UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20459
FORM 10-Q
(Mark One)
   
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period endedSeptember 30, 2008March 31, 2009,
or
   
o 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(I.R.S. Employer

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 check mark 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. Yesþ Noo
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date 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). Yeso     Noo
Indicate by check mark 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. (Check one):
       
Large accelerated filerþ Accelerated filero Non-accelerated filero
Smaller reporting companyo
(Do not check if a smaller reporting company)Smaller reporting companyo
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
Common Stock, $2.50 Par Value – 174,981,000— 175,598,000 shares outstanding as of October 31, 2008April 30, 2009.
 
 

 


 

FULTON FINANCIAL CORPORATION
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2008MARCH 31, 2009
INDEX
     
Description Page
 
 
PART I. FINANCIAL INFORMATION    
 
  3 
 
  3 
 
  4 
 
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  6 
 
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  23 
 
  4838 
 
  5444 
 
    
 
  5545 
 
  5545 
 
  5645 
 
  5645 
 
  5745 
 
  5745 
 
  5745 
 
  5846 
 
  5947 
 
Certifications  6048 
 EXHIBITExhibit 31.1
 EXHIBITExhibit 31.2
 EXHIBITExhibit 32.1
 EXHIBITExhibit 32.2

2


Item 1. Financial Statements
FULTON FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except per-share data)
        
         March 31   
 September 30    2009 December 31 
 2008 December 31  (unaudited) 2008 
 (unaudited) 2007   
ASSETS
  
Cash and due from banks $315,841 $381,283  $265,431 $331,164 
Interest-bearing deposits with other banks 11,819 11,330  14,070 16,791 
Federal funds sold 38,370 9,823  259 4,919 
Loans held for sale 71,090 103,984  102,033 95,840 
Investment securities:  
Held to maturity (estimated fair value of $9,926 in 2008 and $10,399 in 2007) 9,823 10,285 
Held to maturity (estimated fair value of $9,642 in 2009 and $9,765 in 2008) 9,519 9,636 
Available for sale 2,796,712 3,143,267  3,114,168 2,715,205 
  
Loans, net of unearned income 11,823,529 11,204,424  12,009,060 12,042,620 
Less: Allowance for loan losses  (136,988)  (107,547)  (192,410)  (173,946)
          
Net Loans
 11,686,541 11,096,877  11,816,650 11,868,674 
          
  
Premises and equipment 199,464 193,296  205,495 202,657 
Accrued interest receivable 62,018 73,435  59,369 58,566 
Goodwill 624,410 624,072  534,511 534,385 
Intangible assets 25,225 30,836  21,985 23,448 
Other assets 294,832 244,610  350,032 323,821 
     
      
Total Assets
 $16,136,145 $15,923,098  $16,493,522 $16,185,106 
          
  
LIABILITIES
  
Deposits:  
Noninterest-bearing $1,690,499 $1,722,211  $1,776,169 $1,653,440 
Interest-bearing 8,226,056 8,383,234  9,637,813 8,898,476 
          
Total Deposits
 9,916,555 10,105,445  11,413,982 10,551,916 
          
  
Short-term borrowings:  
Federal funds purchased 1,326,873 1,057,335  397,158 1,147,673 
Other short-term borrowings 1,263,093 1,326,609  798,316 615,097 
          
Total Short-Term Borrowings
 2,589,966 2,383,944  1,195,474 1,762,770 
          
 
Accrued interest payable 47,950 69,238  66,691 53,678 
Other liabilities 157,875 147,418  169,456 169,298 
Federal Home Loan Bank advances and long-term debt 1,819,889 1,642,133  1,786,598 1,787,797 
          
Total Liabilities
 14,532,235 14,348,178  14,632,201 14,325,459 
          
  
SHAREHOLDERS’ EQUITY
  
Common stock, $2.50 par value, 600 million shares authorized, 192.3 million shares issued in 2008 and 191.8 million shares issued in 2007 480,810 479,559 
Preferred stock, $1,000 par value, 376,500 shares authorized and outstanding 369,270 368,944 
Common stock, $2.50 par value, 600 million shares authorized, 192.5 million shares issued in 2009 and 192.4 million shares issued in 2008 481,212 480,978 
Additional paid-in capital 1,253,851 1,254,369  1,258,979 1,260,947 
Retained earnings 159,320 141,993  42,143 31,075 
Accumulated other comprehensive loss  (21,262)  (21,773)  (31,518)  (17,907)
Treasury stock, 17.6 million shares in 2008 and 18.3 million shares in 2007, at cost  (268,809)  (279,228)
Treasury stock, 17.0 million shares in 2009 and 17.3 million shares in 2008, at cost  (258,765)  (264,390)
          
Total Shareholders’ Equity
 1,603,910 1,574,920  1,861,321 1,859,647 
          
 
Total Liabilities and Shareholders’ Equity
 $16,136,145 $15,923,098  $16,493,522 $16,185,106 
          
See Notes to Consolidated Financial Statements

3


FULTON FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except per-share data)
                
 Three Months Ended Nine Months Ended         
 September 30 September 30  Three Months Ended March 31 
 2008 2007 2008 2007  2009 2008 
INTEREST INCOME
  
Loans, including fees $180,170 $204,580 $550,477 $598,130  $162,314 $191,166 
Investment securities:  
Taxable 26,025 24,583 84,114 71,201  26,849 29,561 
Tax-exempt 4,513 4,388 13,540 13,069  4,477 4,535 
Dividends 1,421 2,063 5,103 5,998  617 2,163 
Loans held for sale 1,539 2,694 4,727 9,771  1,261 1,577 
Other interest income 141 432 460 1,339  49 218 
              
Total Interest Income
 213,809 238,740 658,421 699,508  195,567 229,220 
  
INTEREST EXPENSE
  
Deposits 47,192 76,403 161,807 221,410  49,895 63,485 
Short-term borrowings 12,877 17,786 44,093 51,734  1,437 18,829 
Long-term debt 19,722 22,141 60,714 61,271  20,119 21,007 
              
Total Interest Expense
 79,791 116,330 266,614 334,415  71,451 103,321 
              
  
Net Interest Income
 134,018 122,410 391,807 365,093  124,116 125,899 
Provision for loan losses 26,700 4,606 54,626 8,263  50,000 11,220 
              
  
Net Interest Income After Provision for Loan Losses
 107,318 117,804 337,181 356,830  74,116 114,679 
 
OTHER INCOME
  
Service charges on deposit accounts 16,177 11,293 45,463 33,145  14,894 13,967 
Gains on sale of mortgage loans 8,591 2,311 
Other service charges and fees 9,598 8,530 27,320 23,746  8,354 8,591 
Investment management and trust services 8,045 9,291 25,193 29,374  7,903 8,759 
Gains on sales of mortgage loans 2,266 2,532 7,247 12,113 
Gain on sale of credit card portfolio   13,910  
Investment securities (losses) gains  (9,501)  (134)  (29,902) 2,277 
Other 4,030 5,231 11,214 12,158  4,253 2,806 
 
Total other-than-temporary impairment losses  (5,856)  (3,575)
Less: Portion of loss recognized in other comprehensive income (before taxes) 2,816  
     
Net other-than-temporary impairment losses  (3,040)  (3,575)
Net gains on sale of investment securities 5,959 4,821 
     
Net investment securities gains 2,919 1,246 
     
          
Total Other Income
 30,615 36,743 100,445 112,813  46,914 37,680 
  
OTHER EXPENSES
  
Salaries and employee benefits 55,310 52,505 164,786 164,353  55,304 55,195 
Net occupancy expense 10,237 9,813 30,999 29,963  11,023 10,524 
Operating risk loss 3,480 16,345 19,108 26,462  6,201 1,243 
FDIC insurance premiums 4,288 862 
Equipment expense 3,079 3,448 
Data processing 3,242 3,131 9,604 9,550  3,072 3,246 
Advertising 3,097 2,470 9,521 7,869 
Equipment expense 3,061 3,438 9,907 10,589 
Marketing 2,571 2,905 
Intangible amortization 1,730 1,995 5,386 6,176  1,463 1,857 
Other 18,998 18,299 56,240 52,046  19,371 17,380 
              
Total Other Expenses
 99,155 107,996 305,551 307,008  106,372 96,660 
              
  
Income Before Income Taxes
 38,778 46,551 132,075 162,635  14,658 55,699 
Income taxes 9,702 12,985 35,825 48,096  1,573 14,203 
              
  
Net Income
 $29,076 $33,566 $96,250 $114,539  13,085 41,496 
Preferred stock dividends and discount accretion  (5,031)  
     
Net Income Available to Common Shareholders
 $8,054 $41,496 
              
  
PER-SHARE DATA:
 
PER COMMON SHARE:
 
Net income (basic) $0.17 $0.19 $0.55 $0.66  $0.05 $0.24 
Net income (diluted) 0.17 0.19 0.55 0.66  0.05 0.24 
Cash dividends 0.150 0.150 0.450 0.448  0.03 0.15 
See Notes to Consolidated Financial Statements

4


FULTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
NINE
THREE MONTHS ENDED SEPTEMBER 30,MARCH 31, 2009 AND 2008 AND 2007
(in thousands)
                                                            
 Accumulated      Accumulated     
 Number of Additional Other      Common Stock Additional Other     
 Shares Common Paid-in Retained Comprehensive Treasury    Preferred Shares Paid-in Retained Comprehensive Treasury   
 Outstanding Stock Capital Earnings Income (Loss) Stock Total  Stock Outstanding Amount Capital Earnings Income (Loss) Stock Total 
Balance at December 31, 2008 $368,944 175,044 $480,978 $1,260,947 $31,075 $(17,907) $(264,390) $1,859,647 
Cumulative effect of FSP FAS 115-2 and FAS 124-2 adoption (net of $3.4 million tax effect)   6,298  (6,298) - 
Comprehensive income (loss): 
Net income 13,085 13,085 
Other comprehensive loss  (7,313)  (7,313)
   
Total comprehensive income
 5,772 
   
Stock issued, including related tax benefits 463 234  (2,348) 5,625 3,511 
Stock-based compensation awards 380 380 
Preferred stock discount accretion 326  (326)  
Preferred stock cash dividends  (2,719)  (2,719)
Common stock cash dividends — $0.03 per share  (5,270)  (5,270)
                 
 
Balance at March 31, 2009 $369,270 175,507 $481,212 $1,258,979 $42,143 $(31,518) $(258,765) $1,861,321 
                 
 
Balance at December 31, 2007 173,503 $479,559 $1,254,369 $141,993 $(21,773) $(279,228) $1,574,920  $ 173,503 $479,559 $1,254,369 $141,993 $(21,773) $(279,228) $1,574,920 
Comprehensive income: 
Cumulative effect of EITF 06-4 adoption  (677)  (677)
Impact of pension plan measurement date change (net of $23,000 tax effect) 43 43 
Comprehensive income (loss): 
Net income 96,250 96,250  41,496 41,496 
Other comprehensive income 511 511  20,010 20,010 
      
Total comprehensive income
 96,761  61,506 
      
Stock issued, including related tax benefits 1,184 1,251  (2,189) 10,419 9,481  219 547 941 1,488 
Stock-based compensation awards 1,671 1,671  587 587 
Impact of pension plan measurement date change (net of $23,000 tax effect) 43 43 
Cumulative effect of EITF 06-4 adoption  (677)  (677)
Cash dividends — $0.450 per share  (78,289)      (78,289)
Common stock cash dividends — $0.15 per share  (26,147)  (26,147)
                   
  
Balance at September 30, 2008 174,687 $480,810 $1,253,851 $159,320 $(21,262) $(268,809) $1,603,910 
Balance at March 31, 2008 $ 173,722 $480,106 $1,255,897 $156,708 $(1,763) $(279,228) $1,611,720 
                   
Balance at December 31, 2006 173,648 $476,987 $1,246,823 $92,592 $(39,091) $(261,001) $1,516,310 
Comprehensive income: 
Net income 114,539 114,539 
Other comprehensive income 10,046 10,046 
   
Total comprehensive income
 124,585 
   
Stock issued, including related tax benefits 920 2,298 4,383 6,681 
Stock-based compensation awards 2,069 2,069 
Cumulative effect of FIN 48 adoption 220 220 
Acquisition of treasury stock  (1,174)  (18,227)  (18,227)
Cash dividends — $0.448 per share  (77,518)      (77,518)
  
 
Balance at September 30, 2007 173,394 $479,285 $1,253,275 $129,833 $(29,045) $(279,228) $1,554,120 
  
See Notes to Consolidated Financial Statements

5


FULTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
                
 Nine Months Ended  Three Months Ended 
 September 30  March 31 
 2008 2007  2009 2008 
CASH FLOWS FROM OPERATING ACTIVITIES:
  
Net Income $96,250 $114,539  $13,085 $41,496 
 
Adjustments to reconcile net income to net cash provided by operating activities:  
Provision for loan losses 54,626 8,263  50,000 11,220 
Depreciation and amortization of premises and equipment 14,776 14,801  4,912 4,904 
Net amortization of investment security premiums 372 1,726  116 370 
Gain on sale of credit card portfolio  (13,910)  
Investment securities losses (gains) 29,902  (2,277)
Net decrease in loans held for sale 17,396 92,314 
Investment securities gains  (2,919)  (1,246)
Net (increase) decrease in loans held for sale  (6,193) 8,840 
Amortization of intangible assets 5,386 6,176  1,463 1,857 
Stock-based compensation expense 1,671 2,069 
Excess tax benefits from stock-based compensation expense  (20)  (111)
Decrease (increase) in accrued interest receivable 11,417  (2,102)
(Increase) decrease in other assets  (12,274) 8,940 
(Decrease) increase in accrued interest payable  (21,288) 9,373 
Decrease in other liabilities  (17,279)  (10,858)
Stock-based compensation 380 587 
Excess tax benefits from stock-based compensation   (2)
(Increase) decrease in accrued interest receivable  (803) 7,570 
Increase in other assets  (12,926)  (8,550)
Increase (decrease) in accrued interest payable 13,013  (2,601)
Increase in other liabilities 19,041 17,098 
          
Total adjustments 70,775 128,314  66,084 40,047 
          
Net cash provided by operating activities
 167,025 242,853  79,169 81,543 
          
  
CASH FLOWS FROM INVESTING ACTIVITIES:
  
Proceeds from sales of securities available for sale 662,993 314,979  162,363 194,571 
Proceeds from maturities of securities held to maturity 5,273 2,774  983 3,961 
Proceeds from maturities of securities available for sale 546,407 366,308  152,432 229,210 
Proceeds from sale of credit card portfolio 100,516  
Purchase of securities held to maturity  (4,813)  (1,986)  (922)  (3,884)
Purchase of securities available for sale  (903,817)  (739,377)  (731,005)  (303,250)
(Increase) decrease in short-term investments  (29,036) 8,515 
Net increase in loans  (715,219)  (589,419)
Decrease in short-term investments 7,381 7,913 
Net decrease (increase) in loans 3,510  (188,589)
Net purchases of premises and equipment  (20,944)  (13,492)  (7,750)  (9,032)
          
Net cash used in investing activities
  (358,640)  (651,698)  (413,008)  (69,100)
          
  
CASH FLOWS FROM FINANCING ACTIVITIES:
  
Net decrease in demand and savings deposits  (21,071)  (171,584)
Net (decrease) increase in time deposits  (167,819) 230,301 
Net increase in demand and savings deposits 247,253 38,894 
Net increase (decrease) in time deposits 614,813  (95,411)
Additions to long-term debt 344,690 723,633   343,990 
Repayments of long-term debt  (166,934)  (394,801)  (1,199)  (95,154)
Increase in short-term borrowings 206,022 92,243 
Decrease in short-term borrowings  (567,296)  (154,817)
Dividends paid  (78,196)  (77,113)  (28,976)  (26,115)
Net proceeds from issuance of stock 9,461 6,570 
Net proceeds from issuance of common stock 3,511 1,486 
Excess tax benefits from stock-based compensation expense 20 111   2 
Acquisition of treasury stock   (18,227)
          
Net cash provided by financing activities
 126,173 391,133  268,106 12,875 
          
  
Net Decrease in Cash and Due From Banks
  (65,442)  (17,712)
Net (Decrease) Increase in Cash and Due From Banks
  (65,733) 25,318 
Cash and Due From Banks at Beginning of Year
 381,283 355,018  331,164 381,283 
          
  
Cash and Due From Banks at End of Year
 $315,841 $337,306  $265,431 $406,601 
          
  
Supplemental Disclosures of Cash Flow Information
  
Cash paid during the period for:  
Interest $287,902 $325,042  $58,438 $105,922 
Income taxes 67,264 52,355  54 5,000 
See Notes to Consolidated Financial Statements

6


FULTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A Basis of Presentation
The accompanying unaudited consolidated financial statements of Fulton Financial Corporation (the Corporation) have been prepared in accordance 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. Operating results for the three and nine-month periodsthree-month period ended September 30, 2008March 31, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008.2009.
NOTE B Net Income Per Common Share and Other Comprehensive Income (Loss)
The Corporation’s basic net income per common share is calculated as net income available to common shareholders divided by the weighted average number of common shares outstanding. Net income available to common shareholders is calculated as net income less accrued dividends and discount accretion related to preferred stock.
For diluted net income per common share, net income available to common shareholders is divided by the weighted average number of common shares outstanding plus the incremental number of shares added as a result of converting common stock equivalents,dilutive securities, calculated using the treasury stock method. The Corporation’s common stock equivalentsdilutive securities consist solely of outstanding stock options, restricted stock and restricted stock.common stock warrants.
A reconciliation of thenet income available to common shareholders and weighted average common shares outstanding used to calculate basic net income per common share and diluted net income per common share follows:follows.
                 
  Three months ended  Nine months ended 
  September 30  September 30 
  2008  2007  2008  2007 
      (in thousands)     
Weighted average shares outstanding (basic)  174,463   173,304   174,017   173,254 
Impact of common stock equivalents  449   1,066   534   1,239 
             
Weighted average shares outstanding (diluted)  174,912   174,370   174,551   174,493 
             
                 
Stock options excluded from the earnings per share computation as their effect would have been anti-dilutive  5,560   4,429   5,261   3,988 
             
         
  Three months ended 
  March 31 
  2009  2008 
  (in thousands) 
Net income $13,085  $41,496 
Preferred stock dividends and discount accretion  5,031    
       
Net income available to common shareholders $8,054  $41,496 
       
         
Weighted average common shares outstanding (basic)  175,315   173,624 
Effect of dilutive securities  233   585 
       
Weighted average common shares outstanding (diluted)  175,548   174,209 
       
         
Stock options and common stock warrants excluded from the earnings per share computation as their effect would have been anti-dilutive  11,818   5,206 
       

7


The following table presents the components of other comprehensive income (loss):
         
  Nine months ended 
  September 30 
  2008  2007 
  (in thousands) 
Unrealized (loss) gain on securities (net of $11.9 million and $1.3 million tax effect in 2008 and 2007, respectively) $(22,118) $2,416 
Unrealized gain (loss) on derivative financial instruments (net of $55,000 and $29,000 tax effect in 2008 and 2007, respectively)  102   (53)
Reclassification adjustment for securities losses (gains) included in net income (net of $12.1 million tax benefit in 2008 and $797,000 tax expense in 2007)  22,527   (1,480)
Defined benefit pension plan curtailment (net of $4.9 million tax effect in 2007)     9,122 
Amortization of unrecognized pension and postretirement costs (net of $22,000 tax effect in 2007)     41 
       
Other comprehensive income $511  $10,046 
       
         
  Three months ended 
  March 31 
  2009  2008 
  (in thousands) 
Unrealized (loss) gain on securities (net of $2.0 million and $9.6 million tax effect in 2009 and 2008, respectively) $(3,789) $17,773 
Non-credit related unrealized loss on other-than-temporarily impaired debt securities (net of $985,000 tax effect) (1)  (1,831)   
Unrealized gain on derivative financial instruments (net of $18,000 tax effect in 2009 and 2008) (2)  34   34 
Amortization of unrecognized pension costs (net of $92,000 tax effect)  170    
Reclassification adjustment for securities (gains) losses included in net income (net of $1.0 million tax expense in 2009 and $1.2 million tax benefit in 2008 )  (1,897)  2,203 
       
Other comprehensive income (loss) $(7,313) $20,010 
       
(1)See Note C, “Investment Securities” for additional details related to the other-than-temporary impairment of debt securities.
(2)Amounts represent the amortization of the effective portions of losses on forward-starting interest rate swaps, designated as cash flow hedges and entered into in prior years in connection with the issuance of fixed-rate debt. The total amount recorded as a reduction to accumulated other comprehensive income upon settlement of these derivatives is being amortized to interest expense over the life of the related securities using the effective interest method. The amount of net losses in accumulated other comprehensive income that will be reclassified into earnings during the next twelve months is expected to be approximately $135,000.
NOTE C INVESTMENT SECURITIES
The following tables present the amortized cost and estimated fair values of investment securities:
                                
 Gross Gross Estimated  Gross Gross Estimated 
 Amortized Unrealized Unrealized Fair  Amortized Unrealized Unrealized Fair 
Held to Maturity at September 30, 2008 Cost Gains Losses Value 
 Cost Gains Losses Value 
 (in thousands) 
Held to Maturity at March 31, 2009
 
 (in thousands)  
U.S. Government sponsored agency securities $6,720 $22 $ $6,742  $6,805 $41 $ $6,846 
State and municipal securities 912 4  916  825 3  828 
Corporate debt securities 25   25 
Mortgage-backed securities 2,166 77  2,243  1,889 79  1,968 
                  
 $9,823 $103 $ $9,926  $9,519 $123 $ $9,642 
                  
  
Available for Sale at September 30, 2008
 
Available for Sale at March 31, 2009
 
  
Equity securities $171,944 $4,842 $(5,737) $171,049  $135,214 $490 $(8,534) $127,170 
U.S. Government securities 14,585 59  14,644  14,506 12  14,518 
U.S. Government sponsored agency securities 76,952 1,632  (10) 78,574  78,767 2,018  (144) 80,641 
State and municipal securities 519,718 1,681  (9,520) 511,879  487,113 7,778  (674) 494,217 
Corporate debt securities 173,057 681  (41,855) 131,883  162,699 516  (64,828) 98,387 
Collateralized mortgage obligations 521,489 15,358  (107) 536,740  687,456 15,963  (204) 703,215 
Mortgage-backed securities 1,191,267 10,755  (3,160) 1,198,862  1,354,952 37,538  (48) 1,392,442 
Auction rate securities (1) 157,011   (3,930) 153,081  218,625 55  (15,102) 203,578 
                  
 $2,826,023 $35,008 $(64,319) $2,796,712  $3,139,332 $64,370 $(89,534) $3,114,168 
                  
 
(1) See Note I,G, “Commitments and Contingencies” for additional details related to auction rate securities.

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 Gross Gross Estimated  Gross Gross Estimated 
 Amortized Unrealized Unrealized Fair  Amortized Unrealized Unrealized Fair 
Held to Maturity at December 31, 2007 Cost Gains Losses Value 
 Cost Gains Losses Value 
 (in thousands) 
Held to Maturity at December 31, 2008 
 (in thousands)  
U.S. Government sponsored agency securities $6,478 $33 $ $6,511  $6,782 $60 $ $6,842 
State and municipal securities 1,120 7  1,127  825 5  830 
Corporate debt securities 25   25  25   25 
Mortgage-backed securities 2,662 74  2,736  2,004 66  (2) 2,068 
                  
 $10,285 $114 $ $10,399  $9,636 $131 $(2) $9,765 
                  
  
Available for Sale at December 31, 2007 
 
Equity securities $215,177 $282 $(23,734) $191,725 
U.S. Government securities 14,489 47  14,536 
U.S. Government sponsored agency securities 200,899 1,658  (34) 202,523 
State and municipal securities 520,670 2,488  (1,620) 521,538 
Corporate debt securities 172,907 1,259  (8,184) 165,982 
Collateralized mortgage obligations 588,848 6,604  (677) 594,775 
Mortgage-backed securities 1,460,219 6,167  (14,198) 1,452,188 
         
 $3,173,209 $18,505 $(48,447) $3,143,267 
         
                 
Available for Sale at December 31, 2008                
 
Equity securities $138,071  $2,133  $(1,503) $138,701 
U.S. Government securities  14,545   83      14,628 
U.S. Government sponsored agency securities  74,616   2,406   (20)  77,002 
State and municipal securities  520,429   5,317   (2,210)  523,536 
Corporate debt securities  154,976   1,085   (36,167)  119,894 
Collateralized mortgage obligations  489,686   14,713   (206)  504,193 
Mortgage-backed securities  1,118,508   24,160   (1,317)  1,141,351 
Auction rate securities  208,281      (12,381)  195,900 
             
  $2,719,112  $49,897  $(53,804) $2,715,205 
             
The amortized cost and estimated fair value of debt securities as of March 31, 2009, by contractual maturity, are shown in the following table. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
                 
  Held to Maturity  Available for Sale 
  Amortized  Estimated  Amortized  Estimated 
  Cost  Fair Value  Cost  Fair Value 
  (in thousands) 
Due in one year or less $322  $326  $118,611  $119,202 
Due from one year to five years  7,308   7,348   236,763   242,507 
Due from five years to ten years        102,514   98,224 
Due after ten years        503,822   431,408 
             
   7,630   7,674   961,710   891,341 
Collateralized mortgage obligations        687,456   703,215 
Mortgage-backed securities  1,889   1,968   1,354,952   1,392,442 
             
  $9,519  $9,642  $3,004,118  $2,986,998 
             

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The following table presents information related to the Corporation’s gains and losses on the sales of equity and debt securities, and losses recognized for the other-than-temporary impairment of investments. Gross realized losses on equity and debt securities are net of other-than-temporary impairment charges:
                 
          Other-than-    
  Gross  Gross  temporary    
  Realized  Realized  Impairment  Net Gains 
  Gains  Losses  Losses  (Losses) 
  (in thousands) 
Three months ended March 31, 2009:                
Equity securities $112  $(216) $(1,062) $(1,166)
Debt securities  6,171   (108)  (1,978)  4,085 
             
Total $6,283  $(324) $(3,040) $2,919 
             
                 
Three months ended March 31, 2008:                
Equity securities $4,756  $(8) $(3,575) $1,173 
Debt securities  196   (123)     73 
             
Total $4,952  $(131) $(3,575) $1,246 
             
The following table presents a summary of other-than-temporary impairment charges recorded by the Corporation, by investment security type:
         
  Three months ended 
  March 31 
  2009  2008 
  (in thousands) 
Financial institution stocks $956  $3,575 
Mutual funds  106    
       
Total equity securities charges  1,062   3,575 
       
         
Debt securities — Pooled trust preferred securities  1,978    
       
         
Total other-than-temporary impairment charges $3,040  $3,575 
       
During the first quarter of 2009, the values of financial institutions stocks, including those held by the Corporation, declined significantly. The $956,000 other-than-temporary impairment charge during the first quarter of 2009 was due to the increasing severity and duration of the decline in fair values of such holdings. These factors, in conjunction with management’s assessment of the near-term prospects of each specific issuer, resulted in the charges recorded during the first quarter of 2009. As of March 31, 2009, after other-than-temporary impairment charges, the financial institution stock portfolio had a cost basis of $40.4 million and a fair value of $32.4 million.
In April 2009, the Financial Accounting Standards Board (FASB) issued Staff Position No. 115-2 and 124-2, “Recognition and Presentation of Other-than-Temporary Impairments” (FSP FAS 115-2). FSP FAS 115-2 amends other-than-temporary impairment guidance for debt securities and expands disclosure requirements for other-than-temporarily impaired debt and equity securities. FSP FAS 115-2 requires companies to record other-than-temporary impairment charges, through earnings, if they have the intent to sell, or will more likely than not be required to sell, an impaired debt security before a recovery of its amortized cost basis. In addition, FSP FAS 115-2 requires companies to record other-than-temporary impairment charges through earnings for the amount of credit losses, regardless of the intent or requirement to sell. Credit loss is measured as the difference between the present value of an impaired debt security’s cash flows and its amortized cost basis. Non-credit related write-downs to fair value must be recorded as decreases to accumulated other comprehensive income as long as a company has no intent or requirement to sell an impaired security before

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a recovery of amortized cost basis. Finally, FSP FAS 115-2 requires companies to record all previously recorded non-credit related other-than-temporary impairment charges for debt securities as cumulative effect adjustments to retained earnings as of the beginning of the period of adoption. FSP FAS 115-2 is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for the period ending after March 15, 2009. The Corporation elected to early adopt FSP FAS 115-2, effective January 1, 2009.
The $2.0 million of other-than-temporary impairment losses recognized in earnings were determined through the use of an expected cash flow model, consistent with the guidance in Emerging Issues Task Force 99-20-1, “Amendments to the Impairment Guidance in EITF Issue No. 99-20”. The most significant input to the expected cash flows model was the assumed default rate for each impaired pooled trust preferred security. The Corporation evaluates the financial metrics, such as capital ratios and non-performing asset ratios, of each individual financial institution issuer that comprises the impaired pooled trust preferred securities to estimate the expected default rates for each security. The weighted average default rate for pooled trust preferred securities which were deemed to be other-than-temporarily impaired due to expected credit losses was approximately 20%.
During 2008, the Corporation recorded other-than-temporary impairment charges for pooled trust preferred securities of $15.8 million. Upon adoption of FSP FAS 115-2, the Corporation determined that $9.7 million of those other-than-temporary impairment charges were non-credit related. As such, a $6.3 million (net of $3.4 million of taxes) increase to retained earnings and a corresponding decrease to accumulated other comprehensive income was recorded as the cumulative effect impact of adopting FSP FAS 115-2 as of January 1, 2009.
The following table presents a summary of the cumulative credit related other-than-temporary impairment charges recognized as components of earnings for securities still held by the Corporation at March 31, 2009 (in thousands):
     
Beginning balance of cumulative credit losses on pooled trust preferred securities, January 1, 2009 (1) $(6,142)
Additions for credit losses recorded during the first quarter of 2009 which were not previously recognized as components of earnings  (1,978)
    
Ending balance of cumulative credit losses on pooled trust preferred securities, March 31, 2009 $(8,120)
    
(1)Amount represents the other-than-temporary impairment charges recorded during the year ended December 31, 2008 for pooled trust preferred securities, net of the Corporation’s cumulative effect adjustment upon adoption of FSP FAS 115-2, effective January 1, 2009.

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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 September 30, 2008:March 31, 2009:
                                                
 Less Than 12 months 12 Months or Longer Total  Less Than 12 months 12 Months or Longer Total 
 Estimated Unrealized Estimated Unrealized Estimated Unrealized  Estimated Unrealized Estimated Unrealized Estimated Unrealized 
 Fair Value Losses Fair Value Losses Fair Value Losses  Fair Value Losses Fair Value Losses Fair Value Losses 
 (in thousands)  (in thousands) 
U.S. Government sponsored agency securities $1,344 $(1) $528 $(9) $1,872 $(10) $20,222 $(126) $502 $(18) $20,724 $(144)
State and municipal securities 198,135  (9,497) 3,587  (23) 201,722  (9,520) 26,924  (404) 13,977  (270) 40,901  (674)
Corporate debt securities 87,817  (29,246) 28,596  (12,609) 116,413  (41,855) 25,696  (19,183) 62,029  (45,645) 87,725  (64,828)
Collateralized mortgage obligations 24,099  (107) 10  24,109  (107)   4,343  (204) 4,343  (204)
Mortgage-backed securities 324,071  (2,000) 99,041  (1,160) 423,112  (3,160) 25,408  (47) 237  (1) 25,645  (48)
Auction rate securities (1) 152,986  (3,930)   152,986  (3,930) 197,481  (15,102)   197,481  (15,102)
                          
Total debt securities 788,452  (44,781) 131,762  (13,801) 920,214  (58,582) 295,731  (34,862) 81,088  (46,138) 376,819  (81,000)
Equity securities 23,690  (4,674) 4,010  (1,063) 27,700  (5,737) 25,761  (8,515) 8  (19) 25,769  (8,534)
                          
 $812,142 $(49,455) $135,772 $(14,864) $947,914 $(64,319) $321,492 $(43,377) $81,096 $(46,157) $402,588 $(89,534)
                          
(1)See Note I, “Commitments and Contingencies” for additional details related to auction rate securities.
As of September 30, 2008, the unrealized losses on the Corporation’sFor its investments in corporate debt securities were caused by decreases in the estimated fair values of investments in single-issuer and pooled trust preferred securities and subordinated debt issued by financial institutions. The unrealized losses on mortgage-backed securities and collateralized mortgage obligations were the result of increases in U.S. Treasury yields at terms that were consistent with the terms of the investments held by the Corporation. The unrealized losses on equity securities, most notably its investments in the above table were due to decreases in the values of stocks of financial institutions.

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The Corporationinstitutions, management evaluates whether unrealized losses on investment securities indicate other-than-temporary impairment. Based upon this evaluation, lossesthe near-term prospects of $10.7 million and $39.3 million were recognized during the three and nine months ended September 30, 2008, respectively, for the other-than-temporary impairment of investment securities.
The following table presents other-than-temporary impairment charges, included within “Investment securities (losses) gains” on the consolidated statements of income, by investment security type:
         
  September 30, 2008 
  Three months  Nine months 
  ended  ended 
  (in thousands) 
Financial institution stocks $2,021  $30,250 
Government sponsored agency stock  356   356 
Mutual funds  460   820 
       
Total Equity securities charges  2,837   31,426 
       
Bank-issued subordinated debt  4,855   4,855 
Pooled trust preferred security  2,990   2,990 
       
Total Debt securities charges  7,845   7,845 
       
Total other-than-temporary impairment charges $10,682  $39,271 
       
During the three and nine months ended September 30, 2007, the Corporation recognized losses of $117,000 for the other-than-temporary impairment of financial institutions stocks. There were no other-than-temporary impairment charges recorded for debt securities during the three and nine months ended September 30, 2007.
Beginningissuers in 2007 and continuing through the third quarter of 2008, the values of financial institution stocks, including those held by the Corporation, declined significantly. The other-than-temporary impairment charges of $2.0 million and $30.3 million for the three and nine months ended September 30, 2008 were duerelation to the increasing severity and duration of the decline in fair valuesimpairment. Based on that evaluation and the Corporation’s ability and intent to hold those investments for a reasonable period of the stocks written down. These factors, in conjunction with management’s evaluationtime sufficient for a recovery of the near-term prospects of each specific issuer, resulted in the charges recognized during the current year. As of September 30, 2008, after other-than-temporary impairment charges, the financial institution stock portfolio had a cost basis of $55.2 million and a fair value, the Corporation does not consider those investments with unrealized holding losses as of $54.3 million.March 31, 2009 to be other-than-temporarily impaired.
In additionrelation to financial institution stocks, the Corporation recorded other-than-temporary impairment charges on other equity securities of $816,000 and $1.2 million for the three and nine months ended September 30, 2008. The charges included a write-down for the Corporation’s entire investment in the stock of government sponsored agencies.
As noted above, the unrealized losses on the Corporation’s investments in debtauction rate securities, were caused by decreases in the estimated fair valuescurrent unrealized holding losses on these securities is attributable to liquidity issues as a result of investments in single-issuer and pooled trust preferredthe failure of periodic auctions. Because the Corporation does not intend to sell, nor does it believe that it will more likely than not be required to sell, any of these securities and subordinated debt securities issued by financial institutions. As with equity securities issued by financial institutions, the estimatedprior to a recovery of their fair value to amortized cost, the Corporation does not consider those investments to be other-than-temporarily impaired as of debt securities issued by financial institutions has also declined significantly during 2008. The $4.9 million other-than-temporary impairment charge for bank-issued subordinated debt wasMarch 31, 2009. For additional information related to anthe Corporation’s investment in a financial institution which failed during the third quarter of 2008. The $3.0 million other-than-temporary impairment charge for a pooled trust preferred security was due to management’s assessment that the expected cash flows from this investment would not exceed its amortized cost.auction rate securities, see Note G, “Commitments and Contingencies”.

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The following table presents the amortized cost and estimated fair values of corporate debt securities issued by financial institutions:securities:
                                
 September 30, 2008 December 31, 2007  March 31, 2009 December 31, 2008 
 Amortized Estimated Amortized Estimated  Amortized Estimated Amortized Estimated 
 cost fair value cost fair value  cost fair value cost fair value 
 (in thousands)  (in thousands) 
Single-issuer trust preferred securities (1) $97,870 $74,512 $96,781 $92,515  $97,902 $54,994 $97,887 $69,819 
Subordinated debt 40,009 31,666 37,886 36,760  34,812 29,756 34,788 31,745 
Pooled trust preferred securities 32,220 22,749 35,271 33,743  27,040 10,692 19,351 15,381 
                  
Total corporate debt securities issued by financial institutions $170,099 $128,927 $169,938 $163,018 
Corporate debt securities issued by financial institutions 159,754 95,442 152,026 116,945 
Other corporate debt securities 2,945 2,945 2,950 2,949 
                  
Available for sale corporate debt securities $162,699 $98,387 $154,976 $119,894 
         
 
(1) Single-issuer trust preferred securities with estimated fair values totaling $8.9$6.3 million as of September 30, 2008March 31, 2009 are classified as Level 3 assets.assets under Statement 157. See Note J,I, “Fair Value Measurements” for additional details.
Based on management’s As required by FSP FAS 115-2, the Corporation has evaluated all corporate debt securities issued by financial institutions to determine if any unrealized holding losses represent credit losses, which would require an

12


other-than-temporary impairment evaluations andcharge through earnings. In addition, the Corporation’s ability and intentCorporation does not intend to hold these investments for a reasonable period of time sufficient forsell, nor does it believe that it will more likely than not be required to sell, any impaired corporate debt securities issued by financial institutions prior to a recovery of fair value,to amortized cost. Therefore, the Corporation does not consider these investments to be other-than-temporarily impaired as of September 30, 2008.
In relation to the Corporation’s investments in mortgage-backed securities and collateralized mortgage obligations, the contractual terms of those investments generally do not permit the issuer to settle the securities at a price less than the amortized cost of the investment. Because the decline in market value for mortgage-backed securities and collateralized mortgage obligations held by the Corporation are attributable to changes in interest rates and not credit quality, and because the Corporation has the ability and intent to hold those investments until a recovery of fair value, which may be maturity, the Corporation does not consider those investments to be other-than-temporarily impaired at September 30, 2008.March 31, 2009.
NOTE D – Sale of Credit Card Portfolio
In April 2008, the Corporation sold its approximately $87.0 million credit card portfolio to U.S. Bank National Association ND, d/b/a Elan Financial Services (Elan). As a result of this sale, the Corporation recorded a $13.9 million gain.
Under a separate agreement with Elan, the Corporation provides ongoing marketing services on behalf of Elan and receives fee income for each new account originated and a percentage of the revenue earned on both new accounts and accounts sold. During the three and nine months ended September 30, 2008, the Corporation recorded $1.3 million and $2.4 million, respectively, of credit card fee income, included within other income on the consolidated statements of income, in connection with this agreement.
NOTE E – Income Taxes
In accordance with Financial Accounting Standards Board (FASB) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48), the Corporation maintains a reserve for unrecognized income tax positions as a component of other liabilities. Upon adoption of FIN 48 on January 1, 2007, the Corporation recorded a $220,000 decrease in existing reserves for unrecognized income tax positions, with a cumulative effect adjustment for the same amount recorded to retained earnings.
As of September 30, 2008 and 2007, the Corporation had total reserves for unrecognized income tax positions of $2.8 million and $4.1 million, respectively, all of which, if recognized, would impact the effective tax rate. Also as of September 30, 2008 and 2007, the Corporation had $807,000 and $1.4 million,

11


respectively, in accrued interest payable related to such unrecognized positions. The Corporation recognizes interest accrued related to unrecognized income tax positions as a component of income tax expense. Penalties, if incurred, would also be recognized in income tax expense.
In March 2008, the Corporation reversed $2.0 million of its reserves for unrecognized income tax positions, resulting in a reduction of income tax expense. The Corporation had not fully recognized in the consolidated financial statements the positions it had taken on its tax returns for disallowed interest expense on certain tax-exempt municipal securities. In the fourth quarter of 2007, a court ruled in favor of a taxpayer who had taken a similar position on its tax returns. In March 2008, the Internal Revenue Service indicated that it would not pursue an appeal of this ruling. As a result, the criteria for remeasurement of this tax position were reached.
The Corporation, or one of its subsidiaries, files income tax returns in the U.S. Federal jurisdiction, and various states. In many cases, unrecognized income tax positions are related to tax years that remain subject to examination by the relevant taxing authorities. With few exceptions, the Corporation is no longer subject to U.S. Federal, state and local examinations by tax authorities for years before 2005.
NOTE F – Stock-Based Compensation
As required by Statement of Financial Accounting Standards No. 123R, “Share-Based Payment”, the fair value of equity awards to employees is recognized as compensation expense over the period during which employees are required to provide service in exchange for such awards. The Corporation’s equity awards consist of stock options and restricted stock granted under its Stock Option and Compensation Plans (Option Plans) and shares purchased by employees under its Employee Stock Purchase Plan.
The following table presents compensation expense and the related tax benefits for equity awards recognized in the consolidated statements of income:
                        
 Three months ended Nine months ended  Three months ended 
 September 30 September 30  March 31 
 2008 2007 2008 2007  2009 2008 
 (in thousands)  (in thousands) 
Stock-based compensation expense $606 $811 $1,671 $2,069  $380 $587 
Tax benefit  (108)  (130)  (234)  (310)  (38)  (74)
              
Stock-based compensation expense, net of tax $498 $681 $1,437 $1,759  $342 $513 
              
Under the Option Plans, stock options and restricted stock are granted to key employees atemployees. Stock option exercise prices are equal to the fair market value of the Corporation’s stock on the date of grant, with stock options having terms of up to ten years. Stock options and restricted stock are typically granted annually on July 1st and become fully vested after a three-year vesting period. Certain events as specifieddefined in the Option Plans and agreements, would result in the acceleration of the vesting period.of both stock options and restricted stock. As of September 30, 2008,March 31, 2009, there were 13.6 million shares reserved for future grants through 2013. On July 1, 2008, the Corporation granted approximately 358,000 stock options and 45,000 shares of restricted stock under its Option Plans.
NOTE G –E — Employee Benefit Plans
The Corporation maintains a defined benefit pension plan (Pension Plan) for certain employees. Contributions to the Pension Plan are actuarially determined and funded annually. Pension Plan assets are invested in: money markets; fixed income securities, including corporate bonds, U.S. Treasury securities and common trust funds; and equity securities, including common stocks and common stock mutual funds.

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On April 30, 2007, the Corporation amended the Pension Plan to discontinue Effective January 1, 2008, the accrual of benefits for all existing participants effective January 1, 2008. As a result of this amendment, the Corporation recorded a $58,000 curtailment loss, as determined by consulting actuaries, during the second quarter of 2007. The curtailment loss resulted from a $13.8 million gain from adjusting the funded status of the Pension Plan and an offsetting $13.9 million write-off of unamortized pension costs and related deferred tax assets.was discontinued.
The Corporation currently provides medical and life insurance benefits under a postretirement benefits plan (Postretirement Plan) to certain retired full-time employees who were employees of the Corporation prior to January 1, 1998. Certain full-time employees may become eligible for these discretionary benefits if they reach retirement age while working for the Corporation. Benefits are based on a graduated scale for years of service after attaining the age of 40.
As required by Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Postretirement Plans” (Statement 158), the Corporation recognizes the funded status of its Pension Plan and Postretirement Plan on the consolidated balance sheets and recognizes the changes in that funded status through other comprehensive income.

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Effective January 1, 2008, as required by Statement 158, the Corporation changed the actuarial measurement date for its Pension Plan from a fiscal year-end of September 30th to December 31st. The impact of this change in the actuarial measurement date resulted in a $66,000 increase to the Corporation’s prepaid pension asset and a cumulative effect adjustment, net of tax, of $43,000 recorded as an increase to retained earnings.
The net periodic benefit cost for the Corporation’s Pension Plan and Postretirement Plan, as determined by consulting actuaries, consisted of the following components for the three and nine-month periodsmonths ended September 30:March 31:
                
 Pension Plan 
 Three months ended Nine months ended                 
 September 30 September 30  Pension Plan Postretirement Plan 
 2008 2007 2008 2007  2009 2008 2009 2008 
 (in thousands)  (in thousands) 
Service cost (1) $36 $394 $110 $1,508  $37 $37 $106 $127 
Interest cost 816 769 2,448 2,515  819 816 166 167 
Expected return on plan assets  (918)  (901)  (2,754)  (3,018)  (722)  (918)  (1)  (1)
Net amortization and deferral    233  262    
Curtailment loss    58 
                  
Net periodic benefit (income) cost $(66) $262 $(196) $1,296 
Net periodic benefit cost (income) $396 $(65) $271 $293 
                  
 
(1) The Pension Plan service costService costs recorded for the Pension Plan for the three and nine months ended September 30,March 31, 2009 and 2008 waswere related to administrative costs associated with the plan and not due to the accrual of additional participant benefits.
                 
  Postretirement Plan 
  Three months ended  Nine months ended 
  September 30  September 30 
  2008  2007  2008  2007 
      (in thousands)     
Service cost $132  $138  $390  $367 
Interest cost  184   182   538   483 
Expected return on plan assets  (1)  (2)  (4)  (4)
Net amortization and deferral     (57)     (170)
             
Net periodic benefit cost $315  $261  $924  $676 
             

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In September 2006, the FASB ratified Emerging Issues Task Force (EITF) Issue 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements ” (EITF 06-4). EITF 06-4 addresses accounting for endorsement split-dollar life insurance arrangements that provide a benefit to an employee that extends to postretirement periods. EITF 06-4 requires that the postretirement benefit aspects of an endorsement-type split-dollar life insurance arrangement be recognized as a liability by the employer if that obligation has not been settled through the related insurance arrangement. 
The Corporation adopted the provisions of EITF 06-4 on January 1, 2008 and recorded a $677,000 liability, with a cumulative effect adjustment for the same amount recorded as a reduction to retained earnings. The amount represents the actuarial cost of maintaining endorsement split-dollar life insurance policies for certain employees which have not been effectively settled through their related insurance arrangements.
NOTE H –F — Derivative Financial Instruments
Interest Rate Swaps
As of September 30, 2008, interest rate swaps with a notional amount of $18.0 million were used to hedge certain long-term fixed rate certificates of deposit. The terms of the certificates of deposit and the interest rate swaps are similar and were committed to simultaneously. Under the terms of the swap agreements,Effective January 1, 2009, the Corporation is the fixed rate receiver and the floating rate payer (generally tied to the three-month London Interbank Offering Rate, or LIBOR, a common index used for setting rates between financial institutions). The interest rate swaps and the certificates of deposit are recorded at fair value, with changes in the fair values during the period recorded to other expense. For the three and nine months ended September 30, 2008, the net impact of the change in fair values of the interest rate swaps and the certificates of deposit was insignificant. For the three and nine months ended September 30, 2007, the net impact of the change in fair values of the interest rate swaps and certificates of deposit, recorded in other expenses, were $10,000 and $251,000, respectively.
In February 2007, the FASB issuedadopted Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an Amendment of FASB Statement No. 115” (Statement 159). Statement 159 permits entities to choose to measure many financial instruments and certain other items at fair value and amends Statement 115 to, among other things, require certain disclosures for amounts for which the fair value option is applied. Statement 159 became effective on January 1, 2008 and the Corporation adopted the provisions of Statement 159 for the interest rate swaps and the related certificates of deposit.
Prior to the adoption of Statement 159, the Corporation accounted for these interest rate swaps and the related certificates of deposit under Statement of Financial Accounting Standards No. 133, “Accounting for161, “Disclosures about Derivative Instruments and Hedging Activities” (Statement 133)161). UnderAs required by Statement 133,161, the Corporation performed testshas included disclosures for each swapits derivative instruments and for its hedging activities.
In connection with its mortgage banking activities, the Corporation enters into commitments to prove they were highly effective. The adoptionoriginate 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 sale or purchase of Statement 159 for these instruments did not resultmortgage-backed securities to or from third-party investors to hedge the effect of changes in a change ininterest rates on the reported valuesvalue of the interest rate swaps or certificateslocks and mortgage loans held for sale. Forward sales commitments may also be in the form of depositcommitments to sell individual mortgage loans at a fixed price at a future date. Both the interest rate locks and the forward commitments are accounted for as derivatives and carried at fair value, determined as the amount that would be necessary to settle each derivative financial instrument at the end of the period. Gross derivative assets and liabilities are recorded within other assets and other liabilities on the Corporation’s consolidated balance sheets. However,sheets, with changes in fair value during the administrative burdenperiod recorded within gains on sale of completing these periodic effectiveness tests was removed, as such tests are not required under Statement 159.mortgage loans on the consolidated statements of income.
The Corporation did not adopt the provisions of Statement 159 for any other financial assets or liabilities on its consolidated balance sheets.
Forward Starting Interest Rate Swaps
In prior years, the Corporation had entered into forward-starting interest rate swaps in anticipationfollowing table presents a summary of the issuanceCorporation’s derivative financial instruments, none of fixed-rate debt. In October 2005, the Corporation entered into a forward-starting interest rate swap with a notional amount of $150.0 million in anticipation of the issuance of trust preferred securities in January 2006. In February 2007, the Corporation entered into a forward-starting interest rate swap with a notional amount of $100.0 million in anticipation of the issuance of subordinated debt in May 2007.which have been designated as hedging instruments:
                 
  March 31, 2009  December 31, 2008 
  Notional      Notional    
  Amount  Fair Value  Amount  Fair Value 
  (in thousands) 
Interest rate locks with customers (1) $465,227  $4,388  $141,145  $425 
Forward commitments (1)  1,076,859   (3,573)  490,448   (1,445)
Interest rate swaps (2)        10,000   18 
               
      $815      $(1,002)
               
(1)As of March 31, 2009, the Corporation recorded gross mortgage banking derivative assets of $9.5 million and gross mortgage banking derivative liabilities of $8.7 million. As of December 31, 2008, the Corporation recorded gross mortgage banking derivative assets of $1.5 million and gross mortgage banking derivative liabilities of $2.5 million.
(2)Interest rate swaps recorded as a component of other liabilities on the consolidated balance sheets. All swaps existing at December 31, 2008 were called in the first quarter of 2009.

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These swaps were accounted for as cash flow hedges as they hedged the variability of interest payments attributable to changes in interest rates on the forecasted issuances of fixed-rate debt. The total amounts recorded in accumulated other comprehensive income upon settlement of these derivatives are being amortized to interest expense over the livesfollowing table presents a summary of the related securities usingfair value gains and losses recorded by the effective interest method. The amount of net losses in accumulated other comprehensive income that will be reclassified into earningsCorporation during the next twelvethree months is approximately $135,000.ended March 31, 2009:
         
  Fair Value Adj. -  Statement of Income 
  Gains/(Losses)  Classification 
  (in thousands)     
Interest rate locks with customers $3,963  Gains on sale of mortgage loans
Forward commitments  (2,128) Gains on sale of mortgage loans
Interest rate swaps  (18) Other expense
        
  $1,817     
        
NOTE I –G — 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 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:
                
 September 30  March 31, December 31,
 2008 2007  2009 2008
 (in thousands)  (in thousands)
Commitments to extend credit $3,810,535 $4,430,940  $3,356,076 $3,360,499 
Standby letters of credit 778,811 727,171  751,752 789,804 
Commercial letters of credit 35,605 26,208  36,730 37,620 
As of September 30,March 31, 2009 and December 31, 2008, the reserve for unfunded lending commitments, included in other liabilities on the consolidated balance sheets, was $4.8 million. Prior to December 31, 2007, the reserve for unfunded lending commitments was included as a component of the allowance for loan losses. As of December 31, 2007, the Corporation reclassified the reserve for unfunded lending commitments to other liabilities. Prior periods were not reclassified.$7.7 million and $6.2 million, respectively.
Auction Rate Securities
During 2008, developments in the market for student loanThe Corporation’s investment management and trust subsidiary, Fulton Financial Advisors, N.A. (FFA), holds auction rate securities, also known as auction rate certificates (ARCs), resulted in the Corporation recording charges of $2.7 million and $15.9 million for the three and nine months ended September 30, 2008, respectively.
The Corporation’s trust company subsidiary, Fulton Financial Advisors, N.A. (FFA), holds ARCs for some of its customers’ accounts. ARCs are one of several types of securities that were previously utilized by FFA as short-term investment vehicles for its customers. ARCs are long-term securities structured to allow their sale in periodic auctions, giving the securities some of the characteristics of short-term instruments in normal market conditions. However, in mid-February 2008, market auctions for ARCs began to fail due to an insufficient number of buyers; these market failures were the first widespread and continuing failures in the over 20-year history of the auction rate securities markets. As a result, although the credit quality of ARCs has not been impacted, ARCs are currently not liquid investments for their holders, including FFA’s customers. It is unclear when liquidity will return to this market.
FFA hasBeginning in the second quarter of 2008, the Corporation agreed to purchase illiquid student-loan backed ARCs from customer accountscustomers of FFA, upon notification from customers that they havehad liquidity needs or otherwise desiredesired to liquidate their holdings. FFA will generally purchase customer ARCs at par value with an interest adjustment, which would position customers as if they had owned 90-day U.S. Treasury bills instead of ARCs. The guarantee was recorded as a liability in accordance with FASB Interpretation No.FIN 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including

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Indirect Guarantees of Indebtedness of Others – an interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34”, and carried at estimated fair value with a corresponding pre-tax charge to earnings both upon the initial establishment of the guarantee and upon changes in its estimated fair value. The estimated fair value of the guarantee was determined based on the difference between the fair value of the underlying ARCs, assuming that all

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ARCs held in customer accounts would be purchased, and their estimated purchase price. The Corporation determined the fair value of the ARCs held by customers based on independent third-party valuations. See Note J,I, “Fair Value Measurements” for additional details related to the Corporation’s determination of fair value.
FFA had generally purchased ARCs from customers at par value with an interest adjustment which was designed to position customers as if they had owned 90-day U.S. Treasury bills instead of ARCs. As FFA’s approach to purchasing customers’ ARCs evolved, however, interest adjustments were not made on certain accounts due to various circumstances and restrictions. To provide similar treatment to all of FFA’s customers holding ARCs and in consideration of certain other market developments, in the first quarter of 2009 the Corporation decided that all future ARC purchases from customer accounts would be at par value, without an interest adjustment. Furthermore, the Corporation plans to reimburse customers for the amount of the interest differential on ARCs previously sold to the Corporation.
As a result, during the first quarter of 2009, the Corporation recorded a pre-tax charge of $6.2 million as a component of operating risk loss on the consolidated statements of income, of which $5.7 million related to the interest adjustment.
The following table presents the change in the ARC investment balances held by customers and the related financial guarantee liability, recorded within other liabilities on the Corporation’s consolidated balance sheet since establishment of the Corporation’s financial guarantee liability during the second quarter of 2008:
         
  Nine months ended 
  September 30, 2008 
  ARCs Held by  Financial 
  Customers, at  Guarantee 
  Par Value  Liability 
  (in thousands) 
Upon establishment of financial guarantee $332,715  $(13,200)
Purchases of ARCs  (166,765)  7,138 
Redemptions of ARCs  (360)   
Estimated fair value adjustment charged to expense     (2,660)
       
Balance at September 30, 2008 $165,590  $(8,772)
       
Duringfor the three and nine months ended September 30, 2008,March 31, 2009:
         
  ARCs Held by  Financial 
  Customers, at  Guarantee 
  Par Value  Liability 
  (in thousands) 
Balance at December 31, 2008 $105,165  $(8,653)
Provision for financial guarantee     (6,158)
Purchases of ARCs  (10,740)  877 
Redemptions of ARCs  (600)   
       
Balance at March 31, 2009 $93,825  $(13,934)
       
Upon purchase from customers, the Corporation purchased ARCs with a par value of $34.2 million and $166.8 million, respectively, from customers. The cost of the ARCs purchased, net of interest adjustments, during the three and nine months ended September 30, 2008 was approximately $33.8 million and $164.4 million, respectively. Upon purchase, the Corporation recorded therecords ARCs as available for sale investment securities at their estimated fair value. During the three and nine months ended September 30, 2008,Since the financial guarantee liability was reduced by an amount equal toestablished in the difference betweensecond quarter of 2008, the Corporation has purchased ARCs with a par value of $233.9 million. In April 2009, FFA notified its remaining customers holding ARCs that it would purchase price of the ARCs andat par value if notice of their estimated fair value, or $1.5 million and $7.1 million, respectively.acceptance of this offer is received by May 15, 2009. After that date, FFA will no longer have any obligation to purchase ARCs still held by customers.
Management believes that the financial guarantee liability recorded as of September 30, 2008March 31, 2009 is adequate. Future purchases of ARCs, changes in their estimated fair value or changes in the likelihood of their purchase from customers could require the Corporation to make adjustments to the liability.
Residential Lending Contingencies
Residential mortgages are originated and sold by the Corporation through Fulton Mortgage Company, (Fulton Mortgage), which is a division of each of the Corporation’s subsidiary banks, and The Columbia Bank, which maintains its own mortgage lending operations. The loans originated and sold through these channels are predominately “prime” loans that conform to published standards of government sponsored agencies. Prior to 2008, the Corporation’s Resource Bank affiliate operated a significant national wholesale mortgage lending operation which originated and sold significant volumes of non-prime loans from the time the Corporation acquired Resource Bank in 2004 through 2007. In
Beginning in 2007, Resource Mortgage experienced an increase in requests from secondary market purchasers to repurchase non-prime loans sold to those investors. The Corporation reduced its residential

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mortgage lending risk by exiting from the national wholesale mortgage business during 2007 and, in the first quarter of 2008, the Corporation merged Resource Bank into its Fulton Bank affiliate.
For the year ended December 31, 2007, the Corporation recorded $25.1 million of charges related to actual and potential repurchases of residential mortgage loans and home equity loans which were originated and sold to secondary market investors by the former Resource Bank’s mortgage division, Resource Mortgage. Of the $25.1 million charge, $16.0 million and $24.9 million were recorded during

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the three and nine months ended September 30, 2007, respectively. Resource Mortgage’s national wholesale mortgage lending operation originated loans that were sold under various investor programs, including some that allowed for reduced documentation and/or no verification of certain borrower qualifications, such as income or assets.
The Corporation reduced its residential mortgage lending risk by exiting from the national wholesale mortgage business at Resource Mortgage, where the majority of the repurchased loans were originated. During the three and nine months ended September 30, 2008, the Corporation recorded $500,000 and $2.0 million, respectively, of additional charges related to actual and potential repurchases of residential mortgage and home equity loans, and continued to evaluate and address the loans repurchased from investors from the prior year. The charges incurred in 2008 were for mortgages originated in prior years that could potentially be repurchased.
The following table presents a summary of the approximate principal balances and related reserves/write-downs recognized on the Corporation’s consolidated balance sheet, by general category:
                        
 September 30, 2008  March 31, 2009 December 31, 2008 
 Reserves/  Reserves/ Reserves/ 
 Principal Write-downs  Principal Write-downs Principal Write-downs 
 (in thousands)  (in thousands) 
Outstanding repurchase requests (1) (2) $9,900 $(4,290) $5,970 $(3,950) $6,290 $(2,900)
No repurchase request received – sold loans with identified potential misrepresentations of borrower information (1) (2) 12,300  (3,710)
No repurchase request received — sold loans with identified potential misrepresentations of borrower information (1) (2) 4,140  (1,660) 7,990  (3,280)
Repurchased loans (3) 11,544  (1,850) 9,000  (1,720) 10,000  (1,690)
Foreclosed real estate (OREO) (4) 17,350   17,890  15,920  
        
Total reserves/write-downs at September 30, 2008 $(9,850)
Total reserves/write-downs $(7,330) $(7,870)
        
 
(1) Principal balances had not been repurchased and, therefore, are not included on the consolidated balance sheetsheets as of September 30,March 31, 2009 and December 31, 2008.
 
(2) Reserve balance included as a component of other liabilities on the consolidated balance sheetsheets as of September 30,March 31, 2009 and December 31, 2008.
 
(3) Principal balances, net of write-downs, are included as a component of loans, net of unearned income on the consolidated balance sheetsheets as of September 30,March 31, 2009 and December 31, 2008.
 
(4) OREO is written down to its estimated fair value upon transfer from loans receivable.
The following presents the change in the reserve/write-down balances:balances for the three months ended March 31, 2009 (in thousands):
                 
  Three months ended  Nine months ended 
  September 30  September 30 
  2008  2007  2008  2007 
      (in thousands)     
Total reserves/write-downs, beginning of period $17,460  $7,920  $18,620  $500 
Additional charges to expense  500   16,040   2,000   24,940 
Charge-offs  (8,110)  (4,190)  (10,770)  (5,670)
             
Total reserves/write-downs, end of period $9,850  $19,770  $9,850  $19,770 
             
During the third quarter of 2008, the Corporation entered into settlement agreements with certain secondary market investors. In total, the Corporation agreed to pay these investors $8.3 million in settlement of outstanding repurchase requests and other potential claims, subject to certain conditions. The result of these settlements was a reduction of the Corporation’s exposure to previously sold loans totaling $16.1 million and a reduction of the reserves for repurchases of $7.7 million.
     
Total reserves/write-downs, January 1, 2009 $7,870 
Credits to expense  (200)
Charge-offs  (340)
    
Total reserves/write-downs, March 31, 2009 $7,330 
    
Management believes that the reserves recorded as of September 30, 2008March 31, 2009 are adequate for the known potential repurchases. However, continued declines in collateral values or the identification of additional loans to be repurchased could necessitate additional reserves in the future.
NOTE H — FAIR VALUE OPTION
Statement 159 became effective for the Corporation on January 1, 2008. Statement 159 permits entities to choose to measure many financial instruments and certain other items at fair value and requires certain disclosures for amounts for which the fair value option is applied.
The Corporation elected to record mortgage loans held for sale which were originated after September 30, 2008 at fair value under Statement 159. Prior to October 1, 2008, mortgage loans held for sale were reported at the lower of aggregate cost or market. The Corporation elected to adopt Statement 159 for mortgage loans held for sale to more accurately reflect the financial performance of its entire mortgage banking activities in its consolidated financial statements. Derivative financial instruments related to these activities are also recorded at fair value under Statement 133, as noted within Note F, “Derivative Financial Instruments”. 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. The Corporation classifies interest income earned on mortgage loans held for sale within interest income on the consolidated statements of income, which is separate from the fair value adjustments on loans held for sale, which are recorded as components of gains on sale of mortgage loans.

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The following table presents a summary of the Corporation’s fair value elections under Statement 159 and their impact on the Corporation’s consolidated balance sheets:
             
  Cost -  Fair Value -    
  Asset  Asset  Balance Sheet 
  (Liability)  (Liability)  Classification 
  (in thousands)    
March 31, 2009:            
Mortgage loans held for sale (1) (2) $83,799  $86,348  Loans held for sale
             
December 31, 2008:            
Mortgage loans held for sale (1) $64,787  $66,567  Loans held for sale
Hedged certificates of deposit (3)  (7,458)  (7,517) Interest-bearing deposits
           
  $57,329  $59,050     
           
(1)Cost basis of mortgage loans held for sale represents the unpaid principal balance.
(2)For the three months ended March 31, 2009, the Corporation recorded income of $769,000, included within gains on sale of mortgage loans on the consolidated statements of income, representing the changes in fair values of mortgage loans held for sale from December 31, 2008 to March 31, 2009.
(3)All hedged certificates of deposit were called in the first quarter of 2009.
NOTE J –I — FAIR VALUE MEASUREMENTS
On January 1, 2008, the Corporation adopted the provisions of Statement of Financial Accounting Standards No. 157, “Fair Value Measurement” (Statement 157) for all financial assets and liabilities and all nonfinancial assets and liabilities required to be measured at fair value on a recurring basis and all financial assets and liabilities required to be measured at fair value on a nonrecurring basis. Although
In April 2009, the FASB issued Staff Position No. 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (FSP FAS 157-4). This staff position provides additional guidance for estimating fair value in accordance with Statement 157 when the volume and level of activity for an asset or liability have declined significantly and includes guidance on identifying circumstances that indicate a transaction is not orderly. This staff position is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Corporation elected to early adopt FSP FAS 157-4, effective March 31, 2009. The Corporation’s available for sale debt securities include ARCs and pooled trust preferred securities and certain single issuer trust preferred securities issued by financial institutions which, prior to the adoption of Statement 157this staff position, were valued through means other than quoted market prices due the Corporation’s conclusion that the market for the securities was not active. Therefore, the adoption of this staff position did not impact the values of assets and liabilities on the Corporation’s consolidated balance sheets, the adoption resulted in expanded disclosure requirements for assets and liabilities recorded at fair value.financial statements as of March 31, 2009.
Statement 157 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into 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.
Companies are required to categorize all financial assets and liabilities and all nonfinancial assets and liabilities required to be measured at fair value on a recurring basis into the above three levels.
In February 2008, the FASB issued Staff Position No. 157-2, “Effective Date of FASB Statement No. 157” (FSP 157-2). FSP 157-2 delayed the effective date of Statement 157 for nonfinancial assets and liabilities measured at fair value on both a recurring and nonrecurring basis until fiscal years beginning after November 15, 2008, or January 1, 2009 forinto the Corporation. In accordance with FSP 157-2, the Corporation did not apply the provisions of Statement 157 for the following nonfinancial assets and liabilities, which are not measured at fair value on a nonrecurring basis: loans, deposits and borrowings acquired in prior years’ business combinations, other intangible assets initially measured at fair value upon acquisition and reporting units tested annually for goodwill impairment under Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets”. The application of FSP 157-2 for these nonfinancial assets and liabilities is not expected to have an impact on their reported values.
In October 2008, the FASB issued Staff Position No. 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active” (FSP 157-3). FSP 157-3 clarifies the application of Statement 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. FSP 157-3 was effective upon issuance for the Corporation.above three levels.

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Items Measured at Fair Value on a Recurring Basis
The Corporation’s assets and liabilities measured at fair value on a recurring basis and reported on the consolidated balance sheet as of September 30, 2008March 31, 2009 were as follows:
                                
 Level 1 Level 2 Level 3 Total  Level 1 Level 2 Level 3 Total 
 (in thousands)  (in thousands) 
Mortgage loans held for sale $ $86,348 $ $86,348 
Available for sale investment securities $57,965 $2,447,898 $184,735 $2,690,598  35,096 2,773,400 220,564 3,029,060 
Other financial assets 9,711   9,711  9,076 9,516  18,592 
                  
 
Total assets $67,676 $2,447,898 $184,735 $2,700,309  $44,172 $2,869,264 $220,564 $3,134,000 
                  
Certificates of deposit $ $13,809 $ $13,809 
 
Other financial liabilities 9,711  (150) 8,722 18,283  $9,076 $8,701 $13,934 $31,711 
                  
Total liabilities $9,711 $13,659 $8,722 $32,092 
         
The valuation techniques used to measure fair value for the items in the table above 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 under Statement 159. Fair value as of March 31, 2009 was measured as the price that secondary market investors were offering for loans with similar characteristics. See Note H, “Fair Value Option” for details related to the Corporation’s election to measure assets and liabilities at fair value under Statement 159.
Available for sale investment securities Included within this asset category are both equity and debt securities. Equity securities consisting of stocks of financial institutions and mutual funds are listed as Level 1 assets, measured at fair value based on quoted prices for identical securities in active markets. Debt securities, excluding ARCs, pooled trust preferred securities and certain single-issuer and pooled trust preferred securities, are classified as Level 2 assets and consist of: U.S. government and U.S. government sponsored agency securities, state and municipal securities, corporate debt securities, collateralized mortgage obligations and mortgage-backed securities. Fair values are determined by a third partythird-party pricing service using both quoted prices for similar assets, when available, and model-based valuation techniques that derive fair value based on market-corroborated data, such as instruments with similar prepayment speeds and default interest rates. See Note C, “Investment Securities” for additional details related to the Corporation’s available for sale investment securities.
 
   ARCs, as discussed in Note I,G, “Commitments and Contingencies”, are classified as Level 3 assets and measured at fair value based on an independent third-party valuation. All ARCs held by the Corporation were acquired during 2008. Due to their illiquidity, ARCs were valued through the use of an expected cash flows model. The assumptions used in preparing the expected cash flowflows model include estimates for coupon rates, a time to maturity and market rates of return.
 
   As of September 30, 2008, the Corporation transferred pooled trust-preferred debtPooled trust preferred securities and certain single-issuersingle issuer trust preferred securities for which no current market exists, toare also classified as Level 3 assets based on guidance provided within FSP 157-3. Prior to September 30, 2008, these securities were presented as Level 2 assets. As of September 30, 2008, theThe fair values of pooled-trustpooled trust preferred debt securities were determined through the use of a discounted cash flow modelmodels which applied a credit and liquidity adjusted discount raterates to expected cash flows for the securities. The fair values of $6.3 million of single-issuer trust preferred securities included within Level 3 assets were determined based on quotes provided by third partythird-party brokers who determined fair values based predominantly on internal valuation models and were not indicative prices or binding offers. The Corporation classified $48.7 million of other single-issuer trust preferred securities as Level 2 assets above.
 
   Restricted equity securities totaling $106.1$85.1 million, issued by the Federal Home Loan Bank and Federal Reserve Bank, have been excluded from the above table.

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  Other financial assets Included within this asset category are Level 1 assets, consisting of mutual funds that are held in trust for employee deferred compensation plans and measured at fair value based on quoted prices for identical securities in active markets.markets, and Level 2 assets representing the fair value of mortgage banking derivatives in the form of interest rate locks with customers and forward commitments with secondary market investors. The Corporation maintains a separate Level 1 deferred compensation liabilityfair value of the same amount, included within the “Other financial liabilities” category above, which represents the amounts due to employees under these deferred compensation plans.
Certificates of deposit – This category consists of hedged long-term fixed rate certificates of deposit accounted for under Statement 159. The certificates of deposit and their associatedCorporation’s interest rate swaps, included withinlocks and forward commitments are determined as the “Otheramount that would be required to settle each derivative financial liabilities” category, are measuredinstrument at fair value through the useend of a model-based approach which utilizes market prices for similar instruments in addition to using market-corroborated means, such as interest rates.the period. See Note H,F, “Derivative Financial Instruments”, for additional information.
 
  Other financial liabilities Included within this category are the following liabilities: Level 1 employee deferred compensation liabilities which are the amounts due to employees under the deferred compensation plans, described under the heading “Other financial assets” above and included as Level 1 liabilities; interest rate swaps that hedge the aforementioned certificates of deposit, categorized asabove; Level 2 liabilities;mortgage banking derivatives, described under the heading “Other financial assets” above; and Level 3 financial guarantees associated with the Corporation’s commitment to purchase ARCs held within customer accounts, categorized as Level 3 liabilities.accounts.
 
   The fair value of the financial guarantee liability associated with ARCs held by the Corporation’s customers was determined using the same methods as the ARCs held by the Corporation and described under the heading “Available for sale investment securities” above. This liability was initially recorded during 2008. See Note I,G, “Commitments and Contingencies” for additional information.
The following tables presenttable presents reconciliations of the Corporation’s assets and liabilities measured at fair value on a recurring basis using unobservable inputs (Level 3) for the three and nine months ended September 30, 2008:March 31, 2009:
                 
  Three months ended September 30, 2008 
  Available for Sale Investment Securities  Other Financial 
  Pooled Trust  Single-issuer      Liabilities – 
  Preferred  Trust Preferred  ARC  ARC Financial 
  Securities  Securities  Investments  Guarantee 
      (in thousands)     
Balance, July 1, 2008 $  $  $124,992  $(7,560)
Transfers to Level 3 (1)  22,749   8,905       
Purchases (2)        32,327   1,498 
Adjustment to fair value (3)        (3,839)  (2,660)
Settlements (4)        (833)   
Discount accretion (5)        434    
             
Balance, September 30, 2008 $22,749  $8,905  $153,081  $(8,722)
             

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  Nine months ended September 30, 2008 
  Available for Sale Investment Securities  Other Financial 
  Pooled Trust  Single-issuer      Liabilities - 
  Preferred  Trust Preferred  ARC  ARC Financial 
  Securities  Securities  Investments  Guarantee 
      (in thousands)     
Balance, January 1, 2008 $  $  $  $ 
Transfers to Level 3 (1)  22,749   8,905       
Purchases (2)        157,309   7,138 
Adjustment to fair value (3)        (3,930)  (15,860)
Settlements (4)        (833)   
Discount accretion (5)        535    
             
Balance, September 30, 2008 $22,749  $8,905  $153,081  $(8,722)
             
                 
  Available for Sale Investment Securities  Other Financial 
  Pooled Trust  Single-issuer      Liabilities - 
  Preferred  Trust Preferred  ARC  ARC Financial 
  Securities  Securities  Investments  Guarantee 
      (in thousands)     
Balance, December 31, 2008 $15,381  $7,544  $195,900  $(8,653)
Purchases (1)        9,642   877 
Realized adjustment to fair value (2)  (1,978)        (6,158)
Unrealized adjustment to fair value (3)  (2,711)  (1,252)  (2,665)   
Redemptions        (89)   
Discount accretion (4)     2   790    
             
Balance, March 31, 2009 $10,692  $6,294  $203,578  $(13,934)
             
 
(1) As of September 30, 2008, the Corporation determined that the market for these securities was not active and transferred all amountsFor ARC investments, amount represents ARCs acquired from Level 2customers, less an adjustment to Level 3 based on fair value measurements performed.upon purchase. For the ARC financial guarantee, amount represents the reversal of the guarantee liability due to the purchase of ARCs from customers.
 
(2) For ARC purchases above, amounts represent ARCs acquired from customers at par value with an interest adjustment based on the difference between the interest customers earned on ARCs during their holding period and the interest that customers would have earned had the amount of the ARCs been invested in 90-day U.S. Treasury bills, less an adjustmentpooled trust preferred securities, realized adjustments to fair value upon purchase.
(3)Adjustment to fair value was basedrepresent credit related other-than-temporary impairment charges that were recorded within investment securities gains on a third party valuationthe consolidated statements of income. For the ARCs held in customer accounts and byARC financial guarantee, the Corporation as of September 30, 2008. For ARCs held within customer accounts, therealized adjustment to fair value has been included as a component of operating risk loss on the Corporation’s consolidated statements of income. For ARCs held by the Corporation
(3)Pooled trust preferred securities, single-issuer trust preferred securities, and ARC investments are classified as available for sale investment securities,securities; as such, the unrealized adjustment to fair value was recorded as an unrealized holding loss.loss and included as a component of available for sale investment securities on the Corporation’s consolidated balance sheet.
 
(4)Represent redemptions of ARCs by their issuers.
(5) Included as a component of net interest income on the Corporation’s consolidated statements of income.
Items Measured at Fair Value on a Nonrecurring Basis
Certain financial assets and liabilities 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.

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The Corporation’s financial assets measured at fair value on a nonrecurring basis and reported on the Corporation’s consolidated balance sheet as of September 30, 2008March 31, 2009 were as follows:
                                
 Level 1 Level 2 Level 3 Total  Level 1 Level 2 Level 3 Total 
 (in thousands)  (in thousands) 
Loans held for sale $ $71,090 $ $71,090  $ $15,685 $ $15,685 
Net loans  950 219,441 220,391    387,926 387,926 
Other financial assets  16,526  16,526   6,014 11,438 17,452 
                  
Total assets $ $88,566 $219,441 $308,007  $ $21,699 $399,364 $421,063 
                  
The valuation techniques used to measure fair value for the items in the table above are as follows:
  Loans held for sale This category consists of loans held for sale that were measured at the lower of aggregate cost or fair value. Fair value was measured byas the price that secondary market investors were offering for loans with similar characteristics.
 
  Net loans-This category consists of residential mortgage loans and home equity loans that were previously sold and repurchased from secondary market investors during the first nine months of 2008 and have been classified as Level 2 assets. Upon repurchase, these loans were written down to the appraised value of their underlying collateral. See Note I, “Commitments and Contingencies” for additional information.
This category also includes commercial loans and commercial mortgage loans which were considered to be impaired under Statement of Financial Accounting Standards No. 114, “Accounting

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by Creditors for Impairment of a Loan” and have been classified as Level 3 assets. Impaired loans are measured at fair value based on the present value of expected future cash flows discounted at the loan’s effective interest rate, or at the loan’s observable market price or fair value of its collateral, if the loan is collateral dependent. An allowance for loan losses is allocated to an impaired loan if its carrying value exceeds its estimated fair value. The amount shown is the balance of impaired loans, net of theirthe related allowance for loan loss.losses.
  Other financial assets This category includes foreclosed assets that the Corporation obtained during the first nine monthsquarter of 2008.2009. Fair values for these Level 2 assets were based on estimated selling prices less estimated selling costs for similar assets in active markets.
Classified as Level 3 assets above are mortgage servicing rights (MSRs), which are initially recorded at fair value upon the sale of residential mortgage loans, which the Corporation continues to service, to secondary market investors. MSRs are amortized as a reduction to servicing income over the estimated lives of the underlying loans.
MSRs are evaluated quarterly for impairment, by comparing the carrying amount to estimated fair value. Fair value is determined at the end of each quarter through a discounted cash flows valuation. Significant inputs to the valuation include expected net servicing income, the discount rate and the expected life of the underlying loans.
NOTE K –J — New Accounting StandardStandards
In March 2008,April 2009, the FASB issued Staff Position No. FAS 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies”. This staff position amends Statement of Financial Accounting Standards No. 161, “Disclosures about Derivative Instruments141(R), “Business Combinations” in relation to the initial recognition and Hedging Activities” (Statement 161). Statement 161 establishes the disclosure requirements for derivative instrumentsmeasurement, subsequent measurement and for hedging activities, includingaccounting, and disclosure of information that should enable users of financial information to understand howassets and whyliabilities arising from contingencies in a company uses derivative instruments, how derivative instruments and related hedged items are accounted for, and how derivative instruments and related hedged items affect a company’s financialbusiness combination. This staff position financial performance, and cash flows. The standard is effective for financial statements issuedbusiness combinations for fiscal years and interim periodswhich the acquisition date is on or after the beginning of the first annual reporting period beginning on or after NovemberDecember 15, 2008, or January 1, 2009 for the Corporation. This staff position does not impact acquisitions consummated prior to January 1, 2009.
In April 2009, the FASB issued Staff Position No. 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments”. This staff position requires publicly traded companies to include all disclosures required by Statement of Financial Accounting Standards No. 107, “Fair Value

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Measurements” in interim reporting periods as well as in annual financial statements. This staff position is effective for interim reporting periods ending after June 15, 2009, or June 30, 2009 for the Corporation. The adoption of this staff position will result in additional disclosures about fair values of financial instruments with the Corporation’s March 31,June 30, 2009 quarterly report on Form 10-Q. The adoption10-Q, but will not result in a change in the reported values of Statement 161 is not expected to have a material impactany amounts on the Corporation’s consolidated financial statements.
NOTE L –K — Reclassifications
Certain amounts in the 20072008 consolidated financial statements and notes have been reclassified to conform to the 20082009 presentation.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations (Management’s Discussion) concerns Fulton Financial Corporation (the Corporation), a financial holding company incorporated under the laws of the Commonwealth of Pennsylvania in 1982, and its wholly owned subsidiaries. This discussion and analysis should be read in conjunction with the consolidated financial statements and notes presented in this report.
FORWARD-LOOKING STATEMENTS
The Corporation has made, and may continue to make, certain forward-looking statements with respect to its acquisition and growth strategies; market risk; changes or adverse developments in economic, political, or regulatory conditions; a continuation or worsening of the current disruption in credit and other markets, including the lack of or reduced access to, and the abnormal functioning of markets for mortgages and other asset-backed securities and for commercial paper and other short-term borrowings; the effect of competition and interest rates on net interest margin and net interest income; investment strategy and income growth; investment securities gains; declines in the value of securities which may result in charges to earnings; changes in rates of deposit and loan growth; asset quality and the impact on assets from adverse changes in the economy and in credit or other markets and resulting effects on credit risk and asset values; balances of risk-sensitive assets to risk-sensitive liabilities; salaries and employee benefits and other expenses; amortization of intangible assets; goodwill impairment; capital and liquidity strategies and other financial and business matters for future periods. The Corporation cautions that these forward-looking statements are subject to various assumptions, risks and uncertainties. Because of the possibility of changes in these assumptions, actual results could differ materially from forward-looking statements. The Corporation undertakes no obligations to update or revise any forward-looking statements.
RESULTS OF OPERATIONS
Overview
Summary Financial Results
The Corporation generates the majority of its revenue through net interest income, or the difference between interest earned on loans and investments and interest paid on deposits and borrowings. Growth in net interest income is dependent upon balance sheet growth and/or maintaining or increasing the net interest margin, which is net interest income (fully taxable-equivalent) 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 sales of assets, such as loans, investments or properties. Offsetting these revenue sources are provisions for credit losses on loans, operating expenses and income taxes.
During the three and nine months ended September 30, 2008, in comparison to the same periods in the prior year, the Corporation experienced strong loan growth in all loan categories, excluding consumer and construction loans. The loan growth was throughout the Corporation’s geographical footprint. New loans are underwritten to the Corporation’s stringent underwriting standards and are priced to compensate for risk and mitigate pressure on the net interest margin.
Obtaining customer funding for this loan growth has been, and will continue to be, a challenge. During 2008, the Corporation experienced declines in total noninterest and interest-bearing demand and savings balances. As a result, increases in short and long-term borrowings were necessary to fund loan growth. While interest rates on these borrowings have been favorable, future interest rate increases could be detrimental to net interest margin and net interest income.

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The following table presents a summary of the Corporation’s earnings and selected performance ratios:
                        
 As of or for the As of or for the  As of or for the
 Three months ended Nine months ended  Three months ended
 September 30 September 30  March 31
 2008 2007 2008 2007  2009 2008
Net income (in thousands) $29,076 $33,566 $96,250 $114,539 
Net income available to common shareholders (in thousands) $8,054 $41,496 
Income before income taxes (in thousands) $14,658 $55,699 
Diluted net income per share $0.17 $0.19 $0.55 $0.66  $0.05 $0.24 
Return on average assets  0.73%  0.88%  0.81%  1.03%  0.33%  1.05%
Return on average equity  7.25%  8.67%  8.02%  10.07%
Return on average tangible equity (1)  12.72%  15.76%  14.00%  18.42%
Return on average common equity  2.84%  10.53%
Return on average tangible common equity (1)  3.88%  18.45%
Net interest margin (2)  3.74%  3.62%  3.69%  3.69%  3.45%  3.58%
Non-performing assets to total assets  1.15%  0.69%  1.15%  0.69%  1.63%  0.90%
Net charge-offs to average loans (annualized)  0.38%  0.08%  0.29%  0.07%  1.00%  0.15%
 
(1) Calculated as net income, adjusted for intangible asset amortization (net of tax), divided by average common shareholders’ equity, excluding goodwill and intangible assets.
 
(2) Presented on a fully taxable-equivalent (FTE) basis, using a 35% Federal tax rate and statutory interest expense disallowances. See also “Net Interest Income” section of Management’s Discussion.
The Corporation’s income before income taxes forin the thirdfirst quarter of 20082009 decreased $7.8$41.0 million, or 16.7%73.7%, from the same period in 2007. Income before taxes forcompared to the first nine monthsquarter of 2008 decreased $30.6 million, or 18.8%,2008. The decrease in income before income taxes in comparison to the first nine monthsquarter of 2007. The decrease in income before taxes for the three and nine months ended September 30, 2008 in comparison to the same periods in 2007 werewas primarily due to the following significant items:
Decreases in income before income taxes:
 IncreasesIncrease in the provision for loan losses of $22.1$38.8 million, and $46.4 million foror 345.6%, from the three and nine months ended September 30, 2008, respectively.first quarter of 2008.
 
 Charges associated withDuring the other-than-temporary impairmentfirst quarter of investment securities of $10.7 million and $39.3 million for2009, the three and nine months ended September 30, 2008, respectively.
Charges related to the Corporation’s decision to purchase auction rate securities from customer accounts of $2.7 million and $15.9 million for the three and nine months ended September 30, 2008, respectively.
Increases in income before taxes:
Increases in net interest income of $11.6 million and $26.7 million for the three and nine months ended September 30, 2008, respectively.
A $13.9 million gain on the salequality of the Corporation’s credit cardloan portfolio recognizedcontinued to deteriorate due to weak economic conditions. The Corporation’s non-performing assets increased from $144.7 million, or 0.90% of total assets, at March 31, 2008 to $269.2 million, or 1.63% of total assets, at March 31, 2009, with significant increases in non-performing construction loans, commercial mortgage loans and commercial loans. Annualized net charge-offs for the secondfirst quarter of 2009 were $30.1 million, or 1.0% of average loans, compared to annualized net charge-offs of $4.4 million, or 0.15% of average loans for the first quarter of 2008.
 
 As a result of the increases in non-performing assets and net charge-offs, the Corporation increased the provision for loan losses.
 A reduction in chargesContingent losses of $6.2 million, recorded as a component of operating risk loss on the Corporation’s consolidated statements of income, associated with the Corporation’s contingent losses relatedguarantee to purchase illiquid auction rate certificates (ARCs) from customers.
Beginning in the potential repurchasesecond quarter of residential mortgage2008, the Corporation agreed to purchase illiquid student-loan backed ARCs from customers of its investment management and home equity loanstrust subsidiary, Fulton Financial Advisors, N.A. (FFA), upon notification from customers that they had liquidity needs or otherwise desired to liquidate their holdings. FFA had generally purchased ARCs from customers at par value with an interest adjustment which was designed to position customers as if they had owned 90-day U.S. Treasury bills instead of $15.5 millionARCs. As FFA’s approach to purchasing customers’ ARCs evolved, however, interest adjustments were not made on certain accounts due to various circumstances and $22.9 millionrestrictions. To provide similar treatment to all of FFA’s customers holding ARCs and in consideration of certain other market developments, in the first quarter of 2009 the Corporation decided that all future ARC purchases from customer accounts would be at par value, without an interest adjustment. Furthermore, the Corporation plans to reimburse customers for the three and nine months ended September 30, 2008, respectively. See Note I, “Commitments and Contingencies” inamount of the Notesinterest differential on ARCs previously sold to Consolidated Financial Statements for additional details.
Asset Quality – Asset quality refers to the underlying credit characteristics of borrowers and the likelihood that defaults on contractual loan payments will result in charge-offs of account balances, which, in turn, result in provisions for loan losses recorded on the consolidated statements of income. By its nature, risk in lending cannot be completely eliminated, but it can be controlled and managed through proper underwriting policies, effective collection procedures and risk management activities. External factors, such as economic conditions, which cannot be controlled by the Corporation, will always have some effect on asset quality, regardless of the strength of an organization’s control policies and procedures. During 2008, the banking industry in general, including the Corporation, has been negatively impacted by deteriorating economic conditions. Significant declines in residential real estate values has

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led
the Corporation. During the first quarter of 2009, the Corporation recorded a pre-tax charge of $6.2 million, with $5.7 million representing the interest adjustment.
In April 2009, FFA notified its remaining customers holding ARCs that it would purchase the ARCs at par value if notice of their acceptance of this offer is received by May 15, 2009. After that date, FFA will no longer have any obligation to purchase ARCs still held by customers.
A $3.4 million, or 397.4%, increase in Federal Deposit Insurance Corporation (FDIC) insurance premiums.
The increase in FDIC insurance premiums in the first quarter of 2009 in comparison to the first quarter of 2008 was primarily due to an increase in assessment rates, as recent bank failures have reduced the FDIC’s bank insurance fund. The Corporation’s FDIC insurance premiums for the remainder of 2009, excluding additional emergency FDIC assessments that could potentially be imposed, are expected to be approximately $11 million.
In March 2009, the FDIC proposed an interim rule that would impose an emergency special assessment of 20 basis points on insured deposits in 2009. Such an assessment would result in the Corporation incurring additional FDIC insurance premiums of approximately $20 million. The terms of a potential special assessment are still being deliberated, and a final rule has not been adopted as of the filing date of this report.
Increase in income before income taxes:
A $6.3 million, or 271.7%, increase in gains on sale of mortgage loans.
During the first quarter of 2009, low interest rates on residential mortgages resulted in a significant increase in residential mortgage refinances. As a result, the Corporation experienced a significant increase in volumes of residential mortgage loans sold to secondary market investors, and a corresponding increase in gains on such sales. Total loans sold in the first quarter of 2009 increased $395.1 million, or 241.5%, from $163.6 million in the first quarter of 2008 to $558.7 million in the first quarter of 2009. Approximately 80% of the volume in the first quarter of 2009 was from refinances, with the remaining 20% from purchases.
Quarter Ended March 31, 2009 compared to the Quarter Ended March 31, 2008
Net Interest Income
Net interest income decreased $1.8 million, or 1.4%, to $124.1 million in 2009 from $125.9 million in 2008 due to a decrease in the net interest margin, offset by an increase in defaults on mortgages and a slowing of the housing markets. This, in turn, has had a detrimental impact on developers and their ability to meet the contractual payments on their loans. Furthermore, weakening economic conditions have impacted other types of credit extended by banks.interest-earning assets.
The Corporation’s non-performing assets increasedDuring 2008, interest rates declined significantly from $107.0 million, or 0.69% of total assets, at September 30, 2007 to $186.4 million, or 1.15% of total assets, at September 30, 2008. The increase was primarily due to deteriorating general economic conditions, which have negatively impacted consumer confidence and residential real estate values. The Corporation’s non-performing assets increased across all loan types, geographic areas, and industries.
The increase in non-performing assets and net charge-offs contributed to the provision for loan losses increasing $22.1 million, or 479.7%, in comparison to the third quarter of 2007. The provision for loan losses for the first nine months of 2008 increased $46.4 million, or 561.1%, in comparison to the first nine months of 2007.
Management believes that its policies and procedures for managing asset quality are sound. However, no assurance regarding asset quality in the future can be given. Continuing negative trends in general economic conditions and decreases in the values of underlying collateral could have a detrimental impact on borrowers’ ability to repay their loans.
Other-Than-Temporary Impairment of Investment Securities – During the three and nine months ended September 30, 2008, the Corporation recorded charges of $10.7 million and $39.3 million for the other-than-temporary impairment of investment securities, recorded within “Investment securities (losses) gains” on the consolidated statements of income.
The Corporation had a portfolio of financial institution stocks at September 30, 2008 with a cost basis of $55.2 million and a fair value of $54.3 million. During the three and nine months ended September 30, 2008, the Corporation’s other-than-temporary impairment charges related to financial institution stocks were $2.0 million and $30.3 million, respectively. Uncertainty surrounding the financial institution sector as a whole negatively impacted the value of these securities. Beginning in 2007 and continuing through the third quarter of 2008, the values of financial institution stocks, including those held by the Corporation, declined significantly. The other-than-temporary impairment charges recorded during the nine months ended September 30, 2008 was due to the increasing severity and duration ofFederal Reserve Board lowering the decline in fair values of the stocks written down. These factors, in conjunction with management’s evaluation of the near-term prospects of each specific issuer, resulted in the impairment charges.
Federal funds rate from 4.25% at January 1, 2008 to 0-0.25% at December 31, 2008. During the three and nine months ended September 30, 2008, the Corporation also recorded $816,000 and $1.2 million in other-than-temporary impairment charges for other equity securities in the form of mutual fund investments and stocks of government sponsored agencies.
During the thirdfirst quarter of 2008,2009, however, the Corporation recorded an other-than-temporary charge of $7.8 million for corporate debt securities. The $7.8 million charge included a $4.9 million charge for the write-off of an investment in subordinated debt issued by a failed financial institution and a $3.0 million charge for a pooled trust preferred security, also issued by financial institutions, for which the carrying value exceeds the future expected cash flows. The fair value of the pooled-trust preferred debt security was determined through the use of a discounted cash flow model which applied a credit and liquidity adjusted discount rate to expected cash flows for the securities. See Note J, “Fair Value Measurements” in the Notes to Consolidated Financial Statements and the “Market Risk” section of Management’s Discussion for additional details. As of September 30, 2008, the Corporation had debt securities backed by financial institutions, with a cost basis of $170.1 million and fair value of $128.9 million, after other-than-temporary write-downs. See Note C, “Investment Securities” in the Notes to the Consolidated Financial Statements for additional details.

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'

Further declines in financial institution stock values or in the values of debt securities issued by financial institutions may result in additional other-than-temporary impairment charges, in the future.
Auction Rate SecuritiesCurrent year developments in the market for student loan auction rate securities, also known as auction rate certificates (ARCs), resulted in the Corporation recording pre-tax charges of $2.7 million and $15.9 million, as components of operating risk loss on the consolidated statements of income, during the three and nine months ended September 30, 2008, respectively.
The Corporation’s trust company subsidiary, Fulton Financial Advisors, N.A. (FFA), holds ARCs for some of its customers’ accounts. ARCs are one of several types of securities that were previosuly utilized by FFA as short-term investment vehicles for its customers. ARCs are long-term securities structured to allow their sale in periodic auctions, giving the securities some of the characteristics of short-term instruments in normal market conditions. However, in mid-February, 2008, market auctions for ARCs began to fail due to an insufficient number of buyers; these market failures were the first widespread and continuing failures in the over 20-year history of the auction rate securities markets. As a result, although the credit quality of ARCs has not been impacted, ARCs are currently not liquid investments for their holders, including FFA’s customers. It is unclear when liquidity will return to this market.
Beginning in the second quarter of 2008, FFA agreed to purchase ARCs from customer accounts upon notification from customers that they have liquidity needs or otherwise desire to liquidate their holdings. FFA generally agreed to purchase customer ARCs at par value with an interest adjustment, which would position customers as if they had owned 90-day U.S. Treasury bills instead of ARCs. The estimated fair value of this guarantee was recorded as a liability in accordance with the Financial Accounting Standards Board’s Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others – an interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34”, with a corresponding pre-tax charge to earnings. Upon establishment of the guarantee in the second quarter of 2008, $332.7 million of ARCs, at par value, were held in customer accounts.
As of September 30, 2008, after purchases by the Corporation and redemptions of ARCs by customers, the total balance of ARCs in customer accounts was $165.6 million. Included within “Available for sale” investment securities on the Corporation’s consolidated balance sheet are ARCs with a total cost of $157.0 million and a fair value of $153.1 million.
See Note I, “Commitments and Contingencies” in the Notes to Consolidated Financial Statements and the “Market Risk” section of Management’s Discussion for additional details.
Net Interest Margin and Net Interest IncomeThe improvement in net interest income in comparison to the three and nine months ended September 30, 2007 was largely due to an increase in average interest-earning assets.
Also contributing to the improvement in net interest income was the fact that interest rates paid on short-term borrowings and many deposit balances declined more quickly than interest rates earned on assets. Decreases in interest rates on short-term borrowings and deposit balances were the result of the Federal Reserve Board (FRB) lowering the Federal Funds rate a total of 275 basis points since September 30, 2007 (from 4.75%interest-earning assets continued to 2.00%). For the three months ended September 30, 2008, interest expense decreased $36.5 million, or 31.4%, while interest income decreased $24.9 million, or 10.4%. For the first nine months of 2008, interest expense decreased $67.8 million, or 20.3%, while interest income decreased $41.1 million, or 5.9%. The more pronounced decreases in interest expense during the three and nine months ended September 30, 2008 in comparisondecline due to the same periods in 2007 contributed to the increase to net interest income for both periods. The continued repricing of assets andto lower rates, while decreases in rates paid on interest-bearing liabilities slowed. As a result, the inability to move deposit rates lower in similar increments may mitigate this benefit in the future.

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Finally, the improvement inCorporation’s net interest income was also duemargin decreased from 3.58% for the first quarter of 2008 to a change in3.45% for the compositionfirst quarter of interest-bearing liabilities in 2008 in comparison to 2007. During the three and nine months ended September 30, 2008, decreases in time deposits and interest-bearing deposits were replaced with lower-cost overnight short-term borrowings.2009.
The Corporation manages its risk associated with changes in interest rates through the techniques described in the “Market Risk” section of Management’s Discussion.
Sale of Credit Card Portfolio – In April 2008, the Corporation sold its approximately $87 million credit card portfolio to U.S. Bank National Association ND, d/b/a Elan Financial Services (Elan). As a result of this sale, the Corporation recorded a $13.9 million gain in the second quarter of 2008.
Under a separate agreement with Elan, the Corporation provides ongoing marketing services on behalf of Elan and receives fee income for each new account originated and a percentage of the revenue earned on both new accounts and accounts sold. During the three and nine months ended September 30, 2008, the Corporation recognized $1.3 million and $2.4 million, respectively, of credit card fee income, included within other income on the consolidated statements of income, in connection with this agreement.
The sale of the credit card portfolio has reduced, and will continue to impact, the Corporation’s net interest income for the remainder of 2008. During the year ended December 31, 2007, interest income earned on the credit card portfolio was $14.8 million, or 1.6% of total interest income, at an average yield of 19.2%. In 2008, prior to the sale of the credit card portfolio, the Corporation recognized interest income on the credit card portfolio of $5.1 million at an average yield of 20.1%. Assuming the funding for credit cards was provided by Federal funds purchased, the net interest income impact for 2008 and 2007 would be approximately $4.3 million and $10.9 million, respectively. Despite the negative impact to the Corporation’s net interest margin, the sale of the credit card portfolio has resulted in a reduction of consumer credit risk, while providing a future revenue stream.
Quarter Ended September 30, 2008 compared to the Quarter Ended September 30, 2007
Net Interest Income
Net interest income increased $11.6 million, or 9.5%, to $134.0 million in 2008 from $122.4 million in 2007 due to both an increase in average interest-earning assets and an increase in the net interest margin.

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The following table provides a comparative average balance sheet and net interest income analysis for the thirdfirst quarter of 20082009 as compared to the same period in 2007.2008. Interest income and yields are presented on an FTEa fully taxable-equivalent basis (FTE), using a 35% Federal tax rate and statutory interest expense disallowances. The discussion following this table is based on these FTE amounts. All dollar amounts are in thousands.
                                                
 Three months ended September 30  Three months ended March 31 
 2008 2007  2009 2008 
 Average Yield/ Average Yield/  Average Yield/ Average Yield/ 
 Balance Interest (1) Rate Balance Interest (1) Rate  Balance Interest (1) Rate Balance Interest (1) Rate 
ASSETS
  
Interest-earning assets:  
Loans, net of unearned income (2) $11,696,841 $181,562  6.18% $10,857,636 $205,747  7.52% $12,041,286 $163,753  5.51% $11,295,531 $192,422  6.85%
Taxable investment securities (3) 2,117,207 26,025 4.70 2,116,123 24,583 4.65  2,212,639 26,849 4.86 2,407,189 29,561 4.91 
Tax-exempt investment securities (3) 509,994 6,944 5.45 499,389 6,377 5.11  503,265 6,887 5.47 515,856 6,761 5.24 
Equity securities (1) (3) 168,690 1,614 3.82 188,490 2,269 4.80  137,308 774 2.28 213,004 2,380 4.48 
                          
Total investment securities 2,795,891 34,583 4.78 2,804,002 33,229 4.74  2,853,212 34,510 4.84 3,136,049 38,702 4.94 
Loans held for sale 101,319 1,539 6.08 159,492 2,694 6.76  104,467 1,261 4.83 98,676 1,577 6.39 
Other interest-earning assets 19,013 142 2.94 34,536 432 4.91  16,934 50 1.19 26,784 218 3.25 
                          
Total interest-earning assets 14,613,064 217,826  5.91% 13,855,666 242,102  6.95% 15,015,899 199,574  5.38% 14,557,040 232,919  6.43%
Noninterest-earning assets:  
Cash and due from banks 322,550 338,862  317,928 310,719 
Premises and equipment 197,895 190,175  202,875 196,037 
Other assets 933,303 890,901  924,755 927,260 
Less: Allowance for loan losses  (123,865)  (108,628)   (187,183)  (109,914) 
          
Total Assets
 $15,942,947 $15,166,976  $16,274,274 $15,881,142 
          
  
LIABILITIES AND EQUITY
  
 
Interest-bearing liabilities:  
Demand deposits $1,734,198 $3,166  0.73% $1,729,357 $7,630  1.75% $1,754,003 $1,776  0.41% $1,685,620 $4,405  1.05%
Savings deposits 2,192,747 6,633 1.20 2,259,231 13,680 2.40  2,058,021 4,353 0.86 2,137,704 9,163 1.72 
Time deposits 4,308,903 37,393 3.45 4,626,160 55,093 4.72  5,432,676 43,767 3.27 4,520,004 49,918 4.44 
                          
Total interest-bearing deposits 8,235,848 47,192 2.28 8,614,748 76,403 3.52  9,244,700 49,896 2.19 8,343,328 63,486 3.06 
Short-term borrowings 2,432,109 12,877 2.08 1,477,288 17,786 4.74  1,517,064 1,436 0.38 2,347,463 18,828 3.19 
FHLB advances and long-term debt 1,819,897 19,722 4.32 1,655,599 22,141 5.32  1,787,493 20,119 4.55 1,798,508 21,007 4.69 
                          
Total interest-bearing liabilities 12,487,854 79,791  2.54% 11,747,635 116,330  3.93% 12,549,257 71,451  2.31% 12,489,299 103,321  3.32%
Noninterest-bearing liabilities:  
Demand deposits 1,669,908 1,703,137  1,657,658 1,616,283 
Other 190,012 179,391  201,449 190,496 
          
Total Liabilities
 14,347,774 13,630,163  14,408,364 14,296,078 
Shareholders’ equity 1,595,173 1,536,813  1,865,910 1,585,064 
          
Total Liabilities and Shareholders’ Equity
 $15,942,947 $15,166,976  $16,274,274 $15,881,142 
          
Net interest income/net interest margin (FTE) 138,035  3.74% 125,772  3.62% 128,123  3.45% 129,598  3.58%
          
Tax equivalent adjustment  (4,017)  (3,362)   (4,007)  (3,699) 
          
Net interest income $134,018 $122,410  $124,116 $125,899 
          
 
(1) Includes dividends earned on equity securities.
 
(2) Includes non-performing loans.
 
(3) Balances include amortized historical cost for available for sale securities. The related unrealized holding gains (losses) are included in other assets.

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The following table summarizes the changes in FTE interest income and expense due to changes in average balances (volume) and changes in rates:
                        
 2008 vs. 2007    2009 vs. 2008 
 Increase (decrease) due    Increase (decrease) due 
 to change in    to change in 
 Volume Rate Net  Volume Rate Net 
 (in thousands)  (in thousands) 
Interest income on:  
Loans, net of unearned income $14,834 $(39,019) $(24,185) $11,650 $(40,319) $(28,669)
Taxable investment securities 66 1,376 1,442   (1,337)  (1,375)  (2,712)
Tax-exempt investment securities 137 430 567   (164) 290 126 
Equity securities  (223)  (432)  (655)  (673)  (933)  (1,606)
Loans held for sale  (906)  (249)  (1,155) 86  (402)  (316)
Other interest-earning assets  (153)  (137)  (290)  (62)  (106)  (168)
              
  
Total interest income
 $13,755 $(38,031) $(24,276) $9,500 $(42,845) $(33,345)
              
  
Interest expense on:  
Demand deposits $21 $(4,485) $(4,464) $168 $(2,797) $(2,629)
Savings deposits  (392)  (6,655)  (7,047)  (332)  (4,478)  (4,810)
Time deposits  (3,593)  (14,107)  (17,700) 8,672  (14,823)  (6,151)
Short-term borrowings 7,945  (12,854)  (4,909)  (4,988)  (12,404)  (17,392)
FHLB advances and long-term debt 2,030  (4,449)  (2,419)  (157)  (731)  (888)
              
  
Total interest expense
 $6,011 $(42,550) $(36,539) $3,363 $(35,233) $(31,870)
              
Interest income decreased $24.3$33.3 million, or 10.0%14.3%, due to a $38.0$42.8 million decrease caused by a 104105 basis point reductiondecrease in the average rates,yield on earning assets, offset by a $13.8$9.5 million increase in interest income realized from growth in average balances of $757.4$458.9 million, or 5.5%3.2%.
The increase in average interest-earning assets was due to loan growth, which is summarized in the following table:
                 
  Three months ended    
  September 30  Increase (decrease) 
  2008  2007  $  % 
      (dollars in thousands)     
Real estate – commercial mortgage $3,820,045  $3,383,487  $436,558   12.9%
Commercial – industrial, financial and agricultural  3,557,142   3,281,342   275,800   8.4 
Real estate – home equity  1,619,935   1,454,947   164,988   11.3 
Real estate – construction  1,293,096   1,382,951   (89,855)  (6.5)
Real estate – residential mortgage  953,420   769,381   184,039   23.9 
Consumer  368,804   502,482   (133,678)  (26.6)
Leasing and other  84,399   83,046   1,353   1.6 
             
Total
 $11,696,841  $10,857,636  $839,205   7.7%
             
                 
  Three months ended    
  March 31  Increase (decrease) 
  2009  2008  $  % 
      (dollars in thousands)     
Real estate — commercial mortgage $4,048,269  $3,529,168  $519,101   14.7%
Commercial — industrial, financial and agricultural  3,682,678   3,472,443   210,235   6.1 
Real estate — home equity  1,698,599   1,526,473   172,126   11.3 
Real estate — construction  1,203,328   1,349,924   (146,596)  (10.9)
Real estate — residential mortgage  957,939   858,187   99,752   11.6 
Consumer  360,919   473,247   (112,328)  (23.7)
Leasing and other  89,554   86,089   3,465   4.0 
             
Total
 $12,041,286  $11,295,531  $745,755   6.6%
             
Loan growth was particularly strong in the commercial mortgage loan and commercial loan categories, which together increased $712.4$729.3 million, or 10.7%.10.4%, with increases in both categories across all of the Corporation’s geographical areas. The growth in commercial mortgages and commercial loans was primarily in floating and adjustable rate products. Additional growth came from residential mortgageproducts while the increase in commercial loans which increased $184.0 million, or 23.9%, primarily in traditionalwas spread across fixed, floating and adjustable rate products, and anproducts. The $172.1 million increase in home equity loans of $165.0 million, or 11.3%, which was primarily due to the introductiona significant increase in home equity lines of a new blended fixed/floatingcredit. The $99.8 million increase in residential mortgages was mainly due to an increase in adjustable rate product in late 2007. Generally, the increase was across all loan categories and geographical areas.loans.

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Offsetting these increases were decreaseswas a $146.6 million decrease in construction loans, primarily in floating rate loan products, and a $112.3 million decrease in consumer loans. The decrease in construction loans was due to a slowdown in residential housing construction and the Corporation’s efforts to reduce its lending exposure in this sector. The decrease in consumer loans of $133.7 million, or 26.6%,was largely due to the sale of the Corporation’s credit card portfolio in the second quarter of 2008 and partially due to a decrease in the indirect automobile portfolio and a $90.0 million, or 6.5%, decrease in construction loans, largely due to a decrease in floating rate commercial construction loans.loan portfolio.
The average yield on loans decreased 134 basis points, or 17.8%19.6%, from 7.52%6.85% in 20072008 to 6.18%5.51% in 2008.2009. The decrease in yield reflected a lower interest rate environment, as illustrated by a lower average prime rate during the thirdfirst quarter of 2008 (5.00%2009 (3.25%) as compared to the same period in 2007 (8.19%2008 (6.27%). The decrease in average yields was not as pronounced as the decrease in the average prime rate as fixed and adjustable rate loans, unlike floating rate loans, do not immediately reprice when short-term rates decline.
Average loans held for saleinvestments decreased $58.2$282.8 million, or 36.5%, as a result9.0%. During the first quarter of a $36.5 million, or 13.5%, decrease2009, proceeds from maturities and sales were not fully reinvested in the volumeportfolio based on balance sheet management considerations, such as the Corporation’s overall funding position and the current and expected interest rate environment. In addition, in late 2007, the Corporation “pre-purchased” approximately $180 million of loans originatedinvestments, based on expected cash flows to be generated from maturing securities over an approximate six-month period, resulting in an increase in average investments for salethe first quarter of 2008. Partially offsetting the impact of these items was the purchases of ARCs, which increased average investments by $214.0 million in the thirdfirst quarter of 2008 as2009 compared to the same period in 2007. The decrease was primarily due to the Corporation’s exit from the national wholesale mortgage business. See Note I, “Commitments and Contingencies” in the Notes to Consolidated Financial Statements for additional details related to the Corporation’s residential lending activities.2008.
The $24.3$33.3 million decrease in interest income was exceededpartially offset by a decrease in interest expense of $36.5$31.9 million, or 31.4%30.8%, to $79.8$71.5 million in the thirdfirst quarter of 20082009 from $116.3$103.3 million in the same period in 2007.2008. Interest expense decreased $42.6$35.2 million as a result of a 139101 basis point, or 35.4%30.4%, decrease in the average cost of interest-bearing liabilities. The decrease was slightly offset by a $6.0$3.4 million increase in interest expense caused by growth in average interest-bearing liabilities of $740.2$60.0 million, or 6.3%0.5%.
The following table summarizes the changes in average deposits, by type:
                                
 Three months ended    Three months ended   
 September 30 Increase (decrease)  March 31 Increase (decrease) 
 2008 2007 $ %  2009 2008 
 (dollars in thousands)  (dollars in thousands) 
Noninterest-bearing demand $1,669,908 $1,703,137 $(33,229)  (2.0)% $1,657,658 $1,616,283 $41,375  2.6%
Interest-bearing demand 1,734,198 1,729,357 4,841 0.3  1,754,003 1,685,620 68,383 4.1 
Savings 2,192,747 2,259,231  (66,484)  (2.9) 2,058,021 2,137,704  (79,683)  (3.7)
                  
Total, excluding time deposits
 5,596,853 5,691,725  (94,872)  (1.7) 5,469,682 5,439,607 30,075 0.6 
Time deposits 4,308,903 4,626,160  (317,257)  (6.9) 5,432,676 4,520,004 912,672 20.2 
                  
Total
 $9,905,756 $10,317,885 $(412,129)  (4.0)% $10,902,358 $9,959,611 $942,747  9.5%
                  
The Corporation experienced a net decreaseincrease in noninterest-bearing and interest-bearing demand and savings accounts of $94.9$30.1 million, or 1.7%0.6%. The decreaseincrease in noninterest-bearing and interest-bearing demand and savings accounts was in personalbusiness and governmental accounts, offset by a slight increase in interest-bearing demand and savings business accounts. The decrease in time deposits was due to a $239.2 million decrease in brokeredpersonal accounts. During late 2008 and throughout the first quarter of 2009, the Corporation promoted certificates of deposit and a $78.1in order to decrease its reliance on wholesale funding. The result was an $826.6 million, decreaseor 19.4%, increase in customer certificates of deposit. The decrease in brokered certificatesIn the short-term, this certificate of deposit was due to the use of alternativegrowth had a negative impact on net interest income and net interest margin as short-term borrowings carry a lower cost than time deposits. However, this shift in funding withsources reduces interest rate risk and increases more favorable interest rates.desirable customer funding.

3028


As average deposits decreased,increased, the Corporation’s short and long-term borrowings were used to provide the funding needed to support the growth in average loans.decreased. The following table summarizes the changes in average borrowings, by type:
                                
 Three months ended    Three months ended   
 September 30 Increase (decrease)  March 31 Increase (decrease) 
 2008 2007 $ %  2009 2008 $ % 
 (dollars in thousands)  (dollars in thousands) 
Short-term borrowings:  
Customer short-term promissory notes $337,069 $471,470 $(134,401)  (28.5%)
Customer repurchase agreements 246,429 226,921 19,508 8.6 
         
 
Total short-term customer funding
 583,498 698,391  (114,893)  (16.5)
 
Federal funds purchased $1,399,130 $756,360 $642,770  85.0% 792,001 1,184,370  (392,369)  (33.1)
Short-term promissory notes 486,179 446,182 39,997 9.0 
Federal Reserve Bank borrowings 138,222  138,222 N/A 
FHLB overnight repurchase agreements 290,761 29,413 261,348 888.5   449,615  (449,615)  
Customer repurchase agreements 213,827 242,375  (28,548)  (11.8)
Other short-term borrowings 42,212 2,958 39,254 N/M  3,343 15,087  (11,744)  (77.8)
         
 
Total other short-term borrowings
 933,566 1,649,072  (715,506)  (43.4)
         
          
Total short-term borrowings
 2,432,109 1,477,288 954,821 64.6  1,517,064 2,347,463  (830,399) 35.4 
                  
  
Long-term debt:  
FHLB advances 1,436,741 1,254,251 182,490 14.5  1,404,275 1,415,840  (11,565)  (0.8)
Other long-term debt 383,156 401,348  (18,192)  (4.5) 383,218 382,668 549  0.1 
                  
 
Total long-term debt
 1,819,897 1,655,599 164,298 9.9  1,787,493 1,798,508  (11,016)  (0.6)
         
          
Total
 $4,252,006 $3,132,887 $1,119,119  35.7% $3,304,557 $4,145,972 $(841,415)  (20.3%)
                  
 
N/MNot meaningful
N/A — Not applicable
During the fourth quarter of 2008, the Corporation pledged a combination of commercial real estate loans, commercial loans and securities to the Federal Reserve Bank of Philadelphia to provide access to overnight borrowings under the Federal Reserve Bank’s discount window and term borrowings under the Federal Reserve Bank’s term auction facility. As of March 31, 2009, the Corporation had $1.5 billion of collateralized borrowing availability. The increase in short-term$138.2 million of outstanding borrowings was mainly due to an increase infor the first quarter of 2009 were made under the Federal funds purchased, which increased $642.8 million, and Federal Home Loan Bank (FHLB) overnight repurchase agreements, which increased $261.3 million. The increase in long-term debt was due to an increase in FHLB advances as longer-term rates were locked and durations were extended to manage interest rate risk.Reserve Bank’s discount window.
Provision for Loan Losses and Allowance for Credit Losses
The following table presents ending balances of loans outstanding, net of unearned income:
             
  September 30  December 31  September 30 
  2008  2007  2007 
  (in thousands) 
Real-estate – commercial mortgage $3,897,703  $3,502,282  $3,407,715 
Commercial – industrial, agricultural and financial  3,554,615   3,427,085   3,328,963 
Real-estate – home equity  1,647,245   1,501,231   1,472,376 
Real-estate – construction  1,277,552   1,342,923   1,389,164 
Real-estate – residential mortgage  979,486   851,577   809,148 
Consumer  387,849   500,708   500,021 
Leasing and other  79,079   78,618   80,920 
          
Total
 $11,823,529  $11,204,424  $10,988,307 
          
             
  March 31  December 31  March 31 
  2009  2008  2008 
      (in thousands)     
Real-estate — commercial mortgage $4,068,342  $4,016,700  $3,597,307 
Commercial — industrial, agricultural and financial  3,653,503   3,635,544   3,493,352 
Real-estate — home equity  1,673,613   1,695,398   1,547,323 
Real-estate — construction  1,205,256   1,269,330   1,328,802 
Real-estate — residential mortgage  947,837   972,797   879,491 
Consumer  378,851   365,692   451,037 
Leasing and other  81,658   87,159   91,341 
          
Total
 $12,009,060  $12,042,620  $11,388,653 
          
Approximately $5.2$5.3 billion, or 43.8%43.9%, of the Corporation’s loan portfolio was in commercial mortgage and construction loans at September 30, 2008.March 31, 2009. While the Corporation does not have a concentration of credit risk with any single borrower industry or geographical location,industry, the performance of real estate markets and general economic

29


conditions have adversely impacted the performance of these loans.loans, most significantly construction loans to residential housing developers in the Corporation’s Maryland and Virginia markets.
Poor economic conditions began to have a more noticeable impact on theThe credit quality of the Corporation’s commercial loans, comprising 30.1%30.4% of the total loan portfolio, during the third quarter of 2008,has been impacted generally by poor economic conditions as evidenced by an increasing level of non-performing loans. The performance of commercial loans and ato businesses related to the residential housing industry continued increase in lineto deteriorate during the first quarter of credit usage which

31


increased from 38.4% at September 31, 2007 to 42.5% at September 31, 2008. Based on economic forecasts for the remainder of the year, improvements in asset quality for this sector is not expected in the near future.2009.
Approximately $2.6 billion, or 22.2%21.8%, of the Corporation’s loan portfolio was in residential mortgage and home equity loans at September 30, 2008. DespiteMarch 31, 2009. Significant decreases in residential real estate values in some of the Corporation’s geographic areas, most notably in portions of Maryland, New Jersey and Virginia, non-performing levels for these loan types have remained steady for the past year.negatively impacted this portfolio.
The following table presents the activity in the Corporation’s allowance for credit losses:
        
 Three months ended         
 September 30  Three months ended March 31 
 2008 2007  2009 2008 
 (dollars in thousands)  (dollars in thousands) 
Loans, net of unearned income outstanding at end of period $11,823,529 $10,988,307  $12,009,060 $11,388,653 
          
Daily average balance of loans, net of unearned income $11,696,841 $10,857,636  $12,041,286 $11,295,531 
          
  
Balance at beginning of period
 $126,223 $106,892  $180,137 $112,209 
Loans charged off:  
Commercial – industrial, agricultural and financial 4,684 1,452 
Real estate – mortgage 5,857 122 
Real estate — construction 12,242  
Commercial — industrial, agricultural and financial 10,622 2,764 
Real estate — commercial mortgage 3,960 318 
Real estate — residential mortgage and home equity 1,937 531 
Consumer 991 874  2,076 1,381 
Leasing and other 1,166 357  946 632 
          
Total loans charged off
 12,698 2,805  31,783 5,626 
          
Recoveries of loans previously charged off:  
Commercial – industrial, agricultural and financial 749 267 
Real estate – mortgage 238 8 
Real estate — construction 112  
Commercial — industrial, agricultural and financial 904 276 
Real estate — commercial mortgage 10 77 
Real estate — residential mortgage and home equity 1 3 
Consumer 304 324  429 418 
Leasing and other 313 143  253 492 
          
Total recoveries
 1,604 742  1,709 1,266 
          
Net loans charged off 11,094 2,063  30,074 4,360 
Provision for loan losses 26,700 4,606  50,000 11,220 
          
Balance at end of period
 $141,829 $109,435  $200,063 $119,069 
          
  
Components of Allowance for Credit Losses:
  
Allowance for loan losses $136,988 $109,435  $192,410 $115,257 
Reserve for unfunded lending commitments (1) 4,841  
Reserve for unfunded lending commitments 7,653 3,812 
          
Allowance for credit losses $141,829 $109,435  $200,063 $119,069 
     
      
Selected Ratios:
  
Net charge-offs to average loans (annualized)  0.38%  0.08%  1.00%  0.15%
Allowance for credit losses to loans outstanding  1.20%  1.00%  1.67%  1.05%
Allowance for loan losses to loans outstanding  1.16%  1.00%  1.60%  1.01%
(1)The reserve for unfunded lending commitments was transferred to other liabilities as of December 31, 2007. Prior periods were not reclassified.

3230


The following table summarizes the Corporation’s non-performing assets as of the indicated dates:
                        
 September 30 December 31 September 30  March 31 March 31 December 31 
 2008 2007 2007  2009 2008 2008 
 (dollars in thousands)  (dollars in thousands) 
Non-accrual loans $143,310 $76,150 $71,043  $198,765 $96,588 $161,962 
Loans 90 days past due and accruing 21,354 29,782 23,406  47,284 29,733 35,177 
              
Total non-performing loans
 164,664 105,932 94,449  246,049 126,321 197,139 
Other real estate owned 21,706 14,934 12,536  23,189 18,333 21,855 
              
Total non-performing assets
 $186,370 $120,866 $106,985  $269,238 $144,654 $218,994 
              
  
Non-accrual loans to total loans  1.21%  0.68%  0.65%  1.66%  0.85%  1.34%
Non-performing assets to total assets  1.15%  0.76%  0.69%  1.63%  0.90%  1.35%
Allowance for credit losses to non-performing loans  86%  106%  116%  81%  94%  91%
Non-performing assets to tangible common shareholders’ equity and allowance for credit losses  23.7%  13.4%  19.7%
The following table summarizes the Corporation’s non-performing loans, by type, as of the indicated dates:
             
  September 30  December 31  September 30 
  2008  2007  2007 
  (in thousands) 
Real estate – construction $57,436  $30,926  $28,029 
Commercial – industrial, agricultural and financial  41,489   27,715   24,078 
Real estate – commercial mortgage  32,642   14,515   14,254 
Real estate – residential mortgage and home equity  26,274   25,775   24,505 
Consumer  6,558   4,741   3,447 
Leasing  265   2,260   136 
          
Total non-performing loans
 $164,664  $105,932  $94,449 
          
             
  March 31  March 31  December 31 
  2009  2008  2008 
  (in thousands) 
Real estate — construction $93,425  $28,160  $80,083 
Commercial — industrial, agricultural and financial  50,493   35,462   40,294 
Real estate — commercial mortgage  59,899   30,162   41,745 
Real estate — residential mortgage and home equity  31,365   24,586   26,304 
Consumer  10,316   5,858   8,374 
Leasing  551   2,093   339 
          
Total non-performing loans
 $246,049  $126,321  $197,139 
          
Non-performing assets increased to $186.4$269.2 million, or 1.15%1.63% of total assets, at September 30, 2008,March 31, 2009, from $107.0$144.7 million, or 0.69%0.90% of total assets, at September 30, 2007. Total non-performing assets increased $65.5 million from DecemberMarch 31, 2007.2008. The increase in non-performing assets in comparison to September 30, 2007March 31, 2008 was primarily due to increasesa $65.3 million, or 231.8%, increase in non-performing construction loans, a $29.7 million, or 98.6%, increase in non-performing commercial mortgagesmortgage loans and a $15.0 million, or 42.4%, increase in non-performing commercial loans.
In comparison to September 30, 2007,The $65.3 million increase in non-performing construction loans increased $29.4 million, or 104.9%,was related to the deteriorating valuesslowdown of residential housing. Non-performinghousing activity and deteriorating real estate values, particularly within the Corporation’s Maryland and Virginia markets, which accounted for $69.3 million, or 74.2%, of the $93.4 million of non-performing construction loans at March 31, 2009.
The $29.7 million increase in non-performing commercial mortgage loans increased $18.4was generally due to poor economic conditions and not attributable to any specific industry or geographical area. The $15.0 million or 129.0%, andincrease in non-performing commercial loans increased $17.4 million, or 72.3%. The increases in these categories were across most geographical areaswas caused by both poor economic conditions and industries and were dueborrowers whose businesses are tied to general economic conditions.the to the residential construction sector.
The $21.7$23.2 million balance of other real estate owned as of September 30, 2008March 31, 2009 was primarily due to foreclosures on repurchased residential mortgage loans, which contributed $17.3$17.9 million to the balance of other real estate owned.

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Net charge-offs increased $25.7 million, or 589.8%, to $30.1 million for the first quarter of 2009 compared to $4.4 million for the first quarter of 2008. Annualized net charge-offs to average loans increased 85 basis points, or 566.7%, to 100 basis points for the first quarter of 2009, compared to 15 basis points for the first quarter of 2008. Of the $30.1 million of net charge-offs recorded for the first quarter of 2009, 33% was for borrowers located in Maryland, 29% in Virginia, 19% in Pennsylvania and 15% in New Jersey. During the first quarter of 2009, there were seven individual charge-offs which exceeded $1.0 million, with an aggregate amount of $15.8 million, almost all of which were related to residential construction.
The provision for loan losses totaled $26.7$50.0 million for the thirdfirst quarter of 2008,2009, an increase of $22.1$38.8 million, or 479.7%345.6%, over the same period in 2007.2008. This significant increase in the provision for loan losses was primarily related to the increase in non-performing loans and net charge-offs, which required additional allocations of the allowance for credit losses.charge-offs.

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Management believes that the allowance for credit losses balance of $141.8$200.1 million at September 30, 2008March 31, 2009 is sufficient to cover losses inherent in both the loan portfolio and the unfunded lending commitments on that date and is appropriate based on applicable accounting standards.
Other Income
The following table presents the components of other income:
                                
 Three months ended    Three months ended   
 September 30 Increase (decrease)  March 31 Increase (decrease) 
 2008 2007 $ %  2009 2008 $ % 
 (dollars in thousands)  (dollars in thousands) 
Service charges on deposit accounts $16,177 $11,293 $4,884  43.2% $14,894 $13,967 $927  6.6%
Gains on sale of mortgage loans 8,591 2,311 6,280 271.7 
Other service charges and fees 9,598 8,530 1,068 12.5  8,354 8,591  (237)  (2.8)
Investment management and trust services 8,045 9,291  (1,246)  (13.4) 7,903 8,759  (856)  (9.8)
Gains on sales of mortgage loans 2,266 2,532  (266)  (10.5)
Credit card servicing income 1,187  1,187 N/A 
Other 4,030 5,231  (1,201)  (23.0) 3,066 2,806 260 9.3 
                  
Total, excluding investment securities losses
 40,116 36,877 3,239 8.8 
Investment securities losses  (9,501)  (134)  (9,367) N/M 
Total, excluding investment securities gains
 43,995 36,434 7,561 20.8 
Investment securities gains 2,919 1,246 1,673 134.3 
                  
Total
 $30,615 $36,743 $(6,128)  (16.7%) $46,914 $37,680 $9,234  24.5%
                  
 
N/M –A — Not meaningfulapplicable
The $4.9 million,$927,000, or 43.2%6.6%, increase in service charges on deposit accounts was due to an increase of $4.2 million,$752,000, or 79.3%9.8%, in overdraft fees and a $501,000, or 17.5%,$207,000 increase in cash management fees, due to an increase in the number of cash managementother service charges on deposit accounts. The increase in overdraft fees was due to a new automatedresult of the rollout of a matrix-based overdraft program that was introduced in November 2007.the fall of 2007, as well as the impact of current economic conditions on our customers. The increase in cash management fees was due to a combined increase in average customer repurchase agreements and short-term promissory notes during the third quarter of 2008 in comparison to the third quarter of 2007.
The $1.1 million, or 12.5%, increase in other service charges and fees was primarilydue to the decline in interest rates, which reduced the earnings credits against commercial customers’ fees.
Gains on sale of mortgage loans increased $6.3 million, or 271.7%, due to an increase in the volume of $694,000loans sold. Total loans sold in foreign currency processing revenue as a resultthe first quarter of 2009 were $558.7 million, compared to $163.6 million in the growthfirst quarter of 2008. The $395.1 million, or 241.5%, increase in the Corporation’s foreign currency processing company andvolume of loans sold was mainly due to an increase in fees earned on these services and a $343,000, or 15.7%, increase in debit card fees due to increased transaction volumes.refinance activity as rates remained low.
The $1.2 million,$856,000, or 13.4%9.8%, decrease in investment management and trust services income was due to a $1.1 million,$665,000, or 38.4%10.4%, decrease in trust revenue and a $191,000, or 8.0%, decrease in brokerage revenue. During the first quarter of 2008, the Corporation began transitioning its brokerage business from a transaction-based model to a relationship model. This transition is expected to continue through the remainder of 2008 and may have a negative impact on revenue in the short-term, but is expected to have a positive long-term impact. The negative performance of equity markets contributed to a $174,000 decreasethe decreases in both trust revenue.
The $1.2 million, or 23.0%, decrease in other income was due to a $2.1 million gain recorded during the third quarter of 2007, related to the resolution of litigation and the sale of certain assets between the Corporation’s former Resource Bank affiliate and another bank. The impact of this non-recurring gain was offset by $1.3 million of credit card fee income generated subsequent to the sale of the Corporation’s credit card portfolio.
Investment securities losses of $9.5 million for the third quarter of 2008 were primarily due to $2.0 million in charges related to the other-than-temporary impairment of financial institution stocks and $7.8 million related to the other-than-temporary impairment of debt securities. These impairment charges were offset by net gains of $862,000 and $420,000 on the sale of financial institutions stock and debt securities, respectively.brokerage revenues.

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The $1.2 million of credit card servicing income was related to income earned subsequent to the Corporation’s sale of its credit card portfolio in April 2008. Under a separate agreement entered into with the purchaser of the portfolio, the Corporation receives fees for each new account originated and a percentage of the revenue earned on both new accounts and accounts sold.
Investment securities gains of $2.9 million for the first quarter of 2009 included $6.0 million of net gains on the sale of securities, primarily collateralized mortgage obligations, offset by $3.0 million of other-than-temporary impairment charges. The Corporation recorded $2.0 million of other-than-temporary impairment charges for pooled trust preferred securities issued by financial institutions and $956,000 of other-than-temporary impairment charges related to financial institution stocks. See Note C, “Investment Securities” in the Notes to Consolidated Financial Statements for additional details.
The $1.2 million of investment securities gains for the first quarter of 2008 included $4.6 million in gains from the redemption of Class B shares in connection with Visa, Inc.’s (Visa) initial public offering and gains on the sale of MasterCard, Incorporated shares, offset by $3.6 million of other-than-temporary impairment charges related to financial institution stocks.
Other Expenses
The following table presents the components of other expenses:
                                
 Three months ended    Three months ended   
 September 30 Increase (decrease)  March 31 Increase (decrease) 
 2008 2007 $ %  2009 2008 $ % 
 (dollars in thousands)  (dollars in thousands) 
Salaries and employee benefits $55,310 $52,505 $2,805  5.3% $55,304 $55,195 $109  0.2%
Net occupancy expense 10,237 9,813 424 4.3  11,023 10,524 499 4.7 
Operating risk loss 3,480 16,345  (12,865)  (78.7) 6,201 1,243 4,958 398.9 
FDIC insurance premiums 4,288 862 3,426 397.4 
Equipment expense 3,079 3,448  (369)  (10.7)
Data processing 3,242 3,131 111 3.5  3,072 3,246  (174)  (5.4)
Advertising 3,097 2,470 627 25.4 
Equipment expense 3,061 3,438  (377)  (11.0)
Marketing 2,571 2,905  (334)  (11.5)
Professional fees 2,228 2,347  (119)  (5.1)
Telecommunications 2,002 2,016  (14)  (0.7) 2,163 1,968 195 9.9 
Intangible amortization 1,730 1,995  (265)  (13.3) 1,463 1,857  (394)  (21.2)
Professional fees 1,575 1,769  (194)  (11.0)
Postage 1,384 1,457  (73)  (5.0)
Supplies 1,419 1,471  (52)  (3.5) 1,281 1,358  (77)  (5.7)
Postage 1,307 1,275 32 2.5 
Other 12,695 11,768 927 7.9  12,315 10,250 2,065 20.1 
                  
Total
 $99,155 $107,996 $(8,841)  (8.2%) $106,372 $96,660 $9,712  10.0%
                  
Salaries and employee benefits increased $2.8 million,$109,000, or 5.3%0.2%, with salaries increasing $2.9decreasing $1.2 million, or 6.8%2.7%, andoffset by an increase in employee benefits decreasing $124,000,of $1.3 million, or 1.3%14.1%. The increasedecrease in salaries was primarily due to corporatea $1.3 million decrease in employee bonuses and affiliate management bonus accruals, which increased $2.1 million, anda $208,000 decrease in stock-based compensation, offset by a $325,000 increase in salaries due to normal merit increases, offset by decreases related to staff reductions that were made as part of corporate-wide workforce management and centralization initiatives which began in the second quarter of 2007.increases. Average full-time equivalent employees decreased from 3,760 for3,660 in the first quarter of 2008 to 3,640 in the first quarter of 2009.
The $1.3 million increase in employee benefits was primarily due to a $973,000 increase in healthcare costs as claims increased and $749,000 of severance expense associated with the Corporation’s Columbia Bank subsidiary in anticipation of consolidating back office functions in the third quarter of 2007 to 3,6802009. These increases were offset by a $500,000 decrease in accruals for the third quartercost of 2008.compensated absences.
The decrease$5.0 million increase in operating risk loss was due to $6.2 million of charges increasing the financial guarantee liability associated with the Corporation’s commitment to purchase ARCs from customer

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accounts, offset by a $15.5$1.0 million reductiondecrease in contingent losses related toon the actual and potential repurchase of residential mortgage and home equity loans, offset by a $2.7 million charge to increase the financial guarantee liability associated with the commitment to purchase ARCs still held in customer accounts, as a result of a decrease in the estimated fair values of the ARCs.loans. See Note I,G, “Commitments and Contingencies” in the Notes to Consolidated Financial Statements for additional details.
The $627,000, or 25.4%,$3.4 million increase in advertising expenseFDIC insurance premiums was primarily due to core deposit promotional campaigns. an increase in assessment rates effective January 1, 2009. In the first quarter of 2009, gross FDIC insurance premiums were $4.4 million, reduced by $114,000 of one-time credits. In the first quarter of 2008, gross FDIC insurance premiums were $1.8 million, reduced by $890,000 of one-time credits.
The $377,000$369,000 decrease in equipment expense and the $265,000 decrease in intangible amortization were due to both equipment and intangible assets becoming fully depreciated and amortized during 2008. The $194,000 decrease in professional fees was due to a decrease in legal feesbranch maintenance costs and a decrease in depreciation expense. The $334,000 decrease in marketing expense was due to deposit promotional campaigns and customer service initiatives which began during the first quarter of 2008. The $394,000 decrease in intangible amortization was mainly in core deposit intangibles.
The $2.1 million increase in other expenses was caused by the impact of the reversal $1.4 million of litigation reserves in the first quarter of 2008 associated with repurchasesthe Corporation’s share of previously sold loans, partially offset by increasesindemnification liabilities with Visa, which were no longer necessary as a result of Visa’s initial public offering. Also contributing to the increase in legal fees associated withother expenses was a $1.1 million increase in costs related to the maintenance and disposition of foreclosed real estate. The $927,000, or 7.9%, increase in other expenses was due to an increase of $1.2 million associated with the disposition and maintenance of foreclosed real estate and an increase of $637,000 in insurance premiums assessed by the Federal Deposit Insurance Corporation (FDIC) as a result of one-time credits expiring at certain affiliate banks. These increases were offset by a reduction in non-income based state tax expense of $1.1 million due to mergers of affiliate banks in prior years.
During the three months ended September 30, 2008, FDIC insurance premiums, included in other expenses in the above table, totaled $1.1 million, consisting of gross premiums of $1.8 million, reduced by $662,000 of one-time credits. The FDIC has proposed a change in the insurance assessment rates, which is expected to significantly increase the Corporation’s premiums in 2009.

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Income Taxes
Income tax expense for the thirdfirst quarter of 20082009 was $9.7$1.6 million, a $3.3$12.6 million, or 25.3%88.9%, decrease from $13.0$14.2 million in 2007.2008. The decrease was primarily due to a decrease in income before taxes.
The Corporation’s effective tax rate was 25.0%10.7% in 2008,2009, as compared to 27.9%25.5% in 2007.2008. The effective rate is generally lower than the Federal statutory rate of 35% due to investments in tax-free municipal securities and Federal tax credits from investments in low and moderate-income housing partnerships. The effective rate for the thirdfirst quarter of 20082009 is lower than the same period in 2007 as2008 due to non-taxable income and tax credits hadhaving a larger impact on the effective rate due to a $7.8the $41.0 million decrease in income before taxes.
Nine Months Ended September 30, 2008 Compared to the Nine Months Ended September 30, 2007
Net Interest Income
Net interest income increased $26.7 million, or 7.3%, to $391.8 million in 2008 from $365.1 million in 2007 due to an increase in average interest-earning assets.

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The following table provides a comparative average balance sheet and net interest income analysis for the first nine months of 2008 as compared to the same period in 2007. Interest income and yields are presented on an FTE basis, using a 35% Federal tax rate and statutory interest expense disallowances. The discussion following this table is based on these FTE amounts. All dollar amounts are in thousands.
                         
  Nine months ended September 30 
  2008  2007 
  Average      Yield/  Average      Yield/ 
  Balance  Interest (1)  Rate  Balance  Interest (1)  Rate 
ASSETS
                        
Interest-earning assets:                        
Loans, net of unearned income (2) $11,472,748  $554,437   6.45% $10,619,834  $601,390   7.57%
Taxable investment securities (3)  2,275,681   84,114   4.84  ��2,092,916   71,201   4.54 
Tax-exempt investment securities (3)  511,871   20,831   5.43   497,504   19,010   5.09 
Equity securities (1) (3)  192,803   5,723   3.96   185,215   6,628   4.78 
                   
Total investment securities  2,980,355   110,668   4.89   2,775,635   96,839   4.65 
Loans held for sale  102,819   4,726   6.13   188,223   9,771   6.92 
Other interest-earning assets  20,701   462   2.96   36,008   1,339   4.93 
                   
Total interest-earning assets  14,576,623   670,293   6.13%  13,619,700   709,339   6.96%
Noninterest-earning assets:                        
Cash and due from banks  318,844           331,945         
Premises and equipment  196,977           190,711         
Other assets  948,134           896,604         
Less: Allowance for loan losses  (116,598)          (108,425)        
                       
Total Assets
 $15,923,980          $14,930,535         
                       
                         
LIABILITIES AND EQUITY
                        
Interest-bearing liabilities:                        
Demand deposits $1,709,380  $10,538   0.82% $1,688,129  $21,733   1.72%
Savings deposits  2,179,432   22,396   1.37   2,284,521   41,266   2.41 
Time deposits  4,396,409   128,873   3.92   4,537,160   158,411   4.67 
                   
Total interest-bearing deposits  8,285,221   161,807   2.61   8,509,810   221,410   3.48 
Short-term borrowings  2,365,052   44,093   2.46   1,424,109   51,734   4.82 
FHLB advances and long-term debt  1,829,981   60,714   4.43   1,564,333   61,271   5.23 
                   
Total interest-bearing liabilities  12,480,254   266,614   2.85%  11,498,252   334,415   3.88%
Noninterest-bearing liabilities:                        
Demand deposits  1,649,560           1,726,782         
Other  190,487           184,010         
                       
Total Liabilities
  14,320,301           13,409,044         
Shareholders’ equity  1,603,679           1,521,491         
                       
Total Liabilities and Shareholders’ Equity
 $15,923,980          $14,930,535         
                       
Net interest income/net interest margin (FTE)      403,679   3.69%      374,924   3.69%
                       
Tax equivalent adjustment      (11,872)          (9,831)    
                       
Net interest income     $391,807          $365,093     
                       
(1)Includes dividends earned on equity securities.
(2)Includes non-performing loans.
(3)Balances include amortized historical cost for available for sale securities. The related unrealized holding gains (losses) are included in other assets.

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The following table summarizes the changes in FTE interest income and expense due to changes in average balances (volume) and changes in rates:
             
  2008 vs. 2007 
  Increase (decrease) due 
  to change in 
  Volume  Rate  Net 
  (in thousands) 
Interest income on:            
Loans, net of unearned income $46,318  $(93,271) $(46,953)
Taxable investment securities  7,362   5,551   12,913 
Tax-exempt investment securities  552   1,269   1,821 
Equity securities  264   (1,169)  (905)
Loans held for sale  (4,030)  (1,015)  (5,045)
Other interest-earning assets  (452)  (425)  (877)
          
             
Total interest income
 $50,014  $(89,060) $(39,046)
          
             
Interest expense on:            
Demand deposits $271  $(11,466) $(11,195)
Savings deposits  (1,826)  (17,044)  (18,870)
Time deposits  (4,767)  (24,771)  (29,538)
Short-term borrowings  24,482   (32,123)  (7,641)
FHLB advances and long-term debt  9,528   (10,085)  (557)
          
             
Total interest expense
 $27,688  $(95,489) $(67,801)
          
Interest income decreased $39.0 million, or 5.5%, due to an $88.1 million decrease caused by an 83 basis point reduction in average rates, offset by a $50.0 million increase in interest income realized from a $956.9 million, or 7.0%, increase in average balances.
The increase in average interest-earning assets was due mainly to loan growth, which is summarized in the following table:
                 
  Nine months ended    
  September 30  Increase (decrease) 
  2008  2007  $  % 
  (dollars in thousands) 
Real estate – commercial mortgage $3,688,880  $3,303,854  $385,026   11.7%
Commercial – industrial, financial and agricultural  3,513,406   3,162,524   350,882   11.1 
Real estate – home equity  1,571,705   1,444,100   127,605   8.8 
Real estate – construction  1,304,252   1,386,960   (82,708)  (6.0)
Real estate – residential mortgage  903,226   727,491   175,735   24.2 
Consumer  406,058   508,544   (102,486)  (20.2)
Leasing and other  85,221   86,361   (1,140)  (1.3)
             
Total
 $11,472,748  $10,619,834  $852,914   8.0%
             
The growth in loans during the first nine months of 2008 in comparison to the first nine months of 2007 was due to a $385.0 million, or 11.7%, increase in commercial mortgages and a $350.9 million, or 11.1%, increase in commercial loans. In both categories, the increases were primarily due to increases in floating and adjustable rate loan products, and partially due to increases in fixed rate products with terms less than five years. Additional growth came from residential mortgage loans, which increased $175.7 million, or 24.2%, due primarily to increases in traditional adjustable rate products, and an increase in home equity loans of $127.6 million, or 8.8%, which was primarily due to the introduction of a new blended

38


fixed/floating rate product in late 2007. Offsetting these increases were decreases in consumer loans of $102.5 million, or 20.2%, and a decrease in construction loans of $82.7 million, or 6.0%. The decrease in consumer loans was due to a decrease in the indirect automobile portfolio and the sale of the credit card portfolio during the second quarter of 2008.
The average yield on loans decreased 112 basis points, or 14.8%, from 7.57% in 2007 to 6.45% in 2008. The decrease in yields reflected a lower interest rate environment, as illustrated by a lower average prime rate during the first nine months of 2008 (5.45%) as compared to the first nine months of 2007 (8.23%).
Average investment securities increased $204.7 million, or 7.4%. In late 2007, the Corporation “pre-purchased” investments, based on the expected cash flows to be generated from maturing securities over an approximate six-month period. The result of this pre-purchase was a higher average investment balance for the first nine months of 2008. Also contributing to the increase was the sale of approximately $250 million of lower-yielding investment securities during the first quarter of 2007, which lowered the balance of average investment securities for the first nine months of 2007.
The average yield on investment securities increased 24 basis points, or 5.2%, from 4.65% in 2007 to 4.89% in 2008. The increase in yield was due to the systematic reinvestment of normal portfolio cash flows, primarily from shorter-duration, lower-yielding mortgage-backed securities, into a combination of higher-yielding mortgage-backed pass-through securities, conservative U.S. government issued collateralized mortgage obligations and longer-term municipal securities.
Average loans held for sale decreased $85.4 million, or 45.4%, as a result of a $435.5 million, or 36.6%, decrease in the volume of loans originated for sale in the first nine months 2008 as compared to the first nine months of 2007. The decrease was due to the Corporation’s exit from the national wholesale mortgage business, which began during 2007, offset by an increase in volumes across the Corporation’s existing retail network.
The $39.0 million decrease in interest income was more than offset by a decrease in interest expense of $67.8 million, or 20.3%. Interest expense decreased $95.5 million as a result of a 103 basis point, or 26.5%, decrease in the average cost of interest-bearing liabilities. The decrease was partially offset by a $27.7 million increase in interest expense caused by a $982.0 million, or 8.5%, increase in average interest-bearing liabilities.
The following table summarizes the changes in average deposits, by type:
                 
  Nine months ended    
  September 30  Increase (decrease) 
  2008  2007  $  % 
  (dollars in thousands) 
Noninterest-bearing demand $1,649,560  $1,726,782  $(77,222)  (4.5)%
Interest-bearing demand  1,709,380   1,688,129   21,251   1.3 
Savings  2,179,432   2,284,521   (105,089)  (4.6)
             
Total, excluding time deposits
  5,538,372   5,699,432   (161,060)  (2.8)
Time deposits  4,396,409   4,537,160   (140,751)  (3.1)
             
Total
 $9,934,781  $10,236,592  $(301,811)  (2.9)%
             
The Corporation experienced a net decrease in noninterest-bearing and interest-bearing demand and savings accounts of $161.1 million, or 2.8%. The decrease in non-interest bearing and savings accounts was in both business and personal accounts, while the increase in interest-bearing demand deposits was due to personal accounts. The $140.8 million decrease in time deposits was due to a $172.3 million decrease in brokered certificates of deposit, offset by a $31.5 million increase in customer certificates of deposit.

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As average deposits decreased, borrowings were used to provide the funding needed to support the growth in average loans and investments. The following table summarizes the changes in average borrowings, by type:
                 
  Nine months ended    
  September 30  Increase (decrease) 
  2008  2007  $  % 
  (dollars in thousands) 
Short-term borrowings:                
Federal funds purchased $1,296,074  $751,954  $544,120   72.4%
Short-term promissory notes  475,523   379,761   95,762   25.2 
FHLB overnight repurchase agreements  346,770   9,912   336,858   N/M 
Customer repurchase agreements  221,253   251,520   (30,267)  (12.0)
Other short-term borrowings  25,432   30,962   (5,530)  (17.9)
             
Total short-term borrowings
  2,365,052   1,424,109   940,943   66.1 
             
                 
Long-term debt:                
FHLB advances  1,447,161   1,204,572   242,589   20.1 
Other long-term debt  382,820   359,761   23,059   6.4 
             
Total long-term debt
  1,829,981   1,564,333   265,648   17.0 
             
Total
 $4,195,033  $2,988,442  $1,206,591   40.4%
             
N/M – Not meaningful
The $940.9 million increase in short-term borrowings was mainly due to an increase in Federal funds purchased, which increased $544.1 million, and FHLB overnight repurchase agreements, which increased $336.9 million. The increase in long-term debt was due to an increase in FHLB advances as longer-term rates were locked and durations were extended to manage interest rate risk.

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Provision for Loan Losses and Allowance for Credit Losses
The following table presents the activity in the Corporation’s allowance for credit losses:
         
  Nine months ended 
  September 30 
  2008  2007 
  (dollars in thousands) 
Loans, net of unearned income outstanding at end of period $11,823,529  $10,988,307 
       
Daily average balance of loans, net of unearned income $11,472,748  $10,619,834 
       
         
Balance at beginning of period
 $112,209  $106,884 
Loans charged off:        
Commercial – industrial, agricultural and financial  12,200   4,596 
Real estate – mortgage  8,811   527 
Consumer  3,738   2,509 
Leasing and other  3,771   1,039 
       
Total loans charged off
  28,520   8,671 
       
Recoveries of loans previously charged off:        
Commercial – industrial, agricultural and financial  1,025   1,467 
Real estate – mortgage  385   89 
Consumer  1,022   903 
Leasing and other  1,082   500 
       
Total recoveries
  3,514   2,959 
       
Net loans charged off  25,006   5,712 
Provision for loan losses  54,626   8,263 
       
Balance at end of period
 $141,829  $109,435 
       
         
Net charge-offs to average loans (annualized)  0.29%  0.07%
       
The provision for loan losses for the first nine months of 2008 totaled $54.6 million, an increase of $46.4 million, or 561.1%, from the same period in 2007. The significant increase in the provision for loan losses was related to the increase in non-performing loans and net charge-offs, which required additional allocations of the allowance for credit losses.
The Corporation experienced increases in charge-offs for commercial loans and mortgage loans of $7.6 million and $8.3 million, respectively for the nine months ended September 30, 2008 in comparison to the first nine months of 2007. The ten largest charge-offs for the first nine months of 2008 totaled $12.7 million, with $5.8 million of these charge-offs in commercial loans and $6.9 million in construction and land development loans. Geographically, these charge-offs were spread throughout the Corporation’s footprint.

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Other Income
The following table presents the components of other income:
                 
  Nine months ended    
  September 30  Increase (decrease) 
  2008  2007  $  % 
  (dollars in thousands) 
Service charges on deposit accounts $45,463  $33,145  $12,318   37.2%
Other service charges and fees  27,320   23,746   3,574   15.1 
Investment management and trust services  25,193   29,374   (4,181)  (14.2)
Gains on sales of mortgage loans  7,247   12,113   (4,866)  (40.2)
Other  11,214   12,158   (944)  (7.8)
             
Total, excluding gain on sale of credit card portfolio and investment securities(losses) gains
  116,437   110,536   5,901   5.3 
Gain on sale of credit card portfolio  13,910      13,910   N/A 
Investment securities (losses) gains  (29,902)  2,277   (32,179)  N/M 
             
Total
 $100,445  $112,813  $(12,368)  (11.0)%
             
N/A – Not applicable
N/M – Not meaningful
The $12.3 million, or 37.2%, increase in service charges on deposit accounts was due to an increase of $10.5 million, or 69.0%, in overdraft fees and a $1.5 million, or 17.8%, increase in cash management fees, due to an increase in the number of cash management accounts. The increase in overdraft fees was due to a new automated overdraft program that was introduced in November 2007. The increase in cash management fees was due to a combined increase in average customer repurchase agreements and short-term promissory notes during the first nine months of 2008 in comparison to the first nine months of 2007.
The $3.6 million, or 15.1%, increase in other service charges and fees was primarily due to an increase of $1.8 million in foreign currency processing revenue as a result of the growth of the Corporation’s foreign currency processing company and an increase in fees earned on these services. Additional increases came from debit card fees of $1.0 million, or 16.1%, due to transaction volume increases, and letter of credit fees of $502,000, or 13.2%.
The $4.2 million, or 14.2%, decrease in investment management and trust services was due to a $3.9 million, or 38.9%, decrease in brokerage revenue. During the first quarter of 2008, the Corporation began transitioning its brokerage business from a transaction-based model to a relationship model. This transition is expected to continue through the remainder of 2008 and may have a negative impact on revenue in the short-term, but is expected to have a positive long-term impact. The negative performance of equity markets contributed to a $265,000 decrease in trust revenue.
The $4.9 million, or 40.2%, decrease in gains on sales of mortgage loans was primarily due to a decrease in volumes of loans sold, as a result of exiting the national wholesale mortgage business in 2007.
The $944,000, or 7.8%, decrease in other income was due to a $2.1 million gain related to the resolution of litigation and the sale of certain assets between the Corporation’s former Resource Bank affiliate and another bank and a $700,000 gain related to the redemption of a partnership interest, both recorded in 2007. In 2008, $2.4 million of credit card fee income was generated subsequent to the sale of the Corporation’s credit card portfolio which was offset by a $501,000 decrease in the cash surrender value of life insurance plans due to lower returns.

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Investment securities losses of $29.9 million for the first nine months of 2008 were primarily due to $30.3 million in charges related to the other-than-temporary impairment of financial institution stocks and $7.8 million related to the other-than-temporary impairment of debt securities. These impairment charges were offset by $4.8 million in gains from the redemption of Class B shares in connection with Visa, Inc.’s (Visa) initial public offering and gains on the sale of MasterCard, Incorporated shares, in addition to net gains of $1.3 million and $2.2 million on the sale of financial institutions stock and debt securities, respectively.
Other Expenses
The following table presents the components of other expenses:
                 
  Nine months ended    
  September 30  Increase (decrease) 
  2008  2007  $  % 
  (dollars in thousands) 
Salaries and employee benefits $164,786  $164,353  $433   0.3%
Net occupancy expense  30,999   29,963   1,036   3.5 
Operating risk loss  19,108   26,462   (7,354)  (27.8)
Equipment expense  9,907   10,589   (682)  (6.4)
Data processing  9,604   9,550   54   0.6 
Advertising  9,521   7,869   1,652   21.0 
Telecommunications  5,960   6,189   (229)  (3.7)
Professional fees  5,717   4,353   1,364   31.3 
Intangible amortization  5,386   6,176   (790)  (12.8)
Supplies  4,303   4,369   (66)  (1.5)
Postage  4,218   4,047   171   4.2 
Other  36,042   33,088   2,954   8.9 
             
Total
 $305,551  $307,008  $(1,457)  (0.5%)
             
Salaries and employee benefits increased $433,000, or 0.3%, with salaries increasing $3.1 million, or 2.3%, and benefits decreasing $2.7 million, or 8.6%.
The increase in salaries was primarily due to corporate and affiliate management bonus accruals, which increased $875,000, and normal merit increases, offset by decreases related to staff reductions that were made as part of corporate-wide workforce management and centralization initiatives which began in the second quarter of 2007. Average full-time equivalent employees decreased from 3,900 for the first nine months of 2007 to 3,670 for the first nine months of 2008.
The decrease in employee benefits included a $1.7 million reduction associated with the curtailment of the Corporation’s defined benefit pension plan during the second quarter of 2007 and a net decrease in expense for the Corporation’s retirement plans as a result of changes in contribution formulas, which were effective January 1, 2008. Also contributing to the decrease was a $1.1 million decrease in severance expenses as a result of corporate-wide workforce management and centralization initiatives that occurred in 2007.
The $7.4 million decrease in operating risk loss resulted from $15.9 million of charges incurred in 2008 due to the Corporation’s decision to purchase illiquid ARCs from customer accounts, offset by a $22.9 million decrease in contingent losses related to the potential repurchase of residential mortgage and home equity loans. See Note I, “Commitments and Contingencies” in the Notes to Consolidated Financial Statements for additional details.
The $1.7 million, or 21.0%, increase in advertising expense was due to core deposit promotional campaigns initiated during 2008. The $682,000 decrease in equipment expense and the $790,000 decrease in tangible amortization were due to both equipment and intangible assets becoming depreciated and

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amortized during 2008. The $1.4 million, or 31.3%, increase in professional fees was primarily due to charges related to a previously disclosed special review conducted at the former Resource Bank relating to potential repurchases of previously sold mortgage loans in the beginning of 2008 and an increase in legal fees as a result of the disposition of foreclosed real estate owned.
The $3.0 million, or 8.9%, increase in other expenses was primarily due to an increase of $3.2 million associated with the disposition and maintenance of foreclosed real estate and an increase of $1.5 million in insurance premiums assessed by the FDIC. These increases were offset by the reversal of $1.4 million of litigation reserves associated with the Corporation’s share of indemnification liabilities with Visa which were no longer necessary as a result of Visa’s initial public offering during the first quarter of 2008.
During the nine months ended September 30, 2008, FDIC insurance premiums, included within other expense in the above table, totaled $2.7 million, consisting of gross premiums of $5.0 million, reduced by $2.3 million of one-time credits. The FDIC has proposed a change in the insurance assessment rates, which is expected to significantly increase the Corporation’s premiums in 2009.
Income Taxes
Income tax expense for the first nine months of 2008 was $35.8 million, a $12.3 million, or 25.5%, decrease from $48.1 million in 2007, due to a decrease in income before taxes.
The Corporation’s effective tax rate was 27.1% in 2008, as compared to 29.6% in 2007. The effective rate is generally lower than the Federal statutory rate of 35% due mainly to investments in tax-free municipal securities and Federal tax credits from investments in low and moderate-income housing partnerships. The effective rate in 2008 is lower than 2007 as non-taxable income and tax credits had a larger impact on the effective tax rate due to a $30.6 million decrease in income before taxes.

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FINANCIAL CONDITION
Total assets of the Corporation increased $213.0$308.4 million, or 1.3%1.9%, to $16.1$16.5 billion at September 30, 2008,March 31, 2009, compared to $15.9$16.2 billion at December 31, 2007.2008.
The Corporation experienced a $619.1$33.6 million, or 5.5%0.3%, increasedecrease in loans, net of unearned income, primarilyincome. Construction loans decreased $64.1 million, or 5.0%, due to commercial mortgage loans, which increased $395.4a significant slowdown in residential housing construction and $12.1 million of net charge-offs recorded in the first quarter of 2009. Residential mortgages decreased $25.0 million, or 11.3%2.6%, and commercial loans, which increased $127.5due to refinance activity generated by low interest rates. Offsetting these decreases was a $51.6 million, or 3.7%. The1.3%, increase in commercial mortgage loans was in adjustablemortgages and floating rate products, while thean $18.0 million, or 0.5%, increase in commercial loans, was in fixed, floating and adjustable rate products. The Corporation also had additionalwith increases in home equity loans of $146.0 million, or 9.7%, and residential mortgages of $127.9 million, or 15.0%. The increaseboth categories primarily in home equity loans was due to the introduction of a new blended fixed/floating rate product in late 2007. Offsetting these increases were decreases in consumer loans of $112.9 million, or 22.5%, and construction loans of $65.4 million, or 4.9%, with the decrease in consumer loans occurring largely as a result of the Corporation’s sale of its credit card portfolio in the second quarter of 2008 and the decrease in construction loans due to the slowing in residential housing construction.products.
Investment securities decreased $347.0increased $398.8 million, or 11.0%14.6%, funded primarily by increases in deposits. The increase was primarily in anticipation of higher mortgage prepayments resulting from the Federal government’s mortgage-backed security repurchase program and other efforts to stabilize the housing sector through lower residential mortgage rates.
Other assets increased $26.2 million, or 8.1%, primarily due to a $8.1 million increase in the fair value of gross mortgage banking derivative assets, a $9.0 million increase in low-income housing investments, and a $3.9 million increase in mortgage servicing rights, as residential mortgage loans sold with servicing retained increased.
Deposits increased $862.1 million, or 8.2%, due to normal pay downs, sales and maturities exceeding purchases. Contributing to the decrease was a late 2007 pre-purchase of approximately $250 million of investment securities that was based on cash flows expected to be received in the short-term from securities. In addition, during 2008, pay downs and maturities of investment securities were not being fully reinvested. Finally, the Corporation sold approximately $180 million of securities at the end of the second quarter of 2008 in order to fund balance sheet growth and manage interest rate risk. The impact of the above factors was partially offset by $166.8 million of ARCs that were purchased from customers during the first nine months of 2008. See Note I, “Commitments and Contingencies” in the Notes to the Consolidated Financial Statements for additional details.
Deposits decreased $188.9 million, or 1.9%, due to a decreasean increase in time deposits of $167.8$614.8 million, or 3.7%12.1%, and a decreasean increase in noninterest-bearing and interest-bearing demand and savings deposits of $21.1$247.3 million, or 0.4%, due to decreases in personal accounts.4.5%. The decreaseincrease in time deposits was mainly due to a $247.7$622.1 million increase in customer certificates of deposit, offset by a $7.3 million decrease in brokered certificates of deposit, as interest rates on alternative funding sources were more attractive, offset by andeposit. The increase of $79.9 million in customer certificates of deposit.deposit was due to the continued promotion of a variable rate product in the first quarter of 2009. The increase in demand and savings accounts was in both personal and commercial accounts.
Short-term borrowings increased $206.0decreased $567.3 million, or 8.6%32.2%, due to a $269.5$750.5 million increasedecrease in Federal funds purchased, and a $25.0offset by $200.0 million of borrowings under the Federal Reserve Bank’s discount window. The decrease in short-term borrowings largely resulted from the increase in borrowings outstanding under the Corporation’s line of credit with an unaffiliated bank, offset by a $100.0 million reduction in FHLB overnight repurchase agreements. Long-term debt increased $177.8 million, or 10.8%, due to an increase in FHLB term advances.deposits.
Capital Resources
Total shareholders’ equity increased $29.0$1.7 million, or 1.8%0.1%, during the first nine monthsquarter of 2008.2009. The increase was due to $13.1 million of net income of $96.2 million and $9.5$3.5 million in stock issuances, offset by $78.3$8.0 million in cash dividends paid to shareholders.on common and preferred shares outstanding and $7.3 million of other comprehensive losses.
The Corporation and its subsidiary banks are subject to various regulatory capital requirements administered by banking regulators. Failure to meet minimum capital requirements can initiate certain actions by regulators that could have a material effect on the Corporation’s consolidated financial statements. The regulations require that banks maintain minimum amounts and ratios of total and Tier I capital (as defined in the regulations) to risk weighted assets (as defined), and Tier I capital to average assets (as defined). As of September 30, 2008,March 31, 2009, the Corporation and each of its bank subsidiaries met the minimum requirements. In addition, each of the Corporation’s bank subsidiaries’ capital ratios exceeded the amounts required to be considered “well capitalized” as defined in the regulations.

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The following table summarizes the Corporation’s capital ratios in comparison to regulatory requirements:
                  
 Regulatory  Regulatory 
 Minimum  Minimum 
 September 30 December 31 Capital  March 31 December 31 Capital 
 2008 2007 Adequacy  2009 2008 Adequacy 
Total Capital (to Risk Weighted Assets)  11.9%  11.9%  8.0%  14.0%  14.3%  8.0%
Tier I Capital (to Risk Weighted Assets)  9.1%  9.3%  4.0%  11.2%  11.5%  4.0%
Tier I Capital (to Average Assets)  7.5%  7.4%  3.0%  9.5%  9.6%  3.0%
In connection with the Emergency Economic Stabilization Act of 2009 and the Troubled Asset Recovery Program (TARP)2008 (EESA), the U.S. Treasury Department of the Treasury (UST) has initiated a capital purchase program. Through this program,Capital Purchase Program (CPP) which allows for qualifying financial institutions are eligible to participate in the sale of seniorissue preferred stock to the UST, in an amount not less than 1%subject to certain terms and conditions. The EESA was initially developed to attract broad participation by strong financial institutions, to stabilize the financial system and increase lending to benefit the national economy and citizens of total risk-weighted assets and not more than 3% of total risk-weighted assets, or between $125 million and $375 million forthe U.S.
In December 2008, the Corporation asvoluntarily participated in the CPP by issuing $376.5 million of September 30, 2008. The seniorfixed rate cumulative perpetual preferred stock, will payand warrants to purchase 5.5 million of the Corporation’s common stock, to the UST. The preferred stock pays a compounding cumulative dividendsdividend at a rate of 5% per year5.0% for the first five years and 9%9.0% thereafter.
The UST would also receive warrants to purchase a number of shares of common stock$376.5 million par value of the Corporation having an aggregate market value equal to 15% of the senior preferred stock on the date of the investment, subject to certain reductions.is included in regulatory capital. Pro-forma regulatory capital ratios, excluding this amount at March 31, 2009 would be as follows:
In November 2008, the Corporation applied to participate in the capital purchase program up to the maximum allowable amount of 3% of risk-weighted assets, or approximately $375 million.
Total Capital (to Risk Weighted Assets)11.2%
Tier I Capital (to Risk Weighted Assets)8.4%
Tier I Capital (to Average Assets)7.2%
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 outstanding loans and investments 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 needs.
The Corporation’s sources and uses of cash were discussed in general terms in the quarterly and nine months ended net interest income sectionssection of Management’s Discussion. The consolidated statements of cash flows provide additional information. The Corporation generated $167.0$79.2 million in cash from operating activities during the first nine monthsquarter of 2008,2009, mainly due to net income, as adjusted for non-cash expenses, such asmost notably the provision for loan losses and investment securities gains and losses. Investing activities resulted in a net cash outflow of $358.6$413.0 million, due to purchases of available for sale securities and net increases in loans exceeding the proceeds from the sales and maturities of available for sale securities. Cash flows provided by financing activities were $126.2$268.1 million, primarily due primarily to proceeds from FHLB advances and net increases in deposits exceeding net decreases in short-term borrowings exceeding long-term debt repayments and dividend payments.
Liquidity must also be managed at the Fulton Financial Corporation Parent Company level. For safety and soundness reasons, banking regulations limit the amount of cash that can be transferred from subsidiary banks to the Parent Company in the form of loans and dividends. Generally, these limitations are based on the subsidiary banks’ regulatory capital levels and their net income. The Parent Company’s cash needs have increased in recent years, requiring additional sources of funds, including the issuance of subordinated debt and trust-preferred securities and the addition of a working capital line of credit with an unaffiliated bank.securities.

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These borrowing arrangements supplement the liquidity available from subsidiaries through dividends and borrowings and provide some flexibility in Parent Company cash management. Management

46


continues to monitor the liquidity and capital needs of the Parent Company and will implement appropriate strategies, as necessary, to remain adequately capitalized and to meet its cash needs.
As of September 30, 2008, the Corporation had a revolving line of credit agreement with an unaffiliated bank. Under the terms of the agreement, the Parent Company could borrow up to $100.0 million with interest calculated based on a short-term London Interbank Offering Rate (LIBOR) repriced daily. The credit requires the Corporation to maintain certain financial ratios related to capital strength and earnings. As of September 30, 2008, $25.0 million was outstanding under this agreement and the Corporation was in compliance with all required covenants. Subsequent to September 30, 2008, the Corporation repaid all outstanding borrowings under this agreement, as the agreement expired on October 31, 2008. These borrowings were replaced by funds from other internal sources.

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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 risk and commodity price risk. Due to the nature of its operations, only equity andmarket price risk, debt security market price risk and interest rate risk are significant to the Corporation.
Equity Market Price Risk
Equity market price risk is the risk that changes in the values of equity investments could have a material impact on the financial position or results of operations of the Corporation. The Corporation’s equity investments consist of $54.3$32.4 million of stocks of publicly traded financial institutions, $106.1$85.1 million of FHLB and FRBFederal Reserve Bank stock and $10.6$9.7 million of money market mutual funds and other.other equity investments. The equity investments most susceptible to equity market price risk are the financial institutions stocks, which had a cost basis of approximately $55.2$40.4 million and fair value of $54.3$32.4 million at September 30, 2008.March 31, 2009. Gross unrealized gains in this portfolio were $4.8 million,$484,000, and gross unrealized losses were $5.7 million, at September 30, 2008.
Although the carrying value of financial institution stocks accounted for less than 0.4% of the Corporation’s total assets at September 30, 2008, the Corporation has a history of realizing gains from this portfolio. However, significant declines in the values of financial institution stocks held in this portfolio have not only impacted the Corporation’s ability to realize gains on their sale, but have also resulted in significant other-than-temporary impairment charges.$8.5 million.
Management continuously monitors the fair value of its equity investments and evaluates current market conditions and operating results of the companies. Periodic sale and purchase decisions are made based on this monitoring process. None of the Corporation’s equity securities are classified as trading. Future cash flows from these investments are not provided in the table on page 5141 as such investments do not have maturity dates.
Although the carrying value of financial institution stocks accounted for less than 0.2% of the Corporation’s total assets at March 31, 2009, the Corporation has a history of realizing gains from this portfolio. However, significant declines in the values of financial institution stocks held in this portfolio have not only impacted the Corporation’s ability to realize gains on their sale, but have also resulted in significant other-than-temporary impairment charges in 2008 and 2009.
The Corporation evaluated based on existing accounting guidance, whether any unrealized losses on individual equity investments constituted other-than-temporary impairment, which would require a write-down through a charge to earnings. Based on the results of such evaluations, the Corporation recorded write-downs of $2.0 million and $30.3 million$956,000 for specific financial institution stocks that were deemed to exhibit other-than-temporary impairment in value during the three and nine months ended September 30, 2008, respectively.as of March 31, 2009. In addition, the Corporation recorded an other-than-temporary impairment chargescharge of $816,000 and $1.2 million$106,000 during the three and nine months ended September 30, 2008, respectively,first quarter of 2009 for a mutual fund investment and stock of government sponsored agencies, also categorized as equity investments.investment. Additional impairment charges may be necessary in the future depending upon the performance of the equity markets in general and the performance of the individual investments held by the Corporation. See Note C, “Investment Securities” in the Notes to Consolidated Financial Statements for additional details.
In addition to the Corporation’s investment portfolio, its investment management and trust services income could be impacted by fluctuations in the securities market.markets. A portion of this revenue is based on the value of the underlying investment portfolios. If the values of those investment portfolios decrease, whether due to factors influencing U.S. securities markets in general, or otherwise, the Corporation’s revenue could be negatively impacted. In addition, the Corporation’s ability to sell its brokerage services is dependent, in part, upon consumers’ level of confidence in the outlook for rising securities prices.
Debt Security Market Price Risk
Debt security market price risk is the risk that changes in the values of debt security investments could have a material impact on the financial position or results of operations of the Corporation. The

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Corporation’s debt security investments consist primarily of mortgage-backed securities and collateralized mortgage obligations whose principal payments are guaranteed by U.S. government

38


sponsored agencies, state and municipal securities, U.S. government sponsored and U.S. government debt securities, auction rate certificates and corporate debt securities. Only the auction rate certificates and corporate debt securities have significant debt security market price risk.
Auction rate certificatesRate Certificates (ARCs)
Beginning in the second quarter of 2008, theThe Corporation’s debt securities also includedinclude ARCs purchased from customers.customers of FFA. Due to the current market environment, these ARCs are susceptible to significant market price risk. At September 30, 2008, ARC securitiesMarch 31, 2009, ARCs held by the Corporation had a cost basis of $157.0$218.6 million and fair value of $153.1$203.6 million, or 0.9%1.2% of total assets.
ARCs are long-term securities structured to allow their sale in periodic auctions, resulting in both the treatment of ARCs as short-term instruments in normal market conditions and fair values that could be derived based on periodic auction prices. However, as previously disclosed, beginning in mid-February 2008, market auctions for these securities began to fail due to an insufficient number of buyers, resulting in an illiquid market. This illiquidity has resulted in recent market prices that represent forced liquidations or distressed sales and do not provide an accurate basis for fair value. Therefore, at September 30, 2008,March 31, 2009, the fair value of the ARC securitiesARCs held by the Corporation were derived using significant unobservable inputs based on an expected cash flow model which produced fair values which were materially different from those that would be expected from settlement of these investments in the illiquid market that presently exists. The expected cash flow model produced fair values which assumed a return to market liquidity sometime within the next three to five years. If liquidity does not return within a time-frametime frame that is materially consistent with the Corporation’s assumptions, the fair value of ARCs could significantly change.
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 September 30, 2008, the total estimated fair value of the ARCs held by the Corporation and held within customers’ accounts was approximately $310 million, with $153.1 million held by the Corporation, as stated above. Approximately 97% of the approximately $310 million of ARCs are backed by government-backed student loans, while the remaining ARCs are backed by state and municipal securities. Approximately 80% of the student loan ARCs have credit ratings of AAA, with substantially all of the remaining 20% AA-rated. The current illiquid market did not impact the credit risk associated with the assets underlying the ARCs, both those held by the Corporation and those that remain in customer accounts. Therefore, as of September 30, 2008, the risk of changes in the estimated fair values of ARCs due to deterioration in the credit quality of their underlying debt instruments is not significant.

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Corporate Debt Securities
The Corporation holds corporate debt securities in the form of pooled trust preferred securities, single-issuer trust preferred securities and subordinated debt issued by financial institutions, as presented in the following table:
                
 September 30, 2008  March 31, 2009 
 Amortized Estimated  Amortized Estimated 
 cost fair value  cost fair value 
 (in thousands)  (in thousands) 
Single-issuer trust preferred securities (1) $97,870 $74,512  $97,902 $54,994 
Subordinated debt 40,009 31,666  34,812 29,756 
Pooled trust preferred securities 32,220 22,749  27,040 10,692 
          
Total corporate debt securities issued by financial institutions $170,099 $128,927  $159,754 $95,442 
          
 
(1) Single-issuer trust preferred securities with estimated fair values totaling $8.9$6.3 million as of September 30, 2008March 31, 2009 are classified as Level 3 assets.assets under Statement 157. See Note J,I, “Fair Value Measurements” in the Notes to Consolidated Financial Statements for additional details.
The single-issuer trust preferred securities and subordinated debt were all issued by banks. Due to the current environment faced by financial institutions, these securities are subject to significant market price risk at this time.
Historically, the Corporation determined the fair value of these securities based on prices received from third party brokers and pricing agencies who determined fair values for these securities using both quoted prices for similar assets, when available, and model-based valuation techniques that derived fair value based on market-corroborated data, such as instruments with similar prepayment speeds and default interest rates.
Due to distressed market prices that currently exist for these securities, the Corporation determined that the market for pooled trust preferred securities and certain single-issuer trust preferred securities held by the Corporation was not active. Consistent with the Financial Accounting Standards Board’s (FASB) Staff Position No. 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset is not Active” (Staff Position No. 157-3), issued in October 2008, and FASB Staff Position No. 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly”, issued in April 2009, the Corporation determined the fair value of its

39


investments in pooled trust preferred securities using a discounted cash flows model, which applied a credit and liquidity adjusted discount rate to expected cash flows. For certain single-issuer trust preferred securities, the Corporation determined fair values based on quotes provided by third party brokers who determined fair values based predominantly on internal valuation models and were not indicative prices or binding offers.
DuringIn April 2009, the thirdFASB issued Staff Position No. 115-2 and 124-2, “Recognition and Presentation of Other-than-Temporary Impairments” (FSP FAS 115-2). FSP FAS 115-2 amends other-than-temporary impairment guidance for debt securities and expands disclosure requirements for other-than-temporarily impaired debt and equity securities. FSP FAS 115-2 requires companies to record other-than-temporary impairment charges, through earnings, for impaired debt securities if they have the intent to sell, or will more likely than not be required to sell, before a recovery in their amortized cost basis. In addition, FSP FAS 115-2 requires companies to record other-than-temporary impairment charges through earnings for the amount of credit losses, regardless of the intent or requirement to sell. Credit loss is measured as the difference between the present value of an impaired debt security’s cash flows and its amortized cost basis. Non-credit related write-downs to fair value must be recorded as decreases to accumulated other comprehensive income as long as a company has no intent or requirement to sell an impaired security before a recovery of amortized cost basis. Finally, FSP FAS 115-2 requires companies to record all previously recorded non-credit related other-than-temporary impairment charges for debt securities as cumulative effect adjustments to retained earnings as of the beginning of the period of adoption. FSP FAS 115-2 is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for the period ending after March 15, 2009. The Corporation elected to early adopt FSP FAS 115-2, effective January 1, 2009.
As a result of its adoption of FSP FAS 115-2, during the first quarter of 2008,2009, the Corporation recorded a $3.0$2.0 million of other-than-temporary impairment chargecharges as a reduction to investment securities gains on the consolidated statements of income, related to an investmentinvestments in a pooled trust preferred securitysecurities issued by financial institutions. These other-than-temporary impairment charges were based on the fair value calculated using its internal valuation model.credit losses determined by modeling expected cash flows. In addition, the Corporation recorded $2.8 million ($1.8 million, net of tax) of non-credit related write-downs to fair value as a $4.9component of other comprehensive loss during the first quarter of 2009.
During 2008, the Corporation recorded other-than-temporary impairment charges for pooled trust preferred securities of $15.8 million. Upon adoption of FSP FAS 115-2, the Corporation determined that $9.7 million of those other-than-temporary charge relatedimpairment charges were non-credit related. As such, a $6.3 million (net of $3.4 million of taxes) increase to subordinated debt issued byretained earnings and a failed financial institution. The current distressed marketcorresponding decrease to accumulated other comprehensive income was recorded as the cumulative effect impact of adopting FSP FAS 115-2 as of January 1, 2009. Because previously recognized other-than-temporary impairment charges were reversed through equity rather than earnings, $1.6 million of the $2.0 million of other-than-temporary impairment charges recorded during the first quarter of 2009 were also presented as other-than-temporary impairment charges on the Corporation’s statements of operations for the year ended December 31, 2008.
Additional impairment charges for debt securities issued by financial institutions may continue to impact the fair values of these securities. Additional impairment charges may be necessary in the future depending upon the performance of the individual investments held by the Corporation.
See Note J,C, “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 Note I, “Fair Value Measurements”, in the Notes to Consolidated Financial Statements further discussion related to debt securities’ fair values.
Interest Rate Risk
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 income and changes in the economic value of its equity.

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The Corporation employs various management techniques to minimize its exposure to interest rate risk. An Asset/Liability Management Committee (ALCO), consisting of key financial and senior management personnel, meets on a bi-weekly basis. The ALCO is responsible for reviewing the interest rate sensitivity position of the Corporation, approving asset and liability management policies, and overseeing the formulation and implementation of strategies regarding balance sheet positions and earnings.
The following table provides information about the Corporation’s interest rate sensitive financial instruments. The table presents expected cash flows and weighted average rates for each significant interest rate sensitive financial instrument, by expected maturity period. None of the Corporation’s financial instruments are classified as trading. All dollar amounts are in thousands.
                                  
 Expected Maturity Period Estimated Expected Maturity Period Estimated
 Year 1 Year 2 Year 3 Year 4 Year 5 Beyond Total Fair Value Year 1 Year 2 Year 3 Year 4 Year 5 Beyond Total Fair Value
Fixed rate loans (1) $1,122,652 $636,464 $464,427 $338,289 $290,720 $637,201 $3,489,753 $3,511,951  $1,143,393 $606,278 $452,025 $339,331 $285,910 $613,488 $3,440,425 $3,447,388 
Average rate
  5.83%  6.66%  6.62%  6.58%  6.68%  6.37%  6.33%   5.20%  6.56%  6.57%  6.53%  6.57%  6.42%  6.08% 
Floating rate loans (1) (7)(2) 2,614,447 1,179,194 890,475 698,266 1,624,359 1,318,440 8,325,181 8,161,882  2,436,878 1,103,301 805,562 674,536 1,798,834 1,738,654 8,557,765 8,270,136 
Average rate
  5.77%  5.99%  5.97%  6.02%  5.25%  6.25%  5.82%   4.77%  5.22%  5.29%  5.26%  4.30%  6.01%  5.07% 
  
Fixed rate investments (2)(3) 461,826 379,355 240,044 254,981 274,701 795,372 2,406,279 2,399,348  723,880 521,095 357,647 245,972 188,075 670,634 2,707,303 2,736,271 
Average rate
  4.65%  4.72%  4.57%  4.61%  5.07%  4.94%  4.79%   4.60%  4.74%  4.15%  4.88%  4.96%  5.11%  4.75% 
Floating rate investments (2)(3) 63  157,511  148 100,830 258,552 237,084   500 218,625  134 88,005 307,264 261,175 
Average rate
  4.67%   3.69%   2.86%  5.21%  4.28%    5.62%  4.50%   1.20%  3.56%  4.23% 
  
Other interest-earning assets 121,280      121,280 121,280  116,363      116,363 116,363 
Average rate
  4.78%       4.78%   4.77%       4.77% 
    
Total
 $4,320,268 $2,195,013 $1,752,457 $1,291,536 $2,189,928 $2,851,843 $14,601,045 $14,431,545  $4,420,514 $2,231,174 $1,833,859 $1,259,839 $2,272,953 $3,110,781 $15,129,120 $14,831,333 
Average rate
  5.64%  5.96%  5.74%  5.89%  5.42%  5.87%  5.74%   4.86%  5.47%  5.29%  5.53%  4.64%  5.83%  5.22% 
    
  
Fixed rate deposits (3) $3,207,161 $631,788 $308,281 $86,296 $93,428 $41,774 $4,368,728 $4,384,778 
Fixed rate deposits (4) $4,586,804 $589,399 $290,486 $156,283 $52,106 $37,852 $5,712,930 $5,762,065 
Average rate
  3.26%  3.89%  3.60%  4.27%  4.43%  1.82%  3.41%   3.00%  3.52%  3.57%  4.36%  3.88%  1.23%  3.11% 
Floating rate deposits (4) 1,549,506 172,143 172,143 157,202 149,267 1,657,067 3,857,328 3,857,328 
Floating rate deposits (5) 1,550,171 174,909 174,909 160,943 153,526 1,710,424 3,924,882 3,924,883 
Average rate
  1.39%  0.93%  0.93%  0.85%  0.81%  0.72%  1.01%   0.88%  0.61%  0.61%  0.55%  0.52%  0.46%  0.65% 
  
Fixed rate borrowings (5) 171,877 494,741 179,796 102,743 5,781 508,623 1,463,561 1,361,045 
Fixed rate borrowings (6) 398,931 403,772 87,792 30,777 818 864,190 1,786,280 1,775,279 
Average rate
  4.38%  4.86%  3.74%  4.01%  2.87%  5.58%  4.85%   4.62%  4.46%  3.89%  4.46%  5.10%  4.93%  4.70% 
Floating rate borrowings (6) 2,946,294      2,946,294 2,945,699 
Floating rate borrowings (7) 1,195,792      1,195,792 1,195,792 
Average rate
  2.09%       2.09%   0.28%       0.28% 
  
  
Total
 $7,874,838 $1,298,672 $660,220 $346,241 $248,476 $2,207,464 $12,635,911 $12,548,850  $7,731,698 $1,168,080 $553,187 $348,003 $206,450 $2,612,466 $12,619,884 $12,658,019 
Average rate
  2.48%  3.87%  2.94%  2.64%  2.22%  1.86%  2.54%   2.24%  3.41%  2.68%  2.61%  1.38%  1.95%  2.30% 
    
 
(1) Amounts are based on contractual payments and maturities, adjusted for expected prepayments.
 
(2) Line of credit amounts are based on historical cash flow assumptions, with an average life of approximately 5 years.
(3)Amounts are based on contractual maturities; adjusted for expected prepayments on mortgage-backed securities, collateralized mortgage obligations and expected calls on agency and municipal securities.
 
(3)(4) Amounts are based on contractual maturities of time deposits.
 
(4)(5) Estimated based on history of deposit flows.
 
(5)(6) Amounts are based on contractual maturities of debt instruments, adjusted for possible calls. Amounts also include junior subordinated deferrable interest debentures.
 
(6)(7) Amounts include Federal Funds purchased, short-term promissory notes floating FHLB advances and securities sold under agreements to repurchase, which mature in less than 90 days, in addition to junior subordinated deferrable interest debentures.
(7)Line of credit amounts are based on historical cash flow assumptions, with an average life of approximately 5 years.
The preceding table and discussion addressed the liquidity implications of interest rate risk and focused on expected contractual cash flows from financial instruments. Expected maturities, however, do not necessarily estimate the net interest income impact of interest rate changes. Certain financial instruments, such as adjustable rate loans, have repricing periods that differ from expected cash flows.flows periods. Overdraft deposit balances are not included in the preceding table.

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Included within the $8.2$8.6 billion of floating rate loans above are $3.4$3.6 billion of loans, or 40%42% of the total, that float with the prime interest rate, $1.1 billion, or 14%13%, of loans which float with other interest rates, primarily LIBOR, and $3.7$3.9 billion, or 46%45%, of adjustable rate loans. The $3.7$3.9 billion of adjustable rate loans include loans that are fixed rate instruments for a certain period of time, and then convert to floating rates. The following table presents the percentage of adjustable rate loans, stratified by their initialremaining fixed term:term at March 31, 2009:
     
  Percent of Total
  Adjustable Rate
Fixed Rate Term Loans
One year  33.219.2%
Two years  21.80.9 
Three years  16.52.3 
Four years  12.41.3 
Five years  12.160.2 
Greater than five years  4.016.1 
The Corporation uses three complementary methods to measure and manage interest rate risk. They are static gap analysis, simulation of earnings, and estimates of economic value of equity. Using these measurements in tandem provides a reasonably comprehensive summary of the magnitude of interest rate risk in the Corporation, level of risk as time evolves, and exposure to changes in interest rate relationships.
Static gap provides a measurement of repricing risk in the Corporation’s balance sheet as of a point in time. This measurement is accomplished through stratification of the Corporation’s assets and liabilities into repricing periods. The sum of assets and liabilities in each of these periods are compared for mismatches within that maturity segment. Core deposits having no contractual maturities are placed into repricing periods based upon historical balance performance. Repricing for mortgage loans, mortgage-backed securities and collateralized mortgage obligations includes the effect of expected cash flows. Estimated prepayment effects are applied to these balances based upon industry projections for prepayment speeds. The Corporation’s policy limits the cumulative six-month ratio of rate sensitive assets to rate sensitive liabilities (RSA/RSL) to a range of 0.85 to 1.15. As of September 30, 2008,March 31, 2009, the cumulative six-month ratio of RSA/RSL was 1.02.1.08.
Simulation of net interest income and net income is performed for the next twelve-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 earnings 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 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 across the yield curve based upon changes in the prime rate. The shocks do not take into account changes in customer behavior that could result in changes to mix and/or volumes in the balance sheet nor do they account for competitive pricing over the forward 12-month period.

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The following table summarizes the expected impact of interest rate shocks on net interest income (due to the current level of interest rates, the 200 and 300 basis point downward shock scenario is not shown):
         
  Annual change  
  in net interest  
Rate Shock income % Change
+300 bp + $19.0$55.5 million  +3.6 10.5%
+200 bp + $14.2$34.2 million  +2.7 6.5%
+100 bp + $8.0$14.6 million  +1.5 2.8%
-100 bp - $11.8$16.5 million  - 2.23.1%
Economic value of equity estimates the discounted present value of asset cash flows and liability cash flows. Discount rates are based upon market prices for like assets and liabilities. Upward and downward shocks of interest rates 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. A policy limit of 10% of economic equity may be at risk for every 100 basis point shock movement in interest rates. As of September 30, 2008,March 31, 2009, the Corporation was within policy limits for every 100 basis point shock movement in interest rates.

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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 our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Corporation’s Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this quarterly report, the Corporation’s disclosure controls and procedures are effective. Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in Corporation reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.
There have been no changes in our internal control over financial reporting during the fiscal quarter covered by this quarterly report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 1A. Risk Factors
Information responsive to this item as of September 30, 2008March 31, 2009 appears under the heading, “Risk Factors” within the Corporation’s Form 10-K for the year ended December 31, 2007, except for the following risk factors, which has been amended or added since December 31, 2007.
Price fluctuations in equity markets, as well as recent market events, such as a continuation of the disruption in credit and other markets and the abnormal functioning of markets for securities, could have an impact on the Corporation’s net income.
At September 30, 2008, the Corporation’s equity investments consisted of $106.1 million of FHLB and FRB stock, $54.3 million of stocks of other financial institutions and $10.6 million of mutual funds and other. The value of the securities in the Corporation’s equity portfolio may be affected by a number of factors, including factors that impact the performance of the U.S. securities market in general and, due to the concentration in stocks of financial institutions in the Corporation’s equity portfolio, specific risks associated with that sector. Historically, gains on sales of stocks of other financial institutions have been a recurring component of the Corporation’s earnings. However, general economic conditions and uncertainty surrounding the financial institution sector as a whole has impacted the value of these securities, as shown by the portfolio’s $899,000 net unrealized loss as of September 30, 2008. Further declines in bank stock values may impact the Corporation’s ability to realize gains in the future and could result in other-than-temporary impairment charges, as reflected by the $30.3 million of impairment charges recorded during the first nine months of 2008.
In addition to the Corporation’s investment portfolio, the Corporation’s investment management and trust services income could be impacted by fluctuations in the securities market. A portion of this revenue is based on the value of the underlying investment portfolios. If the values of those investment portfolios decrease, whether due to factors influencing U.S. securities markets in general, or otherwise, the Corporation’s revenue could be negatively impacted. In addition, the Corporation’s ability to sell its brokerage services is dependent, in part, upon consumers’ level of confidence in the outlook for rising securities prices.
Recent developments in the market for student loan auction rate securities (also known as “auction rate certificates” or “ARCs”) resulted in the Corporation recording charges of $13.2 million, recorded as a component of operating risk loss on the consolidated statements of income, during the second quarter of 2008.
The Corporation’s trust company subsidiary, Fulton Financial Advisors, N.A. (FFA), holds ARCs for some of its customers’ accounts. ARCs are one of several types of securities that were previously utilized by FFA as short-term investment vehicles for its customers. ARCs are long-term securities structured to allow their sale in periodic auctions, resulting in the treatment of ARCs as short-term instruments in normal market conditions. However, in mid-February, 2008, market auctions for ARCs began to fail due to an insufficient number of buyers; these market failures were the first widespread and continuing failures in the over 20-year history of the auction rate securities markets. As a result, although the credit quality of ARCs has not been impacted, ARCs are currently not liquid investments for their holders, including FFA’s customers. It is unclear when liquidity will return to this market.

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FFA has agreed to purchase ARCs from customer accounts upon notification from customers that they have liquidity needs or otherwise desire to liquidate their holdings. Specifically, FFA will generally purchase customer ARCs at par value with an interest adjustment, which would position customers as if they had owned 90-day U.S. Treasury bills instead of ARCs.
Management believes that the financial guarantee liability recorded as of September 30, 2008 is adequate. Future purchases of ARCs, changes in their estimated fair value or changes in the likelihood of their purchase could require the Corporation to make adjustments to the amount of the liability and have a material impact on the Corporation’s net income.
Difficult Conditions in the Capital Markets and the Economy Generally May Materially Adversely Affect The Corporation’s Business and Results of Operations. The Corporation Does Not Expect These Conditions to Improve in the Near Future.
The Corporation’s results of operations are affected by conditions in the capital markets and the economy generally. The capital and credit markets have been experiencing extreme volatility and disruption for more than twelve months. The volatility and disruption in these markets have produced downward pressure on stock prices of, and credit availability to, certain companies without regard to those companies’ underlying financial strength.
Recently, concerns over inflation, the availability and cost of credit and a declining U.S. real estate market have contributed to increased volatility and diminished expectations for the economy and the capital and credit markets going forward. These factors, combined with declining business and consumer confidence, have precipitated an economic slowdown and induced fears of a prolonged recession. In addition, the fixed-income markets are experiencing a period of extreme volatility which has negatively impacted market liquidity conditions. Initially, the concerns on the part of market participants were focused on the subprime segment of the mortgage-backed securities market. However, these concerns have since expanded to include a broad range of mortgage-and asset-backed and other fixed income securities, including those rated investment grade, the U.S. and international credit and inter-bank money markets generally, and a wide range of financial institutions and markets, asset classes and sectors. As a result, the market for fixed income instruments has experienced decreased liquidity, increased price volatility, credit downgrade events, and increased risk of default. Equity markets have also been experiencing heightened volatility and turmoil, with issuers that have exposure to the real estate, mortgage and credit markets particularly affected. These events and the continuing market upheavals, may have a continued adverse effect on the Corporation. In addition, in the event of extreme and prolonged market events, such as the global credit crisis, the Corporation could incur significant losses.
Factors such as consumer spending, business investment, government spending, the volatility and strength of the capital markets, and inflation all affect the business and economic environment and, ultimately, the amount and profitability of the Corporation. The current crisis has also raised the possibility of future legislative and regulatory actions in addition to the recent enactment of the Emergency Economic Stabilization Act of 2008 that could further impact the Corporation. The Corporation cannot predict whether or when such actions may occur, or what impact, if any, such actions could have on our business, results of operations and financial condition.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities and Use of Proceeds
Not applicable.

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Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6.Exhibits
See Exhibit Index for a list of the exhibits required by Item 601 of Regulation S-K and filed as part of this report.

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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: November 10, 2008 /s/ R. Scott Smith, Jr.  
R. Scott Smith, Jr. 
Chairman, Chief Executive Officer and President 
 
   
Date: November 10, 2008May 11, 2009/s/ R. Scott Smith, Jr.
R. Scott Smith, Jr.
Chairman and Chief Executive Officer
Date: May 11, 2009 /s/ Charles J. Nugent
Charles J. Nugent
  
 Charles J. Nugent 
 Senior Executive Vice President and
Chief Financial Officer
  

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EXHIBIT INDEX
Exhibits Required Pursuant
to Item 601 of Regulation S-K
3.1 AmendedArticles of Incorporation, as amended and Restated restated, of Fulton Financial Corporation as amended — Incorporated by reference to Exhibit 3.1 of the Fulton Financial Corporation Form S-4 Registration Statement filed on October 7, 2005.
3.2Bylaws of Fulton Financial Corporation as amended and restated on September 16, 2008 – Incorporated by reference to Exhibit 3.1 of the Fulton Financial Corporation Current Report on Form 8-K dated September 18, 2008.
3.3Certificate of Designations of Fixed Rate Cumulative Preferred Stock, Series A of Fulton Financial Corporation — Incorporated by reference to Exhibit 3.1 of the Fulton Financial Corporation Current Report on Form 8-K dated December 23, 2008.
 
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.

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