,110		7,961		(851		)	(10.7	)
Mortgage servicing income	817		2,066		(1,249		)	(60.5	)
Total mortgage banking income	7,927		10,027		(2,100		)	(20.9	)
Credit card income	5,020		4,709		311			6.6
Other income	3,882		3,473		409			11.8
Total, excluding investment securities gains, net	88,251		84,666		3,585			4.2
Investment securities gains, net	1,023		6,560		(5,537		)	(84.4	)
Total	$	89,274	$	91,226	$	(1,952	)	(2.1	)%

The $502,000, or 4.9%, increase in overdraft fee income during the six months ended June 30, 2016 in comparison to the same period during 2015 consisted of a $310,000 increase in fees assessed on commercial accounts and a $192,000 increase in fees assessed on personal accounts, due to higher volumes. Cash management fees increased $460,000, or 7.0%, compared to 2015 due to increased transaction volumes and fee increases in 2016.

The $670,000, or 9.2%, increase in merchant fee income and the $215,000, or 4.3%, increase in debit card income were due to an increase in the volumes of transactions in comparison to 2015. The $2.4 million increase in commercial interest rate swap fees were due to an increase in new loan volumes in comparison to 2015.

Gains on sales of mortgage loans decreased $851,000, or 10.7%, due to a $124.1 million, or 20.9%, decrease in new loan commitments, partially offset by a 12.9% increase in pricing spreads compared to the prior year. Mortgage servicing income, excluding a $1.7 million impairment charge on MSRs recognized in the second quarter of 2016, increased $470,000, or 22.7%. See Note 6, "Mortgage Servicing Rights," in the Notes to Consolidated Financial Statements for additional details regarding the impairment charge.

Gains on sales of investment securities decreased $5.5 million compared to the first six months of 2015. 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:



	Six months ended June 30				Increase (Decrease)
	2016		2015		$			%
	(dollars in thousands)
Salaries and employee benefits	$	139,401	$	130,057	$	9,344		7.2	%
Net occupancy expense	24,031		25,501		(1,470		)	(5.8	)
Other outside services	11,564		13,875		(2,311		)	(16.7	)
Data processing	10,876		9,662		1,214			12.6
Software	7,874		6,694		1,180			17.6
Equipment expense	6,243		7,293		(1,050		)	(14.4	)
FDIC insurance expense	5,909		5,707		202			3.5
Professional fees	5,686		5,602		84			1.5
Supplies and postage	5,285		5,095		190			3.7
Marketing	3,540		3,468		72			2.1
Telecommunications	2,947		3,333		(386		)	(11.6	)
Operating risk loss	1,526		1,501		25			1.7
Other real estate owned and repossession expense	1,003		1,491		(488		)	(32.7	)
Intangible amortization	—		236		(236		)	(100.0	)
Other	16,165		17,317		(1,152		)	(6.7	)
Total	$	242,050	$	236,832	$	5,218		2.2	%

The $9.3 million, or 7.2%, increase in salaries and employee benefits during the six months ended June 30, 2016 in comparison to the same period during 2015 primarily resulted from an $8.4 million, or 7.8%, increase in salaries, resulting from higher average salaries per full-time equivalent (FTE) employee, normal merit increases and an increase in incentive compensation. Benefits expenses increased $930,000, or 4.3%, due to an increase in 401(k) matching expense, defined benefit plan expense, employee education and other employee benefits.

The $1.5 million, or 5.8%, decrease in occupancy expense was due to decreases in snow removal and utilities expenses when compared to the first six months of 2015. The $2.3 million, or 16.7%, decrease in other outside services in comparison to the first six months of 2015 was largely due to the timing of certain expenses related to the Corporation’s BSA/AML compliance program remediation efforts.

The $2.4 million, or 14.6%, combined increase in data processing and software resulted from higher transaction volumes and contractual increases related to core processing systems, and amortization of capitalized software investments.

Equipment expense decreased $1.1 million, or 14.4%, primarily due to lower depreciation expense when compared to the first six months of 2015 as certain assets became fully depreciated. Other real estate owned and repossession expense decreased $488,000, or 32.7%, when compared to the first six months of 2015 due to decreases in repossession expense, maintenance expense and insurance expense on other real estate properties. This expense category can experience volatility from period to period based on the timing of foreclosures and sales of properties and payments of expenses, such as real estate taxes.

Other expense decreased $1.2 million, or 6.7%, due to lower state taxes and the timing of certain expense items, which can fluctuate from period to period.

Income Taxes

Income tax expense for the first six months of 2016 was $23.1 million, a $2.5 million, or 9.9%, decrease from $25.7 million in 2015.

The Corporation’s effective tax rate was 22.9% in the first six months of 2016, as compared to 25.1% in the first six months of 2015. 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 investments in partnerships that generate tax credits under various federal programs. The decrease in the effective rate from 2015 was driven by higher low-income housing tax credits.

FINANCIAL CONDITION

The table below presents condensed consolidated ending balance sheets.



					Increase (Decrease)
	June 30, 2016		December 31, 2015		$			%
	(dollars in thousands)
Assets
Cash and due from banks	$	84,647	$	101,120	$	(16,473	)	(16.3	)%
Other interest-earning assets	408,086		292,516		115,570			39.5
Loans held for sale	34,330		16,886		17,444			103.3
Investment securities	2,529,724		2,484,773		44,951			1.8
Loans, net of allowance	13,992,613		13,669,548		323,065			2.4
Premises and equipment	228,861		225,535		3,326			1.5
Goodwill and intangible assets	531,556		531,556		—			—
Other assets	670,218		592,784		77,434			13.1
Total Assets	$	18,480,035	$	17,914,718	$	565,317		3.2	%
Liabilities and Shareholders’ Equity
Deposits	$	14,292,564	$	14,132,317	$	160,247		1.1	%
Short-term borrowings	722,214		497,663		224,551			45.1
Long-term debt	965,552		949,542		16,010			1.7
Other liabilities	392,708		293,302		99,406			33.9
Total Liabilities	16,373,038		15,872,824		500,214			3.2
Total Shareholders’ Equity	2,106,997		2,041,894		65,103			3.2
Total Liabilities and Shareholders’ Equity	$	18,480,035	$	17,914,718	$	565,317		3.2	%

Other Interest-earning Assets

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

Investment Securities

The following table presents the carrying amount of investment securities:



					Increase (Decrease)
	June 30, 2016		December 31, 2015		$			%
	(dollars in thousands)
U.S. Government sponsored agency securities	$	146	$	25,136	$	(24,990	)	(99.4	)%
State and municipal securities	345,347		262,765		82,582			31.4
Corporate debt securities	91,547		96,955		(5,408		)	(5.6	)
Collateralized mortgage obligations	706,346		821,509		(115,163		)	(14.0	)
Mortgage-backed securities	1,267,763		1,158,835		108,928			9.4
Auction rate securities	97,886		98,059		(173		)	(0.2	)
Total debt securities	2,509,035		2,463,259		45,776			1.9
Equity securities	20,689		21,514		(825		)	(3.8	)
Total	$	2,529,724	$	2,484,773	$	44,951		1.8	%

U.S. Government sponsored agency securities decreased $25.0 million, or 99.4%, as the result of maturities. The proceeds were reinvested in municipal securities, which increased $82.6 million, or 31.4%.

Collateralized mortgage obligations decreased $115.2 million, or 14.0%, as the Corporation reduced its holdings in lower coupon investments due to volatility in market pricing. The proceeds were reinvested in mortgage-backed securities, which increased $108.9 million, or 9.4%, in an effort to improve the portfolio yield.

Loans, net of Unearned Income

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



					Increase (Decrease)
	June 30, 2016		December 31, 2015		$			%
	(dollars in thousands)
Real estate – commercial mortgage	$	5,635,347	$	5,462,330	$	173,017		3.2	%
Commercial – industrial, financial and agricultural	4,099,177		4,088,962		10,215			0.2
Real estate – home equity	1,647,319		1,684,439		(37,120		)	(2.2	)
Real estate – residential mortgage	1,447,292		1,376,160		71,132			5.2
Real estate – construction	853,699		799,988		53,711			6.7
Consumer	278,071		268,588		9,483			3.5
Leasing, other and overdrafts	194,254		158,135		36,119			22.8
Loans, net of unearned income	$	14,155,159	$	13,838,602	$	316,557		2.3	%

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

Construction loans include loans to commercial borrowers secured by commercial real estate, loans to commercial borrowers secured by residential real estate, and other construction loans, which represent loans to individuals secured by residential real estate. The following table presents outstanding construction loans and their delinquency rates by these class segments:



	June 30, 2016						December 31, 2015
	Balance		Delinquency Rate (1)		% of Total		Balance		Delinquency Rate (1)		% of Total
	(dollars in thousands)
Commercial	$	604,113	0.8	%	70.8	%	$	559,991	0.2	%	70.0	%
Commercial - residential	183,667		4.9		21.5		179,303		7.3		22.4
Other	65,919		3.8		7.7		60,694		1.1		7.6
Total Real estate - construction	$	853,699	1.9	%	100.0	%	$	799,988	1.8	%	100.0	%


(1)	Represents all accruing loans 30 days or more past due and non-accrual loans as a percentage of total loans in each class segment.

The Corporation does not have a significant concentration of credit risk with any single borrower, industry or geographical location. Approximately $6.5 billion, or 45.8%, of the loan portfolio was in commercial mortgage and construction loans as of June 30, 2016. The Corporation's maximum total lending commitment to an individual borrower was $50.0 million as of June 30, 2016. In addition to its policy of limiting the maximum total lending commitment to any individual borrower to $50.0 million, the Corporation has established lower total lending limits for certain types of lending commitments, and lower total lending limits based on the Corporation's internal risk rating of an individual borrower at the time the lending commitment is approved. As of June 30, 2016, the Corporation had 113 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:



	June 30, 2016		December 31, 2015
Services	21.9	%	22.6	%
Health care	11.2		10.6
Manufacturing	10.7		11.3
Construction ⁽¹⁾	9.8		9.7
Retail	9.2		8.3
Wholesale	8.0		8.0
Real estate ⁽²⁾	7.7		7.3
Agriculture	4.8		5.1
Arts and entertainment	2.8		2.8
Transportation	2.7		2.7
Financial services	2.0		1.7
Other	9.2		9.9
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 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:



	June 30, 2016		December 31, 2015
	(in thousands)
Commercial - industrial, financial and agricultural	$	162,712	$	152,830
Real estate - commercial mortgage	104,418		96,219
Total	$	267,130	$	249,049

Total shared national credits increased $18.1 million, or 7.3%, in comparison to December 31, 2015. The Corporation's shared national credits are to borrowers located in its geographical markets, and the increase was due to normal lending activities consistent with the Corporation's underwriting policies. As of June 30, 2016, none of the shared national credits were past due compared to one credit totaling $1.1 million, or 0.4%, of the total balance that was past due as of December 31, 2015.

Provision for Credit Losses and Allowance for Credit Losses

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



	Three months ended June 30						Six months ended June 30
	2016			2015			2016			2015
	(dollars in thousands)
Average balance of loans, net of unearned income	$	13,966,024		$	13,192,600		$	13,909,722		$	13,144,332

Balance of allowance for credit losses at beginning of period	$	166,065		$	179,658		$	171,412		$	185,931
Loans charged off:
Commercial – industrial, financial and agricultural	4,625			11,166			10,813			13,029
Real estate – residential mortgage	340			783			1,408			2,064
Real estate – home equity	1,045			870			2,586			1,638
Real estate – commercial mortgage	1,474			1,642			2,056			2,351
Consumer	569			357			1,576			1,137
Real estate – construction	742			87			1,068			87
Leasing, other and overdrafts	1,951			467			2,394			830
Total loans charged off	10,746			15,372			21,901			21,136
Recoveries of loans previously charged off:
Commercial – industrial, financial and agricultural	2,931			1,471			5,250			2,257
Real estate – residential mortgage	420			187			556			346
Real estate – home equity	350			189			688			440
Real estate – commercial mortgage	1,367			451			2,192			887
Consumer	539			368			735			609
Real estate – construction	1,563			231			1,946			1,378
Leasing, other and overdrafts	108			70			189			241
Total recoveries	7,278			2,967			11,556			6,158
Net loans charged off	3,468			12,405			10,345			14,978
Provision for credit losses	2,511			2,200			4,041			(1,500		)
Balance of allowance for credit losses at end of period	$	165,108		$	169,453		$	165,108		$	169,453

Net charge-offs to average loans (annualized)	0.10		%	0.38		%	0.15		%	0.23		%

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



	June 30, 2016			December 31, 2015
	(dollars in thousands)
Allowance for loan losses	$	162,546		$	169,054
Reserve for unfunded lending commitments	2,562			2,358
Allowance for credit losses	$	165,108		$	171,412

Allowance for credit losses to loans outstanding	1.17		%	1.24		%

The provision for credit losses for the three months ended June 30, 2016 was $2.5 million, an increase of $311,000 in comparison to the same period in 2015. For the six months ended June 30, 2016, the provision for credit losses was $4.0 million, an increase of $5.5 million in comparison to the first six months of 2015. The increase in the provision for credit losses was largely due to a

negative provision recorded in the six months ended June 30, 2015 which was driven by an improvement in net charge-off levels, particularly among pooled impaired loans across all portfolio segments.

Net charge-offs decreased $8.9 million, or 72.0%, to $3.5 million for the second quarter of 2016, compared to $12.4 million for the second quarter of 2015. Gross charge-offs decreased by $4.6 million and recoveries increased by $4.3 million. Of the $3.5 million of net charge-offs recorded in the second quarter of 2016, the majority were for loans originated in New Jersey ($2.5 million) and Pennsylvania ($2.4 million) partially offset by net recoveries in Maryland ($1.2 million) and, to a lesser extent, Delaware and Virginia.

During the first half of 2016, net charge-offs decreased $4.6 million, or 30.9%, to $10.3 million compared to $15.0 million for the first half of 2015. The decrease in net charge-offs was primarily due to an increase in recoveries during the first half of 2016 compared to the same period in the prior year. Of the $10.3 million of net charge-offs recorded in the first half of 2016, the majority were for loans originated in Pennsylvania ($7.9 million) and New Jersey ($3.7 million) partially offset by net recoveries in Maryland ($1.0 million) and, to a lesser extent, Delaware and Virginia.

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



	June 30, 2016			June 30, 2015			December 31, 2015
	(dollars in thousands)
Non-accrual loans	$	111,742		$	129,152		$	129,523
Loans 90 days or more past due and still accruing	15,992			20,353			15,291
Total non-performing loans	127,734			149,505			144,814
Other real estate owned (OREO)	11,918			12,763			11,099
Total non-performing assets	$	139,652		$	162,268		$	155,913
Non-accrual loans to total loans	0.79		%	0.98		%	0.94		%
Non-performing assets to total assets	0.76		%	0.93		%	0.87		%
Allowance for credit losses to non-performing loans	129.26		%	113.34		%	118.37		%

The following table presents accruing loans whose terms have been modified under troubled debt restructurings ("TDRs"), by type, as of the indicated dates:



	June 30, 2016		June 30, 2015		December 31, 2015
	(in thousands)
Real estate – residential mortgage	$	27,324	$	31,584	$	28,511
Real estate – commercial mortgage	17,808		17,482		17,563
Real estate – construction	3,086		4,482		3,942
Commercial – industrial, financial and agricultural	5,756		6,975		5,953
Real estate – home equity	7,173		3,084		4,556
Consumer	18		34		33
Total accruing TDRs	61,165		63,641		60,558
Non-accrual TDRs ⁽¹⁾	24,887		27,230		31,035
Total TDRs	$	86,052	$	90,871	$	91,593

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

TDRs modified during the first six months of 2016 and still outstanding as of June 30, 2016 totaled $6.5 million. During the first six months of 2016, $3.7 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 and six months ended June 30, 2016:



	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)
Three months ended June 30, 2016
Balance of non-accrual loans at March 31, 2016	$	37,116		$	40,861		$	10,498		$	20,780		$	11,494		$	—		$	1,421		$	122,170
Additions	6,340			4,835			3,098			2,100			2,068			572			207			19,220
Payments	(2,888		)	(5,150		)	(2,396		)	(1,595		)	(1,086		)	(1		)	(20		)	(13,136		)
Charge-offs	(4,625		)	(1,474		)	(742		)	(340		)	(1,045		)	(569		)	(1,608		)	(10,403		)
Transfers to accrual status	—			(3,149		)	—			(150		)	(206		)	(2		)	—			(3,507		)
Transfers to OREO	(405		)	(411		)	(1,038		)	(226		)	(522		)	—			—			(2,602		)
Balance of non-accrual loans at June 30, 2016	$	35,538		$	35,512		$	9,420		$	20,569		$	10,703		$	—		$	—		$	111,742

Six months ended June 30, 2016
Balance of non-accrual loans as of December 31, 2015	$	42,199		$	40,731		$	12,044		$	21,914		$	11,210		$	—		$	1,425		$	129,523
Additions	12,776			10,794			3,850			3,497			5,055			1,579			292			37,843
Payments	(8,219		)	(8,693		)	(4,368		)	(1,746		)	(1,452		)	(1		)	(24		)	(24,503		)
Charge-offs	(10,813		)	(2,056		)	(1,068		)	(1,408		)	(2,586		)	(1,576		)	(1,693		)	(21,200		)
Transfers to accrual status	—			(3,149		)	—			(310		)	(881		)	(2		)	—			(4,342		)
Transfers to OREO	(405		)	(2,115		)	(1,038		)	(1,378		)	(643		)	—			—			(5,579		)
Balance of non-accrual loans at June 30, 2016	$	35,538		$	35,512		$	9,420		$	20,569		$	10,703		$	—		$	—		$	111,742

Non-accrual loans decreased $17.4 million, or 13.5%, and $17.8 million, or 13.7%, in comparison to June 30, 2015 and December 31, 2015, respectively.

The following table summarizes non-performing loans, by type, as of the indicated dates:



	June 30, 2016		June 30, 2015		December 31, 2015
	(in thousands)
Real estate – commercial mortgage	$	35,704	$	49,932	$	41,170
Commercial – industrial, financial and agricultural	38,902		35,839		44,071
Real estate – residential mortgage	25,030		31,562		28,484
Real estate – home equity	14,173		14,632		14,683
Real estate – construction	11,879		14,884		12,460
Consumer	1,888		2,583		2,440
Leasing	158		73		1,506
Total non-performing loans	$	127,734	$	149,505	$	144,814

Non-performing loans decreased $21.8 million, or 14.6%, and $17.1 million, or 11.8%, in comparison to June 30, 2015 and December 31, 2015, respectively. The decrease in non-performing loans was realized across all loan categories.

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



	June 30, 2016		June 30, 2015		December 31, 2015
	(in thousands)
Residential properties	$	6,098	$	7,992	$	7,303
Commercial properties	3,686		2,123		2,167
Undeveloped land	2,134		2,648		1,629
Total OREO	$	11,918	$	12,763	$	11,099

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

Total internally risk rated loans were $10.5 billion and $10.3 billion as of June 30, 2016 and December 31, 2015, respectively. The following table presents internal risk ratings for commercial loans, commercial mortgages and construction loans to commercial borrowers with internal risk ratings of Special Mention (considered criticized loans) or Substandard or lower (considered classified loans), by class segment:



	Special Mention						Increase (decrease)					Substandard or lower						Increase (decrease)					Total Criticized and Classified Loans
	June 30, 2016			December 31, 2015			$			%		June 30, 2016			December 31, 2015			$			%		June 30, 2016			December 31, 2015
	(dollars in thousands)
Real estate - commercial mortgage	$	141,417		$	102,625		$	38,792		37.8	%	$	122,564		$	155,442		$	(32,878	)	(21.2	)%	$	263,981		$	258,067
Commercial - secured	95,330			92,711			2,619			2.8		130,180			136,710			(6,530		)	(4.8	)	225,510			229,421
Commercial -unsecured	2,467			2,761			(294		)	(10.6	)	3,421			3,346			75			2.2		5,888			6,107
Total Commercial - industrial, financial and agricultural	97,797			95,472			2,325			2.4		133,601			140,056			(6,455		)	(4.6	)	231,398			235,528
Construction - commercial residential	17,012			17,154			(142		)	(0.8	)	14,838			21,812			(6,974		)	(32.0	)	31,850			38,966
Construction - commercial	2,548			3,684			(1,136		)	(30.8	)	4,594			3,597			997			27.7		7,142			7,281
Total real estate - construction (excluding construction - other)	19,560			20,838			(1,278		)	(6.1	)	19,432			25,409			(5,977		)	(23.5	)	38,992			46,247
Total	$	258,774		$	218,935		$	39,839		18.2	%	$	275,597		$	320,907		$	(45,310	)	(14.1	)%	$	534,371		$	539,842

% of total risk rated loans	2.5		%	2.1		%						2.6		%	3.1		%						5.1		%	5.2		%

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



	June 30, 2016									June 30, 2015									December 31, 2015
	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		%	0.63		%	0.81		%	0.34		%	0.96		%	1.30		%	0.14		%	0.77		%	0.91		%
Commercial – industrial, financial and agricultural	0.30		%	0.95		%	1.25		%	0.22		%	0.93		%	1.15		%	0.21		%	1.06		%	1.27		%
Real estate – construction	0.54		%	1.39		%	1.93		%	0.02		%	2.04		%	2.06		%	0.28		%	1.59		%	1.87		%
Real estate – residential mortgage	0.97		%	1.73		%	2.70		%	1.53		%	2.30		%	3.83		%	1.33		%	2.07		%	3.40		%
Real estate – home equity	0.61		%	0.86		%	1.47		%	0.55		%	0.87		%	1.42		%	0.53		%	0.87		%	1.40		%
Consumer, leasing and other	1.03		%	0.43		%	1.46		%	1.29		%	0.65		%	1.94		%	1.36		%	0.92		%	2.28		%
Total	0.39		%	0.91		%	1.30		%	0.47		%	1.13		%	1.60		%	0.37		%	1.04		%	1.41		%
Total dollars (in thousands)	$	55,744		$	127,734		$	183,478		$	61,931		$	149,505		$	211,436		$	51,927		$	144,814		$	196,741


(1)	Includes non-accrual loans.

Management believes that the allowance for credit losses of $165.1 million as of June 30, 2016 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.

Other Assets and Other Liabilities

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

Deposits and Borrowings

The following table presents ending deposits, by type:



					Increase (Decrease)
	June 30, 2016		December 31, 2015		$			%
	(dollars in thousands)
Noninterest-bearing demand	$	4,125,375	$	3,948,114	$	177,261		4.5	%
Interest-bearing demand	3,358,536		3,451,207		(92,671		)	(2.7	)
Savings	3,986,008		3,868,046		117,962			3.0
Total demand and savings	11,469,919		11,267,367		202,552			1.8
Time deposits	2,822,645		2,864,950		(42,305		)	(1.5	)
Total deposits	$	14,292,564	$	14,132,317	$	160,247		1.1	%

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

The $118.0 million, or 3.0%, increase in savings account balances was due to a $215.6 million, or 8.6%, increase in personal account balances partially offset by a decrease of $58.9 million, or 7.4%, in business account balances and a $38.7 million, or 6.7%, decrease in municipal account balances.

Interest-bearing demand accounts decreased $92.7 million, or 2.7%, primarily due to a $58.8 million, or 2.9%, decrease in personal account balances, a $22.4 million, or 1.9%, decrease in municipal account balances and an $11.6 million, or 1.9%, decrease in business account balances.

The following table summarizes the changes in ending borrowings, by type:



					Increase (Decrease)
	June 30, 2016		December 31, 2015		$			%
	(dollars in thousands)
Short-term borrowings:
Customer repurchase agreements	$	168,521	$	111,496	$	57,025		51.1	%
Customer short-term promissory notes	69,509		78,932		(9,423		)	(11.9	)
Total short-term customer funding	238,030		190,428		47,602			25.0
Federal funds purchased	449,184		197,235		251,949			127.7
Short-term FHLB advances ⁽¹⁾	35,000		110,000		(75,000		)	(68.2	)
Total short-term borrowings	722,214		497,663		224,551			45.1
Long-term debt:
FHLB advances	603,685		587,756		15,929			2.7
Other long-term debt	361,867		361,786		81			—
Total long-term debt	965,552		949,542		16,010			1.7
Total borrowings	$	1,687,766	$	1,447,205	$	240,561		16.6	%

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

The $224.6 million, or 45.1%, increase in total short-term borrowings resulted from loan growth exceeding deposit growth during the first six months of 2016.

Shareholders' Equity

Total shareholders’ equity increased $65.1 million, or 3.2%, during the first six months of 2016. The increase was due primarily to $78.0 million of net income and a $29.7 million increase in other comprehensive income, partially offset by $33.0 million of common stock dividends and $16.3 million in treasury stock purchases.

Regulatory Capital

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

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

The U.S. Basel III Capital Rules require the Corporation and its bank subsidiaries to:


•	Meet a new minimum Common Equity Tier 1 capital ratio of 4.50% of risk-weighted assets and a Tier 1 capital ratio of 6.00% of risk-weighted assets;


•	Continue to require the current minimum Total capital ratio of 8.00% of risk-weighted assets and the minimum Tier 1 leverage capital ratio of 4.00% of average assets; and


•	Comply with a revised definition of capital to improve the ability of regulatory capital instruments to absorb losses. Certain non-qualifying capital instruments, including cumulative preferred stock and TruPS, are being phased out as a component of Tier 1 capital for institutions of the Corporation's size.

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 June 30, 2016, the Corporation and each of its bank subsidiaries met the minimum requirements of the U.S. Basel III Capital Rules, and each of the Corporation’s bank subsidiaries’ capital ratios exceeded the amounts required to be considered "well capitalized" as defined in the regulations. As of June 30, 2016, 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:



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

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 June 30, 2016 (due to the current level of interest rates, the 200 and 300 basis point downward shock scenarios are not shown):



Rate Shock (1)	Annual change in net interest income	% Change in net interest income
+300 bp	+ $73.3 million	14.1%
+200 bp	+ $49.1 million	9.43%
+100 bp	+ $22.5 million	4.3%
–100 bp	– $15.6 million	– 3.0%


(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 June 30, 2016, the Corporation was within economic value of equity policy limits for every 100 basis point shock.

Interest Rate Swaps

The Corporation enters into interest rate swaps with certain qualifying commercial loan customers to meet their interest rate risk management needs. The Corporation simultaneously enters into interest rate swaps with dealer counterparties, with identical notional amounts and terms. The net result of these interest rate swaps is that the customer pays a fixed rate of interest and the Corporation receives a floating rate. These interest rate swaps are derivative financial instruments that are recorded at their fair value in other assets and liabilities on the consolidated balance sheets. Changes in fair value during the period are recorded in other non-interest expense on the consolidated statements of income.

Liquidity

The Corporation must maintain a sufficient level of liquid assets to meet the cash needs of its customers, who, as depositors, may want to withdraw funds or who, as borrowers, need credit availability. Liquidity is provided on a continuous basis through scheduled and unscheduled principal and interest payments on investments and outstanding loans and through the availability of deposits and borrowings. The Corporation also maintains secondary sources that provide liquidity on a secured and unsecured basis to meet short-term and long-term needs.

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

Each of the Corporation’s subsidiary banks is a member of the FHLB and has access to FHLB overnight and term credit facilities. As of June 30, 2016, the Corporation had $638.7 million of short- and long-term advances outstanding from the FHLB with an additional borrowing capacity of approximately $2.8 billion under these facilities. Advances from the FHLB are secured by qualifying commercial real estate and residential mortgage loans, investments and other assets.

As of June 30, 2016, the Corporation had aggregate availability under federal funds lines of $1.1 billion with $449.2 million borrowed against that amount. A combination of commercial real estate loans, commercial loans and securities are pledged to the Federal Reserve Bank of Philadelphia to provide access to Federal Reserve Bank Discount Window borrowings. As of June 30, 2016, the Corporation had $1.3 billion of collateralized borrowing availability at the Discount Window, and no outstanding borrowings.

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

The Corporation’s sources and uses of funds were discussed in general terms in the net interest income section of Management’s Discussion and Analysis. The consolidated statements of cash flows provide additional information. The Corporation’s operating activities during the first six months of 2016 generated $74.1 million of cash, mainly due to net income. Cash used in investing activities was $447.0 million, mainly due to net increases in loans and short-term investments. Net cash provided by financing activities was $356.4 million due to increases in deposits, short-term borrowings and additions to long-term debt, partially offset by cash dividends and purchases of treasury stock.

Equity Market Price Risk

Equity market price risk is the risk that changes in the values of equity investments could have a material impact on the financial position or results of operations of the Corporation. As of June 30, 2016, equity investments consisted of $19.8 million of common stocks of publicly traded financial institutions and $895,000 of other equity investments.

The equity investments most susceptible to equity market price risk are the financial institutions stocks, which had a cost basis of approximately $13.4 million and a fair value of $19.8 million at June 30, 2016, including an investment in a single financial

institution with a cost basis of $7.4 million and a fair value of $10.4 million. The fair value of this investment accounted for 52.5% of the fair value of the common stocks of publicly traded financial institutions. No other investment in a single financial institution in the financial institutions stock portfolio exceeded 10% of the portfolio's fair value. In total, net unrealized gains in this portfolio were approximately $6.5 million as of June 30, 2016.

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

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

Debt Security Market Price Risk

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

Municipal Securities

As of June 30, 2016, the Corporation owned $345.3 million of municipal securities issued by various municipalities. Ongoing uncertainty with respect to the financial strength of municipal bond insurers places greater emphasis on the underlying strength of issuers. Continued pressure on local tax revenues of issuers due to adverse economic conditions could have an adverse impact on the underlying credit quality of issuers. The Corporation evaluates existing and potential holdings primarily based on the creditworthiness of the issuing municipality and then, to a lesser extent, on any underlying credit enhancement. Municipal securities can be supported by the general obligation of the issuing municipality, allowing the securities to be repaid by any means available to the issuing municipality. As of June 30, 2016, approximately 97% of municipal securities were supported by the general obligation of corresponding municipalities. Approximately 77% of these securities were school district issuances, which are also supported by the states of the issuing municipalities.

Auction Rate Securities

As of June 30, 2016, the Corporation’s investments in student loan auction rate certificates (ARC), a type of auction rate securities, had a cost basis of $106.9 million and a fair value of $97.9 million.

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

The credit quality of the underlying debt associated with the ARCs is also a factor in the determination of their estimated fair value. As of June 30, 2016, all of the ARCs were rated above investment grade. All of the loans underlying the ARCs have principal payments that are guaranteed by the federal government. At June 30, 2016, all ARCs were current and making scheduled interest payments.

Corporate Debt Securities

The Corporation holds corporate debt securities in the form of pooled trust preferred securities, single-issuer trust preferred securities, subordinated debt issued by financial institutions and senior debt. As of June 30, 2016, these securities had an amortized cost of $95.4 million and an estimated fair value of $91.5 million. The amortized cost of pooled trust preferred securities was $0 as of June 30, 2016.

The fair values for pooled trust preferred securities and certain single-issuer trust preferred securities were based on quotes provided by third-party brokers who determined fair values based predominantly on internal valuation models which were not indicative prices or binding offers.

See "Note 4 - Investment Securities," in the Notes to Consolidated Financial Statements for further discussion related to the Corporation’s other-than-temporary impairment evaluations for debt securities, and see "Note 11 - Fair Value Measurements," in the Notes to Consolidated Financial Statements for further discussion related to the fair values of debt securities.

Item 4. Controls and Procedures

The Corporation carried out an evaluation, under the supervision and with the participation of the Corporation’s management, including the Corporation’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures pursuant to Rule 13a-15, promulgated under the Securities Exchange Act of 1934 (the "Exchange Act"). Based upon that evaluation, the Corporation’s Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this quarterly report, the Corporation’s disclosure controls and procedures are effective. Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in Corporation reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

There have been no changes in the Corporation’s internal control over financial reporting during the fiscal quarter covered by this quarterly report that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

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

See Part I, Item 1A of the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2015 for a detailed discussion of risk factors affecting the Company. Following is an additional risk factor:

Changes in accounting policies, standards, and interpretations could materially affect how we report our financial condition and results of operations.

The preparation of the Corporation’s financial statements in accordance with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements, as well as revenues and expenses during the period. A summary of the accounting policies that the Corporation considers to be most important to the presentation of its financial condition and results of operations, because they require management’s most difficult judgments as a result of the need to make estimates about the effects of matters that are inherently uncertain, is set forth under the heading "Critical Accounting Policies" within Item 7. "Management’s Discussion and Analysis of Financial Condition and Results of Operations," of the Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015.

A variety of factors could affect the ultimate values of assets, liabilities, income and expenses recognized and reported in the Corporation’s financial statements and these ultimate values may differ materially from those determined based on management’s estimates and assumptions. In addition, the Financial Accounting Standards Board (FASB), regulatory agencies, and other bodies that establish accounting standards from time to time change the financial accounting and reporting standards governing the preparation of the Corporation’s financial statements. Further, those bodies that establish and interpret the accounting standards (such as the FASB, the Securities and Exchange Commission, and banking regulators) may change prior interpretations or positions regarding how these standards should be applied. These changes can be difficult to predict and can materially affect how the Corporation records and reports its financial condition and results of operations. For example, the FASB recently issued a new accounting standard that will require the recognition of credit losses on loans and other financial assets based on an entity’s current estimate of expected losses over the lifetime of each loan or other financial asset, as opposed to current accounting standards, which require recognition of losses on loans and other financial assets only when those losses are "probable." The Corporation’s adoption of this accounting standard could materially affect the Corporation’s allowance for credit losses methodology, financial condition, capital levels and results of operations, including expenses the Corporation may incur in implementing this accounting standard.

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

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



Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Approximate Dollar Value that May Yet Be Purchased Under the Plans or Programs

April 1, 2016 to April 30, 2016	—	$	—	—	$	38,804,488
May 1, 2016 to May 31, 2016	—	—		—	38,804,488
June 1, 2016 to June 30, 2016	392,938	12.87		392,938	33,746,157

In October, 2015, the Corporation announced that its board of directors had approved a share repurchase program pursuant to which the Corporation is authorized to repurchase up to $50.0 million of its outstanding shares of common stock, or approximately 2.3% of its outstanding shares, through December 31, 2016. Repurchased shares may be added to treasury stock, at cost. As permitted by securities laws and other legal requirements and subject to market conditions and other factors, purchases may be made from time to time in open market or privately negotiated transactions, including without limitation, through accelerated share repurchase transactions. The share repurchase program may be discontinued at any time. During the first quarter of 2016, 917,200 shares had been repurchased under this program for a total cost of $11.2 million, or $12.21 per share. During the second quarter of 2016, 392,938 shares had been repurchased under this program for a total cost of $5.1 million, or $12.87 per share.

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

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable.

Item 6. Exhibits

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

FULTON FINANCIAL CORPORATION AND SUBSIDIARIES

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



FULTON FINANCIAL CORPORATION

Date:	August 5, 2016	/s/ E. Philip Wenger
		E. Philip Wenger
		Chairman, Chief Executive Officer and President

Date:	August 5, 2016	/s/ Patrick S. Barrett
		Patrick S. Barrett
		Senior Executive Vice President 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.

3.2		Bylaws of Fulton Financial Corporation as amended – Incorporated by reference to Exhibit 3.1 of the Fulton Financial Corporation Current Report on an Amended Form 8-K dated September 23, 2014.

10.1		Fulton Financial Corporation Equity and Cash Incentive Compensation Plan, as amended and restated effective June 30, 2016.

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

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

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

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

101		Financial statements from the Quarterly Report on Form 10-Q of Fulton Financial Corporation for the period ended June 30, 2016, filed on August 5, 2016, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income (iv) the Consolidated Statements of Shareholders' Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to Consolidated Financial Statements - filed herewith.