Document


 
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, 2018, 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.
Large accelerated filer
 
ý
  
Accelerated filer
 
¨
Non-accelerated filer
 
¨
  
Smaller reporting company
 
¨
 
 
 
 
Emerging growth company
 
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
¨

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
Common Stock, $2.50 Par Value –175,754,000 shares outstanding as of April 27, 2018.

1



FULTON FINANCIAL CORPORATION
FORM 10-Q FOR THE THREE MONTHS ENDED MARCH 31, 2018
INDEX
 
Description
Page
 
 
 
 
 
 
 
 
 
PART I. FINANCIAL INFORMATION
 
 
 
 
 
 
 
 
(a)
 
 
 
(b)
 
 
 
(c)
 
 
 
(d)
 
 
 
(e)
 
 
 
(f)
 
 
 
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 4. Mine Safety Disclosures - (not applicable)
 
 
 
 
Item 5. Other Information - (none to be reported)
 
 
 
 
 
 
 
 
 
 


2




Item 1. Financial Statements
 

CONSOLIDATED BALANCE SHEETS 
 
(in thousands, except per-share data)
 
March 31,
2018
 
December 31,
2017
 
(unaudited)
 
ASSETS
 
 
 
Cash and due from banks
$
100,151

 
$
108,291

Interest-bearing deposits with other banks
210,906

 
293,805

Federal Reserve Bank and Federal Home Loan Bank stock
56,900

 
60,761

Loans held for sale
23,450

 
31,530

Available for sale investment securities
2,592,823

 
2,547,956

Loans, net of unearned income
15,696,284

 
15,768,247

Less: Allowance for loan losses
(163,217
)
 
(169,910
)
Net Loans
15,533,067

 
15,598,337

Premises and equipment
230,313

 
222,802

Accrued interest receivable
53,060

 
52,910

Goodwill and intangible assets
531,556

 
531,556

Other assets
616,715

 
588,957

Total Assets
$
19,948,941

 
$
20,036,905

LIABILITIES
 
 
 
Deposits:
 
 
 
Noninterest-bearing
$
4,291,821

 
$
4,437,294

Interest-bearing
11,185,282

 
11,360,238

Total Deposits
15,477,103

 
15,797,532

Short-term borrowings:
 
 
 
Federal funds purchased
395,000

 
220,000

Other short-term borrowings
542,852

 
397,524

Total Short-Term Borrowings
937,852

 
617,524

Accrued interest payable
9,681

 
9,317

Other liabilities
350,313

 
344,329

Federal Home Loan Bank advances and other long-term debt
938,499

 
1,038,346

Total Liabilities
17,713,448

 
17,807,048

SHAREHOLDERS’ EQUITY
 
 
 
Common stock, $2.50 par value, 600 million shares authorized, 221.1 million shares issued in 2018 and 220.9 million shares issued in 2017
552,682

 
552,232

Additional paid-in capital
1,481,545

 
1,478,389

Retained earnings
857,153

 
821,619

Accumulated other comprehensive loss
(67,172
)
 
(32,974
)
Treasury stock, at cost, 45.7 million shares in 2018 and 2017
(588,715
)
 
(589,409
)
Total Shareholders’ Equity
2,235,493

 
2,229,857

Total Liabilities and Shareholders’ Equity
$
19,948,941

 
$
20,036,905

 
 
 
 
See Notes to Consolidated Financial Statements
 
 
 
 

3



CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except per-share data)
Three months ended March 31
 
2018
 
2017
INTEREST INCOME
 
 
 
Loans, including fees
$
160,136

 
$
142,566

Investment securities:
 
 
 
Taxable
13,193

 
11,914

Tax-exempt
2,965

 
2,849

Dividends
5

 
129

Loans held for sale
216

 
187

Other interest income
1,172

 
842

Total Interest Income
177,687

 
158,487

INTEREST EXPENSE
 
 
 
Deposits
16,450

 
11,801

Short-term borrowings
2,041

 
855

Federal Home Loan Bank advances and other long-term debt
7,878

 
8,252

Total Interest Expense
26,369

 
20,908

Net Interest Income
151,318

 
137,579

Provision for credit losses
3,970

 
4,800

Net Interest Income After Provision for Credit Losses
147,348

 
132,779

NON-INTEREST INCOME
 
 
 
Investment management and trust services
12,871

 
11,808

Service charges on deposit accounts
11,962

 
12,400

Other service charges and fees
11,419

 
12,437

Mortgage banking income
4,193

 
4,596

Other
5,411

 
4,326

Non-interest income before investment securities gains
45,856

 
45,567

Investment securities gains, net
19

 
1,106

Total Non-Interest Income
45,875

 
46,673

NON-INTEREST EXPENSE
 
 
 
Salaries and employee benefits
75,768

 
69,236

Net occupancy expense
13,632

 
12,663

Data processing and software
10,473

 
8,979

Other outside services
8,124

 
5,546

Professional fees
4,816

 
2,737

Equipment expense
3,534

 
3,359

FDIC insurance expense
2,953

 
2,058

State Taxes
2,302

 
2,087

Marketing
2,250

 
1,986

Amortization of tax credit investments
1,637

 
998

Other
11,172

 
12,626

Total Non-Interest Expense
136,661

 
122,275

Income Before Income Taxes
56,562

 
57,177

Income taxes
7,082

 
13,797

Net Income
$
49,480

 
$
43,380

 
 
 
 
PER SHARE:
 
 
 
Net Income (Basic)
$
0.28

 
$
0.25

Net Income (Diluted)
0.28

 
0.25

Cash Dividends
0.12

 
0.11

See Notes to Consolidated Financial Statements
 
 
 

4




CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
 
(in thousands)
 
Three months ended March 31
 
2018
 
2017
 
 
Net Income
$
49,480

 
$
43,380

Other Comprehensive (Loss) Income, net of tax:
 
 
 
Unrealized (loss) gain on securities
(27,644
)
 
4,273

Reclassification adjustment for securities gains included in net income
(16
)
 
(719
)
Non-credit related unrealized gain on other-than-temporarily impaired debt securities
224

 

Amortization of net unrecognized pension and postretirement items
339

 
343

Other Comprehensive (Loss) Income
(27,097
)
 
3,897

Total Comprehensive Income
$
22,383

 
$
47,277

 
 
 
 
See Notes to Consolidated Financial Statements
 
 
 


5




CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2018 AND 2017
 
(in thousands, except per-share data)
 
Common Stock
 
 
 
Retained
Earnings
 
 
 
Treasury
Stock
 
Total
 
Shares
Outstanding
 
Amount
 
Additional Paid-in
Capital
 
Accumulated
Other Comprehensive
Income (Loss)
 
 
 
Balance at December 31, 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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2016
174,040

 
$
549,707

 
$
1,467,602

 
$
732,099

 
$
(38,449
)
 
$
(589,844
)
 
$
2,121,115

Net income

 

 

 
43,380

 

 

 
43,380

Other comprehensive income

 

 

 

 
3,897

 

 
3,897

Stock issued
303

 
585

 
3,265

 

 

 
881

 
4,731

Stock-based compensation awards

 

 
734

 

 

 

 
734

Common stock cash dividends - $0.11 per share

 

 

 
(19,174
)
 

 

 
(19,174
)
Balance at March 31, 2017
174,343

 
$
550,292

 
$
1,471,601

 
$
756,305

 
$
(34,552
)
 
$
(588,963
)
 
$
2,154,683

 
 
 
 
 
 
 
 
 
 
 
 
 
 
See Notes to Consolidated Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) Result of adoption of ASU 2018-02, See Note 1 to Consolidated Financial Statements for further details.
 
 
 
 
 
 
 
 
 

6



CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
(in thousands)
 
Three months ended March 31
 
2018
 
2017
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net Income
$
49,480

 
$
43,380

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for credit losses
3,970

 
4,800

Depreciation and amortization of premises and equipment
7,329

 
7,032

Amortization of tax credit investments
8,364

 
9,128

Net amortization of investment securities premiums
2,517

 
2,416

Investment securities gains, net
(19
)
 
(1,106
)
Gain on sales of mortgage loans held for sale
(2,645
)
 
(3,074
)
Proceeds from sales of mortgage loans held for sale
170,693

 
115,417

Originations of mortgage loans held for sale
(159,968
)
 
(108,429
)
Amortization of issuance costs on long-term debt
194

 
168

Stock-based compensation
1,510

 
734

Increase in accrued interest receivable
(150
)
 
(61
)
Increase in other assets
(6,923
)
 
(4,514
)
Increase in accrued interest payable
364

 
2,874

(Decrease) increase in other liabilities
(2,890
)
 
1,039

Total adjustments
22,346

 
26,424

Net cash provided by operating activities
71,826

 
69,804

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Proceeds from sales of securities available for sale
1,444

 
8,735

Proceeds from principal repayments and maturities of securities available for sale
78,150

 
98,024

Purchase of securities available for sale
(161,944
)
 
(49,430
)
Decrease (increase) in short-term investments
86,760

 
(59,135
)
Net decrease (increase) in loans
67,928

 
(267,383
)
Net purchases of premises and equipment
(14,840
)
 
(5,397
)
Net change in tax credit investments
(20,783
)
 
(5,283
)
Net cash provided by (used in) investing activities
36,715

 
(279,869
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Net (decrease) increase in demand and savings deposits
(278,626
)
 
112,348

Net decrease in time deposits
(41,803
)
 
(34,868
)
Increase (decrease) in short-term borrowings
320,328

 
(88,000
)
Additions to long-term debt

 
223,375

Repayments of long-term debt
(100,041
)
 
(15,037
)
Net proceeds from issuance of common stock
2,790

 
4,731

Dividends paid
(19,329
)
 
(17,403
)
Net cash (used in) provided by financing activities
(116,681
)
 
185,146

Net Decrease in Cash and Due From Banks
(8,140
)
 
(24,919
)
Cash and Due From Banks at Beginning of Period
108,291

 
118,763

Cash and Due From Banks at End of Period
$
100,151

 
$
93,844

Supplemental Disclosures of Cash Flow Information:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
26,005

 
$
18,034

Income taxes
154

 
116

See Notes to Consolidated Financial Statements
 
 
 
 

7



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

The accompanying unaudited consolidated financial statements of Fulton Financial Corporation (the "Corporation") have been prepared in conformity with U.S. generally accepted accounting principles ("U.S. GAAP") for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the amounts of assets and liabilities as of the date of the financial statements as well as revenues and expenses during the period. Actual results could differ from those estimates. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2017. Operating results for the three months ended March 31, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018. The Corporation evaluates subsequent events through the date of filing of this Form 10-Q with the Securities and Exchange Commission ("SEC").

Recently Adopted Accounting Standards

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Codification ("ASC") Update 2014-09, "Revenue from Contracts with Customers." This standards update established a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle prescribed by this standards update is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard applies to all contracts with customers, except those that are within the scope of other topics in the FASB ASC. The Corporation adopted this standard, and all subsequent Accounting Standards Updates ("ASU") that modified it on January 1, 2018 under the modified retrospective approach with no material impact on its consolidated financial statements. The Corporation evaluated the impact of the adoption of ASC Update 2014-09 on its consolidated financial statements and did not identify any significant changes in the timing of revenue recognition as a result of this amended guidance. The sources of revenue for the Corporation are interest income from loans and investments, net of interest expense on deposits and borrowings, and non-interest income. Non-interest income is earned from various banking and financial services that the Corporation offers through its subsidiary banks. Revenue is recognized as earned based on contractual terms, as transactions occur, or as services are provided. Following is further detail of the various types of revenue the Corporation earns and when it is recognized.

Interest income: Interest income is recognized on an accrual basis according to loan agreements, securities contracts or other such written contracts and is outside the scope of ASC Update 2014-09.

Investment management and trust services: Consists of trust commission income, brokerage income, money market income and insurance commission income. Trust commission income consists of advisory fees that are based on market values of clients' managed portfolios and transaction fees for fiduciary services performed, both of which are recognized as earned. Brokerage income includes advisory fees which are recognized as earned on a monthly basis and transaction fees that are recognized when transactions occur. Money market income is based on the balances held in trust accounts and is recognized monthly. Insurance commission income is earned and recognized when policies are originated. Currently, no investment management and trust service income is based on performance or investment results.

Service charges on deposit accounts: Consists of cash management, overdraft, non-sufficient fund fees and other service charges on deposit accounts. Revenue is primarily transactional and recognized when earned, at the time the transactions occur.

Other service charges and fees: Consists of branch fees, automated teller machine fees, debit card income and merchant services fees. These fees are primarily transactional, and revenue is recognized when transactions occur. Also included in other service charges and fees are letter of credit fees, foreign exchange income and commercial loan interest rate swap fees, which are outside the scope of ASC Update 2014-09.

Mortgage banking income: Consists of gains or losses on the sale of residential mortgage loans and mortgage loan servicing income. These revenues are outside the scope of ASC Update 2014-09.


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Other Income: Includes credit card income, gains on sales of Small Business Association ("SBA") loans, cash surrender value of life insurance, and other miscellaneous income. These items are either outside the scope of ASC Update 2014-09 or are immaterial.

In January 2016, the FASB issued ASC Update 2016-01, "Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities." ASC Update 2016-01 provides guidance regarding the income statement impact of equity investments held by an entity and the recognition of changes in fair value of financial liabilities when the fair value option is elected. This standard requires equity investments to be measured at fair value, with changes recorded in net income. This ASU also requires the use of the exit price notion when measuring the fair value of financial instruments for disclosure purposes. ASC Update 2016-01 was effective for interim and annual reporting periods beginning after December 15, 2017. The Corporation adopted this standards update effective with its March 31, 2018 quarterly report on Form 10-Q and the adoption of ASC Update 2016-01 did not have a material impact on its consolidated financial statements.

In August 2016, the FASB issued ASC Update 2016-15, "Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments." This standards update provides guidance regarding the presentation of certain cash receipts and cash payments in the statement of cash flows, addressing eight specific cash flow classification issues, in order to reduce existing diversity in practice. ASC Update 2016-15 was effective for interim and annual reporting periods beginning after December 15, 2017. The Corporation adopted this standards update effective with its March 31, 2018 quarterly report on Form 10-Q and the adoption of ASC Update 2016-15 did not have a material impact on its consolidated financial statements.

In November 2016, the FASB issued ASC Update 2016-18, "Statement of Cash Flows - Restricted Cash." This standards update provides guidance regarding the presentation of restricted cash in the statement of cash flows. The update requires companies to include amounts generally described as restricted cash and restricted cash equivalents, along with cash and cash equivalents, when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. It also requires an entity to disclose the nature of the restrictions on cash and cash equivalents. ASC Update 2016-18 was effective for interim and annual reporting periods beginning after December 15, 2017. The Corporation adopted this standards update effective with its March 31, 2018 quarterly report on Form 10-Q and the adoption of ASC Update 2016-18 did not have a material impact on its consolidated financial statements.

In March 2017, the FASB issued ASC Update 2017-07, "Improving the Presentation of Net Periodic Pension Costs and Net Periodic Benefit Cost." This standards update requires a company to present service cost separately from the other components of net benefit cost. In addition, the update provides explicit guidance on how to present the service cost component and the other components of net benefit cost in the income statement and allows only the service cost component of net benefit cost to be eligible for capitalization. ASC Update 2017-07 was effective for interim and annual reporting periods beginning after December 15, 2017. The Corporation adopted this standards update effective with its March 31, 2018 quarterly report on Form 10-Q and the adoption of ASC Update 2017-07 did not have a material impact on its consolidated financial statements.

In February 2018, the FASB issued ASC Update 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income." This ASU permits a reclassification from accumulated other comprehensive income ("AOCI") to retained earnings of the stranded tax effects resulting from the application of the Tax Cuts and Jobs Act of 2017 ("Tax Act"), which changed the corporate tax rate from 35% to 21%. This ASU is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. The Corporation adopted this standards update effective January 1, 2018 and elected to reclassify $7.1 million of stranded tax effects from AOCI to retained earnings at the beginning of the period of adoption. The Corporation's policy for releasing income tax effects from accumulated other comprehensive income is to release them as investments are sold or mature and pension and post-retirement liabilities are extinguished.

Recently Issued Accounting Standards

In February 2016, the FASB issued ASC Update 2016-02, "Leases." This standards update states that a lessee should recognize the assets and liabilities that arise from all leases with a term greater than 12 months. The core principle requires the lessee to recognize a liability to make lease payments and a "right-of-use" asset. The accounting applied by the lessor is relatively unchanged. The standards update also requires expanded qualitative and quantitative disclosures. The FASB has also issued amendments to this standard (ASC Updates 2017-13, 2018-01). ASC Update 2016-02 is effective for interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted. The Corporation intends to adopt this standards update effective with its March 31, 2019 quarterly report on Form 10-Q. The Corporation is currently evaluating the impact of the adoption of ASC Update 2016-02 on its consolidated financial statements. The Corporation currently operates a number of branches that are leased, with the leases accounted for as operating leases that are not recognized on the consolidated balance sheet. Under ASC Update 2016-02, right-of-use assets and lease liabilities will need to be recognized on the consolidated balance sheet for these branches, which will

9



also have an impact on regulatory capital ratios. The recognition of operating leases on the Corporation's consolidated balance sheet is expected to be the most significant impact of the adoption of this standards update.

In June 2016, the FASB issued ASC Update 2016-13, "Financial Instruments - Credit Losses." The new impairment model prescribed by this standards update is a single impairment model for all financial assets (i.e., loans and 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 probable under current U.S. GAAP. ASU 2016-13 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. ASC Update 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019. Early adoption is permitted. The Corporation intends to adopt this standards update effective with its March 31, 2020 quarterly report on Form 10-Q. The Corporation is currently evaluating the impact of the adoption of ASC Update 2016-13 on its consolidated financial statements and disclosures. While the Corporation is currently unable to reasonably estimate the impact of adopting ASU 2016-13, it expects that the impact of adoption could be significantly influenced by the composition, characteristics and quality of its loan portfolio as well as the prevailing economic conditions and forecasts as of the adoption date. As part of the evaluation process, the Corporation has established a steering committee and working group that includes individuals from various functional areas to assess processes, portfolio segmentation, systems requirements and needed resources to implement this new accounting standard.

In January 2017, the FASB issued ASC Update 2017-04, "Intangibles - Goodwill and Other." This standards update eliminates Step 2 of the goodwill impairment test which measures the impairment amount. Identifying and measuring impairment will take place in a single quantitative step. In addition, no separate qualitative assessment for reporting units with zero or negative carrying amount is required. Entities must disclose the existence of these reporting units and the amount of goodwill allocated to them. This update should be applied on a prospective basis, and an entity is required to disclose the nature of and reason for the change in accounting principle upon transition. ASC Update 2017-04 is effective for annual or interim goodwill impairment tests in reporting periods beginning after December 15, 2019. Early adoption is permitted. The Corporation intends to adopt this standards update effective with its 2020 goodwill impairment test and does not expect the adoption of ASC Update 2017-04 to have a material impact on its consolidated financial statements.

In March 2017, the FASB issued ASC Update 2017-08, "Premium Amortization on Purchased Callable Debt Securities." This standards update requires that a company amortize the premium on callable debt securities to the earliest call date versus current U.S. GAAP which requires amortization over the contractual life of the securities. The amortization period for callable debt securities purchased at a discount would not be impacted by the new accounting standards update. This amendment is to be adopted on a modified retrospective basis with a cumulative effect adjustment to retained earnings as of the beginning of the period of adoption. ASC Update 2017-08 is effective for annual or interim reporting periods beginning after December 15, 2018. Early adoption is permitted. The Corporation intends to adopt this standards update effective with its March 31, 2019 quarterly report on Form 10-Q and does not expect the adoption of ASC Update 2017-08 to have a material impact on its consolidated financial statements.

Reclassifications

Certain amounts in the 2017 consolidated financial statements and notes have been reclassified to conform to the 2018 presentation. On the Consolidated Statements of Cash Flows, the net change in tax credit investments is presented as cash flows from investing activities. Prior to the quarter ended March 31, 2018, these cash flows were presented as cash flows from operating activities, included in the net increase (decrease) in other liabilities. The presentation of the cash flows for the quarter ended March 31, 2017 were changed to conform to this presentation, resulting in a $5.3 million decrease in net cash flows used in investing activities and a corresponding increase in net cash flows provided by operating activities. The change had no impact on net income or retained earnings. In addition, the Corporation will revise the Consolidated Statements of Cash Flows for each of the comparative 2017 periods in future filings.

NOTE 2 – Net Income Per Share

Basic net income per share is calculated as net income divided by the weighted average number of shares outstanding. Diluted net income per share is calculated as net income divided by the weighted average number of shares outstanding plus the incremental number of shares added as a result of converting common stock equivalents, calculated using the treasury stock method. The Corporation’s common stock equivalents consist of outstanding stock options, restricted stock 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.


10



A reconciliation of weighted average shares outstanding used to calculate basic net income per share and diluted net income per share follows:
 
Three months ended March 31
 
 
2018
 
2017
 
 
(in thousands)
Weighted average shares outstanding (basic)
175,303

 
174,150

 
Impact of common stock equivalents
1,265

 
1,427

 
Weighted average shares outstanding (diluted)
176,568

 
175,577

 

NOTE 3 – Accumulated Other Comprehensive Income

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, 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 (2)
430

 
(91
)
 
339

Total Other Comprehensive Loss
$
(34,295
)
 
$
7,198

 
$
(27,097
)
Three months ended March 31, 2017
 
 
 
 
 
Unrealized gain on securities
$
6,575

 
$
(2,302
)
 
$
4,273

Reclassification adjustment for securities gains included in net income (1)
(1,106
)
 
387

 
(719
)
Amortization of net unrecognized pension and postretirement items (2)
528

 
(185
)
 
343

Total Other Comprehensive Income
$
5,997

 
$
(2,100
)
 
$
3,897


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

11



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)
Three months ended March 31, 2018
 
 
 
 
 
 
 
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
)
Three months ended March 31, 2017

 

 

 

Balance at December 31, 2016
$
(23,047
)
 
$
273

 
$
(15,675
)
 
$
(38,449
)
Other comprehensive income before reclassifications
4,273



 

 
4,273

Amounts reclassified from accumulated other comprehensive income (loss)
(719
)
 

 
343

 
(376
)
Balance at March 31, 2017
$
(19,493
)
 
$
273

 
$
(15,332
)
 
$
(34,552
)


12



NOTE 4 – Investment Securities

The following table presents the amortized cost and estimated fair values of investment securities, which were all classified as available for sale:
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
 
(in thousands)
March 31, 2018
 
 
 
 
 
 
 
U.S. Government sponsored agency securities
$
21,105

 
$
40

 
$
(183
)
 
$
20,962

State and municipal securities
413,632

 
2,247

 
(9,780
)
 
406,099

Corporate debt securities
101,367

 
2,482

 
(1,894
)
 
101,955

Collateralized mortgage obligations
695,840

 
236

 
(16,376
)
 
679,700

Residential mortgage-backed securities
1,084,582

 
3,006

 
(33,422
)
 
1,054,166

Commercial mortgage-backed securities
231,378

 
15

 
(4,501
)
 
226,892

Auction rate securities
107,410

 

 
(4,361
)
 
103,049

   Total
$
2,655,314

 
$
8,026

 
$
(70,517
)
 
$
2,592,823

 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
 
(in thousands)
December 31, 2017
 
 
 
 
 
 
 
U.S. Government sponsored agency securities
$
5,962

 
$
2

 
$
(26
)
 
$
5,938

State and municipal securities
405,860

 
5,638

 
(2,549
)
 
408,949

Corporate debt securities
96,353

 
2,832

 
(1,876
)
 
97,309

Collateralized mortgage obligations
611,927

 
491

 
(9,795
)
 
602,623

Residential mortgage-backed securities
1,132,080

 
3,957

 
(15,241
)
 
1,120,796

Commercial mortgage-backed securities
215,351

 

 
(2,596
)
 
212,755

Auction rate securities
107,410

 

 
(8,742
)
 
98,668

   Total debt securities
2,574,943

 
12,920

 
(40,825
)
 
2,547,038

Equity securities
776

 
142

 

 
918

   Total
$
2,575,719

 
$
13,062

 
$
(40,825
)
 
$
2,547,956

Securities carried at $1.8 billion at March 31, 2018 and December 31, 2017, were pledged as collateral to secure public and trust deposits and customer repurchase agreements.

13



The amortized cost and estimated fair values of debt securities as of March 31, 2018, by contractual maturity, are shown in the following table. Actual maturities may differ from contractual maturities as certain investment securities are subject to call or prepayment with or without call or prepayment penalties.
 
 
Amortized
Cost
 
Estimated
Fair Value
 
(in thousands)
Due in one year or less
 
$
14,055

 
$
14,063

Due from one year to five years
 
36,871

 
36,986

Due from five years to ten years
 
119,069

 
119,529

Due after ten years
 
473,519

 
461,487

 
 
643,514

 
632,065

Residential mortgage-backed securities(1)
 
1,084,582

 
1,054,166

Commercial mortgage-backed securities(1)
 
231,378

 
226,892

Collateralized mortgage obligations(1)
 
695,840

 
679,700

  Total
 
$
2,655,314

 
$
2,592,823

(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 on the sales of equity and debt securities:
 
Gross
Realized
Gains
Three months ended March 31, 2018
(in thousands)
Equity securities
$
9

Debt securities
10

Total
$
19

Three months ended March 31, 2017
 
Equity securities
$
1,045

Debt securities
61

Total
$
1,106

 
 

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, 2018 and March 31, 2017 was $11.5 million. There were no other-than-temporary impairment charges recognized for the three months ended March 31, 2018 and March 31, 2017.

14



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, 2018 and December 31, 2017:
 
Less than 12 months
 
12 months or longer
 
Total
 
Estimated
Fair Value
 
Unrealized
Losses
 
Estimated
Fair Value
 
Unrealized
Losses
 
Estimated
Fair Value
 
Unrealized
Losses
March 31, 2018
(in thousands)
U.S. Government sponsored agency securities
$
12,499

 
$
(183
)
 
$

 
$

 
$
12,499

 
$
(183
)
State and municipal securities
163,345

 
(3,132
)
 
114,024

 
(6,648
)
 
277,369

 
(9,780
)
Corporate debt securities
9,466

 
(130
)
 
28,219

 
(1,764
)
 
37,685

 
(1,894
)
Collateralized mortgage obligations
456,200

 
(7,184
)
 
176,076

 
(9,192
)
 
632,276

 
(16,376
)
Residential mortgage-backed securities
527,502

 
(13,611
)
 
471,703

 
(19,811
)
 
999,205

 
(33,422
)
Commercial mortgage-backed securities
196,887

 
(3,884
)
 
21,539

 
(617
)
 
218,426

 
(4,501
)
Auction rate securities

 

 
103,049

 
(4,361
)
 
103,049

 
(4,361
)
Total
$
1,365,899

 
$
(28,124
)
 
$
914,610

 
$
(42,393
)
 
$
2,280,509

 
$
(70,517
)
 
Less than 12 months
 
12 months or longer
 
Total
 
Estimated
Fair Value
 
Unrealized
Losses
 
Estimated
Fair Value
 
Unrealized
Losses
 
Estimated
Fair Value
 
Unrealized
Losses
December 31, 2017
(in thousands)
U.S. Government sponsored agency securities
$
5,830

 
$
(26
)
 
$

 
$

 
$
5,830

 
$
(26
)
State and municipal securities
11,650

 
(50
)
 
118,297

 
(2,499
)
 
129,947

 
(2,549
)
Corporate debt securities
4,544

 
(48
)
 
32,163

 
(1,828
)
 
36,707

 
(1,876
)
Collateralized mortgage obligations
303,932

 
(2,408
)
 
187,690

 
(7,387
)
 
491,622

 
(9,795
)
Residential mortgage-backed securities
511,378

 
(4,348
)
 
500,375

 
(10,893
)
 
1,011,753

 
(15,241
)
Commercial mortgage-backed securities
190,985

 
(2,118
)
 
21,770

 
(478
)
 
212,755

 
(2,596
)
Auction rate securities

 

 
98,668

 
(8,742
)
 
98,668

 
(8,742
)
Total
$
1,028,319

 
$
(8,998
)
 
$
958,963

 
$
(31,827
)
 
$
1,987,282

 
$
(40,825
)

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, 2018.
As of March 31, 2018, 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, 2018. 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.

15



The majority of the Corporation's available for sale corporate debt securities are issued by financial institutions. The following table presents the amortized cost and estimated fair values of corporate debt securities:
 
March 31, 2018
 
December 31, 2017
 
Amortized
cost
 
Estimated
fair value
 
Amortized
cost
 
Estimated
fair value
 
(in thousands)
Single-issuer trust preferred securities
$
31,352

 
$
30,513

 
$
31,335

 
$
30,703

Subordinated debt
54,011

 
54,357

 
49,013

 
49,533

Senior debt
12,029

 
12,245

 
12,031

 
12,392

Pooled trust preferred securities

 
865

 

 
707

Corporate debt securities issued by financial institutions
97,392

 
97,980

 
92,379

 
93,335

Other corporate debt securities
3,975

 
3,975

 
3,974

 
3,974

Available for sale corporate debt securities
$
101,367

 
$
101,955

 
$
96,353

 
$
97,309


Single-issuer trust preferred securities had an unrealized loss of $839,000 at March 31, 2018. Four of the 17 single-issuer trust preferred securities, with an amortized cost of $4.9 million and an estimated fair value of $4.7 million at March 31, 2018, were rated below investment grade by at least one ratings agency. All of the single-issuer trust preferred securities rated below investment grade were rated either "BB" or "Ba". Two single-issuer trust preferred securities with an amortized cost of $3.8 million and an estimated fair value of $3.1 million at March 31, 2018 were not rated by any ratings agency.
Based on management’s evaluations, no corporate debt securities were subject to any other-than-temporary impairment charges for the three months ended March 31, 2018. 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.


16



NOTE 5 – Loans and Allowance for Credit Losses

Loans, Net of Unearned Income

Loans, net of unearned income are summarized as follows:
 
March 31,
2018
 
December 31, 2017
 
(in thousands)
Real-estate - commercial mortgage
$
6,332,508

 
$
6,364,804

Commercial - industrial, financial and agricultural
4,299,072

 
4,300,297

Real-estate - residential mortgage
1,976,524

 
1,954,711

Real-estate - home equity
1,514,241

 
1,559,719

Real-estate - construction
976,131

 
1,006,935

Consumer
326,766

 
313,783

Leasing and other
297,465

 
291,556

Overdrafts
2,031

 
4,113

Loans, gross of unearned income
15,724,738

 
15,795,918

Unearned income
(28,454
)
 
(27,671
)
Loans, net of unearned income
$
15,696,284

 
$
15,768,247


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

Allowance for Credit Losses

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

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

The following table presents the components of the allowance for credit losses:
 
March 31,
2018
 
December 31,
2017
 
(in thousands)
Allowance for loan losses
$
163,217

 
$
169,910

Reserve for unfunded lending commitments
12,802

 
6,174

Allowance for credit losses
$
176,019

 
$
176,084



17



The following table presents the activity in the allowance for credit losses:
 
Three months ended March 31
 
2018
 
2017
 
(in thousands)
Balance at beginning of period
$
176,084

 
$
171,325

Loans charged off
(6,397
)
 
(9,407
)
Recoveries of loans previously charged off
2,362

 
5,929

Net loans charged off
(4,035
)
 
(3,478
)
Provision for credit losses
3,970

 
4,800

Balance at end of period
$
176,019

 
$
172,647


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

The following table presents the activity in the allowance for loan losses by portfolio segment:
 
Real Estate -
Commercial
Mortgage
 
Commercial -
Industrial,
Financial and
Agricultural
 
Real Estate -
Home
Equity
 
Real Estate -
Residential
Mortgage
 
Real Estate -
Construction
 
Consumer
 
Leasing, other
and
overdrafts
 
Unallocated
 
Total
 
(in thousands)
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 charged off
(267
)
 
(4,005
)
 
(408
)
 
(162
)
 
(158
)
 
(892
)
 
(505
)
 

 
(6,397
)
Recoveries of loans previously charged off
279

 
1,075

 
206

 
107

 
306

 
179

 
210

 

 
2,362

Net loans charged off
12

 
(2,930
)
 
(202
)
 
(55
)
 
148

 
(713
)
 
(295
)
 

 
(4,035
)
Provision for loan 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

Three months ended March 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2016
$
46,842

 
$
54,353

 
$
26,801

 
$
22,929

 
$
6,455

 
$
3,574

 
$
3,192

 
$
4,533

 
$
168,679

Loans charged off
(1,224
)
 
(5,527
)
 
(698
)
 
(216
)
 
(247
)
 
(856
)
 
(639
)
 

 
(9,407
)
Recoveries of loans previously charged off
450

 
4,191

 
137

 
230

 
548

 
236

 
137

 

 
5,929

Net loans charged off
(774
)
 
(1,336
)
 
(561
)
 
14

 
301

 
(620
)
 
(502
)
 

 
(3,478
)
Provision for loan losses (1)
1,305

 
2,292

 
(2,419
)
 
(925
)
 
745

 
77

 
578

 
3,222

 
4,875

Balance at March 31, 2017
$
47,373

 
$
55,309

 
$
23,821

 
$
22,018

 
$
7,501

 
$
3,031

 
$
3,268

 
$
7,755

 
$
170,076


(1)
The provision for loan losses excluded an increase of $6.6 million and a decrease of $75,000 in the reserve for unfunded lending commitments for the three months ended March 31, 2018 and March 31, 2017, respectively. These amounts were reclassified to Other Liabilities.










18



The following table presents loans, net of unearned income and their related allowance for loan losses, by portfolio segment:
 
Real Estate -
Commercial
Mortgage
 
Commercial -
Industrial,
Financial and
Agricultural
 
Real Estate -
Home
Equity
 
Real Estate -
Residential
Mortgage
 
Real Estate -
Construction
 
Consumer
 
Leasing, other
and
overdrafts
 
Unallocated
 
Total
 
(in thousands)
Allowance for loan losses at March 31, 2018:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans collectively evaluated for impairment
$
50,392

 
$
51,314

 
$
6,440

 
$
5,610

 
$
5,245

 
$
1,887

 
$
2,054

 
N/A

 
$
122,942

Loans individually evaluated for impairment
8,325

 
10,516

 
11,088

 
9,651

 
679

 
16

 

 
N/A

 
40,275

 
$
58,717

 
$
61,830

 
$
17,528

 
$
15,261

 
$
5,924

 
$
1,903

 
$
2,054

 
N/A

 
$
163,217

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans, net of unearned income at March 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans collectively evaluated for impairment
$
6,279,144

 
$
4,234,362

 
$
1,489,429

 
$
1,935,587

 
$
965,398

 
$
326,742

 
$
271,042

 
N/A

 
$
15,501,704

Loans individually evaluated for impairment
53,364

 
64,710

 
24,812

 
40,937

 
10,733

 
24

 

 
N/A

 
194,580

 
$
6,332,508

 
$
4,299,072

 
$
1,514,241

 
$
1,976,524

 
$
976,131

 
$
326,766

 
$
271,042

 
N/A

 
$
15,696,284

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses at March 31, 2017:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans collectively evaluated for impairment
$
37,457

 
$
43,155

 
$
14,744

 
$
10,581

 
$
4,915

 
$
3,007

 
$
3,268

 
$
7,755

 
$
124,882

Loans individually evaluated for impairment
9,916

 
12,154

 
9,077

 
11,437

 
2,586

 
24

 

 
N/A

 
45,194

 
$
47,373

 
$
55,309

 
$
23,821

 
$
22,018

 
$
7,501

 
$
3,031

 
$
3,268

 
$
7,755

 
$
170,076

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans, net of unearned income at March 31, 2017:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans collectively evaluated for impairment
$
6,067,492

 
$
4,119,550

 
$
1,576,949

 
$
1,620,302

 
$
869,225

 
$
288,789

 
$
243,983

 
N/A

 
$
14,786,290

Loans individually evaluated for impairment
51,041

 
48,259

 
18,952

 
44,840

 
13,758

 
37

 

 
N/A

 
176,887

 
$
6,118,533

 
$
4,167,809

 
$
1,595,901

 
$
1,665,142

 
$
882,983

 
$
288,826

 
$
243,983

 
N/A

 
$
14,963,177

 
N/A - Not applicable.

Impaired Loans

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

All loans individually evaluated for impairment are measured for losses on a quarterly basis. As of March 31, 2018 and December 31, 2017, substantially all of the Corporation’s individually evaluated impaired loans with total outstanding balances greater than or equal to $1.0 million were measured based on the estimated fair value of each loan’s collateral. Collateral could be in the form of real estate, in the case of impaired commercial mortgages and construction loans, or business assets, such as accounts receivable or inventory, in the case of commercial and industrial loans. Commercial and industrial loans may also be secured by real estate.

As of March 31, 2018 and 2017, approximately 72% and 67%, respectively, of impaired loans with principal balances greater than or equal to $1.0 million, whose primary collateral is real estate, were measured at estimated fair value of the collateral using appraisals that had been updated in the preceding 12 months, performed by state certified third-party appraisers.

When updated appraisals are not obtained for loans 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%).



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The following table presents total impaired loans by class segment:
 
March 31, 2018
 
December 31, 2017
 
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
$
29,862

 
$
27,819

 
$

 
$
26,728

 
$
22,886

 
$

Commercial
46,673

 
40,525

 

 
44,936

 
39,550

 

Real estate - residential mortgage
4,547

 
4,547

 

 
4,575

 
4,575

 

Construction
12,343

 
7,842

 

 
12,477

 
8,100

 

 
93,425

 
80,733

 

 
88,716

 
75,111

 

With a related allowance recorded:
 
 
 
 
 
 
 
 
 
 
Real estate - commercial mortgage
32,863

 
25,545

 
8,325

 
33,710

 
25,895

 
8,112

Commercial
29,723

 
24,185

 
10,516

 
29,816

 
24,175

 
11,406

Real estate - home equity
28,387

 
24,812

 
11,088

 
28,282

 
24,693

 
11,124

Real estate - residential mortgage
41,889

 
36,390

 
9,651

 
42,597

 
37,132

 
9,895

Construction
6,186

 
2,891

 
679

 
7,308

 
4,097

 
967

Consumer
25

 
24

 
16

 
26

 
26

 
17

 
139,073

 
113,847

 
40,275

 
141,739

 
116,018

 
41,521

Total
$
232,498

 
$
194,580

 
$
40,275

 
$
230,455

 
$
191,129

 
$
41,521

As of March 31, 2018 and December 31, 2017, there were $80.7 million and $75.1 million, respectively, of impaired loans that did not have a related allowance for loan loss. The estimated fair values of the collateral securing these loans exceeded their carrying amount, or the loans were previously charged down to realizable collateral values. Accordingly, no specific valuation allowance was considered to be necessary.
The following table presents average impaired loans by class segment:
 
Three months ended March 31
 
2018
 
2017
 
Average
Recorded
Investment
 
Interest
Income (1)
 
Average
Recorded
Investment
 
Interest
Income (1)
 
(in thousands)
With no related allowance recorded:
 
 
 
 
 
 
 
Real estate - commercial mortgage
$
25,353

 
$
83

 
$
23,842

 
$
70

Commercial
40,038

 
73

 
25,574

 
36

Real estate - residential mortgage
4,561

 
27

 
4,673

 
26

Construction
7,971

 

 
5,046

 
2

 
77,923

 
183

 
59,135

 
134

With a related allowance recorded:
 
 
 
 
 
 
 
Real estate - commercial mortgage
25,720

 
84

 
29,126

 
85

Commercial
24,181

 
44

 
23,044

 
32

Real estate - home equity
24,752

 
184

 
19,079

 
95

Real estate - residential mortgage
36,761

 
221

 
40,839

 
230

Construction
3,495

 

 
7,100

 
3

Consumer
25