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, exceeded $10 billion in total assets as of December 31, 2016 and is required to clear all eligible interest rate swap contracts with a central counterparty, effective January 1, 2017. 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:



	June 30, 2018					December 31, 2017
	Notional Amount		Asset (Liability) Fair Value			Notional Amount		Asset (Liability) Fair Value
	(in thousands)
Interest Rate Locks with Customers
Positive fair values	$	158,905	$	1,425		$	129,469	$	1,059
Negative fair values	8,765		(65		)	8,957		(59		)
Net interest rate locks with customers			1,360					1,000
Forward Commitments
Positive fair values	12,829		5			3,856		34
Negative fair values	114,774		(499		)	100,808		(213		)
Net forward commitments			(494		)			(179		)
Interest Rate Swaps with Customers
Positive fair values	431,935		7,903			1,316,548		24,505
Negative fair values	1,802,086		(57,393		)	716,634		(18,978		)
Net interest rate swaps with customers			(49,490		)			5,527
Interest Rate Swaps with Dealer Counterparties
Positive fair values ^{(1) (3)}	1,802,086		48,518			716,634		18,941
Negative fair values ^{(2) (3)}	431,935		(4,716		)	1,316,548		(19,764		)
Net interest rate swaps with dealer counterparties			43,802					(823		)
Foreign Exchange Contracts with Customers
Positive fair values	10,564		335			4,852		276
Negative fair values	6,758		(194		)	5,914		(119		)
Net foreign exchange contracts with customers			141					157
Foreign Exchange Contracts with Correspondent Banks
Positive fair values	9,397		296			7,960		184
Negative fair values	12,147		(329		)	6,048		(255		)
Net foreign exchange contracts with correspondent banks			(33		)			(71		)
Net derivative fair value asset			$	(4,714	)			$	5,611

(1) Includes centrally cleared interest rate swaps with a notional amount of $399.3 million and a fair value of $0 as of June 30, 2018 and a notional amount of $24.4 million and a fair value of $0 as of December 31, 2017.

(2) Includes centrally cleared interest rate swaps with a notional amount of $158.8 million and a fair value of $0 as of June 30, 2018 and a notional amount of $377.1 million and a fair value of $0 as of December 31, 2017.

(3) 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 of $5.8 million at June 30, 2018, increasing the fair value of such swaps to $0, and $4.6 million at December 31, 2017, reducing the fair value of such swaps to $0.

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



	Three months ended June 30						Six months ended June 30
	2018			2017			2018			2017
	(in thousands)
Interest rate locks with customers	$	231		$	(155	)	$	360		$	690
Forward commitments	(541		)	157			(315		)	(2,222		)
Interest rate swaps with customers	(12,375		)	13,809			(55,017		)	12,994
Interest rate swaps with dealer counterparties ⁽¹⁾	10,811			(10,831		)	44,625			(7,830		)
Foreign exchange contracts with customers	(23		)	(325		)	(16		)	(317		)
Foreign exchange contracts with correspondent banks	(50		)	367			38			330
Net fair value (losses) gains on derivative financial instruments	$	(1,947	)	$	3,022		$	(10,325	)	$	3,645

(1) Not included is $1.6 million and $10.4 million, respectively, of gains representing the change in the variation margin for the three and six months ended June 30, 2018 and $2.9 million and $5.1 million, respectively, of losses representing the change in the variation margin for the three and six months ended June 30, 2017.

Fair Value Option

The Corporation has elected to measure mortgage loans held for sale at fair value. Derivative financial instruments related to mortgage banking activities are also recorded at fair value, as noted above. The Corporation determines fair value for its mortgage loans held for sale based on the price that secondary market investors would pay for loans with similar characteristics, including interest rate and term, as of the date fair value is measured. Changes in fair values during the period are recorded as components of mortgage banking income on the consolidated statements of income.

The following table presents a summary of the Corporation’s mortgage loans held for sale:



	June 30, 2018		December 31, 2017
	(in thousands)
Cost⁽¹⁾	$	35,310	$	31,069
Fair value	35,898		31,530

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

For the three months ended June 30, 2018 and June 30, 2017, gains related to changes in fair values of mortgage loans held for sale were $324,000 and $26,000, respectively. During the six months ended June 30, 2018 and June 30, 2017, the Corporation recorded gains related to changes in fair values of mortgage loans held for sale of $127,000 and $565,000, respectfully.

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 has no intention of setting off these amounts. Therefore, these repurchase agreements are not eligible for offset.

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



	Gross Amounts		Gross Amounts Not Offset
	Recognized		on the Consolidated
	on the		Balance Sheets
	Consolidated		Financial			Cash			Net
	Balance Sheets		Instruments⁽¹⁾			Collateral ⁽²⁾			Amount
	(in thousands)
June 30, 2018
Interest rate swap derivative assets	$	56,421	$	(5,916	)	$	(44,080	)	$	6,425
Foreign exchange derivative assets with correspondent banks	296		(296		)	—			—
Total	$	56,717	$	(6,212	)	$	(44,080	)	$	6,425

Interest rate swap derivative liabilities	$	62,109	$	(5,916	)	$	(13,177	)	$	43,016
Foreign exchange derivative liabilities with correspondent banks	329		(296		)	—			33
Total	$	62,438	$	(6,212	)	$	(13,177	)	$	43,049

December 31, 2017
Interest rate swap derivative assets	$	43,446	$	(16,844	)	$	—		$	26,602
Foreign exchange derivative assets with correspondent banks	184		(184		)	—			—
Total	$	43,630	$	(17,028	)	$	—		$	26,602

Interest rate swap derivative liabilities	$	38,742	$	(16,844	)	$	(6,588	)	$	15,310
Foreign exchange derivative liabilities with correspondent banks	255		(184		)	—			71
Total	$	38,997	$	(17,028	)	$	(6,588	)	$	15,381


(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.