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 March 31, 2008, or

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

For the transition period from                      to                     

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)		Identification No.)

One Penn Square, P.O. Box 4887 Lancaster, Pennsylvania		17604
(Address of principal executive offices)		(Zip Code)

(717) 291-2411

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. Yes þ No o

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 filer þ		Accelerated filer o		Non-accelerated filer o (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). Yes o No þ

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 – 174,002,000 shares outstanding as of April 30, 2008.

 

 

FULTON FINANCIAL CORPORATION
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2008

INDEX

Description		Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
(a) Consolidated Balance Sheets — March 31, 2008 and December 31, 2007			3
(b) Consolidated Statements of Income — Three months ended March 31, 2008 and 2007			4
(c) Consolidated Statements of Shareholders’ Equity and Comprehensive Income — Three months ended March 31, 2008 and 2007			5
(d) Consolidated Statements of Cash Flows — Three months ended March 31, 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			17
Item 3. Quantitative and Qualitative Disclosures about Market Risk			33
Item 4. Controls and Procedures			37
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			38
Item 1A. Risk Factors			38
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			39
Item 3. Defaults Upon Senior Securities			39
Item 4. Submission of Matters to a Vote of Security Holders			39
Item 5. Other Information			39
Item 6. Exhibits			39
Signatures			40
Exhibit Index			41
Certifications			42

Item 1. Financial Statements
FULTON FINANCIAL CORPORATION

		March 31
		2008				December 31
		(unaudited)				2007
ASSETS
Cash and due from banks		$	406,601			$	381,283
Interest-bearing deposits with other banks			12,418				11,330
Federal funds sold			822				9,823
Loans held for sale			95,144				103,984
Investment securities:
Held to maturity (estimated fair value of $10,635 in 2008 and $10,399 in 2007)			10,207				10,285
Available for sale			3,094,620				3,143,267
Loans, net of unearned income			11,388,653				11,204,424
Less: Allowance for loan losses			(115,257	)			(107,547	)
Net Loans			11,273,396				11,096,877
Premises and equipment			197,424				193,296
Accrued interest receivable			65,865				73,435
Goodwill			624,058				624,072
Intangible assets			28,980				30,836
Other assets			243,332				244,610
Total Assets		$	16,052,867			$	15,923,098
LIABILITIES
Deposits:
Noninterest-bearing		$	1,737,442			$	1,722,211
Interest-bearing			8,311,486				8,383,234
Total Deposits			10,048,928				10,105,445
Short-term borrowings:
Federal funds purchased			1,103,804				1,057,335
Other short-term borrowings			1,125,323				1,326,609
Total Short-Term Borrowings			2,229,127				2,383,944
Accrued interest payable			66,637				69,238
Other liabilities			205,486				147,418
Federal Home Loan Bank advances and long-term debt			1,890,969				1,642,133
Total Liabilities			14,441,147				14,348,178
SHAREHOLDERS’ EQUITY
Common stock, $2.50 par value, 600 million shares authorized, 192.0 million shares issued in 2008 and 191.8 million shares issued in 2007			480,106				479,559
Additional paid-in capital			1,255,897				1,254,369
Retained earnings			156,708				141,993
Accumulated other comprehensive loss			(1,763	)			(21,773	)
Treasury stock, 18.3 million shares in 2008 and 2007, at cost			(279,228	)			(279,228	)
Total Shareholders’ Equity			1,611,720				1,574,920
Total Liabilities and Shareholders’ Equity		$	16,052,867			$	15,923,098

See Notes to Consolidated Financial Statements

FULTON FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(dollars in thousands, except per-share data)

		Three Months Ended
		March 31
		2008				2007
INTEREST INCOME
Loans, including fees		$	191,166			$	195,557
Investment securities:
Taxable			29,561				24,619
Tax-exempt			4,535				4,281
Dividends			2,163				1,919
Loans held for sale			1,577				3,684
Other interest income			218				596
Total Interest Income			229,220				230,656
INTEREST EXPENSE
Deposits			63,485				71,208
Short-term borrowings			18,829				19,054
Long-term debt			21,007				18,619
Total Interest Expense			103,321				108,881
Net Interest Income			125,899				121,775
Provision for loan losses			11,220				957
Net Interest Income After Provision for Loan Losses			114,679				120,818
OTHER INCOME
Service charges on deposit accounts			13,967				10,627
Investment management and trust services			8,759				9,810
Other service charges and fees			8,591				7,375
Gains on sales of mortgage loans			2,311				5,393
Investment securities gains			1,246				1,782
Other			2,806				4,078
Total Other Income			37,680				39,065
OTHER EXPENSES
Salaries and employee benefits			55,195				56,293
Net occupancy expense			10,524				10,196
Equipment expense			3,448				3,715
Data processing			3,246				3,202
Advertising			2,905				2,409
Intangible amortization			1,857				1,983
Operating risk loss			1,243				5,914
Other			18,242				17,193
Total Other Expenses			96,660				100,905
Income Before Income Taxes			55,699				58,978
Income taxes			14,203				17,850
Net Income		$	41,496			$	41,128
PER-SHARE DATA:
Net income (basic)		$	0.24			$	0.24
Net income (diluted)			0.24				0.24
Cash dividends			0.1500				0.1475

See Notes to Consolidated Financial Statements

FULTON FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2008 AND 2007

																		Accumulated
		Number of								Additional								Other Com-
		Shares				Common				Paid-in				Retained				prehensive				Treasury
		Outstanding				Stock				Capital				Earnings				Income (Loss)				Stock				Total
		(in thousands)
Balance at December 31, 2007			173,503			$	479,559			$	1,254,369			$	141,993			$	(21,773	)		$	(279,228	)		$	1,574,920
Comprehensive income:
Net income															41,496												41,496
Other comprehensive income																			20,010								20,010
Total comprehensive income																											61,506
Stock issued, including related tax benefits			219				547				952																1,499
Stock-based compensation awards											576																576
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 — $0.1500 per share															(26,147	)											(26,147	)
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															41,128												41,128
Other comprehensive income																			2,265								2,265
Total comprehensive income																											43,393
Stock issued, including related tax benefits			474				1,176				2,218																3,394
Stock-based compensation awards											508																508
Cumulative effect of FIN 48 adoption															220												220
Acquisition of treasury stock			(1,039	)																			(16,377	)			(16,377	)
Cash dividends — $0.1475 per share															(25,517	)											(25,517	)
Balance at March 31, 2007			173,083			$	478,163			$	1,249,549			$	108,423			$	(36,826	)		$	(277,378	)		$	1,521,931

See Notes to Consolidated Financial Statements

FULTON FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)

		Three Months Ended
		March 31
		2008				2007
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income		$	41,496			$	41,128
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses			11,220				957
Depreciation and amortization of premises and equipment			4,904				4,336
Net amortization of investment security premiums			370				563
Investment securities gains			(1,246	)			(1,782	)
Net decrease in loans held for sale			8,840				32,620
Amortization of intangible assets			1,857				1,983
Stock-based compensation expense			587				508
Excess tax benefits from stock-based compensation expense			(2	)			(114	)
Decrease in accrued interest receivable			7,570				4,245
(Increase) decrease in other assets			(8,550	)			2,026
(Decrease) increase in accrued interest payable			(2,601	)			2,092
Increase in other liabilities			17,098				8,594
Total adjustments			40,047				56,028
Net cash provided by operating activities			81,543				97,156
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale			194,571				271,483
Proceeds from maturities of securities held to maturity			3,961				220
Proceeds from maturities of securities available for sale			229,210				103,032
Purchase of securities held to maturity			(3,884	)			(122	)
Purchase of securities available for sale			(303,250	)			(109,428	)
Decrease in short-term investments			7,913				10,511
Net increase in loans			(188,589	)			(73,794	)
Net purchases of premises and equipment			(9,032	)			(3,377	)
Net cash (used in) provided by investing activities			(69,100	)			198,525
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand and savings deposits			38,894				(48,777	)
Net (decrease) increase in time deposits			(95,411	)			51,888
Additions to long-term debt			343,990				290,000
Repayments of long-term debt			(95,154	)			(17,865	)
Decrease in short-term borrowings			(154,817	)			(542,397	)
Dividends paid			(26,114	)			(25,596	)
Net proceeds from issuance of common stock			1,485				3,280
Excess tax benefits from stock-based compensation expense			2				114
Acquisition of treasury stock			—				(16,377	)
Net cash provided by (used in) financing activities			12,875				(305,730	)
Net Increase (Decrease) in Cash and Due From Banks			25,318				(10,049	)
Cash and Due From Banks at Beginning of Year			381,283				355,018
Cash and Due From Banks at End of Year		$	406,601			$	344,969
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest		$	105,922			$	106,789
Income taxes			5,000				1,117

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-month period ended March 31, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008.

NOTE B – Net Income Per Share and Other Comprehensive Income

The Corporation’s basic net income per share is calculated as net income divided by the weighted average number of shares outstanding. For diluted net income per share, net income is divided by the weighted average number of shares outstanding plus the incremental number of shares added as a result of converting common stock equivalents, calculated using the treasury stock method. The Corporation’s common stock equivalents consist solely of outstanding stock options and restricted stock. Excluded from the calculation were 5.2 million and 2.2 million anti-dilutive options for the three months ended March 31, 2008 and 2007, respectively.

A reconciliation of the weighted average shares outstanding used to calculate basic net income per share and diluted net income per share follows:

		Three months ended
		March 31
		2008				2007
		(in thousands)
Weighted average shares outstanding (basic)			173,624				173,273
Impact of common stock equivalents			585				1,605
Weighted average shares outstanding (diluted)			174,209				174,878

The following table presents the components of other comprehensive income (loss):

		Three months ended
		March 31
		2008				2007
		(in thousands)
Unrealized gain on securities (net of $9.6 million and $1.9 million tax effect in 2008 and 2007, respectively)		$	17,773			$	3,537
Unrealized gain (loss) on derivative financial instruments (net of $18,000 and $103,000 tax effect in 2008 and 2007, respectively)			34				(191	)
Reclassification adjustment for securities losses (gains) included in net income (net of $1.2 million tax benefit in 2008 and $624,000 tax expense in 2007)			2,203				(1,158	)
Amortization of unrecognized pension and postretirement costs (net of $41,000 tax effect in 2007)			—				77
Other comprehensive income		$	20,010			$	2,265

NOTE C – 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 March 31, 2008 and 2007 the Corporation had total reserves for unrecognized income tax positions of $3.1 million and $4.1 million, respectively, all of which, if recognized, would impact the effective tax rate. Also as of March 31, 2008 and 2007, the Corporation had $1.0 million 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.

During the three months ended March 31, 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 the first quarter of 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 taxable authorities. With few exceptions, the Corporation is no longer subject to U.S. Federal, state and local examinations by tax authorities for years before 2004.

NOTE D – 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 on the consolidated income statements:

		Three months ended
		March 31
		2008				2007
		(in thousands)
Compensation expense		$	587			$	508
Tax benefit			(74	)			(70	)
Net income effect		$	513			$	438

Under the Option Plans, options are granted to key employees for terms of up to ten years at option prices equal to the fair market value of the Corporation’s stock on the date of grant. Options are typically granted annually on July 1st and become fully vested after a three-year cliff-vesting period. Certain events, as specified in the Option Plans and agreements, would result in the acceleration of the vesting period. As of March 31, 2008, the Option Plans had 14.0 million shares reserved for future grants through 2013.

NOTE 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 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.

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 (income) cost for the Pension Plan and Postretirement Plan, as determined by consulting actuaries, consisted of the following components for the three months ended March 31:

		Pension Plan								Postretirement Plan
		2008				2007				2008				2007
						(in thousands)
Service cost (1)		$	37			$	626			$	127			$	108
Interest cost			816				925				167				142
Expected return on plan assets			(918	)			(1,137	)			(1	)			(1	)
Net amortization and deferral			—				175				—				(57	)
Net periodic benefit (income) cost		$	(65	)		$	589			$	293			$	192

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 F – Derivative Financial Instruments

Interest Rate Swaps

As of March 31, 2008, interest rate swaps with a notional amount of $98.0 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, 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 months ended March 31, 2008, net gains of $33,000 were recorded in other expense, representing the net impact of the change in fair values of the interest rate swaps and the certificates of deposit, compared to net losses of $96,000 for the three months ended March 31, 2007.

In February 2007, the FASB issued 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 for Derivative Instruments and Hedging Activities” (Statement 133). Under Statement 133, the

Corporation performed tests for each swap to prove they were highly effective. The adoption of Statement 159 for these instruments did not result in a change in the reported values of the interest rate swaps or certificates of deposits on the Corporation’s consolidated balance sheets. However, the administrative burden of completing these periodic effectiveness tests was removed, as such tests are not required under Statement 159.

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

The Corporation entered into a forward-starting interest rate swap with a notional amount of $150.0 million in October 2005 in anticipation of the issuance of trust preferred securities in January 2006. This swap was accounted for as a cash flow hedge as it hedged the variability of interest payments attributable to changes in interest rates on the forecasted issuance of fixed-rate debt. The total amount recorded in accumulated other comprehensive income upon settlement of this derivative 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 $120,000.

The Corporation entered into a forward-starting interest rate swap with a notional amount of $100.0 million in February 2007 in anticipation of the issuance of subordinated debt in May 2007. This swap was accounted for as a cash flow hedge as it hedged the variability of interest payments attributable to changes in interest rates on the forecasted issuance of fixed-rate debt. The total amount recorded in accumulated other comprehensive income upon settlement of this derivative 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 $15,000.

NOTE 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:

		March 31
		2008				2007
		(in thousands)
Commitments to extend credit			4,120,738				4,547,736
Standby letters of credit			778,888				719,028
Commercial letters of credit			29,692				27,023

As of March 31, 2008, the Corporation recorded a $3.8 million reserve for unfunded lending commitments, included in other liabilities, which represented management’s estimates of losses inherent in commitments to extend credit. 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.

Residential Lending Contingencies Beginning in 2008, 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.

During 2007, the Corporation recorded $25.1 million of charges related to actual and potential repurchases of residential loans and home equity loans which were originated and sold to secondary market investors by the former Resource Bank’s mortgage division, Resource Mortgage. Resource Mortgage operated a national wholesale mortgage lending operation through early 2007. Loans were originated and 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 has managed its residential mortgage lending risk by exiting from the national wholesale mortgage business at Resource Mortgage, where the majority of the repurchased loans were generated. In addition, the Corporation merged Resource Bank, including Resource Mortgage, into Fulton Bank in the first quarter of 2008. During the first quarter of 2008, the Corporation recorded $800,000 of additional charges related to actual and potential repurchases of residential mortgage and home equity loans, and continued to work through the loans repurchased from investors from the prior year.

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:

		March 31, 2008
						Reserves/
		Principal				Write-downs
		(in thousands)
Outstanding repurchase requests (1) (2)		$	22,500			$	(7,710	)
No repurchase request received – sold loans with identified potential misrepresentations of borrower information (1) (2)			16,000				(5,840	)
Repurchased loans (3)			19,300				(3,790	)
Foreclosed real estate (OREO)			17,300				—
Other (3) (4)			N/A				(440	)
Total reserves/write-downs at March 31, 2008						$	(17,780	)

The following presents the change in the reserve/write-down balances:

		Three months ended
		March 31
		2008				2007
		(in thousands)
Total reserves/write-downs, beginning of period		$	18,620			$	500
Additional charges to expense			800				5,500
Charge-offs			(1,640	)			(1,210	)
Total reserves/write-downs, end of period		$	17,780			$	4,790

Management believes that the reserves recorded as of March 31, 2008 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 MEASUREMENTS

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurement” (Statement 157). Statement 157 defines fair value, establishes a framework for measuring fair value in U.S. GAAP, and expands disclosure requirements for fair value measurements. Statement 157 does not require any new fair value measurements and is effective for financial statements issued for fiscal years beginning after November 15, 2007, or January 1, 2008 for the Corporation.

On January 1, 2008, the Corporation adopted the provisions of 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. Although the adoption of Statement 157 did not impact the values of assets and liabilities on the Corporation’s consolidated balance sheet, the adoption resulted in expanded disclosure requirements for assets and liabilities recorded at fair value.

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.

The Corporation’s assets and liabilities measured at fair value and reported on the Corporation’s consolidated balance sheet that are subject to Statement 157 as of March 31, 2008 were as follows:

		Level 1				Level 2				Level 3				Total
						(in thousands)
Loans held for sale		$	—			$	95,144			$	—			$	95,144
Loans, net of unearned income			—				370				—				370
Available for sale investment securities			72,105				3,022,515				—				3,094,620
Other financial assets			10,217				4,551				—				14,768
Total assets		$	82,322			$	3,122,580			$	—			$	3,204,902
Certificates of deposit		$	—			$	87,439			$	—			$	87,439
Other financial liabilities			10,217				149				—				10,366
Total liabilities		$	10,217			$	87,588			$	—			$	97,805

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 by the price that secondary market investors are currently offering for loans with similar characteristics.
	•		Loans, net of unearned income – This category consists of residential mortgage loans and home equity loans that were previously sold and repurchased from secondary market investors during the first quarter of 2008. Upon repurchase, these loans were written down to the appraised value of their underlying collateral. See Note G, “Commitments and Contingencies” for additional information.
	•		Available for sale investment securities – Included within this asset category are both equity and debt securities. Equity securities consisting of stocks of financial institutions, mutual funds and certain other government sponsored agency stocks are listed as Level 1 assets, measured at fair value based on quoted prices for identical securities in active markets. All other equity securities, primarily restricted investment securities issued by the Federal Home Loan Bank and Federal Reserve Bank, are categorized as Level 2 assets that are measured at fair value based on prices paid for identical instruments by these agencies. Debt securities, classified as Level 2 assets, consist of: mortgage backed securities and collateralized mortgage obligations, state and municipal bonds, and corporate debt securities. Fair values are determined 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.
	•		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. The Corporation maintains a separate Level 1 deferred compensation liability of the same amount, included within the “other financial liabilities” category above, which represents the amounts due to employees under these deferred compensation plans. Also included in this category are foreclosed assets that the Corporation obtained during the first quarter of 2008. Fair values for these Level 2 assets were based on estimated selling prices less estimated selling costs for similar assets in active markets.
	•		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

			interest rate swaps, included within the “Other financial liabilities” category, are measured at fair value through the use of a model-based approach which utilizes market prices for similar instruments in addition to using market-corroborated means, such as interest rates. See Note F, “Derivative Financial Instruments” for additional information.
	•		Other financial liabilities – Included within this category are the following liabilities: employee deferred compensation liabilities, described under the heading “Other financial assets” above and included as Level 1 liabilities, and interest rate swaps that hedge the aforementioned certificates of deposit, categorized as Level 2 liabilities.

In February 2008, the FASB issued FASB 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, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis, until fiscal years beginning after November 15, 2008, or January 1, 2009 for 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 recurring 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 Financial Accounting Standard 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, but will result in additional disclosure related to the inputs associated with their fair value measurements.

NOTE I – New Accounting Standard

In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (Statement 161). Statement 161 establishes the disclosure requirements for derivative instruments and for hedging activities, including disclosure of information that should enable users of financial information to understand how and why 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 position, financial performance, and cash flows. The standard is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, or the Corporation’s March 31, 2009 quarterly report on Form 10-Q. The adoption of Statement 161 is not expected to have a material impact on the Corporation’s consolidated financial statements.

NOTE J – Subsequent Event

In April 2008, the Corporation entered into a definitive agreement with U.S. Bank National Association ND, d/b/a Elan Financial Services (Elan), to sell its approximately $85.0 million credit card portfolio to Elan. The Corporation estimates that the transaction will result in a gain in the second quarter of 2008 of approximately $10.0 million, which is dependent on the balance of the portfolio on the sale date, among other factors.

Under a separate agreement with Elan, the Corporation will provide ongoing marketing services on behalf of Elan and will receive a fee for each new account originated and a percentage of the revenue earned on both new accounts and accounts sold.

NOTE K – Reclassifications

Certain amounts in the 2007 consolidated financial statements and notes have been reclassified to conform to the 2008 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, impairment of securities, 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.

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

		Three months ended March 31
		2008				2007
Net income (in thousands)		$	41,496			$	41,128
Diluted net income per share		$	0.24			$	0.24
Return on average assets			1.05	%			1.12	%
Return on average equity			10.53	%			11.06	%
Return on average tangible equity (1)			18.45	%			20.34	%
Net interest margin (2)			3.58	%			3.74	%
Non-performing assets to total assets			0.90	%			0.40	%

The Corporation’s net income for the first quarter of 2008 increased $368,000, or 0.9%, from the same period in 2007 due to an increase in net interest income of $4.1 million, or 3.4%, a decrease in other expenses of $4.2 million, or 4.2%, and a $3.6 million, or 20.4%, decrease in income tax expense, offset by a $10.3 million increase in the provision for loan losses and a $1.4 million, or 3.5%, decrease in other income.

The following summarizes some of the more significant factors that influenced the Corporation’s results for the three months ended March 31, 2008.

Net Interest Margin and Net Interest Income – In recent years, the interest rate environment has presented challenges to banks in maintaining and growing their net interest margin. The term “interest rate environment” generally refers to both the level of interest rates and the shape of the U.S. Treasury yield curve, which is a plot of the yields on treasury securities over various maturity terms. Typically, the shape of the yield curve is upward sloping, with longer-term rates exceeding shorter-term rates. Over the past several years, however, there had been little difference between short and long-term rates and, at times, short-term rates exceeded long-term rates. For banks that depend on shorter-term funding to invest longer term in investment securities and loans, this situation has not been favorable.

During the fourth quarter of 2007 and continuing throughout the first quarter of 2008, the yield curve began to return to a more normal, upward-sloping shape. Since the first quarter of 2007, the Federal Reserve Board (FRB) lowered the overnight Federal funds rate six times, for a total decrease of 250 basis points (from 4.75% to 2.25%), with a total decrease of 200 basis points occuring during the first quarter of 2008.

The following graph shows the U. S. treasury yield curve at March 31, 2008, in comparison to March 31, 2007 and each of the two most recent year-ends. This graph illustrates the recent trend toward a more normal-shaped yield curve:

The majority of the Corporation’s interest-earning assets and interest-bearing liabilities have durations of seven years or less. The reduction in short-term rates during the first quarter of 2008 resulted in an upward slope to the yield curve for these durations that had not been seen for some time. During the first quarter there was a slight improvement in net interest income and net interest margin in comparison to the fourth quarter of 2007, as short-term borrowings and many deposit balances repriced to lower rates more quickly than assets. In the longer term, however, this benefit may be mitigated by the continued repricing of assets and the inability to move deposit rates lower in similar increments.

In comparison to the first quarter of 2007, the Corporation experienced a 53 basis point, or 13.8%, decrease in the cost of average interest-bearing liabilities (from 3.85% in 2007 to 3.32% in 2008) as compared to a 56 basis point, or 8.0%, decrease in the yield on average interest-earning assets (from 6.99% in 2007 to 6.43% in 2008). During the first quarter of 2007, interest recoveries totaling $3.7 million added approximately 13 basis points to net interest margin. As a result these two factors, the net interest margin decreased 16 basis points compared to the first quarter of 2007.

The Corporation manages its risk associated with changes in interest rates through the techniques described in the “Market Risk” section of Management’s Discussion.

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.

The Corporation’s non-performing assets increased significantly, from $58.0 million, or 0.40% of total assets, at March 31, 2007 to $144.7 million, or 0.90% of total assets, at March 31, 2008. The increase was primarily due to worsening general economic conditions, which have negatively impacted consumer confidence and residential real estate values, and partially due to the repurchase of residential mortgages

previously sold by the Corporation’s former Resource Bank affiliate, as discussed below. This increase in non-performing assets contributed to a $10.3 million increase in the provision for loan losses as compared to the first quarter of 2007.

Management believes that its policies and procedures for managing asset quality are sound. However, there can be no assurance about maintaining strong asset quality in the future. Continuing decreases in the values of underlying collateral or negative trends in general economic conditions could have a detrimental impact on borrowers’ ability to repay their loans.

Residential Lending – During the first quarter of 2008, the Corporation continued to work through the loans repurchased from investors by the former Resource Bank. As disclosed in prior periods, certain residential mortgage and home equity loans that were originated under “non-prime” programs were repurchased due to “early payment defaults” or misrepresentations of borrower information. Upon repurchase, the majority of these loans were placed on non-accrual status or were foreclosed and transferred to other real estate owned. These loans accounted for approximately $31 million of the Corporation’s non-performing assets as of March 31, 2008.

The Corporation has managed its residential lending risk by exiting the national wholesale residential mortgage business at Resource Mortgage, where the majority of the repurchased loans were generated and by merging Resource Bank (and Resource Mortgage) into Fulton Bank in the first quarter of 2008.

See Note G, “Commitments and Contingencies” in the Notes to Consolidated Financial Statements for additional details.

Equity Markets – The Corporation has a significant portfolio of equity investments in financial institutions stocks, with a carrying value of $67.0 million at March 31, 2008. Historically, gains on sales of these securities 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 $21.2 million of net unrealized losses, recorded within “Investment securities gains” on the consolidated statements of income, as of March 31, 2008. During the first quarter of 2008, the Corporation recorded $3.6 million of losses on stocks that were considered to be other than temporarily impaired. Further declines in bank stock values may impact the Corporation’s ability to realize gains in the future and may also result in additional other than temporary impairment charges.

Visa, Inc. Initial Public Offering – In March 2008, Visa, Inc. (Visa) completed its initial public offering and, as a result, member banks of Visa, who had previously received “Class USA” shares in a restructuring completed in 2007, had these shares converted to “Class B” shares, a portion of which were redeemed by Visa in connection with the initial public offering. Redemption proceeds totaling $3.6 million were recognized as “Investment securities gains” on the consolidated statements of income during the first quarter of 2008. The Corporation retained approximately 133,000 Class B shares, which can be converted to Class A shares at the later of 3 years following the initial public offering or the date on which certain litigation, as defined in Visa’s public filings, has been resolved. The shares will be converted based on a factor that considers the member banks’ relative share of the litigation liability. Since the value of the Class B shares cannot be determined, they have not been recognized on the consolidated balance sheets. Upon conversion to Class A shares, these equity securities will be accounted for in accordance with Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities”.

The Corporation had previously recorded a litigation reserve through a charge to earnings in the fourth quarter of 2007, totaling $1.5 million. This reserve represented the estimated fair value of the Corporation’s share of the member banks’ indemnification liability with Visa related to the previously disclosed litigation. As a result of the initial public offering, a litigation escrow was established by Visa, which eliminated the majority of the member banks’ exposure to this litigation. As a result, in the first

quarter of 2008, the Corporation reversed $1.4 million of this reserve through a reduction in other expenses.

FASB Interpretation No. 48 (FIN 48) – Under FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (FIN 48), income tax positions taken on returns that do not meet the recognition and measurement criteria, as defined, may not be recognized for financial statement purposes. The Corporation had not fully recognized on the consolidated financial statements the positions it had taken on its tax returns for the 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 the first quarter of 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, and the Corporation reversed $2.0 million of reserves it had recorded, resulting in a reduction of income tax expense.

Quarter Ended March 31, 2008 compared to the Quarter Ended March 31, 2007

Net Interest Income Net interest income increased $4.1 million, or 3.4%, to $125.9 million in 2008 from $121.8 million in 2007 due to an increase in average interest-earning assets, offset by a decline in the net interest margin.

The following table provides a comparative average balance sheet and net interest income analysis for the first quarter 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.

		Three months ended March 31
		2008												2007
		Average								Yield/				Average								Yield/
		Balance				Interest (1)				Rate				Balance				Interest (1)				Rate
ASSETS
Interest-earning assets:
Loans, net of unearned income (2)		$	11,295,531			$	192,422				6.85	%		$	10,414,698			$	196,558				7.65	%
Taxable investment securities (3)			2,407,189				29,561				4.91				2,190,230				24,619				4.50
Tax-exempt investment securities (3)			515,856				6,761				5.24				492,709				6,228				5.06
Equity securities (2)			213,004				2,380				4.48				178,488				2,129				4.79
Total investment securities			3,136,049				38,702				4.94				2,861,427				32,976				4.61
Loans held for sale			98,676				1,577				6.39				207,856				3,684				7.09
Other interest-earning assets			26,784				218				3.25				48,328				596				4.97
Total interest-earning assets			14,557,040				232,919				6.43	%			13,532,309				233,814				6.99	%
Noninterest-earning assets:
Cash and due from banks			310,719												315,969
Premises and equipment			196,037												192,002
Other assets			927,260												899,843
Less: Allowance for loan losses			(109,914	)											(107,683	)
Total Assets		$	15,881,142											$	14,832,440
LIABILITIES AND EQUITY
Interest-bearing liabilities:
Demand deposits		$	1,685,620			$	4,405				1.05	%		$	1,657,714			$	6,904				1.69	%
Savings deposits			2,137,704				9,163				1.72				2,295,822				13,811				2.44
Time deposits			4,520,004				49,918				4.44				4,457,363				50,493				4.59
Total interest-bearing deposits			8,343,328				63,486				3.06				8,410,899				71,208				3.43
Short-term borrowings			2,347,463				18,828				3.19				1,552,495				19,054				4.93
FHLB advances and long-term debt			1,798,508				21,007				4.69				1,450,016				18,619				5.14
Total interest-bearing liabilities			12,489,299				103,321				3.32	%			11,413,410				108,881				3.85	%
Noninterest-bearing liabilities:
Demand deposits			1,616,283												1,721,135
Other			190,496												189,297
Total Liabilities			14,296,078												13,323,842
Shareholders’ equity			1,585,064												1,508,598
Total Liabilities and Shareholders’ Equity		$	15,881,142											$	14,832,440
Net interest income/net interest margin (FTE)							129,598				3.58	%							124,933				3.74	%
Tax equivalent adjustment							(3,699	)											(3,158	)
Net interest income						$	125,899											$	121,775

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		$	16,711			$	(20,847	)		$	(4,136	)
Taxable investment securities			2,572				2,370				4,942
Tax-exempt investment securities			299				234				533
Equity securities			392				(141	)			251
Loans held for sale			(1,773	)			(334	)			(2,107	)
Other interest-earning assets			(213	)			(165	)			(378	)
Total interest income		$	17,988			$	(18,883	)		$	(895	)
Interest expense on:
Demand deposits		$	118			$	(2,617	)		$	(2,499	)
Savings deposits			(884	)			(3,764	)			(4,648	)
Time deposits			834				(1,409	)			(575	)
Short-term borrowings			7,821				(8,047	)			(226	)
FHLB advances and long-term debt			4,128				(1,740	)			2,388
Total interest expense		$	12,017			$	(17,577	)		$	(5,560	)

Interest income decreased $895,000, or 0.4%, due to a decrease of $18.9 million caused by a 56 basis point decrease in rates, offset by an $18.0 million increase in interest income realized from a $1.0 billion, or 7.6%, increase in average balances.

The increase in average interest-earning assets was due mainly to loan growth, which is summarized in the following table:

		Three months ended
		March 31								Increase (decrease)
		2008				2007				$				%
						(dollars in thousands)
Commercial — industrial, financial and agricultural		$	3,472,443			$	3,031,242			$	441,201				14.6	%
Real estate — commercial mortgage			3,547,507				3,239,179				308,328				9.5
Real estate — residential mortgage			861,054				701,918				159,136				22.7
Real estate — home equity			1,526,475				1,441,741				84,734				5.9
Real estate — construction			1,328,718				1,396,527				(67,809	)			(4.9	)
Consumer			473,245				516,335				(43,090	)			(8.3	)
Leasing and other			86,089				87,756				(1,667	)			(1.9	)
Total		$	11,295,531			$	10,414,698			$	880,833				8.5	%

Loan growth was particularly strong in the commercial loan and commercial mortgage loan categories, which together increased $749.5 million, or 12.0%. The growth in commercial loans was across all commercial loan types, while growth in commercial mortgages was primarily in adjustable rate categories. Additional growth came from residential mortgage loans, which increased $159.1 million, or 22.7%, primarily in traditional adjustable rate products, and an increase in home equity loans of $84.7 million, or 5.9%, which was primarily due to the introduction of a new blended fixed/floating rate product in late 2007. Offsetting these increases were decreases in construction loans of $67.8 million, or

4.9%, due to a slowdown in the residential housing market in most of the Corporation’s geographical areas and a $43.1 million, or 8.3%, decrease in consumer loans, primarily in the indirect automobile portfolio.

The average yield on loans decreased 80 basis points, or 10.5%, from 7.65% in 2007 to 6.85% in 2008. The decrease in yield reflected a lower interest rate environment, as illustrated by a lower average prime rate during the first quarter of 2008 (6.27%) as compared to the same period in 2007 (8.25%).

Average investment securities increased $274.6 million, or 9.6%. In late 2007, the Corporation “pre-purchased” investments, based on the expected cash flows to be generated from maturing U.S. government sponsored agency securities over an approximate six-month period. This strategy allowed the Corporation to immediately obtain rates more favorable than those that may have been available had cash flows been re-invested as they occurred.

The average yield on investment securities increased 33 basis points, or 7.2%, from 4.61% in 2007 to 4.94% in 2008. The increase in yield was partially due to the pre-purchase strategy and partially due to the systematic reinvestment of normal portfolio cash flows, primarily from shorter duration, significantly lower yielding balloon mortgaged-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. In addition, despite decreases in short-term rates as a result of recent actions by the FRB, yields on securities backed by residential mortgages have not decreased, due primarily to economic factors surrounding the residential housing market.

Average loans held for sale decreased $109.2 million, or 52.5%, as a result of a $278.9 million, or 63.0%, decrease in the volume of loans originated for sale in the first quarter of 2008 as compared to the same period in 2007. The decrease was mainly due to the Corporation’s exit from the national wholesale mortgage business as well as a general slowdown in housing markets.

The $895,000 decrease in interest income (FTE) was exceeded by a decrease in interest expense of $5.6 million, or 5.1%, to $103.3 million in the first quarter of 2008 from $108.9 million in the first quarter of 2007. Interest expense decreased $17.6 million as a result of a 53 basis point, or 13.8%, decrease in the average cost of interest-bearing liabilities. The decrease was offset by a $12.0 million increase in interest expense caused by a $1.1 billion, or 9.4%, increase in average interest-bearing liabilities.

The following table summarizes the changes in average deposits, by type:

		Three months ended
		March 31								Increase (decrease)
		2008				2007				$				%
						(dollars in thousands)
Noninterest-bearing demand		$	1,616,283			$	1,721,135			$	(104,852	)			(6.1	)%
Interest-bearing demand			1,685,620				1,657,714				27,906				1.7
Savings			2,137,704				2,295,822				(158,118	)			(6.9	)
Time deposits			4,520,004				4,457,363				62,641				1.4
Total		$	9,959,611			$	10,132,034			$	(172,423	)			(1.7	)%

The Corporation experienced a net decrease in noninterest-bearing and interest-bearing demand and savings accounts of $235.1 million, or 4.1%, caused by decreases in both business and personal accounts. This decrease was partially offset by a slight increase in time deposits.

As average deposits decreased, borrowings were used to provide the additional funding needed to support the growth in average loans and investments. The following table summarizes the changes in average borrowings, by type:

		Three months ended
		March 31								Increase (decrease)
		2008				2007				$				%
						(dollars in thousands)
Short-term borrowings:
Federal funds purchased		$	1,184,370			$	915,241			$	269,129				29.4	%
Short-term promissory notes			471,470				315,515				155,955				49.4
Other short-term borrowings			464,702				65,081				399,621				614.0
Customer repurchase agreements			226,921				256,658				(29,737	)			(11.6	)
Total short-term borrowings			2,347,463				1,552,495				794,968				51.2
Long-term debt:
FHLB advances			1,415,840				1,144,597				271,243				23.7
Other long-term debt			382,669				305,419				77,250				25.3
Total long-term debt			1,798,509				1,450,016				348,493				24.0
Total		$	4,145,972			$	3,002,511			$	1,143,461				38.1	%