UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20459

FORM 10-Q/A

(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, or

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

For the transition period from                      to                     

Commission File No. 0-10587

FULTON FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

PENNSYLVANIA		23-2195389
(State or other jurisdiction of 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. 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 – 174,981,000 shares outstanding as of October 31, 2008.

 

 

EXPLANATORY NOTE

This Amended Quarterly Report on Form 10-Q/A is being filed for the purpose of correcting clerical errors on Exhibit 32.1 and Exhibit 32.2. In all other material respects this Amended Quarterly Report on Form 10-Q/A is unchanged from the Quarterly Report on Form 10-Q filed by Fulton Financial Corporation on November 10, 2008.

FULTON FINANCIAL CORPORATION
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2008

INDEX

Description		Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
(a) Consolidated Balance Sheets - September 30, 2008 and December 31, 2007			4
(b) Consolidated Statements of Income - Three and nine months ended September 30, 2008 and 2007			5
(c) Consolidated Statements of Shareholders’ Equity and Comprehensive Income - Nine months ended September 30, 2008 and 2007			6
(d) Consolidated Statements of Cash Flows - Nine months ended September 30, 2008 and 2007			7
(e) Notes to Consolidated Financial Statements			8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			24
Item 3. Quantitative and Qualitative Disclosures about Market Risk			49
Item 4. Controls and Procedures			55
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			56
Item 1A. Risk Factors			56
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			57
Item 3. Defaults Upon Senior Securities			57
Item 4. Submission of Matters to a Vote of Security Holders			58
Item 5. Other Information			58
Item 6. Exhibits			58
Signatures			59
Exhibit Index			60
Certifications			61
EX-31.1
EX-31.2
EX-32.1
EX-32.2

Item 1. Financial Statements

		September 30
		2008				December 31
		(unaudited)				2007
ASSETS
Cash and due from banks		$	315,841			$	381,283
Interest-bearing deposits with other banks			11,819				11,330
Federal funds sold			38,370				9,823
Loans held for sale			71,090				103,984
Investment securities:
Held to maturity (estimated fair value of $9,926 in 2008 and $10,399 in 2007)			9,823				10,285
Available for sale			2,796,712				3,143,267
Loans, net of unearned income			11,823,529				11,204,424
Less: Allowance for loan losses			(136,988	)			(107,547	)
Net Loans			11,686,541				11,096,877
Premises and equipment			199,464				193,296
Accrued interest receivable			62,018				73,435
Goodwill			624,410				624,072
Intangible assets			25,225				30,836
Other assets			294,832				244,610
Total Assets		$	16,136,145			$	15,923,098
LIABILITIES
Deposits:
Noninterest-bearing		$	1,690,499			$	1,722,211
Interest-bearing			8,226,056				8,383,234
Total Deposits			9,916,555				10,105,445
Short-term borrowings:
Federal funds purchased			1,326,873				1,057,335
Other short-term borrowings			1,263,093				1,326,609
Total Short-Term Borrowings			2,589,966				2,383,944
Accrued interest payable			47,950				69,238
Other liabilities			157,875				147,418
Federal Home Loan Bank advances and long-term debt			1,819,889				1,642,133
Total Liabilities			14,532,235				14,348,178
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
Additional paid-in capital			1,253,851				1,254,369
Retained earnings			159,320				141,993
Accumulated other comprehensive loss			(21,262	)			(21,773	)
Treasury stock, 17.6 million shares in 2008 and 18.3 million shares in 2007, at cost			(268,809	)			(279,228	)
Total Shareholders’ Equity			1,603,910				1,574,920
Total Liabilities and Shareholders’ Equity		$	16,136,145			$	15,923,098

See Notes to Consolidated Financial Statements

FULTON FINANCIAL CORPORATION AND SUBSIDIARIES

		Three Months Ended								Nine Months Ended
		September 30								September 30
		2008				2007				2008				2007
INTEREST INCOME
Loans, including fees		$	180,170			$	204,580			$	550,477			$	598,130
Investment securities:
Taxable			26,025				24,583				84,114				71,201
Tax-exempt			4,513				4,388				13,540				13,069
Dividends			1,421				2,063				5,103				5,998
Loans held for sale			1,539				2,694				4,727				9,771
Other interest income			141				432				460				1,339
Total Interest Income			213,809				238,740				658,421				699,508
INTEREST EXPENSE
Deposits			47,192				76,403				161,807				221,410
Short-term borrowings			12,877				17,786				44,093				51,734
Long-term debt			19,722				22,141				60,714				61,271
Total Interest Expense			79,791				116,330				266,614				334,415
Net Interest Income			134,018				122,410				391,807				365,093
Provision for loan losses			26,700				4,606				54,626				8,263
Net Interest Income After Provision for Loan Losses			107,318				117,804				337,181				356,830
OTHER INCOME
Service charges on deposit accounts			16,177				11,293				45,463				33,145
Other service charges and fees			9,598				8,530				27,320				23,746
Investment management and trust services			8,045				9,291				25,193				29,374
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
Total Other Income			30,615				36,743				100,445				112,813
OTHER EXPENSES
Salaries and employee benefits			55,310				52,505				164,786				164,353
Net occupancy expense			10,237				9,813				30,999				29,963
Operating risk loss			3,480				16,345				19,108				26,462
Data processing			3,242				3,131				9,604				9,550
Advertising			3,097				2,470				9,521				7,869
Equipment expense			3,061				3,438				9,907				10,589
Intangible amortization			1,730				1,995				5,386				6,176
Other			18,998				18,299				56,240				52,046
Total Other Expenses			99,155				107,996				305,551				307,008
Income Before Income Taxes			38,778				46,551				132,075				162,635
Income taxes			9,702				12,985				35,825				48,096
Net Income		$	29,076			$	33,566			$	96,250			$	114,539
PER-SHARE DATA:
Net income (basic)		$	0.17			$	0.19			$	0.55			$	0.66
Net income (diluted)			0.17				0.19				0.55				0.66
Cash dividends			0.150				0.150				0.450				0.448

See Notes to Consolidated Financial Statements

FULTON FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (UNAUDITED)

NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

(in thousands)

																		Accumulated
		Number of								Additional								Other
		Shares				Common				Paid-in				Retained				Comprehensive				Treasury
		Outstanding				Stock				Capital				Earnings				Income (Loss)				Stock				Total
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															96,250												96,250
Other comprehensive income																			511								511
Total comprehensive income																											96,761
Stock issued, including related tax benefits			1,184				1,251				(2,189	)											10,419				9,481
Stock-based compensation awards											1,671																1,671
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	)
Balance at September 30, 2008			174,687			$	480,810			$	1,253,851			$	159,320			$	(21,262	)		$	(268,809	)		$	1,603,910
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

		Nine Months Ended
		September 30
		2008				2007
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income		$	96,250			$	114,539
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses			54,626				8,263
Depreciation and amortization of premises and equipment			14,776				14,801
Net amortization of investment security premiums			372				1,726
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
Amortization of intangible assets			5,386				6,176
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	)
Total adjustments			70,775				128,314
Net cash provided by operating activities			167,025				242,853
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale			662,993				314,979
Proceeds from maturities of securities held to maturity			5,273				2,774
Proceeds from maturities of securities available for sale			546,407				366,308
Proceeds from sale of credit card portfolio			100,516				—
Purchase of securities held to maturity			(4,813	)			(1,986	)
Purchase of securities available for sale			(903,817	)			(739,377	)
(Increase) decrease in short-term investments			(29,036	)			8,515
Net increase in loans			(715,219	)			(589,419	)
Net purchases of premises and equipment			(20,944	)			(13,492	)
Net cash used in investing activities			(358,640	)			(651,698	)
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
Additions to long-term debt			344,690				723,633
Repayments of long-term debt			(166,934	)			(394,801	)
Increase in short-term borrowings			206,022				92,243
Dividends paid			(78,196	)			(77,113	)
Net proceeds from issuance of stock			9,461				6,570
Excess tax benefits from stock-based compensation expense			20				111
Acquisition of treasury stock			—				(18,227	)
Net cash provided by financing activities			126,173				391,133
Net Decrease in Cash and Due From Banks			(65,442	)			(17,712	)
Cash and Due From Banks at Beginning of Year			381,283				355,018
Cash and Due From Banks at End of Year		$	315,841			$	337,306
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest		$	287,902			$	325,042
Income taxes			67,264				52,355

See Notes to Consolidated Financial Statements

FULTON FINANCIAL CORPORATION

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 ended September 30, 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 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.

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								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

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

NOTE C – INVESTMENT SECURITIES

The following tables present the amortized cost and estimated fair values of investment securities:

						Gross				Gross				Estimated
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
		(in thousands)
Held to Maturity at September 30, 2008
U.S. Government sponsored agency securities		$	6,720			$	22			$	—			$	6,742
State and municipal securities			912				4				—				916
Corporate debt securities			25				—				—				25
Mortgage-backed securities			2,166				77				—				2,243
		$	9,823			$	103			$	—			$	9,926
Available for Sale at September 30, 2008
Equity securities		$	171,944			$	4,842			$	(5,737	)		$	171,049
U.S. Government securities			14,585				59				—				14,644
U.S. Government sponsored agency securities			76,952				1,632				(10	)			78,574
State and municipal securities			519,718				1,681				(9,520	)			511,879
Corporate debt securities			173,057				681				(41,855	)			131,883
Collateralized mortgage obligations			521,489				15,358				(107	)			536,740
Mortgage-backed securities			1,191,267				10,755				(3,160	)			1,198,862
Auction rate securities (1)			157,011				—				(3,930	)			153,081
		$	2,826,023			$	35,008			$	(64,319	)		$	2,796,712

						Gross				Gross				Estimated
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
		(in thousands)
Held to Maturity at December 31, 2007
U.S. Government sponsored agency securities		$	6,478			$	33			$	—			$	6,511
State and municipal securities			1,120				7				—				1,127
Corporate debt securities			25				—				—				25
Mortgage-backed securities			2,662				74				—				2,736
		$	10,285			$	114			$	—			$	10,399
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

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:

		Less Than 12 months								12 Months or Longer								Total
		Estimated				Unrealized				Estimated				Unrealized				Estimated				Unrealized
		Fair Value				Losses				Fair Value				Losses				Fair Value				Losses
		(in thousands)
U.S. Government sponsored agency securities		$	1,344			$	(1	)		$	528			$	(9	)		$	1,872			$	(10	)
State and municipal securities			198,135				(9,497	)			3,587				(23	)			201,722				(9,520	)
Corporate debt securities			87,817				(29,246	)			28,596				(12,609	)			116,413				(41,855	)
Collateralized mortgage obligations			24,099				(107	)			10				—				24,109				(107	)
Mortgage-backed securities			324,071				(2,000	)			99,041				(1,160	)			423,112				(3,160	)
Auction rate securities (1)			152,986				(3,930	)			—				—				152,986				(3,930	)
Total debt securities			788,452				(44,781	)			131,762				(13,801	)			920,214				(58,582	)
Equity securities			23,690				(4,674	)			4,010				(1,063	)			27,700				(5,737	)
		$	812,142			$	(49,455	)		$	135,772			$	(14,864	)		$	947,914			$	(64,319	)

As of September 30, 2008, the unrealized losses on the Corporation’s 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 in the above table were due to decreases in the values of stocks of financial institutions.

The Corporation evaluates whether unrealized losses on investment securities indicate other-than-temporary impairment. Based upon this evaluation, losses 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 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 due to the increasing severity and duration of 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 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 of $54.3 million.

In addition 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 securities were caused by decreases in the estimated fair values of investments in single-issuer and pooled trust preferred securities and subordinated debt securities issued by financial institutions. As with equity securities issued by financial institutions, the estimated fair value 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 related to an 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.

The following table presents the amortized cost and estimated fair values of corporate debt securities issued by financial institutions:

		September 30, 2008								December 31, 2007
		Amortized				Estimated				Amortized				Estimated
		cost				fair value				cost				fair value
		(in thousands)
Single-issuer trust preferred securities (1)		$	97,870			$	74,512			$	96,781			$	92,515
Subordinated debt			40,009				31,666				37,886				36,760
Pooled trust preferred securities			32,220				22,749				35,271				33,743
Total corporate debt securities issued by financial institutions		$	170,099			$	128,927			$	169,938			$	163,018

Based on management’s other-than-temporary impairment evaluations and the Corporation’s ability and intent to hold these investments for a reasonable period of time sufficient for a recovery of fair value, 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.

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
		September 30								September 30
		2008				2007				2008				2007
		(in thousands)
Stock-based compensation expense		$	606			$	811			$	1,671			$	2,069
Tax benefit			(108	)			(130	)			(234	)			(310	)
Stock-based compensation expense, net of tax		$	498			$	681			$	1,437			$	1,759

Under the Option Plans, stock options and restricted stock are granted to key employees at option prices 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 in the Option Plans and agreements, would result in the acceleration of the vesting period. As of September 30, 2008, 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 – 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 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 ended September 30:

		Pension Plan
		Three months ended								Nine months ended
		September 30								September 30
		2008				2007				2008				2007
		(in thousands)
Service cost (1)		$	36			$	394			$	110			$	1,508
Interest cost			816				769				2,448				2,515
Expected return on plan assets			(918	)			(901	)			(2,754	)			(3,018	)
Net amortization and deferral			—				—				—				233
Curtailment loss			—				—				—				58
Net periodic benefit (income) cost		$	(66	)		$	262			$	(196	)		$	1,296

		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 – 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, 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 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 deposit 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

In prior years, the Corporation had entered into forward-starting interest rate swaps in anticipation of the issuance 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.

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 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 approximately $135,000.

NOTE I – 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
		2008				2007
		(in thousands)
Commitments to extend credit		$	3,810,535			$	4,430,940
Standby letters of credit			778,811				727,171
Commercial letters of credit			35,605				26,208

As of September 30, 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.

Auction Rate Securities

During 2008, developments in the market for student loan 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 agreed to purchase ARCs from customer accounts upon notification from customers that they have liquidity needs or otherwise desire 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. 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, “Fair Value Measurements” for additional details related to the Corporation’s determination of fair value.

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 the three and nine months ended September 30, 2008, 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 the ARCs as available for sale investment securities at their estimated fair value. During the three and nine months ended September 30, 2008, the financial guarantee liability was reduced by an amount equal to the difference between the purchase price of the ARCs and their estimated fair value, or $1.5 million and $7.1 million, respectively.

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 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 from the time the Corporation acquired Resource Bank in 2004 through 2007. 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
						Reserves/
		Principal				Write-downs
		(in thousands)
Outstanding repurchase requests (1) (2)		$	9,900			$	(4,290	)
No repurchase request received – sold loans with identified potential misrepresentations of borrower information (1) (2)			12,300				(3,710	)
Repurchased loans (3)			11,544				(1,850	)
Foreclosed real estate (OREO) (4)			17,350				—
Total reserves/write-downs at September 30, 2008						$	(9,850	)

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

		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.

Management believes that the reserves recorded as of September 30, 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 J – 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. Although the adoption of Statement 157 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.

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.