FULTON FINANCIAL CORP (Form: 10-Q, Received: 05/08/2019 15:47:40)

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-Q

(Mark One)



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

For the quarterly period ended March 31, 2019, 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. See the definitions of "large accelerated filer," "accelerated filer" and "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 –168,810,000 shares outstanding as of May 1, 2019.

FULTON FINANCIAL CORPORATION

FORM 10-Q FOR THE THREE MONTHS ENDED MARCH 31, 2019

INDEX



Description		Page



PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited):

(a)	Consolidated Balance Sheets - March 31, 2019 and December 31, 2018	3

(b)	Consolidated Statements of Income - Three months ended March 31, 2019 and 2018	4

(c)	Consolidated Statements of Comprehensive Income - Three months ended March 31, 2019 and 2018	5

(d)	Consolidated Statements of Shareholders’ Equity - Three months ended March 31, 2019 and 2018	6

(e)	Consolidated Statements of Cash Flows - Three months ended March 31, 2019 and 2018	7

(f)	Notes to Consolidated Financial Statements	8

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		39

Item 3. Quantitative and Qualitative Disclosures about Market Risk		58

Item 4. Controls and Procedures		61

PART II. OTHER INFORMATION

Item 1. Legal Proceedings		62

Item 1A. Risk Factors		62

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		62

Item 3. Defaults Upon Senior Securities - (not applicable)

Item 4. Mine Safety Disclosures - (not applicable)

Item 5. Other Information - (none to be reported)

Item 6. Exhibits		63

Signatures		64

Item 1. Financial Statements

CONSOLIDATED BALANCE SHEETS

(in thousands, except per-share data)



	March 31, 2019			December 31, 2018
	(unaudited)
ASSETS
Cash and due from banks	$	115,884		$	103,436
Interest-bearing deposits with other banks	325,504			342,251
Total cash and cash equivalents	441,388			445,687
Federal Reserve Bank and Federal Home Loan Bank stock	85,533			79,283
Loans held for sale	27,768			27,099
Investment securities:
Available for sale, at estimated fair value	2,159,806			2,080,294
Held to maturity, at amortized cost	588,443			606,679
Loans and leases, net of unearned income	16,262,633			16,165,800
Less: Allowance for loan and lease losses	(162,109		)	(160,537		)
Net Loans and leases	16,100,524			16,005,263
Premises and equipment	239,004			234,529
Accrued interest receivable	62,207			58,879
Goodwill and intangible assets	535,356			531,556
Other assets	734,620			612,883
Total Assets	$	20,974,649		$	20,682,152
LIABILITIES
Deposits:
Noninterest-bearing	$	4,255,043		$	4,310,105
Interest-bearing	12,122,935			12,066,054
Total Deposits	16,377,978			16,376,159
Short-Term Borrowings	829,016			754,777
Accrued interest payable	11,219			10,529
Other liabilities	390,105			300,835
Federal Home Loan Bank advances and long-term debt	1,065,312			992,279
Total Liabilities	18,673,630			18,434,579
SHAREHOLDERS’ EQUITY
Common stock, $2.50 par value, 600 million shares authorized, 221.8 million shares issued in 2019 and in 2018	554,485			554,377
Additional paid-in capital	1,491,870			1,489,703
Retained earnings	980,708			946,032
Accumulated other comprehensive loss	(37,633		)	(59,063		)
Treasury stock, at cost, 51.9 million shares in 2019 and 51.6 million shares in 2018	(688,411		)	(683,476		)
Total Shareholders’ Equity	2,301,019			2,247,573
Total Liabilities and Shareholders’ Equity	$	20,974,649		$	20,682,152

See Notes to Consolidated Financial Statements

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)



(in thousands, except per-share data)	Three months ended March 31
	2019		2018
INTEREST INCOME
Loans and leases, including fees	$	183,744	$	160,136
Investment securities:
Taxable	15,435		13,193
Tax-exempt	3,279		2,965
Dividends	—		5
Loans held for sale	240		216
Other interest income	2,002		1,172
Total Interest Income	204,700		177,687
INTEREST EXPENSE
Deposits	29,689		16,450
Short-term borrowings	3,582		2,041
Federal Home Loan Bank advances and long-term debt	8,114		7,878
Total Interest Expense	41,385		26,369
Net Interest Income	163,315		151,318
Provision for credit losses	5,100		3,970
Net Interest Income After Provision for Credit Losses	158,215		147,348
NON-INTEREST INCOME
Wealth management fees	13,239		12,871
Commercial banking income	14,763		13,956
Consumer banking income	11,377		11,408
Mortgage banking income	4,772		4,193
Other income	2,535		3,428
Non-Interest Income Before Investment Securities Gains	46,686		45,856
Investment securities gains, net	65		19
Total Non-Interest Income	46,751		45,875
NON-INTEREST EXPENSE
Salaries and employee benefits	77,757		75,768
Net occupancy expense	12,909		13,632
Data processing and software	10,353		10,473
Other outside services	8,352		8,124
Professional fees	3,960		4,816
Equipment expense	3,342		3,534
FDIC insurance expense	2,609		2,953
Marketing	2,160		2,250
State Taxes	2,002		2,302
Amortization of tax credit investments	1,491		1,637
Intangible amortization	107		—
Other	12,782		11,172
Total Non-Interest Expense	137,824		136,661
Income Before Income Taxes	67,142		56,562
Income taxes	10,479		7,082
Net Income	$	56,663	$	49,480
PER SHARE:
Net Income (Basic)	$	0.33	$	0.28
Net Income (Diluted)	0.33		0.28
Cash Dividends	0.13		0.12
See Notes to Consolidated Financial Statements

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(in thousands)



	Three months ended March 31
	2019			2018

Net Income	$	56,663		$	49,480
Other Comprehensive Income (Loss), net of tax:
Unrealized gain (loss) on securities	20,298			(27,644		)
Reclassification adjustment for securities gains included in net income	(51		)	(16		)
Amortization of net unrealized losses on available for sale securities transferred to held to maturity	974			—
Non-credit related unrealized (loss) gain on other-than-temporarily impaired debt securities	(82		)	224
Amortization of net unrecognized pension and postretirement income	291			339
Other Comprehensive Income (Loss)	21,430			(27,097		)
Total Comprehensive Income	$	78,093		$	22,383

See Notes to Consolidated Financial Statements

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)

(in thousands, except per-share data)



	Common Stock						Retained Earnings						Treasury Stock			Total
	Shares Outstanding		Amount		Additional Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total
Three months ended March 31
Balance at December 31, 2018	170,184		$	554,377	$	1,489,703	$	946,032		$	(59,063	)	$	(683,476	)	$	2,247,573
Net income							56,663									56,663
Other comprehensive income										21,430						21,430
Stock issued	115		108		607								942			1,657
Stock-based compensation awards					1,560											1,560
Acquisition of treasury stock	(376	)											(5,877		)	(5,877		)
Common stock cash dividends - $0.13 per share							(21,987		)							(21,987		)
Balance at March 31, 2019	169,923		$	554,485	$	1,491,870	$	980,708		$	(37,633	)	$	(688,411	)	$	2,301,019

Balance at December 31, 2017	175,170		$	552,232	$	1,478,389	$	821,619		$	(32,974	)	$	(589,409	)	$	2,229,857
Net income							49,480									49,480
Other comprehensive loss										(27,097		)				(27,097		)
Stock issued	234		450		1,646								694			2,790
Stock-based compensation awards					1,510											1,510
Reclassification of stranded tax effects ⁽¹⁾							7,101			(7,101		)				—
Common stock cash dividends - $0.12 per share							(21,047		)							(21,047		)
Balance at March 31, 2018	175,404		$	552,682	$	1,481,545	$	857,153		$	(67,172	)	$	(588,715	)	$	2,235,493

See Notes to Consolidated Financial Statements
(1) The Corporation adopted the Accounting Standards Codification ("ASC") Update 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income" in the first quarter of 2018 which permitted a reclassification from accumulated other comprehensive income ("AOCI") to retained earnings of the stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017, which changed the federal corporate income tax rate from 35% to 21%. As a result, $7.1 million of stranded tax effects were reclassified from AOCI to retained earnings during the first quarter of 2018.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)



(in thousands)	Three months ended March 31
	2019			2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income	$	56,663		$	49,480
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses	5,100			3,970
Depreciation and amortization of premises and equipment	6,888			7,329
Amortization of tax credit investments	8,155			8,364
Net amortization of investment securities premiums	2,075			2,517
Investment securities gains, net	(65		)	(19		)
Gain on sales of mortgage loans held for sale	(3,122		)	(2,645		)
Proceeds from sales of mortgage loans held for sale	142,739			170,693
Originations of mortgage loans held for sale	(140,286		)	(159,968		)
Amortization of intangible assets	107			—
Amortization of issuance costs and discounts on long-term debt	211			194
Stock-based compensation	1,560			1,510
Increase in accrued interest receivable	(3,328		)	(150		)
Increase in other assets	(23,415		)	(6,923		)
Increase in accrued interest payable	690			364
Decrease in other liabilities	(15,701		)	(2,890		)
Total adjustments	(18,392		)	22,346
Net cash provided by operating activities	38,271			71,826
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale	37,660			1,444
Proceeds from principal repayments and maturities of securities held to maturity	18,687			—
Proceeds from principal repayments and maturities of securities available for sale	51,097			78,150
Purchase of securities available for sale	(143,588		)	(161,944		)
(Purchase) redemption of Federal Reserve Bank and Federal Home Loan Bank stock	(6,250		)	3,862
Net (increase) decrease in loans and leases	(101,123		)	67,928
Net purchases of premises and equipment	(11,363		)	(14,840		)
Net cash paid for acquisition	(3,907		)	—
Net change in tax credit investments	(8,003		)	(20,783		)
Net cash (used in) provided by investing activities	(166,790		)	(46,183		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in demand and savings deposits	(108,185		)	(278,626		)
Net increase (decrease) in time deposits	110,004			(41,803		)
Increase in short-term borrowings	74,239			320,328
Additions to long-term debt	75,000			—
Repayments of long-term debt	(2,026		)	(100,041		)
Net proceeds from issuance of common stock	1,657			2,790
Dividends paid	(20,592		)	(19,329		)
Acquisition of treasury stock	(5,877		)	—
Net cash provided by (used in) financing activities	124,220			(116,681		)
Net Decrease in Cash and Cash Equivalents	(4,299		)	(91,038		)
Cash and Cash Equivalents at Beginning of Period	445,687			402,096
Cash and Cash Equivalents at End of Period	$	441,388		$	311,058
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest	$	40,695		$	26,005
Income taxes	1,485			154
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 ("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 GAAP for complete financial statements. The preparation of financial statements in accordance with 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 Corporation's Annual Report on Form 10-K for the year ended December 31, 2018. Operating results for the three months ended March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019. The Corporation evaluates subsequent events through the date of filing of this Form 10-Q with the U.S. Securities and Exchange Commission ("SEC").

Recently Adopted Accounting Standards

In February 2016, the Financial Accounting Standards Board ("FASB") issued ASC Update 2016-02, "Leases (Topic 842)." This standards update requires a lessee to recognize for all leases with an initial term greater than twelve months: (1) a "right-of-use" ("ROU") asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term; and (2) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, each measured on a discounted basis. This standards update is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. The Corporation adopted ASC Update 2016-02 in the first quarter of 2019 using the alternative transition method, which eliminates the requirement to restate the earliest prior period presented in an entity’s financial statements. As such, financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019.

This standards update provides for a number of practical expedients in transition. The Corporation elected to apply the package of practical expedients permitted within the new standard, which, among other things, allowed it to carryforward the prior conclusions on lease identification, lease classification and initial direct costs. In addition, the Corporation elected to not separate lease and non-lease components. The Corporation did not elect the practical expedient to apply hindsight in determining the lease term and in assessing impairment of the ROU assets.

At January 1, 2019, the ROU asset and corresponding lease liability were recognized on the consolidated balance sheets for $106.3 million and $112.6 million, respectively. See "Note 6 - Leases" for additional information and expanded lessee disclosures.

This standards update also provides additional guidance on lessor accounting. The Corporation provides equipment lease financing to its customers, which are categorized as direct financing leases. The adoption of this standards update did not result in any changes to the accounting for this type of lease as the lessor.

In March 2017, the FASB issued ASC Update 2017-08, "Premium Amortization on Purchased Callable Debt Securities." This standards update requires that a company amortize the premium on callable debt securities to the earliest call date versus current GAAP which requires amortization over the contractual life of the securities. The amortization period for callable debt securities purchased at a discount was not impacted by the new accounting standards update. ASC Update 2017-08 was effective for annual and interim reporting periods beginning after December 15, 2018. The Corporation adopted this standards update effective with its March 31, 2019 quarterly report on Form 10-Q and the adoption of ASC Update 2017-08 did not have a material impact on its consolidated financial statements.

Recently Issued Accounting Standards



Standard	Description	Date of Anticipated Adoption	Effect on Financial Statements
ASC Update 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments	The new impairment model prescribed by this standards update is a single impairment model for all financial assets (i.e., loans and held to maturity investments). The recognition of credit losses would be based on an entity’s current estimate of expected losses (referred to as the Current Expected Credit Loss model, or "CECL"), as opposed to recognition of losses only when they are incurred under current GAAP. This update also requires new disclosures for financial assets measured at amortized cost, loans and available-for-sale debt securities. Entities will apply the standard's provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. This adjustment will also be recognized in regulatory capital. This update is effective for interim and annual reporting periods beginning after December 15, 2019. Early adoption is permitted. In November 2018, the FASB issued ASC Update 2018-19, "Codifications Improvements to Topic 326, Financial Instruments - Credit Losses" which clarifies that receivables arising from operating leases are accounted for using lease guidance and not as financial instruments.	First Quarter of 2020	The Corporation intends to adopt these standards updates effective with its March 31, 2020 quarterly report on Form 10-Q. The Corporation believes that total credit loss reserves will increase at the adoption date and that the magnitude of the increase will depend on the composition, characteristics and quality of its loan portfolio and off balance sheet credit exposures as well as the prevailing economic conditions and forecasts as of the adoption date. The Corporation’s steering committee and working group, which are comprised of individuals from various functional areas, are finalizing the processes, accounting policies and interpretations and systems requirements and solutions for the implementation of these standard updates. Current activities also include data gathering and testing the loss models. The Corporation anticipates it will begin full parallel runs of the new processes, systems and controls in mid-2019.
ASC Update 2017-04 Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment	The FASB issued this update to simplify the subsequent quantitative measurement of goodwill by eliminating Step 2 of the goodwill impairment test. Instead, identifying and measuring impairment will take place in a single quantitative step. In addition, no separate qualitative assessment for reporting units with zero or negative carrying amounts is required. Entities must disclose the existence of these reporting units and the amount of goodwill allocated to them. This update should be applied on a prospective basis, and an entity is required to disclose the nature of and reason for the change in accounting principle upon transition. This update is effective for annual or interim goodwill impairment tests in reporting periods beginning after December 15, 2019. Early adoption is permitted.	Fourth Quarter of 2020, in line with its annual impairment testing in October of each year	The Corporation does not expect the adoption of this update to have a material impact on its consolidated financial statements. The Corporation has not needed to perform step 2 since its 2012 impairment testing.
ASC Update 2018-13 Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement	This update changes the fair value measurement disclosure requirements of ASC Topic 820 "Fair Value Measurement." Among other things, the update modifies the disclosure objective paragraphs of ASC 820 to eliminate: (1) "at a minimum" from the phrase "an entity shall disclose at a minimum;" and (2) other similar disclosure requirements to promote the appropriate exercise of discretion by entities.	First Quarter of 2020	The Corporation intends to adopt this standards update effective with its March 31, 2020 quarterly report on Form 10-Q. This standard will impact the Corporation's Fair Value Measurement disclosure, but the Corporation does not expect the adoption of this update to have a material impact on its consolidated financial statements.



Standard	Description	Date of Anticipated Adoption	Effect on Financial Statements
ASC Update 2018-14 Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans	This update amends ASC Topic 715-20 to add, remove, and clarify disclosure requirements related to defined benefit pension and other postretirement plans. This update is effective for annual reporting periods beginning after December 15, 2020. Early adoption is permitted.	First Quarter of 2021	The Corporation intends to adopt this standards update effective with its March 31, 2021 quarterly report on Form 10-Q. This standard will impact the Corporation's disclosure relating to employee benefit plans, but the Corporation does not expect the adoption of this update to have a material impact on its consolidated financial statements.
ASC Update 2018-15 Intangibles - Goodwill and Other - Internal Use Software (Topic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract	This update requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in ASC Subtopic 350-40 to determine which implementation costs to capitalize as assets. This update is effective for annual or interim reporting periods beginning after December 15, 2019. Early adoption is permitted.	First Quarter of 2020	The Corporation intends to adopt this standards update effective with its March 31, 2020 quarterly report on Form 10-Q and does not expect the adoption of this update to have a material impact on its consolidated financial statements.

Reclassifications

Certain amounts in the 2018 consolidated financial statements and notes have been reclassified to conform to the 2019 presentation.

NOTE 2 – Restrictions on Cash and Cash Equivalents

The Corporation’s subsidiary banks are required to maintain reserves against their deposit liabilities. These reserves are in the form of cash and balances with the Federal Reserve Bank ("FRB"), included in "interest-bearing deposits with other banks." The amounts of such reserves as of March 31, 2019 and December 31, 2018 were $86.3 million and $156.8 million, respectively.

In addition, collateral is posted by the Corporation with counterparties to secure derivative contracts and other contracts, which are included in "interest-bearing deposits with other banks." The amounts of such collateral as of March 31, 2019 and December 31, 2018 were $89.3 million and $45.1 million, respectively.

NOTE 3 – Investment Securities

The following table presents the amortized cost and estimated fair values of investment securities:



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
March 31, 2019	(in thousands)
Available for Sale
U.S. Government sponsored agency securities	$	26,900	$	624	$	—		$	27,524
State and municipal securities	293,116		5,840		(1,272		)	297,684
Corporate debt securities	122,006		1,610		(2,328		)	121,288
Collateralized mortgage obligations	889,046		5,561		(7,202		)	887,405
Residential mortgage-backed securities	447,924		1,530		(8,596		)	440,858
Commercial mortgage-backed securities	282,483		1,320		(1,566		)	282,237
Auction rate securities	107,410		—		(4,600		)	102,810
Total	$	2,168,885	$	16,485	$	(25,564	)	$	2,159,806

Held to Maturity
State and municipal securities	$	155,998	$	5,710	$	—		$	161,708
Residential mortgage-backed securities	432,445		9,454		—			441,899
Total	$	588,443	$	15,164	$	—		$	603,607



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
December 31, 2018	(in thousands)
Available for Sale
U.S. Government sponsored agency securities	$	31,586	$	185	$	(139	)	$	31,632
State and municipal securities	282,383		2,178		(5,466		)	279,095
Corporate debt securities	111,454		1,432		(3,353		)	109,533
Collateralized mortgage obligations	841,294		2,758		(11,972		)	832,080
Residential mortgage-backed securities	476,973		1,583		(15,212		)	463,344
Commercial mortgage-backed securities	264,165		524		(3,073		)	261,616
Auction rate securities	107,410		—		(4,416		)	102,994
Total	$	2,115,265	$	8,660	$	(43,631	)	$	2,080,294

Held to Maturity
State and municipal securities	$	156,134	$	1,166	$	(93	)	$	157,207
Residential mortgage-backed securities	450,545		3,667		—			454,212
Total	$	606,679	$	4,833	$	(93	)	$	611,419

Securities carried at $896.6 million at March 31, 2019 and $973.4 million at December 31, 2018, were pledged as collateral to secure public and trust deposits and customer repurchase agreements.

The amortized cost and estimated fair values of debt securities as of March 31, 2019, by contractual maturity, are shown in the following table. Actual maturities may differ from contractual maturities as certain investment securities are subject to call or prepayment with or without call or prepayment penalties.



		Available for Sale				Held to Maturity
		Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
	(in thousands)
Due in one year or less		$	9,252	$	9,256	$	—	$	—
Due from one year to five years		55,635		57,030		—		—
Due from five years to ten years		120,920		120,605		—		—
Due after ten years		363,625		362,415		155,998		161,708
		549,432		549,306		155,998		161,708
Residential mortgage-backed securities⁽¹⁾		447,924		440,858		432,445		441,899
Commercial mortgage-backed securities⁽¹⁾		282,483		282,237		—		—
Collateralized mortgage obligations⁽¹⁾		889,046		887,405		—		—
Total		$	2,168,885	$	2,159,806	$	588,443	$	603,607

(1) Maturities for mortgage-backed securities and collateralized mortgage obligations are dependent upon the interest rate environment and prepayments on the underlying loans.

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



	Gross Realized Gains		Gross Realized Losses			Net Gains
Three months ended March 31, 2019	(in thousands)
Debt securities	257		(192		)	65
Total	$	257	$	(192	)	$	65
Three months ended March 31, 2018
Equity securities	$	9	$	—		$	9
Debt securities	10		—			10
Total	$	19	$	—		$	19

The cumulative balance of credit-related other-than-temporary impairment charges, previously recognized as components of earnings, for debt securities held by the Corporation at March 31, 2019 and March 31, 2018 was $11.5 million. There were no other-than-temporary impairment charges recognized for the three months ended March 31, 2019 or March 31, 2018.

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 March 31, 2019 and December 31, 2018:



	Less than 12 months						12 months or longer						Total
March 31, 2019	Number of Securities	Estimated Fair Value		Unrealized Losses			Number of Securities	Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses
Available for Sale		(in thousands)
State and municipal securities	—	$	—	$	—		39	$	84,753	$	(1,272	)	$	84,753	$	(1,272	)
Corporate debt securities	8	26,514		(190		)	14	26,646		(2,138		)	53,160		(2,328		)
Collateralized mortgage obligations	6	707		(1		)	90	418,166		(7,201		)	418,873		(7,202		)
Residential mortgage-backed securities	—	—		—			116	403,327		(8,596		)	403,327		(8,596		)
Commercial mortgage-backed securities	—	—		—			23	182,150		(1,566		)	182,150		(1,566		)
Auction rate securities	—	—		—			177	102,810		(4,600		)	102,810		(4,600		)
Total	14	$	27,221	$	(191	)	459	$	1,217,852	$	(25,373	)	$	1,245,073	$	(25,564	)

No Held to Maturity investments were in an unrealized loss position at March 31, 2019.



	Less than 12 months						12 months or longer						Total
December 31, 2018	Number of Securities	Estimated Fair Value		Unrealized Losses			Number of Securities	Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses
Available for Sale	(in thousands)
U.S. Government sponsored agency securities	1	$	4,961	$	(31	)	1	$	5,770	$	(108	)	$	10,731	$	(139	)
State and municipal securities	33	72,950		(1,292		)	38	83,770		(4,174		)	156,720		(5,466		)
Corporate debt securities	8	24,419		(227		)	14	25,642		(3,126		)	50,061		(3,353		)
Collateralized mortgage obligations	39	136,563		(1,050		)	89	388,173		(10,922		)	524,736		(11,972		)
Residential mortgage-backed securities	17	18,220		(222		)	110	402,779		(14,990		)	420,999		(15,212		)
Commercial mortgage-backed securities	1	9,778		(35		)	25	197,326		(3,038		)	207,104		(3,073		)
Auction rate securities	—	—		—			177	102,994		(4,416		)	102,994		(4,416		)
Total	99	$	266,891	$	(2,857	)	454	$	1,206,454	$	(40,774	)	$	1,473,345	$	(43,631	)
Held to Maturity
State and municipal securities	6	$	20,601	$	(93	)	—	$	—	$	—		$	20,601	$	(93	)
Total	6	$	20,601	$	(93	)	—	$	—	$	—		$	20,601	$	(93	)

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. The change in fair value of these securities is attributable to changes in interest rates and not credit quality, and the Corporation does not have the intent to sell and does not believe it will more likely than not be required to sell any of these securities prior to a recovery of their fair value to amortized cost. Therefore, the Corporation does not consider these investments to be other-than-temporarily impaired as of March 31, 2019.

As of March 31, 2019, all of the auction rate securities (auction rate certificates, or "ARCs") were rated above investment grade. Based on management’s evaluations, none of the ARCs were subject to any other-than-temporary impairment charges for the three months ended March 31, 2019. 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.

Based on management’s evaluations, no corporate debt securities were subject to any other-than-temporary impairment charges for the three months ended March 31, 2019. 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 4 – Loans and Leases and Allowance for Credit Losses

Loans and Leases, Net of Unearned Income

Loans and leases, net of unearned income are summarized as follows:



	March 31, 2019			December 31, 2018
	(in thousands)
Real-estate - commercial mortgage	$	6,428,688		$	6,434,285
Commercial - industrial, financial and agricultural	4,429,538			4,404,548
Real estate - residential mortgage	2,313,908			2,251,044
Real estate - home equity	1,413,500			1,452,137
Real estate - construction	953,087			916,599
Consumer	433,545			419,186
Equipment lease financing and other	315,934			311,866
Overdrafts	1,739			2,774
Loans and leases, gross of unearned income	16,289,939			16,192,439
Unearned income	(27,306		)	(26,639		)
Loans and leases, net of unearned income	$	16,262,633		$	16,165,800

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

Allowance for Credit Losses

The allowance for credit losses consists of the allowance for loan and lease losses and the reserve for unfunded lending commitments. The allowance for loan and lease losses represents management’s estimate of incurred losses in the loan and lease portfolio as of the balance sheet date and is recorded as a reduction to loans and leases. The reserve for unfunded lending commitments represents management’s estimate of incurred losses in its unfunded loan commitments and other off balance sheet credit exposures, such as letters of credit, 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 and leases individually evaluated for impairment (FASB ASC Section 310-10-35); and (2) allowances calculated for pools of loans and leases collectively evaluated for impairment (FASB ASC Subtopic 450-20).

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



	March 31, 2019		December 31, 2018
	(in thousands)
Allowance for loan and lease losses	$	162,109	$	160,537
Reserve for unfunded lending commitments	8,263		8,873
Allowance for credit losses	$	170,372	$	169,410

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



	Three months ended March 31
	2019			2018
	(in thousands)
Balance at beginning of period	$	169,410		$	176,084
Loans and leases charged off	(6,369		)	(6,397		)
Recoveries of loans and leases previously charged off	2,231			2,362
Net loans and leases charged off	(4,138		)	(4,035		)
Provision for credit losses	5,100			3,970
Balance at end of period	$	170,372		$	176,019

The following table presents the activity in the allowance for loan and lease 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			Equipment lease financing, other and overdrafts			Total
	(in thousands)
Three months ended March 31, 2019
Balance at December 31, 2018	$	52,889		$	58,868		$	18,911		$	18,921		$	5,061		$	3,217		$	2,670		$	160,537
Loans and leases charged off	(1,145		)	(2,787		)	(219		)	(655		)	(95		)	(683		)	(785		)	(6,369		)
Recoveries of loans and leases previously charged off	136			1,243			197			132			84			210			229			2,231
Net loans and leases charged off	(1,009		)	(1,544		)	(22		)	(523		)	(11		)	(473		)	(556		)	(4,138		)
Provision for loan and lease losses ⁽¹⁾	66			3,177			326			748			(109		)	575			927			5,710
Balance at March 31, 2019	$	51,946		$	60,501		$	19,215		$	19,146		$	4,941		$	3,319		$	3,041		$	162,109
Three months ended March 31, 2018
Balance at December 31, 2017	$	58,793		$	66,280		$	18,127		$	16,088		$	6,620		$	2,045		$	1,957		$	169,910
Loans and leases charged off	(267		)	(4,005		)	(408		)	(162		)	(158		)	(892		)	(505		)	(6,397		)
Recoveries of loans and leases previously charged off	279			1,075			206			107			306			179			210			2,362
Net loans and leases charged off	12			(2,930		)	(202		)	(55		)	148			(713		)	(295		)	(4,035		)
Provision for loan and lease losses ⁽¹⁾	(88		)	(1,520		)	(397		)	(772		)	(844		)	571			392			(2,658		)
Balance at March 31, 2018	$	58,717		$	61,830		$	17,528		$	15,261		$	5,924		$	1,903		$	2,054		$	163,217


(1)	The provision for loan and lease losses excluded a $610,000 decrease in the reserve for unfunded lending commitments for the three months ended March 31, 2019 and a $6.6 million increase in the reserve for unfunded lending commitments for the three months ended March 31, 2018. These amounts were reclassified to other liabilities on the consolidated balance sheets.

The following table presents loans and leases, net of unearned income and their related allowance for loan and lease 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		Equipment lease financing, other and overdrafts		Total
	(in thousands)
Allowance for loan and lease losses at March 31, 2019:
Collectively evaluated for impairment	$	45,736	$	48,266	$	8,619	$	9,560	$	4,390	$	3,312	$	3,041	$	122,924
Loans individually evaluated for impairment	6,210		12,235		10,596		9,586		551		7		—		39,185
	$	51,946	$	60,501	$	19,215	$	19,146	$	4,941	$	3,319	$	3,041	$	162,109

Loans and leases, net of unearned income at March 31, 2019:
Collectively evaluated for impairment	$	6,384,048	$	4,373,677	$	1,389,670	$	2,274,330	$	946,436	$	433,534	$	271,854	$	16,073,549
Individually evaluated for impairment	44,640		55,861		23,830		39,578		6,651		11		18,513		189,084
	$	6,428,688	$	4,429,538	$	1,413,500	$	2,313,908	$	953,087	$	433,545	$	290,367	$	16,262,633

Allowance for loan and lease losses at March 31, 2018:
Collectively evaluated for impairment	$	50,392	$	51,314	$	6,440	$	5,610	$	5,245	$	1,887	$	2,054	$	122,942
Individually evaluated for impairment	8,325		10,516		11,088		9,651		679		16		—		40,275
	$	58,717	$	61,830	$	17,528	$	15,261	$	5,924	$	1,903	$	2,054	$	163,217

Loans and leases, net of unearned income at March 31, 2018:
Collectively evaluated for impairment	$	6,279,144	$	4,234,362	$	1,489,429	$	1,935,587	$	965,398	$	326,742	$	271,042	$	15,501,704
Individually evaluated for impairment	53,364		64,710		24,812		40,937		10,733		24		—		194,580
	$	6,332,508	$	4,299,072	$	1,514,241	$	1,976,524	$	976,131	$	326,766	$	271,042	$	15,696,284

Impaired Loans and Leases

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

All loans and leases individually evaluated for impairment are measured for losses on a quarterly basis. As of March 31, 2019 and December 31, 2018, substantially all of the Corporation’s individually evaluated impaired loans and leases with total commitments 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 estate.

As of March 31, 2019 and December 31, 2018, approximately 78% and 89%, respectively, of impaired loans and leases with principal balances greater than or equal to $1.0 million, whose primary collateral is real estate, were measured at estimated fair value using appraisals performed by state certified third-party appraisers that had been updated in the preceding 12 months.

When updated appraisals are not obtained for loans and leases evaluated for impairment 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 and leases by class segment:



	March 31, 2019						December 31, 2018
	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	$	27,178	$	24,902	$	—	$	25,095	$	23,481	$	—
Commercial	33,660		26,887		—		33,493		26,585		—
Real estate - residential mortgage	3,127		3,127		—		3,149		3,149		—
Construction	8,922		5,024		—		8,980		5,083		—
Equipment lease financing	19,269		18,513		—		19,269		19,268		—
	92,156		78,453		—		89,986		77,566		—
With a related allowance recorded:
Real estate - commercial mortgage	26,014		19,738		6,210		29,005		22,592		7,255
Commercial	38,234		28,974		12,235		37,706		28,708		12,513
Real estate - residential mortgage	41,076		36,451		9,586		39,972		35,621		9,394
Real estate - home equity	26,972		23,830		10,596		26,599		23,373		10,370
Construction	5,259		1,627		551		5,984		2,307		793
Consumer	12		11		7		11		11		7
	137,567		110,631		39,185		139,277		112,612		40,332
Total	$	229,723	$	189,084	$	39,185	$	229,263	$	190,178	$	40,332

As of March 31, 2019 and December 31, 2018, there were $78.5 million and $77.6 million, respectively, of impaired loans and leases that did not have a related allowance for loan and lease loss. The estimated fair values of the collateral securing these loans and leases exceeded their carrying amount, or the loans and leases 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 and leases by class segment:



	Three months ended March 31
	2019				2018
	Average Recorded Investment		Interest Income ⁽¹⁾		Average Recorded Investment		Interest Income ⁽¹⁾
	(in thousands)
With no related allowance recorded:
Real estate - commercial mortgage	$	24,192	$	97	$	25,353	$	83
Commercial	26,736		30		40,038		73
Real estate - residential mortgage	3,138		20		4,561		27
Construction	5,054		—		7,971		—
Equipment lease financing, other and overdrafts	18,891		—		—		—
	78,011		147		77,923		183
With a related allowance recorded:
Real estate - commercial mortgage	21,166		85		25,720		84
Commercial	28,842		33		24,181		44
Real estate - home equity	23,601		223		24,752		184
Real estate - residential mortgage	36,036		225		36,761		221
Construction	1,967		—		3,495		—
Consumer	11		—		25		—
	111,623		566		114,934		533
Total	$	189,634	$	713	$	192,857	$	716


(1)	All impaired loans, excluding accruing TDRs, were non-accrual loans. Interest income recognized for the three months ended March 31, 2019 and 2018 represents amounts earned on accruing TDRs.

Credit Quality Indicators and Non-performing Assets

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


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


•	Special Mention: These loans have a heightened credit risk, but not to the 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 in the preceding tables. The migration of loans through the various internal risk rating categories is a significant component of the allowance for credit loss methodology, which bases the probability of default on this migration. Assigning risk ratings involves judgment. The Corporation's loan review officers provide an independent assessment of risk rating accuracy. Ratings may be changed based on the ongoing monitoring procedures performed by loan officers or credit administration staff, or if specific loan review activities identify a deterioration or an improvement in the loan.

The following table presents internal credit risk ratings for the indicated loan class segments:



	Pass						Special Mention						Substandard or Lower						Total
	March 31, 2019			December 31, 2018			March 31, 2019			December 31, 2018			March 31, 2019			December 31, 2018			March 31, 2019			December 31, 2018
	(dollars in thousands)
Real estate - commercial mortgage	$	6,123,827		$	6,129,463		$	158,447		$	170,827		$	146,414		$	133,995		$	6,428,688		$	6,434,285
Commercial - secured	3,920,866			3,902,484			191,025			193,470			147,483			129,026			4,259,374			4,224,980
Commercial - unsecured	162,883			171,589			4,290			4,016			2,991			3,963			170,164			179,568
Total commercial - industrial, financial and agricultural	4,083,749			4,074,073			195,315			197,486			150,474			132,989			4,429,538			4,404,548
Construction - commercial residential	117,155			104,079			6,310			6,912			6,401			6,881			129,866			117,872
Construction - commercial	742,160			723,030			851			1,163			3,244			2,533			746,255			726,726
Total construction (excluding Construction - other)	859,315			827,109			7,161			8,075			9,645			9,414			876,121			844,598
	$	11,066,891		$	11,030,645		$	360,923		$	376,388		$	306,533		$	276,398		$	11,734,347		$	11,683,431
% of Total	94.3		%	94.4		%	3.1		%	3.2		%	2.6		%	2.4		%	100.0		%	100.0		%

The Corporation does not assign internal risk ratings to smaller balance, homogeneous loans and leases, such as home equity, residential mortgage, construction loans to individuals secured by residential real estate, consumer and leases. For these loans and leases, the most relevant credit quality indicator is delinquency status. The migration of loans and leases through the various delinquency status categories is a significant component of the allowance for credit losses methodology for those loans and leases, which bases the probability of default on this migration.

The following table presents a summary of performing, delinquent and non-performing loans and leases for the indicated class segments:



	Performing						Delinquent ⁽¹⁾						Non-performing ⁽²⁾						Total
	March 31, 2019			December 31, 2018			March 31, 2019			December 31, 2018			March 31, 2019			December 31, 2018			March 31, 2019			December 31, 2018
	(dollars in thousands)
Real estate - home equity	$	1,391,323		$	1,431,666		$	11,682		$	10,702		$	10,495		$	9,769		$	1,413,500		$	1,452,137
Real estate - residential mortgage	2,270,802			2,202,955			20,807			28,988			22,299			19,101			2,313,908			2,251,044
Construction - other	76,628			71,511			140			—			198			490			76,966			72,001
Consumer - direct	53,283			55,629			251			338			104			66			53,638			56,033
Consumer - indirect	376,538			359,405			3,198			3,405			171			343			379,907			363,153
Total consumer	429,821			415,034			3,449			3,743			275			409			433,545			419,186
Equipment lease financing, other and overdrafts	270,165			267,112			1,594			1,302			18,608			19,587			290,367			288,001
	$	4,438,739		$	4,388,278		$	37,672		$	44,735		$	51,875		$	49,356		$	4,528,286		$	4,482,369
% of Total	98.0		%	97.9		%	0.8		%	1.0		%	1.2		%	1.1		%	100.0		%	100.0		%


(1)	Includes all accruing loans and leases 30 days to 89 days past due.


(2)	Includes all accruing loans and leases 90 days or more past due and all non-accrual loans and leases.

The following table presents non-performing assets:



	March 31, 2019		December 31, 2018
	(in thousands)
Non-accrual loans and leases	$	127,141	$	128,572
Loans and leases 90 days or more past due and still accruing	11,540		11,106
Total non-performing loans and leases	138,681		139,678
Other real estate owned (OREO)	9,012		10,518
Total non-performing assets	$	147,693	$	150,196

The following tables present past due status and non-accrual loans and leases by portfolio segment and class segment:



	March 31, 2019
	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	$	14,598	$	1,741	$	478	$	29,339	$	29,817	$	46,156	$	6,382,532	$	6,428,688
Commercial - secured	3,719		2,506		46		49,267		49,313		55,538		4,203,836		4,259,374
Commercial - unsecured	302		196		—		835		835		1,333		168,831		170,164
Total commercial - industrial, financial and agricultural	4,021		2,702		46		50,102		50,148		56,871		4,372,667		4,429,538
Real estate - home equity	8,980		2,702		3,452		7,043		10,495		22,177		1,391,323		1,413,500
Real estate - residential mortgage	15,796		5,011		6,806		15,493		22,299		43,106		2,270,802		2,313,908
Construction - commercial residential	148		—		388		6,401		6,789		6,937		122,929		129,866
Construction - commercial	—		—		—		52		52		52		746,203		746,255
Construction - other	140		—		—		198		198		338		76,628		76,966
Total real estate - construction	288		—		388		6,651		7,039		7,327		945,760		953,087
Consumer - direct	135		116		104		—		104		355		53,283		53,638
Consumer - indirect	2,568		630		171		—		171		3,369		376,538		379,907
Total consumer	2,703		746		275		—		275		3,724		429,821		433,545
Equipment lease financing, other and overdrafts	1,268		326		95		18,513		18,608		20,202		270,165		290,367
Total	$	47,654	$	13,228	$	11,540	$	127,141	$	138,681	$	199,563	$	16,063,070	$	16,262,633



	December 31, 2018
	30-59 Days Past Due		60-89 Days Past Due		≥ 90 Days Past Due and Accruing		Non- accrual		Total ≥ 90 Days		Total Past Due		Current		Total
	(in thousands)
Real estate - commercial mortgage	$	12,206	$	1,500	$	1,765	$	30,388	$	32,153	$	45,859	$	6,388,426	$	6,434,285
Commercial - secured	5,227		938		1,068		49,299		50,367		56,532		4,168,448		4,224,980
Commercial - unsecured	1,598		—		51		851		902		2,500		177,068		179,568
Total commercial - industrial, financial and agricultural	6,825		938		1,119		50,150		51,269		59,032		4,345,516		4,404,548
Real estate - home equity	7,144		3,558		3,061		6,708		9,769		20,471		1,431,666		1,452,137
Real estate - residential mortgage	20,796		8,192		4,433		14,668		19,101		48,089		2,202,955		2,251,044
Construction - commercial residential	2,489		—		—		6,881		6,881		9,370		108,502		117,872
Construction - commercial	—		—		—		19		19		19		726,707		726,726
Construction - other	—		—		—		490		490		490		71,511		72,001
Total real estate - construction	2,489		—		—		7,390		7,390		9,879		906,720		916,599
Consumer - direct	267		71		66		—		66		404		55,629		56,033
Consumer - indirect	2,908		497		343		—		343		3,748		359,405		363,153
Total consumer	3,175		568		409		—		409		4,152		415,034		419,186
Equipment lease financing, other and overdrafts	1,005		297		319		19,268		19,587		20,889		267,112		288,001
Total	$	53,640	$	15,053	$	11,106	$	128,572	$	139,678	$	208,371	$	15,957,429	$	16,165,800

The following table presents TDRs, by class segment:



	March 31, 2019		December 31, 2018
	(in thousands)
Real-estate - residential mortgage	$	24,142	$	24,102
Real estate - home equity	16,786		16,665
Real-estate - commercial mortgage	15,301		15,685
Commercial	5,759		5,143
Consumer	11		10
Total accruing TDRs	61,999		61,605
Non-accrual TDRs⁽¹⁾	29,523		28,659
Total TDRs	$	91,522	$	90,264


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

The following table presents TDRs, by class segment for loans that were modified during the three months ended March 31, 2019 and 2018:



	Three months ended March 31
	2019			2018
	Number of Loans	Recorded Investment		Number of Loans	Recorded Investment
	(dollars in thousands)
Commercial	4	$	2,460	9	$	9,359
Real estate - residential mortgage	4	917		1	$	5
Real estate - home equity	12	829		19	$	1,384
Total	20	$	4,206	29	$	10,748

Restructured loan modifications may include payment schedule modifications, interest rate concessions, bankruptcies, principal reduction, or some combination of these concessions. During the three months ended March 31, 2019, restructured loan modifications of residential mortgages, home equity loans and commercial mortgage loans primarily included maturity date extensions, rate modifications and payment schedule modifications.

The following table presents TDRs, by class segment, as of March 31, 2019 and 2018 that were modified in the previous 12 months and had a post-modification payment default during the three months ended March 31, 2019 and 2018. The Corporation defines a payment default as a single missed payment.



	2019			2018
	Number of Loans	Recorded Investment		Number of Loans	Recorded Investment
	(dollars in thousands)
Real estate - residential mortgage	2	$	299	5	$	332
Real estate - commercial mortgage	—	—		1	180
Real estate - home equity	24	1,150		18	1,000
Commercial	3	2,264		6	526
Construction	—	—		2	1,484
Total	29	$	3,713	32	$	3,522

NOTE 5 – Mortgage Servicing Rights

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



	Three months ended March 31
	2019			2018
	(in thousands)
Amortized cost:
Balance at beginning of period	$	38,573		$	37,663
Originations of mortgage servicing rights	1,225			1,483
Amortization	(1,294		)	(1,398		)
Balance at end of period	$	38,504		$	37,748

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

The fair value of MSRs is estimated by discounting the estimated cash flows from servicing income, net of expense, over the expected life of the underlying loans at a discount rate commensurate with the risk associated with these assets. Expected life is based on the contractual terms of the loans, as adjusted for prepayment projections. Based on its fair value analysis, the Corporation determined a valuation allowance was not necessary as of March 31, 2019 or March 31, 2018.

NOTE 6 – Leases

Effective January 1, 2019, the Corporation adopted the standards update 2016-02, Topic 842 using the modified retrospective method of applying the new standard at the adoption date. In addition, the Corporation elected the package of practical expedients permitted under the transition guidance within the new standard as the lessee. This permitted the carry forward of the conclusions on lease identification, lease classification and initial direct costs. The Corporation also elected not to separate lease and non-lease components. Financial results for reporting periods beginning on or after January 1, 2019 are presented under the new guidance (Topic 842), while prior period amounts are not adjusted and continue to be reported in accordance with previous guidance (Topic 840).

As a lessee, the majority of the operating lease portfolio consists of real estate leases for the Corporation's branches, land and office space. The operating leases have remaining lease terms of 1 year to 20 years, some of which include options to extend the

leases for 5 years or more. ROU assets and lease liabilities are not recognized for leases with an initial term of 12 months or less. The Corporation does not have any finance leases as the lessee.

Certain real estate leases have lease payments that adjust based on annual changes in the Consumer Price Index ("CPI"). The leases that are dependent upon CPI are initially measured using the index or rate at the commencement date and are included in the measurement of the lease liability.

Operating lease expense primarily represents fixed lease payments for operating leases recognized on a straight-line basis over the applicable lease term. Variable lease expense represents the payment of real estate taxes, insurance and common area maintenance based on the Corporation's pro-rata share.

In addition, the Corporation rents or subleases certain real estate to third parties. The rental and sublease portfolio consists mostly of operating leases for space within the Corporation's offices and branches.

The following table presents the components of the Corporation’s lease costs for operating leases as the lessee, which is included in net occupancy expense on the consolidated statements of income:



	Three months ended
	March 31, 2019
	(in thousands)
Operating lease expense	$	4,690
Variable lease expense	609
Sublease income	(203		)
Total lease expense	$	5,096

Supplemental balance sheet information related to leases was as follows (in thousands, except for weighted-averages):



Operating Leases	Classification	March 31, 2019
ROU assets	Other assets	$	103,801
Lease liabilities	Other liabilities	$	110,651
Weighted-average remaining lease term		8.4 years
Weighted-average discount rate		3.08		%

The discount rate used in determining the lease liability for each individual lease was the FHLB fixed advance rate which corresponded with the remaining lease term as of January 1, 2019 for leases that existed at adoption and as of the lease commencement date for leases subsequently entered into.

Supplemental cash flow information related to operating leases for the three months ended March 31, 2019 was as follows (in thousands):



	Three months ended
	March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities	$	4,639
ROU assets obtained in exchange for lease obligations	$	108,104

Lease payment obligations for each of the next five years and thereafter with a reconciliation to the Corporation's lease liability were as follows (in thousands):



Year	Operating Leases
For the nine months ending December 31, 2019	$	13,725
2020	18,094
2021	16,896
2022	15,548
2023	13,286
Thereafter	50,280
Total lease payments	127,829
Less: imputed interest	(17,178		)
Present value of lease liabilities	$	110,651

As of March 31, 2019, the Corporation had not entered into any material leases that have not yet commenced.

As previously disclosed in the Corporation's 2018 Annual Report on Form 10-K and under Topic 840, future minimum lease payments for operating leases having initial or remaining noncancellable lease terms in excess of one year as of December 31, 2018 were $18.0 million, $17.3 million, $15.7 million, $13.7 million, $11.4 million for 2019 through 2023, respectively, and $43.3 million in the aggregate for all years thereafter.

NOTE 7 – 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 value recognized in earnings as components of non-interest income or non-interest expense on the consolidated statements of income.

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

Mortgage Banking Derivatives

In connection with its mortgage banking activities, the Corporation enters into commitments to originate certain fixed-rate residential mortgage loans for customers, also referred to as interest rate locks. In addition, the Corporation enters into forward commitments for the future sales or purchases of mortgage-backed securities to or from third-party counterparties to hedge the effect of changes in interest rates on the values of both the interest rate locks and mortgage loans held for sale. Forward sales commitments may also be in the form of commitments to sell individual mortgage loans at a fixed price at a future date. The amount necessary to settle each interest rate lock is based on the price that secondary market investors would pay for loans with similar characteristics, including interest rate and term, as of the date fair value is measured. Gross derivative assets and liabilities are recorded in other assets and other liabilities, respectively, on the consolidated balance sheets, and changes in fair values during the period are recorded in mortgage banking income on the consolidated statements of income.

Interest Rate Swaps

The Corporation enters into interest rate swaps with certain qualifying commercial loan customers to meet their interest rate risk management needs. The Corporation simultaneously enters into interest rate swaps with dealer counterparties, with identical notional amounts and terms. The net result of these interest rate swaps is that the customer pays a fixed rate of interest and the Corporation receives a floating rate. These interest rate swaps are derivative financial instruments and the gross fair values are recorded in other assets and other liabilities on the consolidated balance sheets, with changes in fair values during the period recorded in other non-interest expense on the consolidated statements of income. Fulton Bank, N.A. ("Fulton Bank"), the Corporation's largest banking subsidiary, exceeds $10 billion in total assets and is required to clear all eligible interest rate swap contracts with a central counterparty. As a result, Fulton Bank is subject to the regulations of the Commodity Futures Trading Commission ("CFTC").

Foreign Exchange Contracts

The Corporation enters into foreign exchange contracts to accommodate the needs of its customers. Foreign exchange contracts are commitments to buy or sell foreign currency on a specific date at a contractual price. The Corporation limits its foreign exchange exposure with customers by entering into contracts with institutional counterparties to mitigate its foreign exchange risk. The Corporation also holds certain amounts of foreign currency with international correspondent banks ("Foreign Currency Nostro Accounts"). The Corporation limits the total overnight net foreign currency open positions, which is defined as an aggregate of all outstanding contracts and Foreign Currency Nostro Account balances, to $500,000. Gross fair values are recorded in other assets and other liabilities on the consolidated balance sheets, with changes in fair values during the period recorded in other service charges and fees on the consolidated statements of income.

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



	March 31, 2019					December 31, 2018
	Notional Amount		Asset (Liability) Fair Value			Notional Amount		Asset (Liability) Fair Value
	(in thousands)
Interest Rate Locks with Customers
Positive fair values	$	140,030	$	1,759		$	101,700	$	1,148
Negative fair values	2,491		(17		)	1,646		(12		)
Net interest rate locks with customers			1,742					1,136
Forward Commitments
Positive fair values	20,627		55			1,540		3
Negative fair values	100,002		(1,062		)	83,562		(1,066		)
Net forward commitments			(1,007		)			(1,063		)
Interest Rate Swaps with Customers
Positive fair values	2,039,265		66,479			1,185,144		33,258
Negative fair values	661,338		(13,473		)	1,386,046		(30,769		)
Net interest rate swaps with customers			53,006					2,489
Interest Rate Swaps with Dealer Counterparties
Positive fair values ⁽¹⁾	661,338		13,406			1,386,046		28,143
Negative fair values ⁽¹⁾	2,039,265		(35,533		)	1,185,144		(16,338		)
Net interest rate swaps with dealer counterparties			(22,127		)			11,805
Foreign Exchange Contracts with Customers
Positive fair values	8,991		225			5,881		105
Negative fair values	3,414		(152		)	9,690		(251		)
Net foreign exchange contracts with customers			73					(146		)
Foreign Exchange Contracts with Correspondent Banks
Positive fair values	4,511		190			9,220		287
Negative fair values	9,524		(204		)	6,831		(130		)
Net foreign exchange contracts with correspondent banks			(14		)			157
Net derivative fair value asset			$	31,673				$	14,378

(1) The variation margin posted as collateral on centrally cleared interest rate swaps, which represents the fair value of such swaps, is legally characterized as settlements of the outstanding derivative contracts instead of cash collateral. Accordingly, the fair values of centrally cleared interest rate swaps were offset by variation margins totaling $30.6 million and $14.3 million at March 31, 2019 and December 31, 2018, respectively.

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



	Three months ended March 31
	2019			2018
	(in thousands)
Interest rate locks with customers	$	606		$	129
Forward commitments	56			226
Interest rate swaps with customers	50,517			(42,642		)
Interest rate swaps with dealer counterparties ⁽¹⁾	(33,932		)	33,814
Foreign exchange contracts with customers	219			7
Foreign exchange contracts with correspondent banks	(171		)	88
Net fair value gains (losses) on derivative financial instruments	$	17,295		$	(8,378	)

(1) Not included are $16.3 million of losses and $8.9 million of gains related to the variation margin settlements for the three months ended March 31, 2019 and 2018, respectively.

Fair Value Option

The Corporation has elected to measure mortgage loans held for sale at fair value.

The following table presents a summary of mortgage loans held for sale and the impact of the fair value election on the consolidated financial statements as of the periods shown:



	March 31, 2019		December 31, 2018
	(in thousands)
Cost ⁽¹⁾	$	27,054	$	26,407
Fair value	27,768		27,099

(1) Cost basis of mortgage loans held for sale represents the unpaid principal balance.

For the three months ended March 31, 2019, gains related to changes in fair values of mortgage loans held for sale were $21,000 and for the three months ended March 31, 2018, losses related to changes in fair values of mortgage loans held for sale were $197,000.

Balance Sheet Offsetting

Although 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 such qualifying assets and liabilities.

The Corporation is a party to interest rate swap transactions with financial institution counterparties and customers, disclosed in detail above. Under these agreements, the Corporation has the right to net-settle multiple contracts with the same counterparty in the event of default on, or termination of, any one contract. Cash collateral is posted by the party with a net liability position in accordance with contract thresholds and can be used to settle the fair value of the interest rate swap agreements in the event of default. A daily settlement occurs through a clearing agent for changes in the fair value of centrally cleared derivatives. As a result, the total fair values of interest rate swap derivative assets and derivative liabilities recognized on the consolidated balance sheet are not equal and offsetting.

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

The Corporation also enters into agreements with customers in which it sells securities subject to an obligation to repurchase the same or similar securities, referred to as repurchase agreements. Under these agreements, the Corporation may transfer legal control over the assets but still maintain effective control through agreements that both entitle and obligate the Corporation to repurchase the assets. Therefore, repurchase agreements are reported as secured borrowings, classified in short-term borrowings on the consolidated balance sheets, while the securities underlying the repurchase agreements remain classified with investment

securities on the consolidated balance sheets. The Corporation does not enter into reverse repurchase agreements; therefore, there is no such offsetting to be done with the repurchase agreements.

The following table presents the Corporation's financial instruments that are eligible for offset, and the effects of offsetting, on the consolidated balance sheets:



	Gross Amounts		Gross Amounts Not Offset
	Recognized		on the Consolidated
	on the		Balance Sheets
	Consolidated		Financial			Cash			Net
	Balance Sheets		Instruments⁽¹⁾			Collateral ⁽²⁾			Amount
	(in thousands)
March 31, 2019
Interest rate swap derivative assets	$	79,885	$	(14,334	)	$	—		$	65,551
Foreign exchange derivative assets with correspondent banks	190		(190		)	—			—
Total	$	80,075	$	(14,524	)	$	—		$	65,551

Interest rate swap derivative liabilities	$	49,006	$	(14,334	)	$	(34,672	)	$	—
Foreign exchange derivative liabilities with correspondent banks	204		(190		)	—			14
Total	$	49,210	$	(14,524	)	$	(34,672	)	$	14

December 31, 2018
Interest rate swap derivative assets	$	61,401	$	(12,955	)	$	(23,270	)	$	25,176
Foreign exchange derivative assets with correspondent banks	287		(130		)	—			157
Total	$	61,688	$	(13,085	)	$	(23,270	)	$	25,333

Interest rate swap derivative liabilities	$	47,107	$	(22,786	)	$	(22,786	)	$	1,535
Foreign exchange derivative liabilities with correspondent banks	130		(130		)	—			—
Total	$	47,237	$	(22,916	)	$	(22,786	)	$	1,535


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

(2)

Amounts represent cash collateral received from the counterparty or posted by the Corporation on interest rate swap transactions and foreign exchange contracts with financial institution counterparties. Interest rate swaps with customers are collateralized by the same collateral securing the underlying loans to those borrowers. Cash and securities collateral amounts are included in the table only to the extent of the net derivative fair values.

NOTE 8 – Tax Credit Investments

The Corporation's tax credit investments ("TCIs") are primarily related to investments promoting qualified affordable housing projects and investments in community development entities. The majority of these tax-advantaged investments support the Corporation's corporate mission and vision, as well as regulatory compliance with the Community Reinvestment Act. The Corporation's investments in these projects generate a return primarily through the realization of federal income tax credits and deductions for operating losses over a specified time period.

The TCIs are included in other assets, with any unfunded equity commitments carried in other liabilities on the consolidated balance sheets. Certain TCIs qualify for the proportional amortization method and are amortized over the period the Corporation expects to receive the tax credits, with the expense included within income taxes on the consolidated statements of income. Other TCIs are accounted for under the equity method of accounting, with amortization included within non-interest expense on the consolidated statements of income. This amortization includes equity in partnership losses and the systematic write-down of investments over the period in which income tax credits are earned. All of the TCIs are evaluated for impairment at the end of each reporting period. As illustrated below, realizable tax credits are included within income taxes and offset the amortization expense recorded.

The following table presents the balances of the Corporation's TCIs and related unfunded commitments:



		March 31,		December 31,
		2019		2018
Included in other assets:		(in thousands)
Affordable housing tax credit investment, net		$	169,096	$	170,401
Other tax credit investments, net		73,859		72,584
	Total community development investments, net	$	242,955	$	242,985
Included in other liabilities:
Unfunded affordable housing tax credit commitments		$	21,635	$	23,196
Other tax credit investment liabilities		61,506		59,823
	Total unfunded tax credit investment commitments and liabilities	$	83,141	$	83,019

The following table presents other information relating to the Corporation's TCIs:



		Three Months Ended
		March 31
		2019			2018
Components of income taxes:		(in thousands)
Affordable housing tax credits and other tax benefits		$	(7,575	)	$	(7,544	)
Other tax credit investment credits and tax benefits		(1,136		)	(1,596		)
Amortization of affordable housing investments, net of tax benefit		5,495			5,598
Deferred tax expense		238			335
	Total reduction in income tax expense	$	(2,978	)	$	(3,207	)
Amortization of tax credit investments:
Affordable housing tax credits investment		$	822		$	839
Other tax credit investment amortization		669			798
	Total amortization of tax credit investments	$	1,491		$	1,637

NOTE 9 – Accumulated Other Comprehensive Income (Loss)

The following table presents changes in other comprehensive income (loss):



	Before-Tax Amount			Tax Effect			Net of Tax Amount
	(in thousands)
Three months ended March 31, 2019
Unrealized gain on securities	$	26,062		$	(5,764	)	$	20,298
Reclassification adjustment for securities gains included in net income ⁽¹⁾	(65		)	14			(51		)
Amortization of net unrealized losses on AFS securities transferred to HTM ⁽²⁾	1,252			(278		)	974
Non-credit related unrealized losses on other-than-temporarily impaired debt securities	(105		)	23			(82		)
Amortization of net unrecognized pension and postretirement items ⁽³⁾	374			(83		)	291
Total Other Comprehensive Income	$	27,518		$	(6,088	)	$	21,430
Three months ended March 31, 2018
Unrealized loss on securities	$	(34,991	)	$	7,347		$	(27,644	)
Reclassification adjustment for securities gains included in net income ⁽¹⁾	(19		)	3			(16		)
Non-credit related unrealized gains on other-than-temporarily impaired debt securities	285			(61		)	224
Amortization of net unrecognized pension and postretirement items ⁽³⁾	430			(91		)	339
Total Other Comprehensive Loss	$	(34,295	)	$	7,198		$	(27,097	)


(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 3, "Investment Securities," for additional details.

(2) Amounts reclassified out of accumulated other comprehensive income. Before-tax amounts included as a reduction to "Interest Income" 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 13, "Employee Benefit Plans," for additional details.

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



	Unrealized Gains (Losses) on Investment Securities Not Other-Than-Temporarily Impaired				Unrealized Non-Credit Gains (Losses) on Other-Than-Temporarily Impaired Debt Securities			Unrecognized Pension and Postretirement Plan Income (Costs)			Total
	(in thousands)
Balance at December 31, 2018	$	(44,654	)		$	680		$	(15,089	)	$	(59,063	)
Other comprehensive income before reclassifications	20,298				(82		)	—			20,216
Amounts reclassified from accumulated other comprehensive income (loss)	(51		)		—			291			240
Amortization of net unrealized losses on AFS securities transferred to HTM	974			—	—			—			974
Balance at March 31, 2019	$	(23,433	)		$	598		$	(14,798	)	$	(37,633	)
Balance at December 31, 2017	$	(18,509	)		$	458		$	(14,923	)	$	(32,974	)
Other comprehensive loss before reclassifications	(27,644		)		224			—			(27,420		)
Amounts reclassified from accumulated other comprehensive income (loss)	(16		)		—			339			323
Reclassification of stranded tax effects	(3,887		)		—			(3,214		)	(7,101		)
Balance at March 31, 2018	$	(50,056	)		$	682		$	(17,798	)	$	(67,172	)

NOTE 10 – Fair Value Measurements

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


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


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


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

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

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



	March 31, 2019
	Level 1		Level 2		Level 3		Total
	(in thousands)
Loans held for sale	$	—	$	27,768	$	—	$	27,768
Available for sale investment securities:
U.S. Government sponsored agency securities	—		27,524		—		27,524
State and municipal securities	—		297,684		—		297,684
Corporate debt securities	—		118,088		3,200		121,288
Collateralized mortgage obligations	—		887,405		—		887,405
Residential mortgage-backed securities	—		440,858		—		440,858
Commercial mortgage-backed securities	—		282,237		—		282,237
Auction rate securities	—		—		102,810		102,810
Total available for sale investment securities	—		2,053,796		106,010		2,159,806
Other assets:
Investments held in Rabbi Trust	19,979		—		—		19,979
Derivative assets	428		81,698		—		82,126
Total assets	$	20,407	$	2,163,262	$	106,010	$	2,289,679
Other liabilities:
Investments held in Rabbi Trust	19,979		—		—		19,979
Derivative liabilities	356		50,085		—		50,441
Total liabilities	$	20,335	$	50,085	$	—	$	70,420



	December 31, 2018
	Level 1		Level 2		Level 3		Total
	(in thousands)
Loans held for sale	$	—	$	27,099	$	—	$	27,099
Available for sale investment securities:
U.S. Government sponsored agency securities	—		31,632		—		31,632
State and municipal securities	—		279,095		—		279,095
Corporate debt securities	—		106,258		3,275		109,533
Collateralized mortgage obligations	—		832,080		—		832,080
Residential mortgage-backed securities	—		463,344		—		463,344
Commercial mortgage-backed securities	—		261,616		—		261,616
Auction rate securities	—		—		102,994		102,994
Total available for sale investment securities	—		1,974,025		106,269		2,080,294
Other assets:
Investments held in Rabbi Trust	18,415		—		—		18,415
Derivative assets	392		62,552		—		62,944
Total assets	$	18,807	$	2,063,676	$	106,269	$	2,188,752
Other liabilities:
Investments held in Rabbi Trust	$	18,415	$	—	$	—	$	18,415
Derivative liabilities	381		48,185		—		48,566
Total liabilities	$	18,796	$	48,185	$	—	$	66,981

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

•

Mortgage loans held for sale – This category consists of mortgage loans held for sale that the Corporation has elected to measure at fair value. Fair values as of March 31, 2019 and December 31, 2018 were measured based on the price that secondary market investors were offering for loans with similar characteristics. See "Note 7 - 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 performed for at least 95% of the securities valued by the pricing service. Generally, differences by security in excess of 5% are researched to reconcile the difference.


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

•

Corporate debt securities – This category consists of subordinated debt and senior debt issued by financial institutions ($97.2 million at March 31, 2019 and $86.1 million at December 31, 2018), single-issuer trust preferred securities issued by financial institutions ($19.3 million at March 31, 2019 and $18.6 million at December 31, 2018), pooled trust preferred securities issued by financial institutions ($770,000 at March 31, 2019 and $875,000 at December 31, 2018) and other corporate debt issued by non-financial institutions ($3.9 million at March 31, 2019 and December 31, 2018).

Level 2 investments include the Corporation’s holdings of subordinated debt and senior debt, other corporate debt issued by non-financial institutions and $17.0 million and $16.3 million of single-issuer trust preferred securities held at March 31, 2019 and December 31, 2018, 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 ($770,000 at March 31, 2019 and $875,000 at December 31, 2018) and certain single-issuer trust preferred securities ($2.4 million at March 31, 2019 and December 31, 2018). 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.


•	Derivative assets – fair value of foreign currency exchange contracts classified as Level 1 assets ($415,000 at March 31, 2019 and $392,000 at December 31, 2018). 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, representing 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 March 31, 2019 and $1.2 million at December 31, 2018) and the fair value of interest rate swaps ($79.9 million at March 31, 2019 and $61.4 million at December 31, 2018). 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 7 - Derivative Financial Instruments," for additional information.

•

Investments held in Rabbi Trust - This category consists of mutual funds that are held in trust for employee deferred compensation plans that the Corporation has elected to measure at fair value. Shares of mutual funds are valued based on net asset value, which represent quoted market prices for the underlying shares held in the mutual funds, and as such, are classified as Level 1 and are included in "other assets" on the consolidated balance sheets ($20.0 million at March 31, 2019 and $18.4 million at December 31, 2018).


•	Derivative liabilities - Level 1 liabilities, representing the fair value of foreign currency exchange contracts ($356,000 at March 31, 2019 and $381,000 at December 31, 2018). The fair values of these liabilities are determined in the same manner as the related assets.

Level 2 liabilities, and the fair value of interest rate swaps ($49.0 million at March 31, 2019 and $47.1 million at December 31, 2018). The fair value of these liabilities are determined in the same manner as the related assets, as described under the heading "Derivative assets" above. Level 2 liabilities, representing the fair value of mortgage banking derivatives in the form of interest rate locks and forward commitments with secondary market investors ($1.1 million at March 31, 2019 and December 31, 2018) and the fair value of interest rate swaps ($49.0 million at March 31, 2019 and $47.1 million at December 31, 2018). The fair values of these liabilities are determined in the same manner as the related assets, as described under the heading "Derivative assets" above.


•	Investments held in Rabbi Trust - fair value of amounts due to employees under deferred compensation plans classified as Level 1 liabilities ($20.0 million at March 31, 2019 and $18.4 million at December 31, 2018).

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):



	Pooled Trust Preferred Securities			Single-issuer Trust Preferred Securities		ARCs
Three months ended March 31, 2019	(in thousands)
Balance at December 31, 2018	$	875		$	2,400	$	102,994
Unrealized adjustment to fair value ⁽¹⁾	(105		)	30		(184		)
Balance at March 31, 2019	$	770		$	2,430	$	102,810

Three months ended March 31, 2018
Balance at December 31, 2017	$	707		$	3,050	$	98,668
Unrealized adjustment to fair value ⁽¹⁾	158			42		4,381
Discount accretion ⁽²⁾	—			3		—
Balance at March 31, 2018	$	865		$	3,095	$	103,049


(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 at estimated fair value" on the consolidated balance sheets.


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

Certain assets are not measured at fair value on an ongoing basis, but are subject to fair value measurement in certain circumstances, such as upon their acquisition or when there is evidence of impairment. The following table presents the Corporation’s Level 3 financial assets measured at fair value on a nonrecurring basis and reported on the Corporation’s consolidated balance sheets:



	March 31, 2019		December 31, 2018
	(in thousands)
Net loans and leases	$	149,899	$	149,846
OREO	9,012		10,518
MSRs	38,504		38,573
Total assets	$	197,415	$	198,937

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


•	Net loans and leases – This category consists of loans and leases 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 4 - Loans and Allowance for Credit Losses," for additional details.


•	OREO – This category includes OREO ($9.0 million at March 31, 2019 and $10.5 million at December 31, 2018) classified as Level 3 assets. Fair values for OREO were based on estimated selling prices less estimated selling costs for similar assets in active markets.

•

MSRs - This category includes MSRs ($38.5 million at March 31, 2019 and $38.6 million at December 31, 2018), classified as Level 3 assets. MSRs are initially recorded at fair value upon the sale of residential mortgage loans to secondary market investors. MSRs are amortized as a reduction to servicing income over the estimated lives of the underlying loans. MSRs are stratified and evaluated for impairment by comparing each stratum's carrying amount to its estimated fair value. Fair values are determined at the end of each quarter through a discounted cash flows valuation performed by a third-party valuation expert. Significant inputs to the valuation included expected net servicing income, the discount rate and the expected life of the underlying loans. Expected life is based on the contractual terms of the loans, as adjusted for prepayment projections. The weighted average annual constant prepayment rate and the weighted average discount rate used in the March 31, 2019 valuation were 9.5% and 9.0%, respectively. Management tests the reasonableness of the significant inputs to the third-party valuation in comparison to market data. See "Note 5 - Mortgage Servicing Rights," for additional information.

As required by FASB ASC Section 825-10-50, the following table details the carrying amounts and estimated fair values of the Corporation’s financial instruments as of March 31, 2019 and December 31, 2018. In addition, a general description of the methods and assumptions used to estimate such fair values is also provided.



	March 31, 2019
			Estimated Fair Value
	Carrying Amount		Level 1		Level 2		Level 3		Total
	(in thousands)
FINANCIAL ASSETS
Cash and cash equivalents	$	441,388	$	441,388	$	—	$	—	$	441,388
FRB and FHLB stock	85,533		—		85,533		—		85,533
Loans held for sale	27,768		—		27,768		—		27,768
Available for sale investment securities	2,159,806		—		2,053,796		106,010		2,159,806
Held to maturity investment securities	588,443		603,607		—		—		603,607
Net Loans and Leases	16,100,524		—		—		15,747,820		15,747,820
Accrued interest receivable	62,207		62,207		—		—		62,207
Other financial assets	258,146		128,931		81,698		47,517		258,146
FINANCIAL LIABILITIES
Demand and savings deposits	$	13,369,831	$	13,369,831	$	—	$	—	$	13,369,831
Brokered deposits	251,395		211,395		40,000		—		251,395
Time deposits	2,756,752		—		2,752,582		—		2,752,582
Short-term borrowings	829,016		829,016		—		—		829,016
Accrued interest payable	11,219		11,219		—		—		11,219
Other financial liabilities	213,443		155,095		50,085		8,263		213,443
FHLB advances and long-term debt	1,065,312		—		1,051,696		—		1,051,696
	December 31, 2018
			Estimated Fair Value
	Carrying Amount		Level 1		Level 2		Level 3		Total
	(in thousands)
FINANCIAL ASSETS
Cash and cash equivalents	$	445,687	$	445,687	$	—	$	—	$	445,687
FRB and FHLB stock	79,283		—		79,283		—		79,283
Loans held for sale	27,099		—		27,099		—		27,099
Available for sale investment securities	2,080,294		—		1,974,025		106,269		2,080,294
Held to maturity investment securities	606,679		611,419		—		—		611,419
Net Loans and Leases	16,005,263		—		—		15,446,895		15,446,895
Accrued interest receivable	58,879		58,879		—		—		58,879
Other financial assets	235,782		124,138		62,552		49,092		235,782
FINANCIAL LIABILITIES
Demand and savings deposits	$	13,478,016	$	13,478,016	$	—	$	—	$	13,478,016
Brokered deposits	176,239		176,239		—		—		176,239
Time deposits	2,721,904		—		2,712,296		—		2,712,296
Short-term borrowings	754,777		754,777		—		—		754,777
Accrued interest payable	10,529		10,529		—		—		10,529
Other financial liabilities	218,061		161,003		48,185		8,873		218,061
FHLB advances and long-term debt	992,279		—		970,985		—		970,985

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 cash equivalents		Demand and savings deposits
Accrued interest receivable		Short-term borrowings
		Accrued interest payable

FRB and Federal Home Loan Bank ("FHLB") stock represent restricted investments and are carried at cost on the consolidated balance sheets.

As of March 31, 2019, fair values for loans and leases and time deposits were estimated by discounting future cash flows using the current rates, as adjusted for liquidity considerations, at which similar loans and leases would be made to borrowers and similar deposits would be issued to customers for the same remaining maturities. Fair values of loans and leases also include estimated credit losses that would be assumed in a market transaction, which represents estimated exit prices.

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

NOTE 11 – 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 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 (in thousands, except per share data):



	Three months ended March 31
	2019	2018
Weighted average shares outstanding (basic)	169,884	175,303
Impact of common stock equivalents	1,025	1,265
Weighted average shares outstanding (diluted)	170,909	176,568
Per share:
Basic	0.33	0.28
Diluted	0.33	0.28

NOTE 12 – Stock-Based Compensation

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

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

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

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

As of March 31, 2019, the Employee Equity Plan had 10.6 million shares reserved for future grants through 2023, and the Directors’ Plan had approximately 312,000 shares reserved for future grants through 2021.

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



	Three months ended March 31
	2019			2018
	(in thousands)
Compensation expense	$	1,560		$	1,510
Tax benefit	(331		)	(461		)
Stock-based compensation expense, net of tax benefit	$	1,229		$	1,049

NOTE 13 – Employee Benefit Plans

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



	Three months ended March 31
	2019			2018
	(in thousands)
Interest cost	$	815		$	831
Expected return on plan assets	(689		)	(451		)
Net amortization and deferral	495			664
Net periodic pension cost	$	621		$	1,044

The components of the net benefit for the Corporation’s Postretirement Benefits Plan ("Postretirement Plan") consisted of the following components:



	Three months ended March 31
	2019			2018
	(in thousands)
Interest cost	$	15		$	17
Net accretion and deferral	(139		)	(141		)
Net periodic benefit	$	(124	)	$	(124	)

The Corporation recognizes the funded status of its Pension Plan and Postretirement Plan on the consolidated balance sheets and recognizes the change in that funded status through other comprehensive income.

NOTE 14 – Commitments and Contingencies

Commitments

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

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

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



	March 31, 2019		December 31, 2018
	(in thousands)
Commitments to extend credit	$	6,533,257	$	6,306,583
Standby letters of credit	306,946		309,352
Commercial letters of credit	47,041		48,682

The Corporation records a reserve for unfunded lending commitments, which represents management’s estimate of losses associated with unused commitments to extend credit and letters of credit. See "Note 4 - Loans and Leases Allowance for Credit Losses," for additional details.

Residential Lending

The Corporation originates and sells residential mortgages to secondary market investors. The Corporation provides customary representations and warranties to secondary market investors that specify, among other things, that the loans have been underwritten to the standards of the secondary market investor. The Corporation may be required to repurchase specific loans, or reimburse the investor for a credit loss incurred on a sold loan if it is determined that the representations and warranties have not been met. Under some agreements with secondary market investors, the Corporation may have additional credit exposure beyond customary representations and warranties, based on the specific terms of those agreements.

The Corporation maintains a reserve for estimated credit losses related to loans sold to investors. As of March 31, 2019 and December 31, 2018, the total reserve for losses on residential mortgage loans sold was $2.4 million and $2.1 million, respectively, including reserves for both representation and warranty and credit loss exposures.

Legal Proceedings

The Corporation is involved in various pending and threatened claims and other legal proceedings in the ordinary course of its business activities. The Corporation evaluates the possible impact of these matters, taking into consideration the most recent information available. A loss reserve is established for those matters for which the Corporation believes a loss is both probable and reasonably estimable. Once established, the reserve is adjusted as appropriate to reflect any subsequent developments. Actual losses with respect to any such matter may be more or less than the amount estimated by the Corporation. For matters where a loss is not probable, or the amount of the loss cannot be reasonably estimated by the Corporation, no loss reserve is established.

In addition, from time to time, the Corporation is involved in 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 companies. These inquiries or investigations could lead to administrative, civil or criminal proceedings involving the Corporation, and could result in fines, penalties, restitution, other types of sanctions, or the need for the Corporation to undertake remedial actions, or to alter its business, financial or accounting practices. The Corporation’s practice is to cooperate fully with regulatory and governmental inquiries and 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 legal proceedings, or regulatory or governmental inquiries or investigations, will not have a material adverse effect on the financial condition of the Corporation. However, legal proceedings, inquiries and investigations 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 in any future period, depending, in part, upon the size of the loss or liability imposed and the operating results for the that period, and could have a material adverse effect on the Corporation’s business. In addition, regardless of the ultimate outcome of any such legal proceeding, inquiry or investigation, any such matter could cause the Corporation to incur additional expenses, which could be significant, and possibly material, to the Corporation’s results of operations in any future period.

BSA/AML Consent Order

As of March 31, 2019, the Corporation and its bank subsidiary, Lafayette Ambassador Bank, were subject to a Cease and Desist Order Issued Upon Consent ("Consent Order") issued on September 4, 2014 by the Board of Governors of the Federal Reserve System 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 Consent Order requires, among other things, that the Corporation and Lafayette Ambassador Bank undertake a number of required actions to strengthen and enhance the BSA/AML Compliance Program, and conduct a retrospective review of past account activity and transactions to determine whether suspicious activity was properly identified and reported in accordance with the BSA/AML Requirements. The Corporation and Lafayette Ambassador Bank have implemented numerous enhancements to the BSA/AML Compliance Program, completed the retrospective review required under the Consent Order, and continue to strengthen and refine the BSA/AML Compliance Program to achieve a sustainable program in accordance with the BSA/AML Requirements. In addition to requiring strengthening and enhancement of the BSA/AML Compliance Program, while the Consent Order remains in effect, the Corporation and Lafayette Ambassador Bank are subject to certain restrictions on expansion activities. Further, any failure to comply with the requirements of the Consent Order could result in further enforcement actions, the imposition of material restrictions on the activities of the Corporation or Lafayette Ambassador Bank, or the assessment of fines or penalties.

Fair Lending Investigation

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

SEC Investigation

The Corporation is responding to an investigation by the staff of the Division of Enforcement of the SEC regarding certain accounting determinations that could have impacted the Corporation’s reported earnings per share. The Corporation believes that its financial statements filed with the SEC in Forms 10-K and 10-Q present fairly, in all material respects, its financial condition, results of operations and cash flows as of or for the periods ending on their respective dates. The Corporation is cooperating fully with the SEC and at this time cannot predict when or how the investigation will be resolved.

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

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

FORWARD-LOOKING STATEMENTS

The Corporation has made, and may continue to make, certain forward-looking statements with respect to its financial condition, results of operations and business. Do not unduly rely on forward-looking statements. Forward-looking statements can be identified by the use of words such as "may," "should," "will," "could," "estimates," "predicts," "potential," "continue," "anticipates," "believes," "plans," "expects," "future," "intends," "projects," the negative of these terms and other comparable terminology. These forward-looking statements may include projections of, or guidance on, the Corporation's future financial performance, expected levels of future expenses, anticipated growth strategies, descriptions of new business initiatives and anticipated trends in the Corporation's business or financial results.

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


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


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


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


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


•	the planned phasing out of LIBOR as a benchmark reference rate;


•	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 effects of the extensive level of regulation and supervision to which the Corporation and its bank subsidiaries are subject;


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


•	the potential for negative consequences from regulatory violations, investigations and examinations, including potential supervisory actions, the assessment of fines and penalties, the imposition of sanctions and the need to undertake remedial actions;


•	the additional time, expense and investment required to comply with, and the restrictions on potential growth and investment activities resulting from, the existing enforcement order applicable to the Corporation and Lafayette Ambassador Bank requiring improvement in compliance functions and other remedial actions, or any future enforcement orders;


•	the continuing impact of the Dodd-Frank Act on the Corporation's business and results of operations;


•	the effects of, and uncertainty surrounding, new legislation, changes in regulation and government policy, and changes in leadership at the federal banking agencies and in Congress, which could result in significant changes in banking and financial services regulation;


•	the effects of actions by the federal government, including those of the Federal Reserve Board and other government agencies, that impact money supply and market interest rates;


•	the effects of changes in U.S. federal, state or local tax laws;


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


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


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


•	the Corporation's ability to obtain regulatory approvals to consolidate its bank subsidiaries and achieve intended reductions in the time, expense and resources associated with regulatory compliance from such consolidations, and the impact of the significant implementation costs the Corporation expects to incur in connection with those consolidations;


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


•	completed and potential acquisitions may affect costs and the Corporation may not be able to successfully integrate the acquired business or realize the anticipated benefits from such acquisitions


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


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


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


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


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


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


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


•	the Corporation’s failure to identify and to address cyber-security risks, including data breaches and cyber-attacks;


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


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


•	capital and liquidity strategies, including the Corporation’s ability to comply with applicable capital and liquidity requirements, and the Corporation’s ability to generate capital internally or raise capital on favorable terms;


•	the Corporation’s reliance on its subsidiaries for substantially all of its revenues and its ability to pay dividends or other distributions; and


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

Additional information regarding these as well as other factors that could affect future financial results can be found in the sections entitled "Risk Factors" and "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2018, and elsewhere in this Report, including in Note 14 "Commitments and Contingencies" of the Notes to Consolidated Financial Statements.

RESULTS OF OPERATIONS

Overview

The Corporation is a financial holding company which, through its wholly owned bank subsidiaries, provides a full range of retail and commercial financial services through locations 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 and off-balance sheet credit exposures, non-interest expenses and income taxes.

The following table presents a summary of the Corporation’s earnings and selected performance ratios:



	Three months ended March 31
	2019			2018
Net income (in thousands)	$	56,663		$	49,480
Diluted net income per share	$	0.33		$	0.28
Return on average assets	1.11		%	1.01		%
Return on average equity	10.15		%	9.02		%
Return on average tangible equity ⁽¹⁾	13.28		%	11.85		%
Net interest margin ⁽²⁾	3.49		%	3.35		%
Efficiency ratio ⁽¹⁾	63.9		%	67.5		%
Non-performing assets to total assets	0.70		%	0.73		%
Annualized net charge-offs to average loans	0.10		%	0.10		%


(1)	Ratio represents a financial measure derived by methods other than U.S. 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-U.S.GAAP Based Financial Measures" at the end of this "Overview" section.


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

The following is a summary of financial results for the three months ended March 31, 2019:

•

Net Income and Net Income Per Share Growth - Net income was $56.7 million for the three months ended March 31, 2019, a $7.2 million, or 14.5%, increase compared to the same period in 2018. Diluted net income per share for the three months ended March 31, 2019 increased $0.05, or 17.9%, to $0.33, compared to $0.28 for the same period in 2018. The percent increase in diluted net income per share exceeded the percent increase in net income as a result of a decrease in weighted average diluted shares outstanding due to share repurchases in the fourth quarter of 2018.

•

Net Interest Income Growth - Net interest income increased $12.0 million, or 7.9%, for the three months ended March 31, 2019, compared to the same period in 2018. The increase was the result of a 14 basis point increase in net interest margin, largely driven by the impact of increases in the federal funds target rate ("Fed Funds Rate") during 2018, as well as 3.8% growth in average interest-earning assets, primarily loans.


◦	Net Interest Margin - The net interest margin increase was driven by a 42 basis point increase in yields on interest-earning assets, partially offset by a 31 basis point increase in the cost of funds.


◦	Loan Growth - Average loans were $533.3 million, or 3.4%, higher for the three months ended March 31, 2019 compared to the same period in 2018. The most notable increases were in the residential mortgage, commercial, and consumer loan portfolios. The loan growth occurred throughout all of the Corporation's geographic markets.


◦	Deposit Growth - Average deposits grew $855.3 million, or 5.5%, for the three months ended March 31, 2019 compared to the same period in 2018. The increases resulted from growth in total interest-bearing demand,

savings and money market accounts, brokered deposits and time deposits, partially offset by a slight decrease in noninterest-bearing demand deposits.

•

Asset Quality - Asset quality remained relatively stable as of and for the three months ended March 31, 2019 as compared to the same periods in 2018. The provision for credit losses for the three months ended March 31, 2019 was $5.1 million compared to $4.0 million for the same period in 2018. Non-performing assets decreased to 0.70% of total assets, compared to 0.73% as of March 31, 2018, and annualized net charge-offs to average loans outstanding remained at 0.10% for the three months ended March 31, 2019, compared to the same period in 2018.


•	Non-interest Income - Non-interest income, excluding investment securities gains, increased $830,000, or 1.8%, for the three months ended March 31, 2019 as compared to the same period in 2018. Increases in wealth management fees, mortgage banking income and commercial banking income were partially offset by decreases in consumer banking and other income.


•	Non-interest Expense - For the three months ended March 31, 2019, non-interest expense increased $1.2 million, or 0.9%, in comparison to the same period in 2018. Increases in salaries and employee benefits, other outside services and other expenses were partially offset by decreases in other categories.

•

Income Taxes - Income tax expense was $10.5 million for the three months ended March 31, 2019, resulting in an effective tax rate ("ETR"), or income taxes as a percentage of income before income taxes, of 15.6%, as compared to 12.5%, for the same period in 2018. The ETR is generally lower than the federal statutory rate of 21% due to tax-exempt interest income earned on loans, investments in tax-free municipal securities and investments in community development projects that generate tax credits under various federal programs.

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 the Corporation and 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 at 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:



	Three months ended March 31
	2019			2018
	(dollars in thousands)
Return on average tangible equity
Net income	$	56,663		$	49,480
Plus: Intangible amortization, net of tax	85			—
Numerator	$	56,748		$	49,480

Average common shareholders' equity	$	2,265,097		$	2,224,615
Less: Average goodwill and intangible assets	(531,767		)	(531,556		)
Denominator	$	1,733,330		$	1,693,059

Return on average tangible equity, annualized	13.28		%	11.85		%

Efficiency ratio
Non-interest expense	$	137,824		$	136,661
Less: Intangible amortization	(107		)	—
Less: Amortization of tax credit investments	(1,491		)	(1,637		)
Numerator	$	136,226		$	135,024

Net interest income (fully taxable equivalent) ⁽¹⁾	$	166,565		$	154,232
Plus: Total non-interest income	46,751			45,875
Less: Investment securities gains, net	(65		)	(19		)
Denominator	$	213,251		$	200,088

Efficiency ratio	63.9		%	67.5		%


(1)	Presented on a fully taxable equivalent ("FTE") basis, using a 21% federal tax rate and statutory interest expense disallowances. See also the “Net Interest Income” section of Management’s Discussion.

Three months ended March 31, 2019 compared to the three months ended March 31, 2018

Net Interest Income

FTE net interest income increased $12.3 million, to $166.6 million, in the first three months ended March 31, 2019, from $154.2 million in the same period in 2018. The increase was due to a 14 basis point increase in the net interest margin, to 3.49%, and a $710.8 million, or 3.8%, increase in average 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 21% federal tax rate and statutory interest expense disallowances. The discussion following this table is based on these FTE amounts.



	Three months ended March 31
	2019								2018
	Average Balance			Interest			Yield/ Rate		Average Balance			Interest			Yield/ Rate
ASSETS	(dollars in thousands)
Interest-earning assets:
Loans and leases, net of unearned income ⁽¹⁾	$	16,194,375		$	186,122		4.65	%	$	15,661,032		$	162,262		4.19	%
Taxable investment securities⁽²⁾	2,285,724			15,435			2.70		2,198,838			13,193			2.40
Tax-exempt investment securities⁽²⁾	444,132			4,150			3.71		412,830			3,753			3.64
Equity securities ⁽²⁾	—			—			—		509			5			3.93
Total investment securities	2,729,856			19,585			2.87		2,612,177			16,951			2.60
Loans held for sale	16,434			240			5.85		20,015			216			4.31
Other interest-earning assets	366,175			2,002			2.20		302,783			1,172			1.55
Total interest-earning assets	19,306,840			207,949			4.35		18,596,007			180,601			3.93
Noninterest-earning assets:
Cash and due from banks	110,693								105,733
Premises and equipment	237,124								230,247
Other assets	1,197,034								1,113,326
Less: Allowance for loan and lease losses	(161,326		)						(169,220		)
Total Assets	$	20,690,365							$	19,876,093
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Demand deposits	$	4,153,984		$	7,519		0.73	%	$	3,958,894		$	4,004		0.41	%
Savings and money market deposits	4,912,856			9,962			0.82		4,494,445			4,367			0.39
Brokered deposits	220,115			1,382			2.55		74,026			276			1.51
Time deposits	2,765,803			10,826			1.59		2,646,779			7,803			1.20
Total interest-bearing deposits	12,052,758			29,689			1.00		11,174,144			16,450			0.60
Short-term borrowings	820,054			3,582			1.76		896,839			2,041			0.91
FHLB advances and other long-term debt	1,002,463			8,114			3.26		987,315			7,878			3.21
Total interest-bearing liabilities	13,875,275			41,385			1.21		13,058,298			26,369			0.82
Noninterest-bearing liabilities:
Demand deposits	4,222,875								4,246,168
Other	327,118								347,012
Total Liabilities	18,425,268								17,651,478
Shareholders’ equity	2,265,097								2,224,615
Total Liabilities and Shareholders’ Equity	$	20,690,365							$	19,876,093
Net interest income/net interest margin (FTE)				166,564			3.49	%				154,232			3.35	%
Tax equivalent adjustment				(3,249		)						(2,914		)
Net interest income				$	163,315							$	151,318


(1)	Average balance includes non-performing loans.


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

Note: The weighted average interest rate on total average interest-bearing liabilities and average non-interest bearing demand deposits ("cost of funds") was 0.93% and 0.62% for the three months ended March 31, 2019 and 2018, respectively.

The following table summarizes the changes in FTE interest income and interest expense resulting from changes in average balances (volume) and changes in rates for the three months ended March 31, 2019 in comparison to the same period in 2018:



	2019 vs. 2018 Increase (Decrease) due to change in
	Volume			Rate			Net
	(in thousands)
Interest income on:
Loans and leases, net of unearned income	$	5,672		$	18,188		$	23,860
Taxable investment securities	538			1,704			2,242
Tax-exempt investment securities	313			84			397
Equity securities	(3		)	(2		)	(5		)
Loans held for sale	(44		)	68			24
Other interest-earning assets	278			552			830
Total interest income	$	6,754		$	20,594		$	27,348
Interest expense on:
Demand deposits	$	209		$	3,306		$	3,515
Savings and money market deposits	442			5,153			5,595
Brokered deposits	821			285			1,106
Time deposits	363			2,660			3,023
Short-term borrowings	(194		)	1,735			1,541
FHLB advances and other long-term debt	121			115			236
Total interest expense	$	1,762		$	13,254		$	15,016

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.

Interest rate increases on both interest-earning assets and interest-bearing liabilities and the corresponding increases in FTE interest income and interest expense were largely the result of Fed Funds Rate increases during 2018. The increases in the Fed Funds Rate resulted in corresponding increases to the index rates for the Corporation's variable and adjustable rate loans, primarily the prime rate and the London Interbank Offered Rate ("LIBOR").

As summarized above, the 42 basis point increase in the yield on average interest-earning assets resulted in a $20.6 million increase in FTE interest income. The yield on the loan and lease portfolio increased 46 basis points, or 11.0%, from the first three months of 2018, as all variable and certain adjustable rate loans repriced to higher rates and yields on new loan originations exceeded the average yield on the loan portfolio. Adjustable rate loans reprice on dates specified in the loan agreements, which may be later than the date the Fed Funds Rate and related loan index rates increase or decrease. As such, the benefit of increases in index rates on adjustable rate loans may not be fully realized until future periods. Additionally, the increase in average interest-earning assets, primarily loans, since the first three months of 2018, resulted in a $6.8 million increase in FTE interest income.

Interest expense increased $15.0 million primarily due to the 39 basis point increase in the rate on average interest-bearing liabilities. The rates on average interest-bearing demand deposits and savings and money market deposits increased 32 and 43 basis points, respectively, which contributed $3.3 million and $5.2 million to the increase in interest expense, respectively. In addition, the 39 basis point and 85 basis point increases in the rates on time deposits and short-term borrowings, respectively, contributed $2.7 million and $1.7 million increases to interest expense, respectively.

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



	Three months ended March 31								Increase (Decrease)
	2019				2018				in Balance
	Balance		Yield		Balance		Yield		$			%
	(dollars in thousands)
Real estate – commercial mortgage	$	6,378,145	4.69	%	$	6,305,821	4.16	%	$	72,324		1.1	%
Commercial – industrial, financial and agricultural	4,462,609		4.66		4,288,634		4.15		173,975			4.1
Real estate – residential mortgage	2,276,611		4.06		1,958,505		3.85		318,106			16.2
Real estate – home equity	1,433,574		5.33		1,538,974		4.65		(105,400		)	(6.8	)
Real estate – construction	930,246		4.83		984,242		4.22		(53,996		)	(5.5	)
Consumer	424,480		4.49		315,927		4.67		108,553			34.4
Equipment lease financing	276,949		4.40		260,780		4.53		16,169			6.2
Other	11,761		—		8,149		—		3,612			44.3
Total	$	16,194,375	4.65	%	$	15,661,032	4.19	%	$	533,343		3.4	%

Average loans and leases increased $533.3 million, or 3.4%, compared to the first three months of 2018. The increase was driven largely by growth in the residential mortgage and commercial loan portfolios, as well as the consumer, commercial mortgage and leasing portfolios. The $318.1 million, or 16.2%, increase in residential mortgages was experienced across all geographic markets, with the most significant increases occurring in the Virginia and New Jersey markets. The $174.0 million, or 4.1%, increase in commercial loans was realized primarily in the Delaware, Maryland, Pennsylvania and New Jersey markets. Consumer loans increased $108.6 million, or 34.4%, across all geographic markets.

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



	Three months ended March 31								Increase (Decrease) in Balance
	2019				2018				Increase (Decrease) in Balance
	Balance		Rate		Balance		Rate		$			%
	(dollars in thousands)
Noninterest-bearing demand	$	4,222,875	—	%	$	4,246,168	—	%	$	(23,293	)	(0.5	)%
Interest-bearing demand	4,153,984		0.73		3,958,894		0.41		195,090			4.9
Savings and money market accounts	4,912,856		0.82		4,494,445		0.39		418,411			9.3
Total demand and savings	13,289,715		0.53		12,699,507		0.27		590,208			4.6
Brokered deposits	220,115		2.55		74,026		1.51		146,089			N/M
Time deposits	2,765,803		1.59		2,646,779		1.20		119,024			4.5
Total deposits	$	16,275,633	0.74	%	$	15,420,312	0.43	%	$	855,321		5.5	%

N/M - Not meaningful

The average total demand and savings accounts increased $590.2 million, or 4.6%, which reflected the net impact of a $23.3 million, or 0.5%, decline in noninterest-bearing demand deposits and increases of $195.1 million, or 4.9%, and $418.4 million, or 9.3%, in interest-bearing demand deposits and savings and money market deposits, respectively. The increase in total demand and savings deposits was primarily due to a $299.2 million, or 4.8%, increase in consumer account balances, a $190.3 million, or 8.9%, increase in municipal account balances and a $100.2 million, or 2.4%, increase in business account balances.

Average brokered deposits increased $146.1 million, which was the result of the introduction of new brokered deposit programs in 2018. Average time deposits increased $119.0 million, or 4.5%, primarily driven by promotional rate offerings.

The average cost of total deposits increased 31 basis points, to 0.74%, for the first three months of 2019, compared to 0.43% for the first three months of 2018, mainly as a result of the Fed Funds Rate increases during 2018.

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



	Three months ended March 31								Increase (Decrease)
	2019				2018				in Balance
	Balance		Rate		Balance		Rate		$			%
	(dollars in thousands)
Short-term borrowings:
Customer repurchase agreements	$	56,707	0.79	%	$	175,292	0.17	%	$	(118,585	)	(67.6	)%
Customer short-term promissory notes	312,092		0.71		308,725		0.54		3,367			1.1
Total short-term customer funding	368,799		0.72		484,017		0.41		(115,218		)	(23.8	)
Federal funds purchased	157,122		2.43		379,822		1.50		(222,700		)	(58.6	)
Short-term FHLB advances and other borrowings ⁽¹⁾	294,133		2.71		33,000		1.62		261,133			N/M
Total short-term borrowings	820,054		1.76		896,839		0.91		(76,785		)	(8.6	)
Long-term debt:
FHLB advances	615,343		2.48		600,984		2.41		14,359			2.4
Other long-term debt	387,120		4.49		386,331		4.45		789			0.2
Total long-term debt	1,002,463		3.26		987,315		3.21		15,148			1.5
Total borrowings	$	1,822,517	2.59	%	$	1,884,154	2.12	%	$	(61,637	)	(3.3	)%

(1) Consists of FHLB borrowings with original term of less than one year.

N/M - Not meaningful

Average total short-term borrowings decreased $76.8 million, or 8.6%, primarily as a result of a $222.7 million, or 58.6%, decrease in federal funds purchased and a $115.2 million, or 23.8%, decrease in short-term customer funding, partially offset by a $261.1 million increase in short-term FHLB advances and other borrowings during the first three months of 2019.

Average total long-term debt increased $15.1 million, or 1.5%, during the first three months of 2019, compared to the same period of 2018, primarily as a result of an increase in average FHLB advances.

Provision for Credit Losses

The provision for credit losses was $5.1 million for the first three months of 2019, an increase of $1.1 million from the same period of 2018, driven by loan growth as well as changes in the risk ratings of certain relationships, which resulted in additional allocations for credit losses.

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

Non-Interest Income

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



	Three months ended March 31				Increase (Decrease)
	2019		2018		$			%
	(dollars in thousands)
Wealth management fees	$	13,239	$	12,871	$	368		2.9	%
Commercial banking income:
Merchant and card income	5,558		5,308		250			4.7
Cash management fees	4,361		4,317		44			1.0
Commercial loan interest rate swap fees	2,028		1,291		737			57.1
Other income	2,816		3,040		(224		)	(7.4	)
Total commercial banking income	14,763		13,956		807			5.8
Consumer banking income:
Card income	4,686		4,441		245			5.5
Overdraft fees	4,104		4,241		(137		)	(3.2	)
Other income	2,587		2,726		(139		)	(5.1	)
Total consumer banking income	11,377		11,408		(31		)	(0.3	)
Mortgage banking income:
Gains on sales of mortgage loans	3,122		2,647		475			17.9
Mortgage servicing income	1,650		1,546		104			6.7
Total mortgage banking income	4,772		4,193		579			13.8
Other income	2,535		3,428		(893		)	(26.1	)
Total, excluding investment securities gains, net	46,686		45,856		830			1.8
Investment securities gains, net	65		19		46			N/M
Total	$	46,751	$	45,875	$	876		1.9	%

N/M - Not meaningful

Excluding net investment securities gains, non-interest income increased $830,000, or 1.8%, in the first three months of 2019 as compared to the same period in 2018. Wealth management fees increased $368,000, or 2.9%, resulting primarily from growth in brokerage income due to an increase in client asset levels and improved overall market performance.

Total commercial banking income increased $807,000, or 5.8%, compared to the same period in 2018, with increases in merchant and card income and commercial loan interest rate swap fees, resulting from higher new commercial loan originations, being partially offset by decreases in Small Business Administration ("SBA") lending income, letter of credit fees and overdraft fees, all of which are included in other income in the table above.

Total consumer banking income was relatively flat compared to the same period in 2018, with decreases in overdraft fees and other service charges being largely offset by higher card income, from both debit and credit cards.

Mortgage banking income increased $579,000, or 13.8%, with increases in both gains on the sales of mortgage loans and mortgage servicing income. The increase in gains on sales of mortgage loans was primarily driven by an increase the volume of loans sold, while servicing income grew as a result of lower MSR amortization as prepayments slowed.

Non-Interest Expense

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



	Three months ended March 31				Increase (Decrease)
	2019		2018		$			%
	(dollars in thousands)
Salaries and employee benefits	$	77,757	$	75,768	$	1,989		2.6	%
Net occupancy expense	12,909		13,632		(723		)	(5.3	)
Data processing and software	10,353		10,473		(120		)	(1.1	)
Other outside services	8,352		8,124		228			2.8
Professional fees	3,960		4,816		(856		)	(17.8	)
Equipment expense	3,342		3,534		(192		)	(5.4	)
FDIC insurance expense	2,609		2,953		(344		)	(11.6	)
Marketing	2,160		2,250		(90		)	(4.0	)
State taxes	2,002		2,302		(300		)	(13.0	)
Amortization of tax credit investments	1,491		1,637		(146		)	(8.9	)
Intangible amortization	107		—		107			100.0
Other	12,782		11,172		1,610			14.4
Total	$	137,824	$	136,661	$	1,163		0.9	%

The $2.0 million, or 2.6%, increase in salaries and employee benefits reflects the net impact of a $1.5 million increase in employee salaries, due mainly to annual merit increases and overtime pay, partially offset by decreases in other incentive compensation expense. Benefits increased $500,000 primarily due to higher health insurance expense, driven by an increase in claims.

Net occupancy expense decreased $723,000, or 5.3%, due mainly to lower snow removal and utilities costs in the first three months of 2019 as compared to the same period in 2018.

Other outside services increased $228,000, or 2.8%, largely due to costs associated with merging subsidiary bank charters and consulting services related to various banking and technology initiatives.

Professional fees decreased $856,000, or 17.8%, primarily due to decreases in legal fees. The Corporation incurs fees related to various legal matters in the normal course of business. These fees can fluctuate based on the timing and extent of these matters.

FDIC insurance expense decreased $344,000, or 11.6%, as the deposit insurance surcharge assessed on institutions with consolidated assets of $10 billion or more ended in the fourth quarter of 2018.

Intangible amortization increased $107,000, as a result of amortization related to the acquisition of the assets of a wealth management business with approximately $250 million in assets under management or administration, which was completed in January 2019.

Other expenses increased $1.6 million, or 14.4%, due to $1.0 million of expenses related to the closure of eight branches in 2019 and a $975,000 increase in operating risk loss, partially offset by decreases in other real estate expenses and postage.

Income Taxes

Income tax expense for the first three months of 2019 was $10.5 million, a $3.4 million, or 48.0%, increase from $7.1 million for the same period in 2018. The Corporation’s ETR was 15.6% for the three months ended March 31, 2019, as compared to 12.5% in the same period of 2018. The ETR is generally lower than the federal statutory rate of 21% due to tax-exempt interest income earned on loans, investments in tax-free municipal securities and investments in community development projects that generate tax credits under various federal programs. The increase in income tax expense primarily resulted from higher income before income taxes as well as changes in the New Jersey tax law in mid-2018.

FINANCIAL CONDITION

The table below presents condensed consolidated ending balance sheets.



	March 31, 2019		December 31, 2018		Increase (Decrease)
	March 31, 2019		December 31, 2018		$			%
	(dollars in thousands)
Assets
Total cash and cash equivalents	$	441,388	$	445,687	$	(4,299	)	(1.0	)%
Federal Reserve Bank and FHLB stock	85,533		79,283		6,250			7.9
Loans held for sale	27,768		27,099		669			2.5
Investment securities	2,748,249		2,686,973		61,276			2.3
Loans and leases, net of allowance	16,100,524		16,005,263		95,261			0.6
Premises and equipment	239,004		234,529		4,475			1.9
Goodwill and intangible assets	535,356		531,556		3,800			0.7
Other assets	796,827		671,762		125,065			18.6
Total Assets	$	20,974,649	$	20,682,152	$	292,497		1.4	%
Liabilities and Shareholders’ Equity
Deposits	$	16,377,978	$	16,376,159	$	1,819		—	%
Short-term borrowings	829,016		754,777		74,239			9.8
FHLB advances and other long-term debt	1,065,312		992,279		73,033			7.4
Other liabilities	401,324		311,364		89,960			28.9
Total Liabilities	18,673,630		18,434,579		239,051			1.3
Total Shareholders’ Equity	2,301,019		2,247,573		53,446			2.4
Total Liabilities and Shareholders’ Equity	$	20,974,649	$	20,682,152	$	292,497		1.4	%

Investment Securities

The following table presents the carrying amount of investment securities:



	March 31, 2019		December 31, 2018		Increase (Decrease)
	March 31, 2019		December 31, 2018		$			%
	(dollars in thousands)
Available for Sale
U.S. Government sponsored agency securities	$	27,524	$	31,632	$	(4,108	)	(13.0	)%
State and municipal securities	297,684		279,095		18,589			6.7
Corporate debt securities	121,288		109,533		11,755			10.7
Collateralized mortgage obligations	887,405		832,080		55,325			6.6
Residential mortgage-backed securities	440,858		463,344		(22,486		)	(4.9	)
Commercial mortgage-backed securities	282,237		261,616		20,621			7.9
Auction rate securities	102,810		102,994		(184		)	(0.2	)
Total available for sale securities	$	2,159,806	$	2,080,294	$	79,512		3.8	%

Held to Maturity
State and municipal securities	$	155,998	$	156,134	$	(136	)	(0.1	)%
Residential mortgage-backed securities	432,445		450,545		(18,100		)	(4.0	)
Total held to maturity securities	$	588,443	606,679		$	(18,236	)	(3.0	)%

Total Investment Securities	2,748,249		2,686,973		61,276			2.3	%

Total available for sale investment securities increased $79.5 million, or 3.8%. Cash flows from maturities and repayments of residential mortgage-backed securities and U.S. Government sponsored agency securities were reinvested in other investment

categories to diversify the portfolio into securities with lower expected duration extension risk. Total held to maturity securities decreased $18.2 million, or 3.0%, as a result of principal repayments and premium amortization. There were no purchases of held to maturity securities during the three months ended March 31, 2019.

Loans and Leases

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



	March 31, 2019			December 31, 2018			Increase (Decrease)
	March 31, 2019			December 31, 2018			$			%
	(dollars in thousands)
Real estate – commercial mortgage	$	6,428,688		$	6,434,285		$	(5,597	)	(0.1	)%
Commercial – industrial, financial and agricultural	4,429,538			4,404,548			24,990			0.6
Real estate – residential mortgage	2,313,908			2,251,044			62,864			2.8
Real estate – home equity	1,413,500			1,452,137			(38,637		)	(2.7	)
Real estate – construction	953,087			916,599			36,488			4.0
Consumer	433,545			419,186			14,359			3.4
Equipment lease financing and other	315,934			311,866			4,068			1.3
Overdrafts	1,739			2,774			(1,035		)	(37.3	)
Loans and leases	16,289,939			16,192,439			97,500			0.6
Unearned income	(27,306		)	(26,639		)	(667		)	2.5
Loans and leases, net of unearned income	$	16,262,633		$	16,165,800		$	96,833		0.6	%

Loans and leases, net of unearned income, increased $96.8 million, or 0.6%, in comparison to December 31, 2018. Residential mortgage loans increased $62.9 million, or 2.8%, compared to December 31, 2018, with the growth primarily occurring in Maryland ($24.0 million, or 5.6%) and Virginia ($23.8 million, or 4.0%). The home equity portfolio decreased by $38.6 million, or 2.7%, compared to December 31, 2018.

Construction loans increased $36.5 million, or 4.0%, in comparison to December 31, 2018. 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 Corporation does not have a significant concentration of credit risk with any single borrower, industry or geographic location. Approximately $7.4 billion, or 45.3%, of the loan portfolio was in commercial mortgage and construction loans as of March 31, 2019. The Corporation's internal policy limits its maximum total lending commitment to an individual borrowing relationship to $55 million as of March 31, 2019. In addition, the Corporation has established lower total lending limits for certain types of lending commitments, and lower total lending limits based on the Corporation's internal risk rating of an individual borrowing relationship at the time the lending commitment is approved.

Commercial loans also include shared national credits, which are participations in loans or loan commitments of at least $100 million that are shared by three or more banks. As of March 31, 2019, shared national credits increased $10.8 million, or 16.0%, to $78.3 million, compared to $67.5 million as of December 31, 2018. The Corporation's shared national credits are to borrowers located in its geographic markets, and are granted subject to the Corporation's standard underwriting policies. None of the shared national credits were past due as of March 31, 2019 or December 31, 2018.

Provision and Allowance for Credit Losses

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



	March 31, 2019			December 31, 2018
	(dollars in thousands)
Allowance for loan and lease losses	$	162,109		$	160,537
Reserve for unfunded lending commitments	8,263			8,873
Allowance for credit losses	$	170,372		$	169,410

Allowance for loan and lease losses to loans and leases outstanding	1.00		%	0.99		%
Allowance for credit losses to loans and leases outstanding	1.05		%	1.05		%

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



	Three months ended March 31
	2019			2018
	(dollars in thousands)
Average balance of loans and leases, net of unearned income	$	16,194,375		$	15,661,032

Balance of allowance for credit losses at beginning of period	$	169,410		$	176,084
Loans and leases charged off:
Commercial – industrial, financial and agricultural	2,787			4,005
Real estate – commercial mortgage	1,145			267
Consumer	683			892
Real estate – residential mortgage	655			162
Real estate – home equity	219			408
Real estate – construction	95			158
Equipment lease financing and other	785			505
Total loans and leases charged off	6,369			6,397
Recoveries of loans and leases previously charged off:
Commercial – industrial, financial and agricultural	1,243			1,075
Real estate – commercial mortgage	136			279
Consumer	210			179
Real estate – residential mortgage	132			107
Real estate – home equity	197			206
Real estate – construction	84			306
Equipment lease financing and other	229			210
Total recoveries	2,231			2,362
Net loans and leases charged off	4,138			4,035
Provision for credit losses	5,100			3,970
Balance of allowance for credit losses at end of period	$	170,372		$	176,019

Net charge-offs to average loans and leases (annualized)	0.10		%	0.10		%

The provision for credit losses for the three months ended March 31, 2019 was $5.1 million, an increase of $1.1 million in comparison to the same period in of 2018. Net charge-offs and annualized net charge-offs as a percentage of average loans and leases for the first quarter of 2019 compared to the same period of 2018, were consistent.

The following table presents the changes in non-accrual loans and leases for the three months ended March 31, 2019:



	Commercial - Industrial, Financial and Agricultural			Real Estate - Commercial Mortgage			Real Estate - Construction			Real Estate - Residential Mortgage			Real Estate - Home Equity			Consumer			Equipment Lease Financing			Total
	(in thousands)
Three months ended March 31, 2019
Balance of non-accrual loans and leases at December 31, 2018	$	50,149		$	30,389		$	7,390		$	14,668		$	6,707		$	—		$	19,269		$	128,572
Additions	5,529			2,782			35			2,521			1,160			683			304			13,014
Payments	(2,216		)	(1,844		)	(555		)	(514		)	(415		)	—			(756		)	(6,300		)
Charge-offs	(2,787		)	(1,145		)	(95		)	(655		)	(219		)	(683		)	(304		)	(5,888		)
Transfers to accrual status	(573		)	(163		)	—			(57		)	(175		)	—			—			(968		)
Transfers to OREO	—			(680		)	(124		)	(470		)	(15		)	—			—			(1,289		)
Balance of non-accrual loans and leases at March 31, 2019	$	50,102		$	29,339		$	6,651		$	15,493		$	7,043		$	—		$	18,513		$	127,141

Non-accrual loans decreased $1.4 million, or 1.1%, in comparison to December 31, 2018, as a result of payments, charge-offs and transfers to accrual status and other real estate owned ("OREO") exceeding additions to non-accrual loans.

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



	March 31, 2019		December 31, 2018
	(in thousands)
Commercial – industrial, financial and agricultural	$	50,148	$	51,269
Real estate – commercial mortgage	29,817		32,153
Real estate – residential mortgage	22,299		19,101
Real estate – home equity	10,495		9,769
Real estate – construction	7,039		7,390
Consumer	275		409
Equipment lease financing	18,608		19,587
Total non-performing loans and leases	$	138,681	$	139,678

Non-performing loans and leases decreased $997,000, or 0.7%, in comparison to December 31, 2018. Non-performing loans and leases as a percentage of total loans and leases were 0.85% at March 31, 2019 in comparison to 0.86% at December 31, 2018.

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



	March 31, 2019			December 31, 2018
	(dollars in thousands)
Non-accrual loans and leases	$	127,141		$	128,572
Loans and leases 90 days or more past due and still accruing	11,540			11,106
Total non-performing loans and leases	138,681			139,678
OREO	9,012			10,518
Total non-performing assets	$	147,693		$	150,196
Non-accrual loan and leases to total loan and leases	0.78		%	0.80		%
Non-performing assets to total assets	0.70		%	0.73		%
Allowance for loan and lease losses to non-performing loans and leases	116.9		%	114.9		%
Allowance for credit losses to non-performing loans and leases	122.9		%	121.3		%

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



	March 31, 2019		December 31, 2018
	(in thousands)
Real-estate - residential mortgage	$	24,142	$	24,102
Real estate - home equity	16,786		16,665
Real-estate - commercial mortgage	15,301		15,685
Commercial	5,759		5,143
Consumer	11		10
Total accruing TDRs	61,999		61,605
Non-accrual TDRs ⁽¹⁾	29,523		28,659
Total TDRs	$	91,522	$	90,264

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

During the first three months of 2019, $3.7 million of TDRs that were modified in the previous 12 months had a payment default, which is defined as a single missed scheduled payment subsequent to modification.

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



	March 31, 2019		December 31, 2018
	(in thousands)
Residential properties	$	2,390	$	3,665
Commercial properties	4,397		4,127
Undeveloped land	2,225		2,726
Total OREO	$	9,012	$	10,518

The ability to identify potential problem loans in a timely manner is important to maintaining an adequate allowance for credit losses. For commercial loans, commercial mortgages and construction loans to commercial borrowers, an internal risk rating process is used to monitor credit quality. The evaluation of credit risk for residential mortgages, home equity loans, construction loans to individuals, consumer loans and leases is based on payment history, through the monitoring of delinquency levels and trends. For a description of the Corporation's risk ratings, see Note 4, "Loans and Leases and Allowance for Credit Losses," in the Notes to Consolidated Financial Statements.

Total internally risk-rated loans were $11.7 billion as of both March 31, 2019 and December 31, 2018. 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 by banking regulators) or Substandard or lower (considered "classified" loans by banking regulators), by class segment.



	Special Mention						Increase (Decrease)					Substandard or lower						Increase (Decrease)					Total Criticized Loans
	March 31, 2019			December 31, 2018			$			%		March 31, 2019			December 31, 2018			$			%		March 31, 2019			December 31, 2018
	(dollars in thousands)
Real estate - commercial mortgage	$	158,447		$	170,827		$	(12,380	)	(7.2	)%	$	146,414		$	133,995		$	12,419		9.3	%	$	304,861		$	304,822
Commercial - secured	191,025			193,470			(2,445		)	(1.3	)	147,483			129,026			18,457			14.3		338,508			322,496
Commercial - unsecured	4,290			4,016			274			6.8		2,991			3,963			(972		)	(24.5	)	7,281			7,979
Total Commercial - industrial, financial and agricultural	195,315			197,486			(2,171		)	(1.1	)	150,474			132,989			17,485			13.1		345,789			330,475
Construction - commercial residential	6,310			6,912			(602		)	(8.7	)	6,401			6,881			(480		)	(7.0	)	12,711			13,793
Construction - commercial	851			1,163			(312		)	(26.8	)	3,244			2,533			711			28.1		4,095			3,696
Total real estate - construction (excluding construction - other)	7,161			8,075			(914		)	(11.3	)	9,645			9,414			231			2.5		16,806			17,489
Total	$	360,923		$	376,388		$	(15,465	)	(4.1	)%	$	306,533		$	276,398		$	30,135		10.9	%	$	667,456		$	652,786

% of total risk-rated loans	3.1		%	3.2		%						2.6		%	2.4		%						5.7		%	5.6		%

The following table summarizes loan and lease delinquency rates as a percentage of outstanding balances, as of the dates indicated:



	March 31, 2019									December 31, 2018
	30-89 Days			≥ 90 Days (1)			Total			30-89 Days			≥ 90 Days (1)			Total
Real estate – commercial mortgage	0.25		%	0.45		%	0.70		%	0.21		%	0.48		%	0.69		%
Commercial – industrial, financial and agricultural	0.15		%	0.83		%	0.98		%	0.18		%	0.84		%	1.02		%
Real estate – construction	0.03		%	0.74		%	0.77		%	0.27		%	0.81		%	1.08		%
Real estate – residential mortgage	0.90		%	0.96		%	1.86		%	1.29		%	0.85		%	2.14		%
Real estate – home equity	0.83		%	0.74		%	1.57		%	0.99		%	0.71		%	1.70		%
Consumer	0.80		%	0.06		%	0.86		%	0.89		%	0.10		%	0.99		%
Equipment lease financing and other	0.55		%	0.03		%	0.58		%	0.45		%	0.29		%	0.74		%
Total overall delinquency rate	0.37		%	0.65		%	1.02		%	0.42		%	0.66		%	1.08		%
Total dollars (in thousands)	$	60,882		$	138,681		$	199,563		$	68,693		$	139,678		$	208,371


(1)	Includes non-accrual loans and leases.

Goodwill and Intangible Assets

Goodwill and intangible assets increased $3.8 million, or 0.7%, as a result of the acquisition of the assets of a wealth management business with approximately $250 million in assets under management or administration, which was completed in January 2019.

Other Assets

Other assets increased $125.1 million, or 18.6%, primarily as a result of the implementation of Accounting Standards Codification ("ASC") Update 2016-02, which required the Corporation to recognize a $103.8 million ROU asset with an offsetting liability. See Note 1, "Basis of Presentation," and Note 6, "Leases," in the Notes to Consolidated Financial Statements.

Deposits and Borrowings

The following table presents ending deposits, by type, as of the dates indicated:



	March 31, 2019		December 31, 2018		Increase (Decrease)
	March 31, 2019		December 31, 2018		$			%
	(dollars in thousands)
Noninterest-bearing demand	$	4,255,043	$	4,310,105	$	(55,062	)	(1.3	)%
Interest-bearing demand	4,207,442		4,240,974		(33,532		)	(0.8	)
Savings and money market accounts	4,907,346		4,926,937		(19,591		)	(0.4	)
Total demand and savings	13,369,831		13,478,016		(108,185		)	(0.8	)
Brokered deposits	251,395		176,239		75,156			42.6
Time deposits	2,756,752		2,721,904		34,848			1.3
Total deposits	$	16,377,978	$	16,376,159	$	1,819		—	%

Total demand and savings accounts decreased $108.2 million, or 0.8%, due to a $100.3 million, or 2.3%, decrease in business accounts and a $67.0 million, or 3.5%, primarily attributable to a seasonal decrease in municipal accounts, partially offset by a $33.3 million, or 0.5% increase in consumer accounts.

The following table presents ending borrowings, by type, as of the dates indicated:



	March 31, 2019		December 31, 2018		Increase (Decrease)
	March 31, 2019		December 31, 2018		$			%
	(dollars in thousands)
Short-term borrowings:
Total short-term customer funding	$	354,016	$	369,777	$	(15,761	)	(4.3	)%
Short-term FHLB advances and other borrowings ⁽¹⁾	475,000		385,000		90,000			23.4
Total short-term borrowings	829,016		754,777		74,239			9.8
FHLB advances and other long-term debt:
FHLB advances	674,959		601,978		72,981			12.1
Other long-term debt	390,353		390,301		52			—
Total FHLB advances and other long-term debt	1,065,312		992,279		73,033			7.4
Total borrowings	$	1,894,328	$	1,747,056	$	147,272		8.4	%

(1) Consists of FHLB borrowings with an original maturity term of less than one year.

Total short borrowings increased $74.2 million, or 9.8%, due to a $90.0 million, or 23.4%, increase in short-term FHLB advances and other borrowings, partially offset by a $15.8 million, or 4.3% decrease in short-term customer funding. Total long-term FHLB advances increased $73.0 million, or 12.1%. The increase in total borrowings provided additional funding to support loan growth.

Other Liabilities

Other liabilities increased $90.0 million, or 28.9%, as a result of the implementation of ASC Update 2016-02, which required the Corporation to recognize an offsetting liability to a ROU asset as discussed above under "Other Assets." Also see Note 1, "Basis of Presentation," and Note 6, "Leases," in the Notes to Consolidated Financial Statements. The increase of $110.7 million due to the lease liability was partially offset by normal fluctuations in various other liability accounts.

Shareholders' Equity

Total shareholders’ equity increased $53.4 million during the first three months of 2019. The increase was due primarily to $56.7 million of net income, a $21.4 million increase in accumulated other comprehensive income, $1.7 million of stock issued and $1.6 million of stock-based compensation awards, partially offset by $22.0 million of common stock cash dividends and $5.9 million of common stock repurchases.

In November 2018, the Corporation's board of directors approved a share repurchase program pursuant to which the Corporation is authorized to repurchase up to $75.0 million of its outstanding shares of common stock, or approximately 2.7% of its outstanding

shares, through December 31, 2019. As of December 31, 2018 the Corporation had repurchased approximately 4.1 million shares under this program for a total cost of $63.7 million, or $15.49 per share. During the first quarter of 2019, the Corporation repurchased 376,228 additional shares under this program for a total cost of approximately $5.9 million, or $15.60 per share. Up to an additional 5.5 million of the Corporation's common stock may be repurchased under this program through December 31, 2019.

Total commissions and fees paid on stock repurchases in during the first quarter of 2019 were $95,000. Under the repurchase program, repurchased shares were 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.

In March 2019, the Corporation's board of directors approved an additional share repurchase program pursuant to which the Corporation is authorized to repurchase up to $100.0 million of its outstanding shares of common stock, or approximately 3.5% of its outstanding shares, through December 31, 2019.

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

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

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


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


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


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

As of January 1, 2019, the Corporation and its bank subsidiaries are also 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 weightings for a variety of asset categories.

As of March 31, 2019, the Corporation's capital levels met the fully phased-in minimum capital requirements, including the new capital conservation buffers, as prescribed in the U.S. Basel III Capital Rules.

As of March 31, 2019, each of the Corporation’s subsidiary banks was well capitalized under the regulatory framework for prompt corrective action based on their capital ratio calculations. To be categorized as well capitalized, these banks must maintain minimum total risk-based, Tier I risk-based, Common Equity Tier I risk-based and Tier I leverage ratios as set forth in the regulation. There are no conditions or events since March 31, 2019 that management believes have changed the institutions’ capital categories.

The following table summarizes the Corporation’s capital ratios in comparison to regulatory requirements:



	March 31, 2019		December 31, 2018		Regulatory Minimum for Capital Adequacy		Fully Phased-in, with Capital Conservation Buffers
Total Capital (to Risk-Weighted Assets)	12.6	%	12.8	%	8.0	%	10.5	%
Tier I Capital (to Risk-Weighted Assets)	10.1	%	10.2	%	6.0	%	8.5	%
Common Equity Tier I (to Risk-Weighted Assets)	10.1	%	10.2	%	4.5	%	7.0	%
Tier I Capital (to Average Assets)	8.9	%	9.0	%	4.0	%	4.0	%

The increases in regulatory capital ratios from December 31, 2018 to March 31, 2019 largely reflected increases in regulatory capital, generated by net income less shareholder dividends, outpacing the growth in risk-weighted and total assets.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk is the exposure to economic loss that arises from changes in the values of certain financial instruments. The types of market risk exposures generally faced by financial institutions include interest rate risk, equity market price risk, debt security market price risk, foreign currency price risk and commodity price risk. Due to the nature of its operations, foreign currency price risk and commodity price risk are not significant to the Corporation.

Interest Rate Risk, Asset/Liability Management and Liquidity

Interest rate risk creates exposure in two primary areas. First, changes in rates have an impact on the Corporation’s liquidity position and could affect its ability to meet obligations and continue to grow. Second, movements in interest rates can create fluctuations in the Corporation’s net interest income and changes in the economic value of its equity.

The Corporation employs various management techniques to minimize its exposure to interest rate risk. An Asset/Liability Management Committee ("ALCO") is responsible for reviewing the interest rate sensitivity and liquidity positions of the Corporation, approving asset and liability management policies, and overseeing the formulation and implementation of strategies regarding balance sheet positions.

The Corporation uses two complementary methods to measure and manage interest rate risk. They are simulation of net interest income and estimates of economic value of equity. Using these measurements in tandem provides a reasonably comprehensive summary of the magnitude of the Corporation's interest rate risk, level of risk as time evolves, and exposure to changes in interest rates.

Simulation of net interest income is performed for the next 12-month period. A variety of interest rate scenarios are used to measure the effects of sudden and gradual movements upward and downward in the yield curve. These results are compared to the results obtained in a flat or unchanged interest rate scenario. Simulation of net interest income is used primarily to measure the Corporation’s short-term earnings exposure to rate movements. The Corporation’s policy limits the potential exposure of net interest income, in a non-parallel instantaneous shock, to 10% of the base case net interest income for a 100 basis point shock in interest rates, 15% for a 200 basis point shock and 20% for a 300 basis point shock. A "shock" is an immediate upward or downward movement of interest rates. The shocks do not take into account changes in customer behavior that could result in changes to mix and/or volumes in the balance sheet, nor does it 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 within the investment portfolio. Assumptions based on past experience are incorporated into the model for non-maturity deposit accounts. The assumptions used are inherently uncertain and, as a result, the model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income. Actual results will differ from the model's simulated results due to timing, amount and frequency of interest rate changes as well as changes in market conditions and the application and timing of various management strategies.

The following table summarizes the expected impact of abrupt interest rate changes, i.e. a non-parallel instantaneous shock, on net interest income as of March 31, 2019 (due to the current level of interest rates, the 300 basis point downward shock scenario is not shown):



Rate Shock⁽¹⁾	Annual change in net interest income	% change in net interest income
+300 bp	+ $66.3 million	9.8%
+200 bp	+ $45.8 million	6.8%
+100 bp	+ $23.5 million	3.5%
–100 bp	– $37.1 million	– 5.5%
–200 bp	– $84.0 million	– 12.4%


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

Economic value of equity estimates the discounted present value of asset and liability cash flows. Discount rates are based upon market prices for like assets and liabilities. Abrupt changes or "shocks" in interest rates, both upward and downward, are used to determine the comparative effect of such interest rate movements relative to the unchanged environment. This measurement tool is used primarily to evaluate the longer-term repricing risks and options in the Corporation’s balance sheet. The Corporation's policy limits the economic value of equity that may be at risk, in a non-parallel instantaneous shock, to 10% of the base case economic value of equity for a 100 basis point shock in interest rates, 20% for a 200 basis point shock and 30% for a 300 basis point shock. As of March 31, 2019, the Corporation was within economic value of equity policy limits for every 100 basis point shock.

Interest Rate Swaps

Liquidity

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

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

Each of the Corporation’s subsidiary banks is a member of the FHLB and has access to FHLB overnight and term credit facilities. As of March 31, 2019, the Corporation had $1.2 billion of borrowings outstanding from the FHLB with an additional borrowing capacity of approximately $2.6 billion under these facilities. Advances from the FHLB are secured by qualifying commercial real estate and residential mortgage loans, investments and other assets.

As of March 31, 2019, the Corporation had aggregate availability under federal funds lines of $1.5 billion with no outstanding borrowings against that amount. A combination of commercial real estate loans, commercial loans and securities are pledged to the Federal Reserve Bank of Philadelphia to provide access to Federal Reserve Bank Discount Window borrowings. As of March 31, 2019, the Corporation had $542 million of collateralized borrowing availability at the Discount Window, and no outstanding borrowings.

Liquidity must also be managed at the 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 sufficiently capitalized and to meet its cash needs.

The Corporation’s sources and uses of funds were discussed in general terms in the "Net Interest Income" section of Management’s Discussion and Analysis. The consolidated statements of cash flows provide additional information. The Corporation’s operating activities during the first three months of 2019 generated $38.3 million of cash, mainly due to net income. Cash used in investing activities was $166.8 million, mainly due to net increases in investments and loans. Net cash provided by financing activities was $124.2 million due mainly to increases in time deposits, short-term borrowings and long-term debt, partially offset by decreases in demand and savings deposits.

Debt Security Market Price Risk

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

State and Municipal Securities

As of March 31, 2019, the Corporation owned state and municipal securities issued by various states or municipalities with a total fair value of $459.4 million, which includes both available for sale and held to maturity securities. Downward pressure on local tax revenues of issuers could have an adverse impact on the underlying credit quality of issuers. The Corporation evaluates existing and potential holdings primarily based on the creditworthiness of the issuing state or municipality and then, to a lesser extent, on any underlying credit enhancement. State or municipal securities can be supported by the general obligation of the issuing state or municipality, allowing the securities to be repaid by any means available to the issuing state or municipality. As of March 31, 2019, approximately 98% of state and municipal securities were supported by the general obligation of corresponding states or municipalities. Approximately 64% of these securities were school district issuances, which are also supported by the states of the issuing municipalities.

Auction Rate Securities

As of March 31, 2019, the Corporation’s investments in auction rate certificates ("ARCs"), a type of auction rate security, had a cost basis of $107.4 million and a fair value of $102.8 million.

As of March 31, 2019, 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 may not represent those that could 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 within the next five years. The Corporation believes that the trusts underlying the ARCs will self-liquidate as student loans are repaid.

The credit quality of the underlying debt associated with the ARCs is also a factor in the determination of their estimated fair value. As of March 31, 2019, all of the ARCs were rated above investment grade. All of the loans underlying the ARCs have principal payments that are guaranteed by the federal government. At March 31, 2019, all ARCs were current and making scheduled interest payments.

Corporate Debt Securities

The Corporation holds corporate debt securities in the form of pooled trust preferred securities, single-issuer trust preferred securities, subordinated debt and senior debt issued by financial institutions. As of March 31, 2019, these securities had an amortized cost of $122.0 million and an estimated fair value of $121.3 million.

See "Note 3 - 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 10 - 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 U.S. 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 14 "Commitments and Contingencies" of the Notes to Consolidated Financial Statements is incorporated herein by reference.

Item 1A. Risk Factors

There have been no material changes to the risk factors previously disclosed in Part I, Item 1A of the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2018.

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

(a) None.

(b) None.



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

January 1, 2019 to January 31, 2019	376,228	$	15.60	376,228	$	5,452,608
February 1, 2019 to February 28, 2019	—	—		—	5,452,608
March 1, 2019 to March 31, 2019	—	—		—	105,452,608

On November 20, 2018, 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 $75.0 million of its outstanding shares of common stock, or approximately 2.7% of its outstanding shares, through December 31, 2019. As of December 31, 2018, the Corporation had repurchased approximately 4.1 million shares under this program for a total cost of $63.7 million, or $15.49 per share. During the first quarter of 2019, the Corporation repurchased 376,228 additional shares under this program for a total cost of approximately $5.9 million, or $15.60 per share. Up to an additional $5.5 million of the Corporation's common stock may be repurchased under this program through December 31, 2019. Under the repurchase program, repurchased shares were added to treasury stock, at cost.

On March 19, 2019, the Corporation announced that its board of directors had approved an additional share repurchase program pursuant to which the Corporation is authorized to repurchase up to $100.0 million of its outstanding shares of common stock, or approximately 3.5% of its outstanding shares, through December 31, 2019.

As permitted by securities laws and other legal requirements, and subject to market conditions and other factors, purchases may be made under the above-described share repurchase programs from time to time in open market or privately negotiated transactions, including, without limitation, through accelerated share repurchase transactions.

Item 6. Exhibits




3.1			Articles of Incorporation, as amended and restated, of Fulton Financial Corporation– Incorporated by reference to Exhibit 3.1 of the Fulton Financial Corporation Current Report on Form 8-K dated June 24, 2011. (File No. 0-10587)

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

10.1			First Amendment effective January 1, 2019 to the Fulton Financial Corporation Deferred Compensation Plan – filed herewith.

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.Def			Definition Linkbase Document

101.Pre			Presentation Linkbase Document

101.Lab			Labels Linkbase Document

101.Cal			Calculation Linkbase Document

101.Sch			Schema Document

101.Ins			Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

FULTON FINANCIAL CORPORATION AND SUBSIDIARIES

SIGNATURES

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



FULTON FINANCIAL CORPORATION

Date:	May 8, 2019	/s/ E. Philip Wenger
		E. Philip Wenger
		Chairman and Chief Executive Officer

Date:	May 8, 2019	/s/ Mark R. McCollom
		Mark R. McCollom
		Senior Executive Vice President and Chief Financial Officer


1.	Effective January 1, 2019, Section 1.14 is added as follows:


2.	Effective January 1, 2019, Section 6.02 (b) shall be amended to replace the name “Retirement Plans Administrative Committee” with the name “Retirement Plan Administrative Committee.”


3.	Effective January 1, 2019, Sections 1.03, 1.07, 1.08 and 3.01(d) of the Plan are amended in their entirety to read as follows:


1.	I have reviewed this quarterly report on Form 10-Q of Fulton Financial Corporation;


2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;


3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;


4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:


a.	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;


b.	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;


c.	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and


d.	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and


a.	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and


b.	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.