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 ended~~September 30, 2008~~March 31, 2009,


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 company~~o

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, 2008~~April 30, 2009.

FULTON FINANCIAL CORPORATION
FORM 10-Q FOR THE QUARTER ENDED ~~SEPTEMBER 30, 2008~~MARCH 31, 2009

INDEX


Description	Page


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited):		3

(a) Consolidated Balance Sheets — ~~September 30, 2008~~March 31, 2009 and December 31, ~~2007~~2008		3

(b) Consolidated Statements of Income — Three ~~and nine~~ months ended ~~September 30,~~March 31, 2009 and 2008 ~~and 2007~~		4

(c) Consolidated Statements of Shareholders’ Equity and Comprehensive Income ~~— Nine~~(Loss) - Three months ended ~~September 30,~~March 31, 2009 and 2008 ~~and 2007~~		5

(d) Consolidated Statements of Cash Flows — ~~Nine~~Three months ended ~~September 30,~~March 31, 2009 and 2008 ~~and 2007~~		6

(e) Notes to Consolidated Financial Statements		7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		23

Item 3. Quantitative and Qualitative Disclosures about Market Risk		4838

Item 4. Controls and Procedures		5444

PART II. OTHER INFORMATION

Item 1. Legal Proceedings		5545

Item 1A. Risk Factors		5545

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		5645

Item 3. Defaults Upon Senior Securities		5645

Item 4. Submission of Matters to a Vote of Security Holders		5745

Item 5. Other Information		5745

Item 6. Exhibits		5745

Signatures		5846

Exhibit Index		5947

Certifications		6048
~~EXHIBIT~~Exhibit 31.1
~~EXHIBIT~~Exhibit 31.2
~~EXHIBIT~~Exhibit 32.1
~~EXHIBIT~~Exhibit 32.2

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

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

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

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

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 periods~~three-month period ended ~~September 30, 2008~~March 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 equivalents~~dilutive securities consist ~~solely~~ of outstanding stock options, restricted stock and ~~restricted stock.~~common stock warrants.

A reconciliation of ~~the~~net 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

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.


			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

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

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%.

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.

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’s~~For 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.~~

~~The Corporation~~institutions, management evaluates ~~whether unrealized losses on investment securities indicate other-than-temporary impairment. Based upon this evaluation, losses~~the 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.

~~Beginning~~issuers 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 values~~impairment. 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 evaluation~~time 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 ~~addition~~relation 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 ~~debt~~auction rate securities, ~~were caused by decreases in~~ the ~~estimated fair values~~current unrealized holding losses on these securities is attributable to liquidity issues as a result of ~~investments in single-issuer and pooled trust preferred~~the 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 estimated~~prior 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 was~~March 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”.

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, 2008~~March 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

other-than-temporary impairment ~~evaluations and~~charge through earnings. In addition, the ~~Corporation’s ability and intent~~Corporation does not intend to ~~hold these investments for a reasonable period of time sufficient for~~sell, 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,

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 at~~employees. 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 ~~specified~~defined 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.

~~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.

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 periods~~months 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 cost~~Service costs recorded for the Pension Plan for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2009 and 2008 ~~was~~were 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

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 issued~~adopted 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). ~~Under~~As required by Statement ~~133,~~161, the Corporation ~~performed tests~~has included disclosures for ~~each swap~~its 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 adoption~~originate 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 result~~mortgage-backed securities to or from third-party investors to hedge the effect of changes in ~~a change in~~interest rates on the ~~reported values~~value of the interest rate ~~swaps or certificates~~locks and mortgage loans held for sale. Forward sales commitments may also be in the form of ~~deposit~~commitments 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 burden~~period 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 anticipation~~following table presents a summary of the ~~issuance~~Corporation’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.

~~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 lives~~following table presents a summary of the ~~related securities using~~fair 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 earnings~~Corporation during the ~~next twelve~~three 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 loan~~The 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 has~~Beginning in the second quarter of 2008, the Corporation agreed to purchase illiquid student-loan backed ARCs from ~~customer accounts~~customers of FFA, upon notification ~~from customers~~ that they ~~have~~had liquidity needs or otherwise ~~desire~~desired 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~~

~~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

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 )

~~During~~for 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 to~~established in the ~~difference between~~second 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 ~~and~~at 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, 2008~~March 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

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

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 ~~sheet~~sheets 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 ~~sheet~~sheets 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 ~~sheet~~sheets 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, 2008~~March 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.

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 157~~this 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 for~~into 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.

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, 2008~~March 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 party~~third-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 ~~flow~~flows 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 debt~~Pooled trust preferred securities and certain ~~single-issuer~~single issuer trust preferred securities ~~for which no current market exists, to~~are 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, the~~The fair values of ~~pooled-trust~~pooled trust preferred ~~debt~~ securities were determined through the use of a discounted cash flow ~~model~~models which applied a credit and liquidity adjusted discount ~~rate~~rates 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 party~~third-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.

	•		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 liability~~fair 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 associated~~Corporation’s interest rate ~~swaps, included within~~locks and forward commitments are determined as the ~~“Other~~amount that would be required to settle each derivative financial ~~liabilities” category, are measured~~instrument at ~~fair value through~~ the ~~use~~end 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 as~~above; 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 present~~table 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 )

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 amounts~~For ARC investments, amount represents ARCs acquired from ~~Level 2~~customers, 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 based~~represent credit related other-than-temporary impairment charges that were recorded within investment securities gains on ~~a third party valuation~~the consolidated statements of income. For the ~~ARCs held in customer accounts and by~~ARC financial guarantee, the ~~Corporation as of September 30, 2008. For ARCs held within customer accounts, the~~realized 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.

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, 2008~~March 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

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 ~~their~~the related allowance for loan ~~loss.~~losses.


	•		Other financial assets –— This category includes foreclosed assets that the Corporation obtained during the first ~~nine months~~quarter 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 ~~Standard~~Standards

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 Instruments~~141(R), “Business Combinations” in relation to the initial recognition and ~~Hedging Activities” (Statement 161). Statement 161 establishes the disclosure requirements for derivative instruments~~measurement, subsequent measurement and ~~for hedging activities, including~~accounting, and disclosure of ~~information that should enable users of financial information to understand how~~assets and ~~why~~liabilities 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 financial~~business combination. This staff position ~~financial performance, and cash flows. The standard~~ is effective for ~~financial statements issued~~business combinations for ~~fiscal years and interim periods~~which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after ~~November~~December 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

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 adoption~~10-Q, but will not result in a change in the reported values of ~~Statement 161 is not expected to have a material impact~~any amounts on the ~~Corporation’s~~ consolidated financial statements.

NOTE ~~L –~~K — Reclassifications

Certain amounts in the ~~2007~~2008 consolidated financial statements and notes have been reclassified to conform to the ~~2008~~2009 presentation.

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.

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 ~~for~~in the ~~third~~first quarter of ~~2008~~2009 decreased ~~$7.8~~$41.0 million, or ~~16.7%~~73.7%, ~~from the same period in 2007. Income before taxes for~~compared to the first ~~nine months~~quarter of ~~2008 decreased $30.6 million, or 18.8%,~~2008. The decrease in income before income taxes in comparison to the first ~~nine months~~quarter 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 were~~was primarily due to the following significant items:

Decreases in income before income taxes:

	•		~~Increases~~Increase in the provision for loan losses of ~~$22.1~~$38.8 million, ~~and $46.4 million for~~or 345.6%, from the ~~three and nine months ended September 30, 2008, respectively.~~first quarter of 2008.

	•		~~Charges associated with~~During the ~~other-than-temporary impairment~~first quarter of ~~investment securities of $10.7 million and $39.3 million for~~2009, 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 sale~~quality of the Corporation’s ~~credit card~~loan portfolio ~~recognized~~continued 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 ~~second~~first 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 charges~~Contingent 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 related~~guarantee to purchase illiquid auction rate certificates (ARCs) from customers.

		Beginning in the ~~potential repurchase~~second quarter of ~~residential mortgage~~2008, the Corporation agreed to purchase illiquid student-loan backed ARCs from customers of its investment management and ~~home equity loans~~trust 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 million~~ARCs. 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 million~~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 ~~three and nine months ended September 30, 2008, respectively. See Note I, “Commitments and Contingencies” in~~amount of the ~~Notes~~interest 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

~~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 increased~~During 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 of~~Federal 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 third~~first 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.

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 Securities~~ –Current 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 Income~~ –~~The 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 ~~and~~to 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.~~

~~Finally, the improvement in~~Corporation’s net interest ~~income was also due~~margin decreased from 3.58% for the first quarter of 2008 to ~~a change in~~3.45% for the ~~composition~~first 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.

2725

The following table provides a comparative average balance sheet and net interest income analysis for the ~~third~~first quarter of ~~2008~~2009 as compared to the same period in ~~2007.~~2008. Interest income and yields are presented on ~~an FTE~~a 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.

2826

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 ~~104~~105 basis point ~~reduction~~decrease 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 mortgage~~products while the increase in commercial loans ~~which increased $184.0 million, or 23.9%, primarily in traditional~~was spread across fixed, floating and adjustable rate ~~products, and an~~products. The $172.1 million increase in home equity loans ~~of $165.0 million, or 11.3%, which~~ was ~~primarily~~ due to ~~the introduction~~a significant increase in home equity lines of ~~a new blended fixed/floating~~credit. 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.

2927

Offsetting these increases ~~were decreases~~was 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 ~~2007~~2008 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 ~~third~~first 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 sale~~investments decreased ~~$58.2~~$282.8 million, or ~~36.5%, as a result~~9.0%. During the first quarter of ~~a $36.5 million, or 13.5%, decrease~~2009, proceeds from maturities and sales were not fully reinvested in the ~~volume~~portfolio 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 originated~~investments, 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 ~~sale~~the 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 ~~third~~first quarter of ~~2008 as~~2009 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 ~~exceeded~~partially 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 ~~third~~first quarter of ~~2008~~2009 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 ~~139~~101 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 ~~decrease~~increase in noninterest-bearing and interest-bearing demand and savings accounts of ~~$94.9~~$30.1 million, or ~~1.7%~~0.6%. The ~~decrease~~increase in noninterest-bearing and interest-bearing demand and savings accounts was in ~~personal~~business 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 brokered~~personal accounts. During late 2008 and throughout the first quarter of 2009, the Corporation promoted certificates of deposit ~~and a $78.1~~in order to decrease its reliance on wholesale funding. The result was an $826.6 million, ~~decrease~~or 19.4%, increase in customer certificates of deposit. ~~The decrease in brokered certificates~~In the short-term, this certificate of deposit ~~was due to the use of alternative~~growth 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 ~~with~~sources 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/M~~	–	~~Not 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 in~~for 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

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 the~~The 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 a~~to businesses related to the residential housing industry continued ~~increase in line~~to deteriorate during the first quarter of ~~credit usage which~~

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. Despite~~March 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 December~~March 31, ~~2007.~~2008. The increase in non-performing assets in comparison to ~~September 30, 2007~~March 31, 2008 was primarily due to ~~increases~~a $65.3 million, or 231.8%, increase in non-performing construction loans, a $29.7 million, or 98.6%, increase in non-performing commercial ~~mortgages~~mortgage 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 values~~slowdown of residential ~~housing. Non-performing~~housing 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 $18.4~~was generally due to poor economic conditions and not attributable to any specific industry or geographical area. The $15.0 million ~~or 129.0%, and~~increase in non-performing commercial loans ~~increased $17.4 million, or 72.3%. The increases in these categories were across most geographical areas~~was caused by both poor economic conditions and ~~industries and were due~~borrowers 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, 2008~~March 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.

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 ~~third~~first 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.

Management believes that the allowance for credit losses balance of ~~$141.8~~$200.1 million at ~~September 30, 2008~~March 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 ~~meaningful~~applicable

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 management~~other service charges on deposit accounts. The increase in overdraft fees was ~~due to~~ a ~~new automated~~result 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 ~~primarily~~due 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 ~~$694,000~~loans sold. Total loans sold in ~~foreign currency processing revenue as a result~~the first quarter of 2009 were $558.7 million, compared to $163.6 million in the ~~growth~~first quarter of 2008. The $395.1 million, or 241.5%, increase in the ~~Corporation’s foreign currency processing company and~~volume 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 decrease~~the 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.

3432

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 $2.9~~decreasing $1.2 million, or ~~6.8%~~2.7%, ~~and~~offset by an increase in employee benefits ~~decreasing $124,000,~~of $1.3 million, or ~~1.3%~~14.1%. The ~~increase~~decrease in salaries was primarily due to ~~corporate~~a $1.3 million decrease in employee bonuses and ~~affiliate management bonus accruals, which increased $2.1 million, and~~a $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 for~~3,660 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 3,680~~2009. These increases were offset by a $500,000 decrease in accruals for the ~~third quarter~~cost 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

accounts, offset by a ~~$15.5~~$1.0 million ~~reduction~~decrease in ~~contingent~~ losses ~~related to~~on 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 expense~~FDIC 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 fees~~branch 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 ~~repurchases~~the Corporation’s share of ~~previously sold loans, partially offset by increases~~indemnification 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 with~~other 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.

Income Taxes

Income tax expense for the ~~third~~first quarter of ~~2008~~2009 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 ~~third~~first quarter of ~~2008~~2009 is lower than the same period in ~~2007 as~~2008 due to non-taxable income and tax credits ~~had~~having a larger impact on the effective rate due to ~~a $7.8~~the $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.~~

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.~~

~~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

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.

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.

~~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.

~~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.

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

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.

4434

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%, ~~increase~~decrease in loans, net of unearned ~~income, primarily~~income. Construction loans decreased $64.1 million, or 5.0%, due to ~~commercial mortgage loans, which increased $395.4~~a 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 $127.5~~due to refinance activity generated by low interest rates. Offsetting these decreases was a $51.6 million, or ~~3.7%. The~~1.3%, increase in commercial ~~mortgage loans was in adjustable~~mortgages and ~~floating rate products, while the~~an $18.0 million, or 0.5%, increase in commercial loans, ~~was in fixed, floating and adjustable rate products. The Corporation also had additional~~with increases in ~~home equity loans of $146.0 million, or 9.7%, and residential mortgages of $127.9 million, or 15.0%. The increase~~both 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 $347.0~~increased $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 decrease~~an increase in time deposits of ~~$167.8~~$614.8 million, or ~~3.7%~~12.1%, and ~~a decrease~~an 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 ~~decrease~~increase 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 an~~deposit. 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 $206.0~~decreased $567.3 million, or ~~8.6%~~32.2%, due to a ~~$269.5~~$750.5 million ~~increase~~decrease in Federal funds purchased, ~~and a $25.0~~offset 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 months~~quarter 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.

4535

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 senior~~issue 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 for~~the U.S.

In December 2008, the Corporation asvoluntarily participated in the CPP by issuing $376.5 million of ~~September 30, 2008. The senior~~fixed rate cumulative perpetual preferred stock, ~~will pay~~and warrants to purchase 5.5 million of the Corporation’s common stock, to the UST. The preferred stock pays a compounding cumulative ~~dividends~~dividend at a rate of ~~5% per year~~5.0% 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 ~~sections~~section 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 months~~quarter of ~~2008,~~2009, mainly due to net income, as adjusted for non-cash expenses, ~~such as~~most 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.

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

continues to monitor the liquidity and capital needs of the Parent Company and will implement appropriate strategies, as necessary, to remain adequately capitalized and to meet its cash needs.

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.

4737

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 ~~and~~market 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 ~~FRB~~Federal 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 ~~charges~~charge 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

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

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 certificates~~Rate Certificates (ARCs)

~~Beginning in the second quarter of 2008, the~~The Corporation’s debt securities ~~also included~~include 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 securities~~March 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 securities~~ARCs 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-frame~~time 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.

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, 2008~~March 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

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.

~~During~~In April 2009, the ~~third~~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, 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 ~~charge~~charges as a reduction to investment securities gains on the consolidated statements of income, related to ~~an investment~~investments in a pooled trust preferred ~~security~~securities 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 ~~$4.9~~component 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 related~~impairment charges were non-credit related. As such, a $6.3 million (net of $3.4 million of taxes) increase to ~~subordinated debt issued by~~retained earnings and a ~~failed financial institution. The current distressed market~~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. 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.

5040

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.

5141

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 ~~initial~~remaining fixed ~~term:~~term at March 31, 2009:


	Percent of Total
	Adjustable Rate
Fixed Rate Term	Loans
One year		~~33.2~~19.2	%
Two years		~~21.8~~0.9
Three years		~~16.5~~2.3
Four years		~~12.4~~1.3
Five years		~~12.1~~60.2
Greater than five years		~~4.0~~16.1

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.

5242

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		- ~~2.2~~3.1	%

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.

5343

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.

5444

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

Not applicable.

Item 1A. Risk Factors

Information responsive to this item as of ~~September 30, 2008~~March 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.

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.

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.

5745

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, 2008~~May 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

5846

EXHIBIT INDEX

Exhibits Required Pursuant
to Item 601 of Regulation S-K

3.1		~~Amended~~Articles 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.

3.2		Bylaws 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.

3.3		Certificate 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.

5947


	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


	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	)


	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	)


	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