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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





FORM 10-Q







|x | Quarterly Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934
|- | ---------------------------------------------------------------------------------------

For the Quarterly Period Ended June 30, 2008

Commission File Number
0-16421





PROVIDENT BANKSHARES CORPORATION

(Exact Name of Registrant as Specified in its Charter)







|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|Maryland                                                       |  | 52-1518642                             
|(State or Other Jurisdiction of Incorporation or Organization) |  | (I.R.S. Employer Identification Number)

114 East Lexington Street, Baltimore, Maryland 21202

(Address of Principal Executive Offices)

(410) 277-7000

(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  x    No   ̈

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 definition of accelerated filer, large
accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.

Large accelerated
filer  x    Accelerated filer   ̈    Non-accelerated filer   ̈    Smaller reporting Company   ̈

Indicate
by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ̈    No  x

At August 14, 2008, the Registrant had 33,172,244 shares of $1.00 par value common stock outstanding.









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##### Table of Contents

TABLE OF CONTENTS



|                                                                                                                      |  |                                                                                       |  |   
|--------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------- |  | --
|PART I - FINANCIAL INFORMATION                                                                                        |  |                                                                                      
|                                                                                                                      |  |                                                                                      
|Item 1.                                                                                                               |  | Financial Statements                                                                  |  |   
|                                                                                                                      | 
|Condensed Consolidated Statements of Condition  Unaudited June 30, 2008 and 2007 and December 
31, 2007              |  | 4                                                                                    
|                                                                                                                      | 
|Condensed Consolidated Statements of Operations  Unaudited three and six month periods ended June 
30, 2008 and 2007 |  | 5                                                                                    
|                                                                                                                      | 
|Condensed Consolidated Statements of Cash Flows  Unaudited six month periods ended June 
30, 2008 and 2007           |  | 6                                                                                    
|                                                                                                                      | 
|Notes to Condensed Consolidated Financial Statements  Unaudited                                                      |  | 7                                                                                    
|                                                                                                                      |  |                                                                                      
|Item 2.                                                                                                               |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 28
|                                                                                                                      |  |                                                                                      
|Item 3.                                                                                                               |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 53
|                                                                                                                      |  |                                                                                      
|Item 4.                                                                                                               |  | Controls and Procedures                                                               |  | 53
|                                                                                                                     
|PART II - OTHER INFORMATION                                                                                          
|                                                                                                                      |  |                                                                                      
|Item 1.                                                                                                               |  | Legal Proceedings                                                                     |  | 53
|                                                                                                                      |  |                                                                                      
|Item 1A.                                                                                                              |  | Risk Factors                                                                          |  | 53
|                                                                                                                      |  |                                                                                      
|Item 2.                                                                                                               |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 54
|                                                                                                                      |  |                                                                                      
|Item 3.                                                                                                               |  | Defaults upon Senior Securities                                                       |  | 54
|                                                                                                                      |  |                                                                                      
|Item 4.                                                                                                               |  | Submission of Matters to a Vote of Security Holders                                   |  | 54
|                                                                                                                      |  |                                                                                      
|Item 5.                                                                                                               |  | Other Information                                                                     |  | 55
|                                                                                                                      |  |                                                                                      
|Item 6.                                                                                                               |  | Exhibits                                                                              |  | 55
|                                                                                                                      | 
|SIGNATURES                                                                                                            |  | 56                                                                                   



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Forward-looking Statements

This report, as well as other written communications made from time to time by Provident Bankshares Corporation and its subsidiaries (the Corporation) (including, without limitation, the Corporations 2007 Annual Report to
Stockholders) and oral communications made from time to time by authorized officers of the Corporation, may contain statements relating to the future results of the Corporation (including certain projections and business trends) that are considered
forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995 (the PSLRA). Such forward-looking statements may be identified by the use of such words as believe, expect,
anticipate, should, planned, estimated, intend and potential. Examples of forward-looking statements include, but are not limited to, possible or assumed estimates with respect
to the financial condition, expected or anticipated revenue, and results of operations and business of the Corporation, including earnings growth determined using U.S. generally accepted accounting principles (GAAP); revenue growth in
retail banking, lending and other areas; origination volume in the Corporations consumer, commercial and other lending businesses; asset quality and levels of non-performing assets; impairment charges with respect to investment securities;
current and future capital management programs; non-interest income levels, including fees from services and product sales; tangible capital generation; market share; expense levels; and other business operations and strategies. For these
statements, the Corporation claims the protection of the safe harbor for forward-looking statements contained in the PSLRA.

The Corporation cautions you
that a number of important factors could cause actual results to differ materially from those currently anticipated in any forward-looking statement. Such factors include, but are not limited to: the factors identified in the Corporations Form
10-K for the fiscal year ended December 31, 2007 under the headings Forward-Looking Statements and Item 1A. Risk Factors, prevailing economic conditions, either nationally or locally in some or all areas in which the
Corporation conducts business or conditions in the securities markets or the banking industry; changes in interest rates, deposit flows, loan demand, real estate values and competition, which can materially affect, among other things, consumer
banking revenues, revenues from sales on non-deposit investment products, origination levels in the Corporations lending businesses and the level of defaults, losses and prepayments on loans made by the Corporation, whether held in portfolio
or sold in the secondary markets; changes in the quality or composition of the loan or investment portfolios; the Corporations ability to successfully integrate any assets, liabilities, customers, systems and management personnel the
Corporation may acquire into its operations and its ability to realize related revenue synergies and cost savings within expected time frames; the Corporations timely development of new and competitive products or services in a changing
environment, and the acceptance of such products or services by customers; operational issues and/or capital spending necessitated by the potential need to adapt to industry changes in information technology systems, on which it is highly dependent;
changes in accounting principles, policies, and guidelines; changes in any applicable law, rule, regulation or practice with respect to tax or legal issues; risks and uncertainties related to mergers and related integration and restructuring
activities; conditions in the securities markets or the banking industry; changes in the quality or composition of the investment portfolio; litigation liabilities, including costs, expenses, settlements and judgments; or the outcome of other
matters before regulatory agencies, whether pending or commencing in the future; and other economic, competitive, governmental, regulatory and technological factors affecting the Corporations operations, pricing, products and services.
Additionally, the timing and occurrence or non-occurrence of events may be subject to circumstances beyond the Corporations control. Readers are cautioned not to place undue reliance on these forward-looking statements which are made as of the
date of this report, and, except as may be required by applicable law or regulation, the Corporation assumes no obligation to update the forward-looking statements or to update the reasons why actual results could differ from those projected in the
forward-looking statements.



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##### Table of Contents

PART I  FINANCIAL INFORMATION



|Item 1. | Financial Statements
|------- | --------------------

Provident Bankshares Corporation and Subsidiaries

Condensed Consolidated Statements of Condition



|                                                                                                                                                                                       |  |              |           |   |                  |   |           |              |  |   |           |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | --------- | - | ---------------- | - | --------- | ------------ |  | - | --------- | -
|(dollars in thousands, except per share and share amounts)                                                                                                                             |  | June 30,2008 |           |   | December 31,2007 |   |           | June 30,2007 | 
|                                                                                                                                                                                       |  | (Unaudited)  |           |   |                  |   |           | (Unaudited)  | 
|Assets:                                                                                                                                                                                |  |              |           |   |                  |   |           |              |  |   |           |  
|Cash and due from banks                                                                                                                                                                |  | $            | 131,438   |   |                  | $ | 140,348   |              |  | $ | 147,051   |  
|Short-term investments                                                                                                                                                                 |  |              | 1,172     |   |                  |   | 1,970     |              |  |   | 2,060     |  
|Mortgage loans held for sale                                                                                                                                                           |  |              | 8,080     |   |                  |   | 8,859     |              |  |   | 12,919    |  
|Securities available for sale                                                                                                                                                          |  |              | 1,333,870 |   |                  |   | 1,421,299 |              |  |   | 1,532,230 |  
|Securities held to maturity                                                                                                                                                            |  |              | 47,076    |   |                  |   | 47,265    |              |  |   | 48,278    |  
|Loans                                                                                                                                                                                  |  |              | 4,202,407 |   |                  |   | 4,215,326 |              |  |   | 3,928,086 |  
|Less allowance for loan losses                                                                                                                                                         |  |              | 58,174    |   |                  |   | 55,269    |              |  |   | 45,769    |  
|                                                                                                                                                                                       |  |              |           |   |                  |   |           |              |  |   |           |  
|Net loans                                                                                                                                                                              |  |              | 4,144,233 |   |                  |   | 4,160,057 |              |  |   | 3,882,317 |  
|                                                                                                                                                                                       |  |              |           |   |                  |   |           |              |  |   |           |  
|Premises and equipment, net                                                                                                                                                            |  |              | 59,494    |   |                  |   | 59,979    |              |  |   | 62,955    |  
|Accrued interest receivable                                                                                                                                                            |  |              | 26,702    |   |                  |   | 33,883    |              |  |   | 33,264    |  
|Goodwill                                                                                                                                                                               |  |              | 253,906   |   |                  |   | 253,906   |              |  |   | 253,906   |  
|Intangible assets                                                                                                                                                                      |  |              | 5,519     |   |                  |   | 6,152     |              |  |   | 8,065     |  
|Other assets                                                                                                                                                                           |  |              | 370,565   |   |                  |   | 331,328   |              |  |   | 280,334   |  
|                                                                                                                                                                                       |  |              |           |   |                  |   |           |              |  |   |           |  
|Total assets                                                                                                                                                                           |  | $            | 6,382,055 |   |                  | $ | 6,465,046 |              |  | $ | 6,263,379 |  
|                                                                                                                                                                                       |  |              |           |   |                  |   |           |              |  |   |           |  
|Liabilities:                                                                                                                                                                           |  |              |           |   |                  |   |           |              |  |   |           |  
|Deposits:                                                                                                                                                                              |  |              |           |   |                  |   |           |              |  |   |           |  
|Noninterest-bearing                                                                                                                                                                    |  | $            | 687,915   |   |                  | $ | 676,260   |              |  | $ | 766,281   |  
|Interest-bearing                                                                                                                                                                       |  |              | 3,672,565 |   |                  |   | 3,503,260 |              |  |   | 3,422,007 |  
|                                                                                                                                                                                       |  |              |           |   |                  |   |           |              |  |   |           |  
|Total deposits                                                                                                                                                                         |  |              | 4,360,480 |   |                  |   | 4,179,520 |              |  |   | 4,188,288 |  
|                                                                                                                                                                                       |  |              |           |   |                  |   |           |              |  |   |           |  
|Short-term borrowings                                                                                                                                                                  |  |              | 615,854   |   |                  |   | 861,395   |              |  |   | 654,030   |  
|Long-term debt                                                                                                                                                                         |  |              | 784,371   |   |                  |   | 771,683   |              |  |   | 756,770   |  
|Accrued expenses and other liabilities                                                                                                                                                 |  |              | 48,184    |   |                  |   | 96,677    |              |  |   | 40,124    |  
|                                                                                                                                                                                       |  |              |           |   |                  |   |           |              |  |   |           |  
|Total liabilities                                                                                                                                                                      |  |              | 5,808,889 |   |                  |   | 5,909,275 |              |  |   | 5,639,212 |  
|                                                                                                                                                                                       |  |              |           |   |                  |   |           |              |  |   |           |  
|Stockholders Equity:                                                                                                                                                                  |  |              |           |   |                  |   |           |              |  |   |           |  
|Preferred Stock (par value $1.00) authorized 5,000,000 shares; issued 51,215 shares at June 30, 2008, liquidation preference $1,000 per
share                                          |  |              | 51,215    |   |                  |   |          |              |  |   |          |  
|Common stock (par value $1.00) authorized 100,000,000 shares; issued 33,172,640, 31,621,956 and 32,268,128 shares at June 30,
2008, December 31, 2007, and June 30, 2007, respectively |  |              | 33,173    |   |                  |   | 31,622    |              |  |   | 32,268    |  
|Additional paid-in capital                                                                                                                                                             |  |              | 360,017   |   |                  |   | 347,603   |              |  |   | 362,943   |  
|Retained earnings                                                                                                                                                                      |  |              | 221,814   |   |                  |   | 244,723   |              |  |   | 264,641   |  
|Net accumulated other comprehensive loss                                                                                                                                               |  |              | (93,053   | ) |                  |   | (68,177   | )            |  |   | (35,685   | )
|                                                                                                                                                                                       |  |              |           |   |                  |   |           |              |  |   |           |  
|Total stockholders equity                                                                                                                                                             |  |              | 573,166   |   |                  |   | 555,771   |              |  |   | 624,167   |  
|                                                                                                                                                                                       |  |              |           |   |                  |   |           |              |  |   |           |  
|Total liabilities and stockholders equity                                                                                                                                             |  | $            | 6,382,055 |   |                  | $ | 6,465,046 |              |  | $ | 6,263,379 |  
|                                                                                                                                                                                       |  |              |           |   |                  |   |           |              |  |   |           |  

The accompanying notes are an integral part of these statements.



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Provident Bankshares Corporation and Subsidiaries

Condensed Consolidated Statements of OperationsUnaudited



|                                                    |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |         |  
|--------------------------------------------------- |  | -------------------------- | ------- | - | ------------------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                    |  | Three Months EndedJune 30, |         |   | Six Months EndedJune 30, |  
|(dollars in thousands, except per share data)       |  | 2008                       |         |   | 2007                     |   |        | 2008 |  |   | 2007    |  
|Interest Income:                                    |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Loans, including fees                               |  | $                          | 59,952  |   |                          | $ | 70,278 |      |  | $ | 126,321 |   |  | $ | 139,532 |  
|Investment securities                               |  |                            | 19,598  |   |                          |   | 20,886 |      |  |   | 39,329  |   |  |   | 43,264  |  
|Tax-advantaged loans and securities                 |  |                            | 1,612   |   |                          |   | 1,751  |      |  |   | 3,251   |   |  |   | 3,218   |  
|Short-term investments                              |  |                            | 17      |   |                          |   | 45     |      |  |   | 53      |   |  |   | 142     |  
|                                                    |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Total interest income                               |  |                            | 81,179  |   |                          |   | 92,960 |      |  |   | 168,954 |   |  |   | 186,156 |  
|                                                    |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Interest Expense:                                   |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Deposits                                            |  |                            | 25,010  |   |                          |   | 26,715 |      |  |   | 53,220  |   |  |   | 52,269  |  
|Short-term borrowings                               |  |                            | 3,292   |   |                          |   | 6,829  |      |  |   | 9,381   |   |  |   | 14,571  |  
|Long-term debt                                      |  |                            | 6,874   |   |                          |   | 10,868 |      |  |   | 15,361  |   |  |   | 21,833  |  
|                                                    |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Total interest expense                              |  |                            | 35,176  |   |                          |   | 44,412 |      |  |   | 77,962  |   |  |   | 88,673  |  
|                                                    |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Net interest income                                 |  |                            | 46,003  |   |                          |   | 48,548 |      |  |   | 90,992  |   |  |   | 97,483  |  
|Less provision for loan losses                      |  |                            | 6,400   |   |                          |   | 4,792  |      |  |   | 9,514   |   |  |   | 5,844   |  
|                                                    |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Net interest income after provision for loan losses |  |                            | 39,603  |   |                          |   | 43,756 |      |  |   | 81,478  |   |  |   | 91,639  |  
|                                                    |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Non-Interest Income:                                |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Service charges on deposit accounts                 |  |                            | 22,277  |   |                          |   | 24,502 |      |  |   | 43,308  |   |  |   | 46,681  |  
|Commissions and fees                                |  |                            | 1,400   |   |                          |   | 1,844  |      |  |   | 2,962   |   |  |   | 3,506   |  
|Impairment on investment securities                 |  |                            | (20,748 | ) |                          |   |       |      |  |   | (63,403 | ) |  |   |        |  
|Net gains                                           |  |                            | 8,151   |   |                          |   | 420    |      |  |   | 7,960   |   |  |   | 1,623   |  
|Net derivative activities                           |  |                            | 57      |   |                          |   | (357   | )    |  |   | 96      |   |  |   | (214    | )
|Other non-interest income                           |  |                            | 5,180   |   |                          |   | 4,676  |      |  |   | 10,270  |   |  |   | 9,358   |  
|                                                    |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Total non-interest income                           |  |                            | 16,317  |   |                          |   | 31,085 |      |  |   | 1,193   |   |  |   | 60,954  |  
|                                                    |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Non-Interest Expense:                               |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Salaries and employee benefits                      |  |                            | 26,262  |   |                          |   | 26,699 |      |  |   | 52,944  |   |  |   | 54,628  |  
|Occupancy expense, net                              |  |                            | 5,697   |   |                          |   | 5,891  |      |  |   | 11,669  |   |  |   | 11,995  |  
|Furniture and equipment expense                     |  |                            | 3,985   |   |                          |   | 4,011  |      |  |   | 7,738   |   |  |   | 7,796   |  
|External processing fees                            |  |                            | 4,974   |   |                          |   | 5,041  |      |  |   | 10,222  |   |  |   | 10,131  |  
|Restructuring activities                            |  |                            | (34     | ) |                          |   | 481    |      |  |   | 40      |   |  |   | 1,348   |  
|Other non-interest expense                          |  |                            | 9,489   |   |                          |   | 10,505 |      |  |   | 19,191  |   |  |   | 21,498  |  
|                                                    |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Total non-interest expense                          |  |                            | 50,373  |   |                          |   | 52,628 |      |  |   | 101,804 |   |  |   | 107,396 |  
|                                                    |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Income (loss) before income taxes                   |  |                            | 5,547   |   |                          |   | 22,213 |      |  |   | (19,133 | ) |  |   | 45,197  |  
|Income tax expense (benefit)                        |  |                            | (4,677  | ) |                          |   | 6,691  |      |  |   | (11,735 | ) |  |   | 13,561  |  
|                                                    |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Net income (loss)                                   |  | $                          | 10,224  |   |                          | $ | 15,522 |      |  | $ | (7,398  | ) |  | $ | 31,636  |  
|                                                    |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |         |  
|                                                    |  |                            |         |  
|Net income (loss)                                   |  | $                          | 10,224  |   |                          | $ | 15,522 |      |  | $ | (7,398  | ) |  | $ | 31,636  |  
|Beneficial conversion feature - preferred stock     |  |                            | 1,463   |   |                          |   |       |      |  |   | 1,463   |   |  |   |        |  
|                                                    |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Net income (loss) available to common stockholders  |  | $                          | 8,761   |   |                          | $ | 15,522 |      |  | $ | (8,861  | ) |  | $ | 31,636  |  
|                                                    |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Net Income (Loss) Per Share Amounts:                |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Basic                                               |  | $                          | 0.27    |   |                          | $ | 0.48   |      |  | $ | (0.28   | ) |  | $ | 0.98    |  
|Diluted                                             |  |                            | 0.27    |   |                          |   | 0.48   |      |  |   | (0.28   | ) |  |   | 0.98    |  

The accompanying notes are an integral part of these statements.



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##### Table of Contents

Provident Bankshares Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows  Unaudited



|                                                                                  |  |                          |          |   |      |   |          |  
|--------------------------------------------------------------------------------- |  | ------------------------ | -------- | - | ---- | - | -------- | -
|                                                                                  |  | Six Months EndedJune 30, |         
|(in thousands)                                                                    |  | 2008                     |          |   | 2007 |  
|Operating Activities:                                                             |  |                          |          |   |      |   |          |  
|Net income (loss)                                                                 |  | $                        | (7,398   | ) |      | $ | 31,636   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                          |          |   |      |   |          |  
|Depreciation and amortization                                                     |  |                          | 8,450    |   |      |   | 9,854    |  
|Provision for loan losses                                                         |  |                          | 9,514    |   |      |   | 5,844    |  
|Provision for deferred income tax benefit                                         |  |                          | (24,533  | ) |      |   | (1,614   | )
|Impairment on investment securities                                               |  |                          | 63,403   |   |      |   |         |  
|Net gains                                                                         |  |                          | (7,960   | ) |      |   | (1,623   | )
|Net derivative activities                                                         |  |                          | (96      | ) |      |   | 214      |  
|Originated loans held for sale                                                    |  |                          | (49,553  | ) |      |   | (64,066  | )
|Proceeds from sales of loans held for sale                                        |  |                          | 50,560   |   |      |   | 62,118   |  
|Restructuring activities                                                          |  |                          | 40       |   |      |   | 1,348    |  
|Cash payments for restructuring activities                                        |  |                          | (159     | ) |      |   | (658     | )
|Share based payments                                                              |  |                          | 1,518    |   |      |   | 961      |  
|Net decrease (increase) in accrued interest receivable and other assets           |  |                          | 7,878    |   |      |   | (5,330   | )
|Net increase in accrued expenses and other liabilities                            |  |                          | 300      |   |      |   | 4,607    |  
|                                                                                  |  |                          |          |   |      |   |          |  
|Total adjustments                                                                 |  |                          | 59,362   |   |      |   | 11,655   |  
|                                                                                  |  |                          |          |   |      |   |          |  
|Net cash provided by operating activities                                         |  |                          | 51,964   |   |      |   | 43,291   |  
|                                                                                  |  |                          |          |   |      |   |          |  
|Investing Activities:                                                             |  |                          |          |   |      |   |          |  
|Principal collections and maturities of securities available for sale             |  |                          | 59,553   |   |      |   | 85,406   |  
|Principal collections and maturities of securities held to maturity               |  |                          |         |   |      |   | 52,048   |  
|Proceeds from sales of securities available for sale                              |  |                          | 8,690    |   |      |   | 82,938   |  
|Purchases of securities available for sale                                        |  |                          | (77,779  | ) |      |   | (139,019 | )
|Loan originations and purchases less principal collections                        |  |                          | 7,688    |   |      |   | (66,924  | )
|Purchases of premises and equipment                                               |  |                          | (6,434   | ) |      |   | (3,548   | )
|Sale of branch facility                                                           |  |                          |         |   |      |   | 1,967    |  
|                                                                                  |  |                          |          |   |      |   |          |  
|Net cash provided (used) by investing activities                                  |  |                          | (8,282   | ) |      |   | 12,868   |  
|                                                                                  |  |                          |          |   |      |   |          |  
|Financing Activities:                                                             |  |                          |          |   |      |   |          |  
|Net increase in deposits                                                          |  |                          | 131,411  |   |      |   | 48,176   |  
|Net decrease in short-term borrowings                                             |  |                          | (245,541 | ) |      |   | (4,857   | )
|Proceeds from long-term debt                                                      |  |                          | 65,000   |   |      |   | 155,000  |  
|Payments and maturities of long-term debt                                         |  |                          | (100,265 | ) |      |   | (226,794 | )
|Net proceeds from issuance of subordinated debt                                   |  |                          | 47,731   |   |      |   |         |  
|Proceeds from exercise of stock options                                           |  |                          | 127      |   |      |   | 3,139    |  
|Net proceeds from issuance of common stock                                        |  |                          | 13,116   |   |      |   |         |  
|Net proceeds from issuance of preferred stock                                     |  |                          | 49,266   |   |      |   |         |  
|Tax (expenses) benefits associated with share based payments                      |  |                          | (156     | ) |      |   | 257      |  
|Purchase of treasury stock                                                        |  |                          | (154     | ) |      |   | (12,006  | )
|Cash dividends paid on common stock                                               |  |                          | (13,925  | ) |      |   | (19,875  | )
|                                                                                  |  |                          |          |   |      |   |          |  
|Net cash used by financing activities                                             |  |                          | (53,390  | ) |      |   | (56,960  | )
|                                                                                  |  |                          |          |   |      |   |          |  
|Decrease in cash and cash equivalents                                             |  |                          | (9,708   | ) |      |   | (801     | )
|Cash and cash equivalents at beginning of period                                  |  |                          | 142,318  |   |      |   | 149,912  |  
|                                                                                  |  |                          |          |   |      |   |          |  
|Cash and cash equivalents at end of period                                        |  | $                        | 132,610  |   |      | $ | 149,111  |  
|                                                                                  |  |                          |          |   |      |   |          |  
|Supplemental Disclosures:                                                         |  |                          |          |   |      |   |          |  
|Interest paid, net of amount credited to deposit accounts                         |  | $                        | 47,341   |   |      | $ | 51,320   |  
|Income taxes paid                                                                 |  |                          | 6,802    |   |      |   | 12,826   |  
|Beneficial conversion feature - Preferred stock                                   |  |                          | 1,463    |   |      |   |         |  
|Impairment of premises and equipment                                              |  |                          | 267      |   |      |   | 357      |  

The accompanying notes are an integral part of these statements.



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##### Table of Contents

Provident Bankshares Corporation and Subsidiaries

Notes to Condensed Consolidated Financial StatementsUnaudited

June 30, 2008

NOTE 1SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Provident Bankshares Corporation (the Corporation), a Maryland corporation, is the bank holding company for Provident Bank (the Bank), a Maryland
chartered stock commercial bank. The Bank serves individuals and businesses through a network of banking offices and ATMs in Maryland, Virginia, and southern York County, Pennsylvania. Related financial services are offered through its wholly owned
subsidiaries. Securities brokerage, investment management and related insurance services are available through Provident Investment Company and leases through Court Square Leasing.

The accounting and reporting policies of the Corporation conform with U.S. generally accepted accounting principles (GAAP) and prevailing practices within the banking industry for interim financial
information and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required for complete financial statements and prevailing practices within the banking industry. The following summary of significant
accounting policies of the Corporation is presented to assist the reader in understanding the financial and other data presented in this report. Operating results for the three and six months ended June 30, 2008 are not necessarily indicative
of the results that may be expected for any future quarters or for the year ending December 31, 2008. For further information, refer to the Consolidated Financial Statements and notes thereto included in the Corporations Annual Report on
Form 10-K for the year ended December 31, 2007 as filed with the Securities and Exchange Commission (SEC) on February 29, 2008.

Principles of Consolidation and Basis of Presentation

The unaudited Condensed Consolidated Financial Statements include the accounts of the
Corporation and its wholly owned subsidiary, Provident Bank and its subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation. These unaudited Condensed Consolidated Financial Statements are prepared
in accordance with GAAP and reflect all adjustments which are, in the opinion of management, necessary to a fair statement of our results for the interim periods presented. All such adjustments are of a normal recurring nature.

Certain prior periods and prior years amounts in the unaudited Condensed Consolidated Financial Statements have been reclassified to conform to the presentation
used for the current period. These reclassifications have no effect on stockholders equity or net income as previously reported.

Use of Estimates

The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities for the reporting periods. Management evaluates estimates on an on-going basis and believes the following represent its more significant judgments and
estimates used in preparation of its consolidated financial statements: allowance for loan losses, non-accrual loans, other real estate owned, estimates of fair value and intangible assets associated with mergers, other-than-temporary impairment of
investment securities, pension and post-retirement benefits, asset prepayment rates, goodwill and intangible assets, share-based payment, derivative financial instruments, litigation and income taxes. Management bases its estimates on historical
experience and various other factors and assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily
apparent from other sources. Each estimate and its financial impact, to the extent significant to financial results, is discussed in the audited Consolidated Financial Statements or in the notes to the audited Consolidated Financial Statements as
included in the Corporations Annual Report on Form 10-K for the year ended December 31, 2007. It is at least reasonably possible that each of the Corporations estimates could change in the near term or that actual results may differ
from these estimates under different assumptions or conditions, resulting in a change that could be material to the Corporations unaudited Condensed Consolidated Financial Statements.



7



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##### Table of Contents

Other Changes in Accounting Principles

Effective January 1, 2008, the Corporation adopted the Emerging Issues Task Force (EITF) No. 06-4, Accounting for Deferred Compensation and Postretirement Benefits Aspects of Endorsement
Split-Dollar Life Insurance Arrangements (EITF 06-4). The issue addresses the accounting for the liability and related compensation costs for endorsement split-dollar life insurance arrangements that provide benefits to employees
that extend to postretirement periods. The Corporation has split-dollar arrangements that provide certain postretirement death benefits to certain employees. Under the provisions of EITF 06-4, the application of this guidance was recognized through
a $122 thousand cumulative adjustment of beginning retained earnings.

In December 2007, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141 (revised 2007), Business Combinations (SFAS No. 141R), which will be effective for business combinations occurring on or after December 15,
2008. Early adoption is prohibited. The statement provides guidance on the concept of control of another business and provides further guidance regarding the definition of a business. It further provides an acquisition model which
must be used to account for a business combination including the measurement of the fair value of the acquisition, treatment of transaction costs, contingent consideration, the recognition and measurement of assets, liabilities and noncontrolling
interests, treatment of partial acquisitions and determination of goodwill.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling
Interest in Consolidated Financial Statements (SFAS No. 160), which will be effective for business combinations occurring on or after December 15, 2008. Early adoption is prohibited. This statement applies to
the accounting for noncontrolling interests, previously referred to as minority interests, and transactions with noncontrolling interest holders in consolidated financial statements.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities (SFAS No. 161), which will be effective for fiscal years and interim
periods beginning after November 15, 2008. The statement amends and expands the disclosure requirements of SFAS No. 133 to provide an enhanced understanding of an entitys uses of derivative instruments, how the derivatives are
accounted for and how the derivatives instruments and related hedged items affect an entitys financial position, financial performance and cash flows. The Corporation is currently evaluating the disclosure requirements of this guidance and any
implications it may have on the results of operations of the Corporation.

In June 2008, the FASB issued FSP EITF 03-6-1, Determining Whether
Instruments Granted in Share-Based Payment Transactions are Participating Securities (FSP EITF 03-6-1), which will be effective for fiscal years and interim periods beginning after December 15, 2008, with early adoption
prohibited. This FSP requires unvested share-based payments to entitled employees that receive nonrefundable dividends to also be considered participating securities. The Corporation is currently evaluating the requirements and implications of this
guidance.

NOTE 2FAIR VALUE MEASUREMENTS

Effective January 1, 2008, the Corporation adopted SFAS No. 157  Fair Value Measurements (SFAS No. 157). This statement defines the concept of fair value, establishes a framework for measuring
fair value in GAAP, and expands disclosures about fair value measurements. SFAS No. 157 applies only to fair value measurements required or permitted under current accounting pronouncements, but does not require any new fair value measurements.
Under FASB Staff Position No. 157-2, portions of SFAS No. 157 have been deferred until years beginning after November 15, 2008 for all nonfinancial assets and nonfinancial liabilities recognized or disclosed at fair value in the
financial statement on a recurring basis. Therefore, the Corporation has partially adopted the provisions of SFAS No. 157. Fair value is defined as the price to sell an asset or to transfer a liability in an orderly transaction between willing
market participants as of the measurement date. SFAS No. 157 establishes a framework for measuring fair value that considers the attributes specific to particular assets or liabilities and establishes a three-level hierarchy for determining
fair value based on the transparency of inputs to each valuation as of the fair value measurement date. The statement also expands disclosures about financial instruments that are measured at fair value and eliminates the use of large position
discounts for financial instruments quoted in active markets. The disclosures emphasis is on the inputs used to measure fair value and the effect on the measurement on earnings for the period. The adoption of SFAS No. 157 did not have any
effect on the Corporations financial position or results of operations.



8



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##### Table of Contents

The Corporation has an established and documented process for determining fair values. Fair value is based on quoted
market prices, when available. If listed prices or quotes are not available, fair value is based on fair value models that use market participant or independently sourced market data, which include discount rate, interest rate yield curves,
prepayment speeds, bond ratings, credit risk, loss severities, default rates and expected cash flow assumptions. In addition, valuation adjustments may be made in the determination of fair value. These fair value adjustments may include amounts to
reflect counterparty credit quality, creditworthiness, liquidity and other unobservable inputs that are applied consistently over time. These adjustments are estimated and therefore, subject to managements judgment, and at times, may be
necessary to mitigate the possibility of error or revision in the model-based estimate of the fair value provided by the model. The Corporation has various controls in place to ensure that the valuations are appropriate, including a review and
approval of the valuation models, benchmarking, comparison to similar products and reviews of actual cash settlements. The methods described above may produce fair value calculations that may not be indicative of the net realizable value or
reflective of future fair values. While the Corporation believes its valuation methods are consistent with other financial institutions, the use of different methods or assumptions to determine fair values could result in different estimates of fair
value.

SFAS No. 157 establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based on the
inputs used to value the particular asset or liability at the measurement date. The three levels are defined as follows:



| |  |  | Level 1  inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 2  inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted prices of identical or similar
assets or liabilities in markets that are not active, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 3  inputs to the valuation methodology are unobservable and significant to the fair value measurement.
| | - |  | -------------------------------------------------------------------------------------------------------------

Each financial instruments level assignment within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value
measurement for that particular category.

The following is a description of the valuation methodologies used for instruments measured at fair value, as
well as the general classification of each instrument under the valuation hierarchy.

Assets

Loans held for sale

Loans held for sale are classified as
Level 3 because they are valued based on the unobservable contractual terms established with a third party purchaser who processes and purchases the loans at their face amount.

Investment securities

When quoted prices are available in an active market, securities are classified as
Level 1 within the valuation hierarchy. These securities include highly liquid government bonds and U.S. agency backed mortgage products. Fair values that are estimated by using pricing models, quoted prices of securities with similar
characteristics, or discounted cash flows are generally classified within Level 2 of the valuation hierarchy and include certain corporate obligations and municipal debt obligations. In certain cases where there is limited activity or less
transparency to the valuation inputs, securities are classified as Level 3 within the valuation hierarchy. These securities include certain asset-backed securities, non-agency mortgage-backed securities and pooled trust preferred securities.

Derivatives

The Corporations open
derivative positions are valued using third party developed models that use as their basis observable market data or inputs developed by the third party. These derivatives are considered within Level 2 of the valuation hierarchy. Examples of these
derivatives include interest rate swaps, caps and floors where the indices, correlation and contractual rates may be unobservable. Exchange-traded derivatives, if applicable, are valued using quoted prices and classified within Level 1 of the
valuation hierarchy. At June 30, 2008, the Corporation did not have any exchange-traded derivatives.

Cash surrender value of life insurance
contracts

Cash surrender values are provided by the insurance carrier on a periodic basis. The values approximate the fair value of these policies.
The values assigned the individual policies, which are not actively traded on any exchange, are not observable and are considered within Level 3 of the valuation hierarchy. The fair value determined by each insurance carrier is based on the cash
surrender values of each policy where the Corporation is the beneficiary.



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##### Table of Contents

The following table presents the financial instruments measured at fair value on a recurring basis as of June 30,
2008 on the Condensed Consolidated Statements of Condition utilizing the SFAS No. 157 hierarchy discussed on the previous pages:



|                                |  |                  |           |         |   |         |  |         |         |  |   |        
|------------------------------- |  | ---------------- | --------- | ------- | - | ------- |  | ------- | ------- |  | - | -------
|                                |  | At June 30, 2008
|(in thousands)                  |  | Total            |           | Level 1 |   | Level 2 |  | Level 3
|Mortgage loans held for sale    |  | $                | 8,080     |         | $ |        |  | $       |        |  | $ | 8,080  
|Securities available for sale   |  |                  | 1,333,870 |         |   | 592,559 |  |         | 254,496 |  |   | 486,815
|Derivatives                     |  |                  | 5,220     |         |   |        |  |         | 5,220   |  |   |       
|Bank owned life insurance       |  |                  | 156,196   |         |   |        |  |         |        |  |   | 156,196
|                                |  |                  |           |         |   |         |  |         |         |  |   |        
|Total assets at fair value      |  | $                | 1,503,366 |         | $ | 592,559 |  | $       | 259,716 |  | $ | 651,091
|                                |  |                  |           |         |   |         |  |         |         |  |   |        
|Other liabilities               |  |                  |           |         |   |         |  |         |         |  |   |        
|Derivatives                     |  | $                | 292       |         | $ |        |  | $       | 292     |  | $ |       
|                                |  |                  |           |         |   |         |  |         |         |  |   |        
|Total liabilities at fair value |  | $                | 292       |         | $ |        |  | $       | 292     |  | $ |       
|                                |  |                  |           |         |   |         |  |         |         |  |   |        

Changes in Level 3 fair value measurements

The tables below include a roll forward of the Statement of Financial Condition amounts for the six months ending June 30, 2008, including changes in fair value for
financial instruments within Level 3 of the valuation hierarchy. Level 3 financial instruments typically include unobservable components, but may also include some observable components that may be validated to external sources. The gains or
(losses) in the following table may include changes to fair value due in part to observable factors that may be part of the valuation methodology.

Assets and liabilities measured at fair value on a recurring basis



|                                                                                                                                 |  |                            |        |   |                             |   |         |                         |  |   |        
|-------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------- | ------ | - | --------------------------- | - | ------- | ----------------------- |  | - | -------
|(in thousands)                                                                                                                   |  | Mortgageloans heldfor sale |        |   | Securitiesavailable forsale |   |         | Bankownedlife insurance
|Balance at December 31, 2007                                                                                                     |  | $                          | 8,859  |   |                             | $ | 519,278 |                         |  | $ | 153,355
|Total net gains (losses) for the year included in:                                                                               |  |                            |        |   |                             |   |         |                         |  |   |        
|Net gains (losses)                                                                                                               |  |                            | 228    |   |                             |   | (63,403 | )                       |  |   | 2,841  
|Other comprehensive loss                                                                                                         |  |                            |       |   |                             |   | (29,293 | )                       |  |   |       
|Purchases, sales or settlements, net                                                                                             |  |                            | (1,007 | ) |                             |   | (8,952  | )                       |  |   |       
|Net transfer in/out of Level 3                                                                                                   |  |                            |       |   |                             |   | 69,185  |                         |  |   |       
|                                                                                                                                 |  |                            |        |   |                             |   |         |                         |  |   |        
|Balance at June 30, 2008                                                                                                         |  | $                          | 8,080  |   |                             | $ | 486,815 |                         |  | $ | 156,196
|                                                                                                                                 |  |                            |        |   |                             |   |         |                         |  |   |        
|Net realized gains (losses) included in net income for the year to date relating to assets and liabilities held at June 30,
2008 |  | $                          |       |   |                             | $ | (63,403 | )                       |  | $ | 2,841  
|                                                                                                                                 |  |                            |        |   |                             |   |         |                         |  |   |        



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##### Table of Contents

The following table indicates the changes in fair value recognized in the Condensed Consolidated Statements of
Operations:



|                              |  |                                                                |         |   |                         |   |                                                              |  |   |         |  
|----------------------------- |  | -------------------------------------------------------------- | ------- | - | ----------------------- | - | ------------------------------------------------------------ |  | - | ------- | -
|                              |  | Changes in fair value for the Three Months Ended June 30, 2008 |        
|(in thousands)                |  | Netlosses                                                      |         |   | Othernon-interestincome |   | Total changesin fair valuesincluded incurrent periodearnings | 
|Mortgage loans held for sale  |  | $                                                              |        |   |                         | $ | 116                                                          |  | $ | 116     |  
|Securities available for sale |  |                                                                | (20,748 | ) |                         |   |                                                             |  |   | (20,748 | )
|Bank owned life insurance     |  |                                                                |        |   |                         |   | 1,406                                                        |  |   | 1,406   |  
|                              |  |                                                                |         |   |                         |   |                                                              |  |   |         |  
|Total assets at fair value    |  | $                                                              | (20,748 | ) |                         | $ | 1,522                                                        |  | $ | (19,226 | )
|                              |  |                                                                |         |   |                         |   |                                                              |  |   |         |  
|                              | 
|                              |  | Changes
in fair value for the Six Months Ended June 30, 2008   |        
|(in thousands)                |  | Netlosses                                                      |         |   | Othernon-interestincome |   | Total changesin fair valuesincluded incurrent periodearnings | 
|Mortgage loans held for sale  |  | $                                                              |        |   |                         | $ | 228                                                          |  | $ | 228     |  
|Securities available for sale |  |                                                                | (63,403 | ) |                         |   |                                                             |  |   | (63,403 | )
|Bank owned life insurance     |  |                                                                |        |   |                         |   | 2,841                                                        |  |   | 2,841   |  
|                              |  |                                                                |         |   |                         |   |                                                              |  |   |         |  
|Total assets at fair value    |  | $                                                              | (63,403 | ) |                         | $ | 3,069                                                        |  | $ | (60,334 | )
|                              |  |                                                                |         |   |                         |   |                                                              |  |   |         |  

Nonrecurring fair value changes

Certain assets and liabilities are measured at fair value on a nonrecurring basis. These instruments are not measured at fair value on an ongoing basis but are subject to fair value in certain circumstances, such as
when there is evidence of impairment that may require write-downs. The write-downs for the Corporations more significant assets or liabilities measures on a non-recurring basis are based on the lower of amortized cost or estimated fair value.

Impaired Loans

The Corporation considers loans
to be impaired when it becomes probable that the Corporation will be unable to collect all amounts due in accordance with the contractual terms of the loan agreement. All non-accrual loans are considered impaired. The measurement of impaired loans
is based on the present value of the expected cash flows discounted at the historical effective interest rate, the market price of the loan or the fair value of the underlying collateral.

Foreclosed Assets

Once a loan is determined to be
uncollectible, the underlying collateral of a loan is repossessed and reclassified to other real estate owned. These assets are carried at lower of cost or fair value of the collateral, less cost to sell.

Both impaired loans and foreclosed assets are classified as Level 2 within the valuation hierarchy.



|                  |  |                  |        |         |   |         |  |         |        |  |   |  
|----------------- |  | ---------------- | ------ | ------- | - | ------- |  | ------- | ------ |  | - | -
|                  |  | At June 30, 2008
|(in thousands)    |  | Total            |        | Level 1 |   | Level 2 |  | Level 3
|Assets            |  |                  |        |         |   |         |  |         |        |  |   |  
|Loans             |  | $                | 24,676 |         | $ |        |  | $       | 24,676 |  | $ | 
|Foreclosed assets |  |                  | 11,095 |         |   |        |  |         | 11,095 |  |   | 
|                  |  |                  |        |         |   |         |  |         |        |  |   |  
|Total             |  | $                | 35,771 |         | $ |        |  | $       | 35,771 |  | $ | 
|                  |  |                  |        |         |   |         |  |         |        |  |   |  



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##### Table of Contents

NOTE 3INVESTMENT SECURITIES

The following table presents the aggregate amortized cost and fair values of the investment securities portfolio as of the dates indicated:



|                                                       |  |               |           |                      |   |                       |  |           |         |  |   |          
|------------------------------------------------------ |  | ------------- | --------- | -------------------- | - | --------------------- |  | --------- | ------- |  | - | ---------
|(in thousands)                                         |  | AmortizedCost |           | GrossUnrealizedGains |   | GrossUnrealizedLosses |  | FairValue
|June 30, 2008                                          |  |               |           |                      |   |                       |  |           |         |  |   |          
|Securities available for sale:                         |  |               |           |                      |   |                       |  |           |         |  |   |          
|U.S. Treasury and government agencies and corporations |  | $             | 46,268    |                      | $ | 19                    |  | $         |        |  | $ | 46,287   
|Mortgage-backed securities                             |  |               | 714,485   |                      |   | 648                   |  |           | 34,066  |  |   | 681,067  
|Municipal securities                                   |  |               | 151,629   |                      |   | 344                   |  |           | 1,535   |  |   | 150,438  
|Other debt securities                                  |  |               | 563,090   |                      |   | 221                   |  |           | 107,233 |  |   | 456,078  
|                                                       |  |               |           |                      |   |                       |  |           |         |  |   |          
|Total securities available for sale                    |  |               | 1,475,472 |                      |   | 1,232                 |  |           | 142,834 |  |   | 1,333,870
|                                                       |  |               |           |                      |   |                       |  |           |         |  |   |          
|Securities held to maturity:                           |  |               |           |                      |   |                       |  |           |         |  |   |          
|Other debt securities                                  |  |               | 47,076    |                      |   | 714                   |  |           | 2,509   |  |   | 45,281   
|                                                       |  |               |           |                      |   |                       |  |           |         |  |   |          
|Total securities held to maturity                      |  |               | 47,076    |                      |   | 714                   |  |           | 2,509   |  |   | 45,281   
|                                                       |  |               |           |                      |   |                       |  |           |         |  |   |          
|Total investment securities                            |  | $             | 1,522,548 |                      | $ | 1,946                 |  | $         | 145,343 |  | $ | 1,379,151
|                                                       |  |               |           |                      |   |                       |  |           |         |  |   |          
|December 31, 2007                                      |  |               |           |                      |   |                       |  |           |         |  |   |          
|Securities available for sale:                         |  |               |           |                      |   |                       |  |           |         |  |   |          
|U.S. Treasury and government agencies and corporations |  | $             | 41,928    |                      | $ | 26                    |  | $         |        |  | $ | 41,954   
|Mortgage-backed securities                             |  |               | 724,744   |                      |   | 1,295                 |  |           | 19,664  |  |   | 706,375  
|Municipal securities                                   |  |               | 152,865   |                      |   | 1,156                 |  |           | 330     |  |   | 153,691  
|Other debt securities                                  |  |               | 601,837   |                      |   | 348                   |  |           | 82,906  |  |   | 519,279  
|                                                       |  |               |           |                      |   |                       |  |           |         |  |   |          
|Total securities available for sale                    |  |               | 1,521,374 |                      |   | 2,825                 |  |           | 102,900 |  |   | 1,421,299
|                                                       |  |               |           |                      |   |                       |  |           |         |  |   |          
|Securities held to maturity:                           |  |               |           |                      |   |                       |  |           |         |  |   |          
|Other debt securities                                  |  |               | 47,265    |                      |   | 770                   |  |           | 495     |  |   | 47,540   
|                                                       |  |               |           |                      |   |                       |  |           |         |  |   |          
|Total securities held to maturity                      |  |               | 47,265    |                      |   | 770                   |  |           | 495     |  |   | 47,540   
|                                                       |  |               |           |                      |   |                       |  |           |         |  |   |          
|Total investment securities                            |  | $             | 1,568,639 |                      | $ | 3,595                 |  | $         | 103,395 |  | $ | 1,468,839
|                                                       |  |               |           |                      |   |                       |  |           |         |  |   |          
|June 30, 2007                                          |  |               |           |                      |   |                       |  |           |         |  |   |          
|Securities available for sale:                         |  |               |           |                      |   |                       |  |           |         |  |   |          
|U.S. Treasury and government agencies and corporations |  | $             | 67,167    |                      | $ |                      |  | $         | 2,206   |  | $ | 64,961   
|Mortgage-backed securities                             |  |               | 722,713   |                      |   | 419                   |  |           | 29,869  |  |   | 693,263  
|Municipal securities                                   |  |               | 148,014   |                      |   | 103                   |  |           | 3,098   |  |   | 145,019  
|Other debt securities                                  |  |               | 631,571   |                      |   | 3,399                 |  |           | 5,983   |  |   | 628,987  
|                                                       |  |               |           |                      |   |                       |  |           |         |  |   |          
|Total securities available for sale                    |  |               | 1,569,465 |                      |   | 3,921                 |  |           | 41,156  |  |   | 1,532,230
|                                                       |  |               |           |                      |   |                       |  |           |         |  |   |          
|Securities held to maturity:                           |  |               |           |                      |   |                       |  |           |         |  |   |          
|Other debt securities                                  |  |               | 48,278    |                      |   | 479                   |  |           | 244     |  |   | 48,513   
|                                                       |  |               |           |                      |   |                       |  |           |         |  |   |          
|Total securities held to maturity                      |  |               | 48,278    |                      |   | 479                   |  |           | 244     |  |   | 48,513   
|                                                       |  |               |           |                      |   |                       |  |           |         |  |   |          
|Total investment securities                            |  | $             | 1,617,743 |                      | $ | 4,400                 |  | $         | 41,400  |  | $ | 1,580,743
|                                                       |  |               |           |                      |   |                       |  |           |         |  |   |          

At June 30, 2008, a net unrealized after-tax loss of $85.6 million on the investment securities portfolio was
reflected in net accumulated other comprehensive loss, an element of the Corporations capital. This compares to a net unrealized after-tax loss of $22.4 million at June 30, 2007 and a net unrealized after-tax loss of $60.0 million at
December 31, 2007.



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Changes in current market conditions, such as interest rates and the economic uncertainties in the mortgage, housing and
banking industries have severely constricted the structured securities market. The secondary market for various types of securities has been limited and has negatively impacted securities values. Quarterly, the Corporation reviews each investment
security segment noted in the table below to determine the nature of the decline in the value of investment securities and evaluates if any of the underlying securities has experienced other-than-temporary impairment (OTTI). The
following table provides further detail of the investment securities portfolio at June 30, 2008.



|                                                     |  |               |           |                      |   |                       |  |           |         |  |   |          
|---------------------------------------------------- |  | ------------- | --------- | -------------------- | - | --------------------- |  | --------- | ------- |  | - | ---------
|(in thousands)                                       |  | AmortizedCost |           | GrossUnrealizedGains |   | GrossUnrealizedLosses |  | FairValue
|June 30, 2008                                        |  |               |           |                      |   |                       |  |           |         |  |   |          
|U.S. treasury, agency and agency MBS - AAA rated     |  | $             | 662,021   |                      | $ | 667                   |  | $         | 13,027  |  | $ | 649,661  
|Municipal securities                                 |  |               | 151,629   |                      |   | 344                   |  |           | 1,535   |  |   | 150,438  
|Non-agency MBS - AAA rated                           |  |               | 63,964    |                      |   |                      |  |           | 6,033   |  |   | 57,931   
|Non-agency MBS - AA rated or below                   |  |               | 34,768    |                      |   |                      |  |           | 15,006  |  |   | 19,762   
|Bank and insurance pooled trust preferred securities |  |               | 486,370   |                      |   |                      |  |           | 92,709  |  |   | 393,661  
|REIT pooled trust preferred securities               |  |               | 23,293    |                      |   | 18                    |  |           | 8,249   |  |   | 15,062   
|Corporate securities                                 |  |               | 100,103   |                      |   | 917                   |  |           | 8,784   |  |   | 92,236   
|Other securities                                     |  |               | 400       |                      |   |                      |  |           |        |  |   | 400      
|                                                     |  |               |           |                      |   |                       |  |           |         |  |   |          
|Total                                                |  | $             | 1,522,548 |                      | $ | 1,946                 |  | $         | 145,343 |  | $ | 1,379,151
|                                                     |  |               |           |                      |   |                       |  |           |         |  |   |          

The unrealized losses associated with AAA rated U.S. treasury, agency and agency MBS securities are caused by
changes in interest rates and are not considered credit related since the contractual cash flows of these investments are backed by the full faith and credit of the U.S. government. Unrealized losses that are related to the prevailing interest rate
environment will decline over time and recover as these securities approach maturity.

The unrealized losses in the municipal securities portfolio are due
to widening credit spreads caused by concerns about the bond insurers associated with these securities. In addition, municipal securities were adversely impacted by changes in interest rates. This portfolio segment is not experiencing any credit
problems at June 30, 2008, and each security has a credit rating of at least single A in addition to the bond insurers rating. The Corporation believes that all contractual cash flows will be received on this portfolio.

The non-agency MBS securities portfolio has experienced various levels of price declines since the third quarter of 2007. The AAA rated non-agency MBS securities have
experienced price declines due to the current market environment and the currently limited secondary market for such securities. The credit quality for this portfolio remains strong and no losses are expected in this portfolio at June 30, 2008. The
Corporation believes all contractual cash flows on these securities will be received. Certain AA rated or below non-agency MBS securities have been other-than-temporarily impaired and the value of these securities has been reduced and a
corresponding charge to earnings was recognized. Management monitors the actual default rates and interest deferrals in addition to future expected defaults to determine if there is a high probability for expected losses and contractual shortfalls
of interest or principal, which could warrant further recognition of impairment. In addition, the credit support is also assessed to ensure it can absorb the projected loan losses. All AA rated or below non-agency MBS securities that have not been
written down appear to have enough credit support to cover the projected loan losses.

The bank and insurance pooled trust preferred securities prices
continue to decline due to reduced demand for these securities as their average lives have lengthened and from the increased supply due to forced liquidations from some market participants. Additionally, there has been little secondary market
trading for these types of securities. At June 30, 2008, the Corporation believes that the credit quality of these securities remains adequate to absorb further economic declines, and these securities remain investment grade. Only a limited number
of issuers have contractually deferred their interest payments. As a result, the Corporation believes all contractual cash flows will be received on this portfolio.

As of June 30, 2008, the Corporation recognized that certain REIT trust preferred securities were other-than-temporarily impaired and, accordingly, these securities have been written down to their fair value. The
remaining unrealized losses on these securities are considered temporary in nature. The Corporation believes that these securities have sufficient credit subordination to withstand projected losses without impacting the securities cash flows. The
Corporation analyzes the current level of defaults by issue, forecasts defaults of specific issuers and unspecified issuers along with determining the threshold of defaults necessary for interest to be curtailed. In addition, the credit ratings for
these securities are also reviewed. This analysis is used to forecast each securitys ability to make its contractual interest and principal payments and assist in the impairment determination.



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The unrealized losses in the corporate securities portfolio are associated with the widening spreads in the financial
sector of the corporate bond market. At June 30, 2008, all of the securities are current as to principal and interest payments, and are expected to remain so in the future.

Management performs an extensive review of the investment securities portfolio quarterly to determine the cause of declines in the fair value of each security within each segment of the portfolio. The Corporation uses
inputs provided by an independent third party to determine the fair values of its investment securities portfolio. Inputs provided by the third party are reviewed and corroborated by management. Evaluations of the causes of the unrealized losses are
performed to determine whether the impairment is temporary or other-than-temporary in nature. Considerations such as the Corporations intent and ability to hold the securities, recoverability of the invested amounts over the Corporations
intended holding period, severity in pricing decline and receipt of amounts contractually due, for example, are applied in determining whether a security is other-than-temporarily impaired. Once a decline in value is determined to be
other-than-temporary, the value of the security is reduced and a corresponding charge to earnings is recognized.

The impairment evaluations noted above
are consistent with the accounting guidance in EITF 99-20 Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets
and SFAS 115 Accounting for Certain Investments in Debt and Equity Securities to determine if a security is OTTI. Securities deemed OTTI are written-down to their current market values with a charge to earnings. The review process uses a
combination of the severity of pricing declines and the present value of the expected cash flows and compares those results to the current carrying value. Significant deterioration in pricing or cash flows from a market participant perspective
typically indicates other-than-temporary impairment. The significance of the decline in prices and the determination of OTTI is based on managements judgement of the severity of the price deterioration. Significant inputs provided by the
independent third party such as default and loss severity are reviewed internally for reasonableness and from a market participants perspective. If available, discount rates are determined through identifying trades of similar securities. If
discount rates are unavailable, alternative methods are used and validated to produce appropriate discount rates.

At June 30, 2008, investment
securities that have unrealized losses are considered temporary in nature because the decline in fair value was caused by the interest rate environment or widening spreads and not caused by cash flow impairment. The Corporation has the intent and
ability to hold these securities until recovery, which may be maturity.

Listed below is the impairment recognized as OTTI recorded on the REIT trust
preferred securities portfolio and the non-agency MBS investment security portfolio by the Corporation since the fourth quarter of 2007 and the related book value.



|                                |  |                                     |        |         |   |         |  |       |        |                     |   |         |  |   |        
|------------------------------- |  | ----------------------------------- | ------ | ------- | - | ------- |  | ----- | ------ | ------------------- | - | ------- |  | - | -------
|                                |  | Impairment on Investment Securities |        |        
|                                |  | 4Q 2007                             |        | 1Q 2008 |   | 2Q 2008 |  | Total |        | Book Value6/30/2008
|REIT trust preferred securities |  | $                                   | 47,488 |         | $ | 19,439  |  | $     | 14,817 |                     | $ | 81,744  |  | $ | 23,293 
|Non-agency MBS securities       |  |                                     |        |         |   | 23,216  |  |       | 5,931  |                     |   | 29,147  |  |   | 98,732 
|                                |  |                                     |        |         |   |         |  |       |        |                     |   |         |  |   |        
|Total                           |  | $                                   | 47,488 |         | $ | 42,655  |  | $     | 20,748 |                     | $ | 110,891 |  | $ | 122,025

The additional write-downs of the securities in the first and second quarters of 2008 were the result of the OTTI
review discussed above as these securities have experienced high levels of mortgage delinquencies relative to the credit support remaining in the securities structures or due to further credit impairment of certain home builders and mortgage
REITs that represent the collateral for these securities.

For further details regarding investment securities and impairment of investment securities at
December 31, 2007, refer to Notes 1 and 3 of the Consolidated Financial Statements in the Corporations Form 10-K for the year ended December 31, 2007. The Corporation will continue to evaluate the investment ratings in the securities
portfolio, severity in pricing declines, market price quotes along with timing and receipt of amounts contractually due. Based upon these and other factors, the securities portfolio may experience further impairment. At June 30, 2008,
management currently has the intent and ability to retain investment securities with unrealized losses until the decline in value has been recovered.



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NOTE 4LOANS

A
summary of loans outstanding as of the dates indicated is shown in the table below.



|                                             |  |              |           |                  |   |              |  |   |          
|-------------------------------------------- |  | ------------ | --------- | ---------------- | - | ------------ |  | - | ---------
|(in thousands)                               |  | June 30,2008 |           | December 31,2007 |   | June 30,2007
|Residential real estate:                     |  |              |           |                  |   |              |  |   |          
|Originated and acquired residential mortgage |  | $            | 267,784   |                  | $ | 296,783      |  | $ | 303,748  
|Home equity                                  |  |              | 1,097,290 |                  |   | 1,082,819    |  |   | 1,032,930
|Other consumer:                              |  |              |           |                  |   |              |  |   |          
|Marine                                       |  |              | 357,508   |                  |   | 352,604      |  |   | 361,349  
|Other                                        |  |              | 23,357    |                  |   | 26,101       |  |   | 24,726   
|                                             |  |              |           |                  |   |              |  |   |          
|Total consumer                               |  |              | 1,745,939 |                  |   | 1,758,307    |  |   | 1,722,753
|                                             |  |              |           |                  |   |              |  |   |          
|Commercial real estate:                      |  |              |           |                  |   |              |  |   |          
|Commercial mortgage                          |  |              | 510,436   |                  |   | 439,229      |  |   | 442,813  
|Residential construction                     |  |              | 551,149   |                  |   | 631,063      |  |   | 603,221  
|Commercial construction                      |  |              | 451,409   |                  |   | 447,394      |  |   | 359,955  
|Commercial business                          |  |              | 943,474   |                  |   | 939,333      |  |   | 799,344  
|                                             |  |              |           |                  |   |              |  |   |          
|Total commercial                             |  |              | 2,456,468 |                  |   | 2,457,019    |  |   | 2,205,333
|                                             |  |              |           |                  |   |              |  |   |          
|Total loans                                  |  | $            | 4,202,407 |                  | $ | 4,215,326    |  | $ | 3,928,086
|                                             |  |              |           |                  |   |              |  |   |          

NOTE 5ALLOWANCE FOR LOAN LOSSES

The following table reflects the activity in the allowance for loan losses for the periods indicated:



|                                             |  |                            |        |                          |   |        |  |      |        |  |   |       
|-------------------------------------------- |  | -------------------------- | ------ | ------------------------ | - | ------ |  | ---- | ------ |  | - | ------
|                                             |  | Three Months EndedJune 30, |        | Six Months EndedJune 30,
|(in thousands)                               |  | 2008                       |        | 2007                     |   | 2008   |  | 2007
|Balance at beginning of period               |  | $                          | 55,249 |                          | $ | 45,519 |  | $    | 55,269 |  | $ | 45,203
|Provision for loan losses                    |  |                            | 6,400  |                          |   | 4,792  |  |      | 9,514  |  |   | 5,844 
|Less loans charged-off, net of recoveries:   |  |                            |        |                          |   |        |  |      |        |  |   |       
|Originated and acquired residential mortgage |  |                            | 233    |                          |   | 180    |  |      | 458    |  |   | 318   
|Home equity                                  |  |                            | 354    |                          |   | 118    |  |      | 591    |  |   | 144   
|Marine and other consumer                    |  |                            | 527    |                          |   | 506    |  |      | 965    |  |   | 971   
|Residential construction                     |  |                            | 1,350  |                          |   |       |  |      | 1,670  |  |   |      
|Commercial business                          |  |                            | 1,011  |                          |   | 3,738  |  |      | 2,925  |  |   | 3,845 
|                                             |  |                            |        |                          |   |        |  |      |        |  |   |       
|Net charge-offs                              |  |                            | 3,475  |                          |   | 4,542  |  |      | 6,609  |  |   | 5,278 
|                                             |  |                            |        |                          |   |        |  |      |        |  |   |       
|Balance at end of period                     |  | $                          | 58,174 |                          | $ | 45,769 |  | $    | 58,174 |  | $ | 45,769
|                                             |  |                            |        |                          |   |        |  |      |        |  |   |       



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NOTE 6INTANGIBLE ASSETS

The table below presents an analysis of the goodwill and deposit-based intangible activity for the six months ended June 30, 2008.



|                             |  |                         |         |                         |   |        |                            |  |   |         |  
|---------------------------- |  | ----------------------- | ------- | ----------------------- | - | ------ | -------------------------- |  | - | ------- | -
|(in thousands)               |  | Goodwill                |         | AccumulatedAmortization |   |        | NetGoodwill                | 
|Balance at December 31, 2007 |  | $                       | 254,528 |                         | $ | (622   | )                          |  | $ | 253,906 |  
|                             |  |                         |         |                         |   |        |                            |  |   |         |  
|Balance at June 30, 2008     |  | $                       | 254,528 |                         | $ | (622   | )                          |  | $ | 253,906 |  
|                             |  |                         |         |                         |   |        |                            |  |   |         |  
|                             |  |                         |        
|(in thousands)               |  | Deposit-basedIntangible |         | AccumulatedAmortization |   |        | NetDeposit-basedIntangible | 
|Balance at December 31, 2007 |  | $                       | 10,873  |                         | $ | (4,721 | )                          |  | $ | 6,152   |  
|Amortization expense         |  |                         |        |                         |   | (633   | )                          |  |   | (633    | )
|                             |  |                         |         |                         |   |        |                            |  |   |         |  
|Balance at June 30, 2008     |  | $                       | 10,873  |                         | $ | (5,354 | )                          |  | $ | 5,519   |  
|                             |  |                         |         |                         |   |        |                            |  |   |         |  

As a result of the Corporations decline in market capitalization since December 31, 2007, the last annual
valuation, the Corporation assessed its goodwill for potential impairment as of June 30, 2008. Based upon this assessment, the Corporation has determined no impairment charge is necessary. Management will continue to test for impairment
annually unless a significant event occurs.

NOTE 7DEPOSITS

The table below presents a summary of deposits as of the dates indicated:



|                                    |  |              |           |                  |   |              |  |   |          
|----------------------------------- |  | ------------ | --------- | ---------------- | - | ------------ |  | - | ---------
|(in thousands)                      |  | June 30,2008 |           | December 31,2007 |   | June 30,2007
|Interest-bearing deposits:          |  |              |           |                  |   |              |  |   |          
|Interest-bearing demand             |  | $            | 516,186   |                  | $ | 479,436      |  | $ | 559,488  
|Money market                        |  |              | 628,050   |                  |   | 675,077      |  |   | 578,327  
|Savings                             |  |              | 571,428   |                  |   | 512,684      |  |   | 583,710  
|Direct time certificates of deposit |  |              | 1,118,650 |                  |   | 1,094,622    |  |   | 1,211,480
|Brokered certificates of deposit    |  |              | 838,251   |                  |   | 741,441      |  |   | 489,002  
|                                    |  |              |           |                  |   |              |  |   |          
|Total interest-bearing deposits     |  |              | 3,672,565 |                  |   | 3,503,260    |  |   | 3,422,007
|Noninterest-bearing deposits        |  |              | 687,915   |                  |   | 676,260      |  |   | 766,281  
|                                    |  |              |           |                  |   |              |  |   |          
|Total deposits                      |  | $            | 4,360,480 |                  | $ | 4,179,520    |  | $ | 4,188,288
|                                    |  |              |           |                  |   |              |  |   |          

NOTE 8SHORT-TERM BORROWINGS

The table below presents a summary of short-term borrowings as of the dates indicated:



|                                             |  |              |         |                  |   |              |  |   |        
|-------------------------------------------- |  | ------------ | ------- | ---------------- | - | ------------ |  | - | -------
|(in thousands)                               |  | June 30,2008 |         | December 31,2007 |   | June 30,2007
|Securities sold under repurchase agreements  |  | $            | 213,113 |                  | $ | 309,712      |  | $ | 351,452
|Federal funds purchased                      |  |              | 175,000 |                  |   | 549,000      |  |   | 300,000
|Federal Home Loan Bank advances - fixed rate |  |              | 125,000 |                  |   |             |  |   |       
|Federal term auction                         |  |              | 100,000 |                  |   |             |  |   |       
|Other short-term borrowings                  |  |              | 2,741   |                  |   | 2,683        |  |   | 2,578  
|                                             |  |              |         |                  |   |              |  |   |        
|Total short-term borrowings                  |  | $            | 615,854 |                  | $ | 861,395      |  | $ | 654,030
|                                             |  |              |         |                  |   |              |  |   |        



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##### Table of Contents

NOTE 9LONG-TERM DEBT

The table below presents a summary of long-term debt as of the dates indicated:



|                                                |  |              |         |                  |   |              |  |   |        
|----------------------------------------------- |  | ------------ | ------- | ---------------- | - | ------------ |  | - | -------
|(in thousands)                                  |  | June 30,2008 |         | December 31,2007 |   | June 30,2007
|Federal Home Loan Bank advances - fixed rate    |  | $            | 30,000  |                  | $ | 90,000       |  | $ | 75,000 
|Federal Home Loan Bank advances - variable rate |  |              | 570,000 |                  |   | 545,000      |  |   | 545,000
|Junior Subordinated Debentures                  |  |              | 136,596 |                  |   | 136,683      |  |   | 136,770
|Subordinated notes                              |  |              | 47,775  |                  |   |             |  |   |       
|                                                |  |              |         |                  |   |              |  |   |        
|Total long-term debt                            |  | $            | 784,371 |                  | $ | 771,683      |  | $ | 756,770
|                                                |  |              |         |                  |   |              |  |   |        

On April 24, 2008, the Corporations wholly owned subsidiary, Provident Bank, completed a private
placement of $50.0 million of subordinated unsecured notes that are rated BBB to qualified institutional buyers and accredited investors. The purchase price of the subordinated notes was 97.651% of the principal amount. The subordinated notes bear
interest at a fixed rate of 9.5% and mature on May 1, 2018, with semi-annual interest payments payable on May 1 and November 1 of each year beginning on November 1, 2008. The subordinated notes are not convertible. Beginning on
May 1, 2013, Provident Bank may redeem some or all of the subordinated notes, at any time, at a price equal to 100% of the principal amount of such notes redeemed plus accrued and unpaid interest to the redemption date. Proceeds from the debt
offering, net of issuance costs, totaled $47.7 million and were used to decrease brokered certificates of deposit and fed funds purchased. This debt qualifies as Tier II capital under regulatory capital guidelines.

NOTE 10STOCKHOLDERS EQUITY

Share-Based Payment Plan
Description

The Corporation issues nonqualified stock options and restricted stock grants to certain of its employees and directors pursuant to the
2004 Equity Compensation Plan (the Plan), which has been approved by the Corporations shareholders. The Plan allows for a maximum of 12.5 million shares of common stock to be issued. At June 30, 2008, 3.3 million
shares were available to be granted by the Corporation pursuant to the plan.

Stock Option Awards

Stock options (options) are granted with an exercise price equal to the market price of the Corporations shares at the date of the grant. Options
granted subsequent to January 1, 2005 vest based on four years of continuous service and have eight-year contractual terms. All options issued prior to January 1, 2005 have contractual terms of ten years and are vested.

All options provide for accelerated vesting upon a change in control (as defined in the Plan). Stock options exercised result in the issuance of new shares.

On the date of each grant, the fair value of each award is estimated using the Black-Scholes option pricing model based on assumptions made by the Corporation as
follows:



| |  | Dividend yield is based on the dividend rate of the Corporations stock at the date of the grant;
|- |  | -------------------------------------------------------------------------------------------------



| |  | Risk-free interest rate is based on the U.S. Treasury zero-coupon bond rate with a term equaling the expected life of the granted options.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------



| |  | Expected volatility is based on the historical volatility of the Corporations stock price and
|- |  | ----------------------------------------------------------------------------------------------



| |  | Expected life represents the period of time that granted options are expected to be outstanding based on historical trends.
|- |  | ---------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

Below is a tabular presentation of the option pricing assumptions and the estimated fair value of the options granted
during the periods indicated using these assumptions.



|                                               |  |                            |            |   |                          |   |            |      |  |   |            |   |  |   |            |  
|---------------------------------------------- |  | -------------------------- | ---------- | - | ------------------------ | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                               |  | Three Months EndedJune 30, |            |   | Six Months EndedJune 30, |  
|                                               |  | 2008                       |            |   | 2007                     |   |            | 2008 |  |   | 2007       |  
|Weighted average dividend yield                |  |                            | 7.00       | % |                          |   | 3.41       | %    |  |   | 7.39       | % |  |   | 3.41       | %
|Weighted average risk-free interest rate       |  |                            | 2.86       | % |                          |   | 4.72       | %    |  |   | 2.98       | % |  |   | 4.72       | %
|Weighted average expected volatility           |  |                            | 30.81      | % |                          |   | 16.69      | %    |  |   | 20.76      | % |  |   | 16.69      | %
|Weighted average expected life                 |  |                            | 5.25 years |   |                          |   | 5.25 years |      |  |   | 5.25 years |   |  |   | 5.25 years |  
|Weighted average fair value of options granted |  | $                          | 1.51       |   |                          | $ | 5.44       |      |  | $ | 1.26       |   |  | $ | 5.44       |  

The Corporation recognized compensation expense related to options of $308 thousand and $180 thousand for the
three months ended June 30, 2008 and 2007, respectively. For the six months ended June 30, 2008 compensation expense related to options was $529 thousand compared to $425 thousand for the same period in 2007. There were no options
exercised for the three months ended June 30, 2008. The intrinsic value of options exercised for the three months ended June 30, 2007 was $723 thousand. For the six months ended June 30, 2008 and 2007, the intrinsic value of the
options exercised was $49 thousand and $1.0 million, respectively. Unrecognized compensation cost related to non-vested options was $3.2 million and $2.8 million at June 30, 2008 and 2007, respectively, and is expected to be recognized over a
weighted average period of 2.9 years and 3.2 years, respectively.

The following table presents a summary of the activity related to options for the period
indicated:



|                                         |  |              |   |  |                                |       |                                                     |      |                                       |  
|---------------------------------------- |  | ------------ | - |  | ------------------------------ | ----- | --------------------------------------------------- | ---- | ------------------------------------- | -
|                                         |  | CommonShares |   |  | Weighted AverageExercise Price |       | Weighted AverageContractualRemaining Life(in years) |      | AggregateIntrinsicValue(in thousands)
|Options outstanding at December 31, 2007 |  | 2,323,946    |   |  | $                              | 29.18 |                                                     |      |                                       |  
|Granted                                  |  | 1,117,308    |   |  | $                              | 17.32 |                                                     |      |                                       |  
|Exercised                                |  | (9,450       | ) |  | $                              | 13.48 |                                                     |      |                                       |  
|Cancelled or expired                     |  | (205,781     | ) |  | $                              | 28.63 |                                                     |      |                                       |  
|                                         |  |              |   |  |                                |       |                                                     |      |                                       |  
|Options outstanding at June 30, 2008     |  | 3,226,023    |   |  | $                              | 25.16 |                                                     | 5.84 |                                       | 
|                                         |  |              |   |  |                                |       |                                                     |      |                                       |  
|                                         |  |              |   | 
|Options exercisable at June 30, 2008     |  | 1,695,927    |   |  | $                              | 27.96 |                                                     | 4.51 |                                       | 

Restricted Stock Awards

The Corporation issues restricted stock grants, in the form of new shares, to its directors and certain key employees. The restricted stock grants are issued at the fair market value of the common shares on the date
of each grant. The Corporation grants shares of restricted stock to directors of the Corporation as part of director compensation, and as such, those restricted stock grants vest immediately. The restricted stock grants to the directors may not be
sold or otherwise divested until six months subsequent to their departure from the board of directors. The restricted stock grants to employees vest ratably over four years.

Expense recorded relating to restricted stock grants to directors and employees is presented in the following table:



|                            |  |                            |     |                          |   |      |  |      |       |  |   |      
|--------------------------- |  | -------------------------- | --- | ------------------------ | - | ---- |  | ---- | ----- |  | - | -----
|                            |  | Three Months EndedJune 30, |     | Six Months EndedJune 30,
|(in thousands)              |  | 2008                       |     | 2007                     |   | 2008 |  | 2007
|Grants to directors         |  | $                          | 280 |                          | $ | 320  |  | $    | 280   |  | $ | 320  
|Grants to employees         |  | $                          | 396 |                          | $ | 268  |  | $    | 696   |  | $ | 500  
|Fair value of grants vested |  | $                          | 289 |                          | $ | 319  |  | $    | 1,420 |  | $ | 1,059



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The following table presents a summary of the activity related to restricted stock grants for the period indicated:



|                              |  |              |   |  |                                  |      
|----------------------------- |  | ------------ | - |  | -------------------------------- | -----
|                              |  | CommonShares |   |  | Weighted AverageGrant Fair Value
|Unvested at December 31, 2007 |  | 107,152      |   |  | $                                | 35.48
|Granted                       |  | 136,458      |   |  | $                                | 16.21
|Vested                        |  | (57,519      | ) |  | $                                | 24.69
|Cancelled                     |  | (6,880       | ) |  | $                                | 33.82
|                              |  |              |   |  |                                  |      
|Unvested at June 30, 2008     |  | 179,211      |   |  | $                                | 24.33
|                              |  |              |   |  |                                  |      

At June 30, 2008, unrecognized compensation cost related to non-vested restricted stock grants was $3.1
million and is expected to be recognized over a weighted average period of 3.1 years.

Common Stock and Mandatory Convertible Non-Cumulative Preferred
Stock Offering

On April 9, 2008, the Corporation entered into a Stock Purchase Agreement (the Agreement) with certain institutional
and individual accredited investors and certain officers of the Company and members of the Companys Board of Directors in connection with the private placement of approximately $64.8 million of its capital stock. The Agreement provided for the
sale of 1,422,110 shares of the Corporations common stock at a price of $9.50 per share ($10.80 for officers and directors of the Corporation, which was the closing bid price on April 8, 2008, the date prior to the execution of the
Agreement), and 51,215 shares of a newly created class of Series A Mandatory Convertible Non-Cumulative Preferred Stock (the Series A Preferred) at a purchase price and liquidation preference of $1,000 per share. The transaction
closed on April 14, 2008. Net proceeds from the common and preferred stock offering totaled $62.4 million. Proceeds from the capital issuance was used to decrease brokered certificates of deposit and fed funds purchased.

Each share of Series A Preferred will automatically convert into 95.238 shares of common stock on April 1, 2011. Holders may elect to convert their preferred shares
at any time prior to that date. The conversion rate will be subject to customary anti-dilution adjustments. The discount on the preferred stock conversion feature provides a benefit to the preferred stockholders that must be recognized under the
current accounting guidance in the financial statements as a non-cash dividend. This recognition did not result in any impact on the Corporations capital.

The Series A Preferred will pay dividends in cash, when declared by the Board of Directors, at a rate of 10.0% per annum on the liquidation preference of $1,000 per share, payable quarterly in arrears. In the event that the Corporation
increases its quarterly dividend on its common stock above $0.165, the holders of the Series A Preferred will be entitled to an additional dividend at a rate per annum equal to the percentage increase above $0.165 multiplied by 10.0%. No dividends
may be paid on the Corporations common stock unless dividends have been paid in full on the Series A Preferred.

NOTE 11DERIVATIVE FINANCIAL
INSTRUMENTS

Fair value hedges that meet the criteria for effectiveness have changes in the fair value of the derivative and the designated hedged item
recognized in earnings. During all periods presented, the derivatives designated as fair value hedges were determined to be effective. Accordingly, the designated hedges and the associated hedged items were marked to fair value by equal and
offsetting amounts. At June 30, 2008, there were no derivatives designated as fair value hedges. Cash flow hedges have the effective portion of changes in the fair value of the derivative, net of taxes, recorded in net accumulated other
comprehensive loss. For the six months ended June 30, 2008, the Corporation recorded an increase in the value of derivatives of $726 thousand compared to a decrease of $320 thousand for the same period in 2007, net of taxes, in net accumulated
other comprehensive loss to reflect the effective portion of cash flow hedges. Amounts recorded in net accumulated other comprehensive loss are recognized into earnings concurrent with the impact of the hedged item on earnings. The ineffectiveness
portion of cash flow hedges resulted in a credit to earnings of $6 thousand for the three months ended June 30, 2008 compared to a charge of $5 thousand for the same period in 2007. For the six months ended June 30, 2008, there was a
credit to earnings of $15 thousand compared to a $4 charge for the same period in 2007.

During the first quarter of 2008, the Corporation closed out a
$40.0 million non-designated derivative and added two non-designated derivatives for $4.0 million each. In the second quarter, two additional non-designated derivatives for $11.1 million each were also added. Typically, interest rate swaps that are
classified as non-designated derivatives are marked-to-market and the gains or losses are recorded in non-interest income at the end of each reporting period. Non-designated derivatives may represent interest rate protection on the
Corporations net interest income or derivative products provided to customers but do not meet the requirements to receive hedge accounting treatment. For the three months ended June 30, 2008 the value of the non-designated derivatives
completely offset each other. During the three months ended June 30, 2007, the Corporation recorded net losses $552 thousand to reflect the change in value of the non-designated interest rate swaps. For the six months ended June 30, 2008
and 2007, the Corporation recorded net losses of $266 thousand and $616 thousand, respectively, to reflect the change in the value of the non-designated interest rate swaps.



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The net cash settlements on these interest rate swaps are recorded in non-interest income. The net cash benefit from
these interest rate swaps was $51 thousand and $200 thousand for the three months ended June 30, 2008 and 2007, respectively. For the six months ended June 30, 2008 and 2007, the net cash benefit from these interest rate swaps was $347
thousand and $406 thousand, respectively. These transactions are recorded in net derivative activities on the Condensed Consolidated Statements of Operations.

Where appropriate, the Corporation obtains collateral to reduce counterparty risk associated with interest rate swaps. To the extent the master netting arrangements meet the requirements of FSP FIN 39-1 Amendment of FASB
Interpretation No. 39, amounts are reflected on the Condensed Consolidated Statement of Condition at a net amount. At June 30, 2008, cash collateral of $4.9 million was included in the Condensed Consolidated Statement of Condition
and netted against the fair value of the derivative position.



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The table below presents the Corporations open derivative positions as of the dates indicated:



|                                 |  |                            |  |                |         |                   |   |            |  |   |        |  
|-------------------------------- |  | -------------------------- |  | -------------- | ------- | ----------------- | - | ---------- |  | - | ------ | -
|(in thousands) Derivative Type   |  | Objective                  |  | NotionalAmount |         | Credit RiskAmount |   | MarketRisk | 
|June 30, 2008                    |  |                            |  |                |         |                   |   |            |  |   |        |  
|Designated Derivatives           |  |                            |  |                |         |                   |   |            |  |   |        |  
|Interest rate swaps:             |  |                            |  |                |         |                   |   |            |  |   |        |  
|Receive fixed/pay variable       |  | Hedge investment rate risk |  | $              | 239,450 |                   | $ | 5,621      |  | $ | 5,621  |  
|Interest rate caps/corridors     |  | Hedge borrowing cost       |  |                | 25,000  |                   |   | 4          |  |   | 4      |  
|                                 |  |                            |  |                |         |                   |   |            |  |   |        |  
|Total designated derivatives     |  |                            |  |                | 264,450 |                   |   | 5,625      |  |   | 5,625  |  
|                                 |  |                            |  |                |         |                   |   |            |  |   |        |  
|Non-designated Derivatives       |  |                            |  |                |         |                   |   |            |  |   |        |  
|Interest rate swaps:             |  |                            |  |                |         |                   |   |            |  |   |        |  
|Receive variable/pay fixed       |  |                            |  |                | 15,050  |                   |   | 62         |  |   | (41    | )
|Receive fixed/pay variable       |  |                            |  |                | 15,050  |                   |   | 132        |  |   | 85     |  
|                                 |  |                            |  |                |         |                   |   |            |  |   |        |  
|Total non-designated derivatives |  |                            |  |                | 30,100  |                   |   | 194        |  |   | 44     |  
|                                 |  |                            |  |                |         |                   |   |            |  |   |        |  
|Total derivatives                |  |                            |  | $              | 294,550 |                   | $ | 5,819      |  | $ | 5,669  |  
|                                 |  |                            |  |                |         |                   |   |            |  |   |        |  
|                                 |  |                            |  |               
|December 31, 2007                |  |                            |  |                |         |                   |   |            |  |   |        |  
|Designated Derivatives           |  |                            |  |                |         |                   |   |            |  |   |        |  
|Interest rate swaps:             |  |                            |  |                |         |                   |   |            |  |   |        |  
|Receive fixed/pay variable       |  | Hedge investment rate risk |  | $              | 272,450 |                   | $ | 5,002      |  | $ | 4,968  |  
|Interest rate caps/corridors     |  | Hedge borrowing cost       |  |                | 25,000  |                   |   | 71         |  |   | 71     |  
|                                 |  |                            |  |                |         |                   |   |            |  |   |        |  
|Total designated derivatives     |  |                            |  |                | 297,450 |                   |   | 5,073      |  |   | 5,039  |  
|                                 |  |                            |  |                |         |                   |   |            |  |   |        |  
|Non-designated Derivatives       |  |                            |  |                |         |                   |   |            |  |   |        |  
|Interest rate swaps:             |  |                            |  |                |         |                   |   |            |  |   |        |  
|Receive fixed/pay variable       |  |                            |  |                | 40,000  |                   |   | 2,095      |  |   | 2,095  |  
|                                 |  |                            |  |                |         |                   |   |            |  |   |        |  
|Total non-designated derivatives |  |                            |  |                | 40,000  |                   |   | 2,095      |  |   | 2,095  |  
|                                 |  |                            |  |                |         |                   |   |            |  |   |        |  
|Total derivatives                |  |                            |  | $              | 337,450 |                   | $ | 7,168      |  | $ | 7,134  |  
|                                 |  |                            |  |                |         |                   |   |            |  |   |        |  
|                                 |  |                            |  |               
|June 30, 2007                    |  |                            |  |                |         |                   |   |            |  |   |        |  
|Designated Derivatives           |  |                            |  |                |         |                   |   |            |  |   |        |  
|Interest rate swaps:             |  |                            |  |                |         |                   |   |            |  |   |        |  
|Receive fixed/pay variable       |  | Hedge investment rate risk |  | $              | 277,450 |                   | $ | 4          |  | $ | (2,944 | )
|Interest rate caps/corridors     |  | Hedge borrowing cost       |  |                | 75,000  |                   |   | 525        |  |   | 525    |  
|                                 |  |                            |  |                |         |                   |   |            |  |   |        |  
|Total designated derivatives     |  |                            |  |                | 352,450 |                   |   | 529        |  |   | (2,419 | )
|                                 |  |                            |  |                |         |                   |   |            |  |   |        |  
|Non-designated Derivatives       |  |                            |  |                |         |                   |   |            |  |   |        |  
|Interest rate swaps:             |  |                            |  |                |         |                   |   |            |  |   |        |  
|Receive fixed/pay variable       |  |                            |  |                | 40,000  |                   |   | 1,858      |  |   | 1,858  |  
|                                 |  |                            |  |                |         |                   |   |            |  |   |        |  
|Total non-designated derivatives |  |                            |  |                | 40,000  |                   |   | 1,858      |  |   | 1,858  |  
|                                 |  |                            |  |                |         |                   |   |            |  |   |        |  
|Total derivatives                |  |                            |  | $              | 392,450 |                   | $ | 2,387      |  | $ | (561   | )
|                                 |  |                            |  |                |         |                   |   |            |  |   |        |  



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NOTE 12CONTINGENCIES AND OFF-BALANCE SHEET RISK

Commitments

Commitments to extend credit in the form of consumer,
commercial real estate and business loans at the date indicated were as follows:



|                                      |  |              |          
|------------------------------------- |  | ------------ | ---------
|(in thousands)                        |  | June 30,2008
|Commercial business and real estate   |  | $            | 824,447  
|Consumer revolving credit             |  |              | 839,562  
|Residential mortgage credit           |  |              | 9,892    
|Performance standby letters of credit |  |              | 136,953  
|Commercial letters of credit          |  |              | 4,468    
|                                      |  |              |          
|Total loan commitments                |  | $            | 1,815,322
|                                      |  |              |          

Historically, many of the commitments expire without being fully drawn; therefore, the total commitment amounts do
not necessarily represent realizable future cash requirements.

Litigation

The Corporation is involved in various legal actions that arise in the ordinary course of its business. All active lawsuits entail amounts which management believes to be, individually and in the aggregate, immaterial
to the financial condition and the results of operations of the Corporation.

In 2005, a lawsuit captioned Bednar v. Provident Bank of Maryland was
initiated by a former Bank customer against the Bank in the Circuit Court for Baltimore City (Maryland) asserting that, upon early payoff, the Banks recapture of home equity loan closing costs initially paid by the Bank on the borrowers
behalf constituted a prepayment charge prohibited by state law. The Baltimore City Circuit Court ruled in the Banks favor, finding that the recapture of loan closing costs was not an unlawful charge, a position consistent with that taken by
the State of Maryland Commissioner of Financial Regulation. However, on appeal, the Maryland Court of Appeals reversed this ruling and found in favor of the borrower. The case was remanded to the trial court for further
proceedings. The potential damages for this individual matter are not material to the Corporations results of operations. However, the complaint is styled as a class action complaint. To date, no class has been certified. Management
believes that the Bank has meritorious defense against this action and intends to vigorously defend the litigation. On April 8, 2008, the Governor of Maryland signed legislation that limits the potential recovery of Bank customers in the Bednar
litigation to the amount of closing costs recovered by the Bank upon early payoff. As a result, the Bank believes that, even if a class is certified, the potential damages in the Bednar litigation would not be material to the Banks results of
operations.

NOTE 13NET GAINS

Net gains include
the following components for the periods indicated:



|                                                            |  |                           |       |                         |      |   |      |  |   |       |   |  |   |      
|----------------------------------------------------------- |  | ------------------------- | ----- | ----------------------- | ---- | - | ---- |  | - | ----- | - |  | - | -----
|                                                            |  | Three Months EndedJune 30 |       | Six Months EndedJune 30
|(in thousands)                                              |  | 2008                      |       |                         | 2007 |   | 2008 |  |   | 2007 
|Net gains (losses):                                         |  |                           |       |                         |      |   |      |  |   |       |   |  |   |      
|Sale of MasterCard shares                                   |  | $                         | 8,690 |                         |      | $ |     |  | $ | 8,690 |   |  | $ |     
|Securities sales                                            |  |                           |      |                         |      |   | 187  |  |   |      |   |  |   | 399  
|Asset sales                                                 |  |                           | (86   | )                       |      |   | 233  |  |   | (60   | ) |  |   | 1,071
|Extinguishment of debt and early redemption of brokered CDs |  |                           | (453  | )                       |      |   |     |  |   | (670  | ) |  |   | 153  
|                                                            |  |                           |       |                         |      |   |      |  |   |       |   |  |   |      
|Net gains                                                   |  | $                         | 8,151 |                         |      | $ | 420  |  | $ | 7,960 |   |  | $ | 1,623
|                                                            |  |                           |       |                         |      |   |      |  |   |       |   |  |   |      



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NOTE 14RESTRUCTURING ACTIVITIES

Costs associated with restructuring activities are recorded in the Condensed Consolidated Statements of Operations as they are incurred. The costs include incremental expenses associated with corporate-wide efficiency
and infrastructure initiatives focused on the rationalization of the branch network, the composition and execution of fee generation activities and the creation of efficiencies in the Corporations business model.

All amounts accrued with respect to the initiatives discussed above have been recognized in the Condensed Consolidated Statements of Operations for the three and six
months ended June 30, 2008 and 2007.

The incurred costs for all restructuring activities are reflected in the following tables:



|                                       |  |                                          |   |                       |                                        |     |       |  |   |                |   |                       |   |    |       |   |     |   |  |   |     |  
|-------------------------------------- |  | ---------------------------------------- | - | --------------------- | -------------------------------------- | --- | ----- |  | - | -------------- | - | --------------------- | - | -- | ----- | - | --- | - |  | - | --- | -
|                                       |  | For the Three Months Ended June 30, 2008 |   |                       | For the Six Months Ended June 30, 2008 |    
|(in thousands)                         |  | BranchClosures                           |   | EfficiencyInitiatives |                                        |     | Total |  |   | BranchClosures |   | EfficiencyInitiatives |   |    | Total |  
|Severance and employee-related charges |  | $                                        |  |                       | $                                      | (34 | )     |  | $ | (34            | ) |                       | $ |   |       | $ | (15 | ) |  | $ | (15 | )
|Contract terminations                  |  |                                          |  |                       |                                        |    |       |  |   |               |   |                       |   |   |       |   |    |   |  |   |    |  
|Impairment of fixed assets             |  |                                          |  |                       |                                        |    |       |  |   |               |   |                       |   |   |       |   |    |   |  |   |    |  
|Other related costs                    |  |                                          |  |                       |                                        |    |       |  |   |               |   |                       |   | 55 |       |   |    |   |  |   | 55  |  
|                                       |  |                                          |   |                       |                                        |     |       |  |   |                |   |                       |   |    |       |   |     |   |  |   |     |  
|Total restructuring activities         |  | $                                        |  |                       | $                                      | (34 | )     |  | $ | (34            | ) |                       | $ | 55 |       | $ | (15 | ) |  | $ | 40  |  
|                                       |  |                                          |   |                       |                                        |     |       |  |   |                |   |                       |   |    |       |   |     |   |  |   |     |  



|                                       |  |                                          |   |                                        |   |       |  |                |     |                       |   |       |  |   |     |  |   |      
|-------------------------------------- |  | ---------------------------------------- | - | -------------------------------------- | - | ----- |  | -------------- | --- | --------------------- | - | ----- |  | - | --- |  | - | -----
|                                       |  | For the Three Months Ended June 30, 2007 |   | For the Six Months Ended June 30, 2007
|(in thousands)                         |  | BranchClosures                           |   | EfficiencyInitiatives                  |   | Total |  | BranchClosures |     | EfficiencyInitiatives |   | Total
|Severance and employee-related charges |  | $                                        |  |                                        | $ | 481   |  | $              | 481 |                       | $ |      |  | $ | 481 |  | $ | 481  
|Contract terminations                  |  |                                          |  |                                        |   |      |  |                |    |                       |   | 473   |  |   |    |  |   | 473  
|Impairment of fixed assets             |  |                                          |  |                                        |   |      |  |                |    |                       |   | 357   |  |   |    |  |   | 357  
|Other related costs                    |  |                                          |  |                                        |   |      |  |                |    |                       |   | 37    |  |   |    |  |   | 37   
|                                       |  |                                          |   |                                        |   |       |  |                |     |                       |   |       |  |   |     |  |   |      
|Total restructuring activities         |  | $                                        |  |                                        | $ | 481   |  | $              | 481 |                       | $ | 867   |  | $ | 481 |  | $ | 1,348
|                                       |  |                                          |   |                                        |   |       |  |                |     |                       |   |       |  |   |     |  |   |      

The following table reflects a roll-forward of the accrued liability associated with the restructuring activities:



|                             |  |                  |     |   |                       |   |      |       |  |   |      |  
|---------------------------- |  | ---------------- | --- | - | --------------------- | - | ---- | ----- |  | - | ---- | -
|                             |  | At June 30, 2008 |    
|(in thousands)               |  | BranchClosures   |     |   | EfficiencyInitiatives |   |      | Total | 
|Balance December 31, 2007    |  | $                |    |   |                       | $ | 147  |       |  | $ | 147  |  
|Branch closure costs         |  |                  | 55  |   |                       |   |     |       |  |   | 55   |  
|Efficiency initiatives costs |  |                  |    |   |                       |   | (15  | )     |  |   | (15  | )
|Cash payments                |  |                  | (55 | ) |                       |   | (104 | )     |  |   | (159 | )
|                             |  |                  |     |   |                       |   |      |       |  |   |      |  
|Balance at June 30, 2008     |  | $                |    |   |                       | $ | 28   |       |  | $ | 28   |  
|                             |  |                  |     |   |                       |   |      |       |  |   |      |  

The Corporations efficiency initiatives were substantially completed at June 30, 2008. As part of the
continued focus on cost efficiency and control, the Corporation will continue to incur occasional future expense relating to cost control initiatives as opportunities present themselves. These costs, if applicable, will be presented in non-interest
expenses in the Consolidated Statements of Operations.

NOTE 15INCOME TAXES

Effective January 1, 2007, the Corporation adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN No. 48), which prescribes the
recognition and measurement of tax positions taken or expected to be taken in a tax return. FIN No. 48 provides guidance for de-recognition and classification of previously recognized tax positions that did not meet the certain recognition
criteria in addition to recognition of interest and penalties, if necessary. The Corporation did not have any material unrecognized tax benefits as of the date of adoption. The Corporations policy is to recognize interest and penalties, if
any, related to unrecognized tax benefits in income tax expense on the Condensed Consolidated Statements of Operations. At January 1, 2007, no interest and penalties were required to be recognized. At June 30, 2008, the Corporation did not
have any material unrecognized tax benefits and no interest and penalties were required to be recognized. The tax years that remain subject to examination are 2004 through 2007 for both the Federal and State of Maryland tax authorities.



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NOTE 16EARNINGS PER SHARE

The following table presents a summary of per share data and amounts for the periods indicated.



|                                                       |      |                           |        |                         |      |        |  |      |        |   |  |   |       
|------------------------------------------------------ | ---- | ------------------------- | ------ | ----------------------- | ---- | ------ |  | ---- | ------ | - |  | - | ------
|(in thousands, except per share data)                  |      | Three Months EndedJune 30 |        | Six Months EndedJune 30
|                                                       | 2008 |                           | 2007   |                         | 2008 |        |  | 2007
|Net income (loss)                                      |      | $                         | 10,224 |                         | $    | 15,522 |  | $    | (7,398 | ) |  | $ | 31,636
|Less: Beneficial conversion feature on preferred stock |      |                           | 1,463  |                         |      |       |  |      | 1,463  |   |  |   |      
|                                                       |      |                           |        |                         |      |        |  |      |        |   |  |   |       
|Net income (loss) available to common stockholders     |      | $                         | 8,761  |                         | $    | 15,522 |  | $    | (8,861 | ) |  | $ | 31,636
|                                                       |      |                           |        |                         |      |        |  |      |        |   |  |   |       
|                                                       |      |                           |        |                        
|Basic EPS shares                                       |      |                           | 32,790 |                         |      | 32,128 |  |      | 32,164 |   |  |   | 32,164
|Basic EPS                                              |      | $                         | 0.27   |                         | $    | 0.48   |  | $    | (0.28  | ) |  | $ | 0.98  
|                                                       |      |                           |        |                        
|Dilutive common stock equivalents                      |      |                           | 105    |                         |      | 268    |  |      |       |   |  |   | 276   
|Dilutive EPS shares                                    |      |                           | 32,895 |                         |      | 32,396 |  |      | 32,164 |   |  |   | 32,440
|Dilutive EPS                                           |      | $                         | 0.27   |                         | $    | 0.48   |  | $    | (0.28  | ) |  | $ | 0.98  
|                                                       |      |                           |        |                        
|Antidilutive shares                                    |      |                           | 3,237  |                         |      | 991    |  |      | 2,976  |   |  |   | 540   

Dilutive common stock equivalents are composed of potentially convertible preferred stock and shares associated
with stock-based compensation. Dilutive common stock equivalents have been excluded from the computation of dilutive EPS if the result would be anti-dilutive. Inclusion of dilutive common stock equivalents in the diluted EPS calculation will only
occur in circumstances where net income is high enough to result in dilution.



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NOTE 17COMPREHENSIVE INCOME (LOSS)

Presented below is a reconciliation of net income (loss) to comprehensive income (loss) including the components of other comprehensive income (loss) for the periods indicated:



|                                                                         |                 |                             |         |                     |  |   |          |   |  |                 |         |   |                     |   |         |          |  |   |         |   |  |   |         |  
|------------------------------------------------------------------------ | --------------- | --------------------------- | ------- | ------------------- |  | - | -------- | - |  | --------------- | ------- | - | ------------------- | - | ------- | -------- |  | - | ------- | - |  | - | ------- | -
|(in thousands)                                                           |                 | Three Months Ended June 30, |        
|                                                                         | 2008            |                             |         | 2007                | 
|                                                                         | BeforeIncomeTax |                             |         | TaxExpense(Benefit) |  |   | NetofTax |   |  | BeforeIncomeTax |         |   | TaxExpense(Benefit) |   |         | NetofTax | 
|Securities available for sale:                                           |                 |                             |         |                     |  |   |          |   |  |                 |         |   |                     |   |         |          |  |   |         |   |  |   |         |  
|Net unrealized losses arising during the year                            |                 | $                           | (39,064 | )                   |  | $ | (14,876  | ) |  | $               | (24,188 | ) |                     | $ | (27,181 | )        |  | $ | (10,722 | ) |  | $ | (16,459 | )
|Reclassification of gains (losses) realized in net income                |                 |                             | 20,748  |                     |  |   | 7,877    |   |  |                 | 12,871  |   |                     |   | (187    | )        |  |   | (73     | ) |  |   | (114    | )
|                                                                         |                 |                             |         |                     |  |   |          |   |  |                 |         |   |                     |   |         |          |  |   |         |   |  |   |         |  
|Net unrealized losses on securities arising during the year              |                 |                             | (18,316 | )                   |  |   | (6,999   | ) |  |                 | (11,317 | ) |                     |   | (27,368 | )        |  |   | (10,795 | ) |  |   | (16,573 | )
|Net unrealized losses from derivative activities arising during the year |                 |                             | (4,745  | )                   |  |   | (1,890   | ) |  |                 | (2,855  | ) |                     |   | (2,194  | )        |  |   | (868    | ) |  |   | (1,326  | )
|                                                                         |                 |                             |         |                     |  |   |          |   |  |                 |         |   |                     |   |         |          |  |   |         |   |  |   |         |  
|Other comprehensive loss                                                 |                 | $                           | (23,061 | )                   |  | $ | (8,889   | ) |  |                 | (14,172 | ) |                     | $ | (29,562 | )        |  | $ | (11,663 | ) |  |   | (17,899 | )
|                                                                         |                 |                             |         |                     |  |   |          |   |  |                 |         |   |                     |   |         |          |  |   |         |   |  |   |         |  
|Net income                                                               |                 |                             |         |                     |  |   |          |   |  |                 | 10,224  |   |                     |   |         |          |  |   |         |   |  |   | 15,522  |  
|                                                                         |                 |                             |         |                     |  |   |          |   |  |                 |         |   |                     |   |         |          |  |   |         |   |  |   |         |  
|Comprehensive loss                                                       |                 |                             |         |                     |  |   |          |   |  | $               | (3,948  | ) |                     |   |         |          |  |   |         |   |  | $ | (2,377  | )
|                                                                         |                 |                             |         |                     |  |   |          |   |  |                 |         |   |                     |   |         |          |  |   |         |   |  |   |         |  



|                                                                                 |                 |                           |          |                     |  |   |          |   |  |                 |         |   |                     |   |         |          |  |   |        |   |  |   |         |  
|-------------------------------------------------------------------------------- | --------------- | ------------------------- | -------- | ------------------- |  | - | -------- | - |  | --------------- | ------- | - | ------------------- | - | ------- | -------- |  | - | ------ | - |  | - | ------- | -
|(in thousands)                                                                   |                 | Six Months Ended June 30, |         
|                                                                                 | 2008            |                           |          | 2007                | 
|                                                                                 | BeforeIncomeTax |                           |          | TaxExpense(Benefit) |  |   | NetofTax |   |  | BeforeIncomeTax |         |   | TaxExpense(Benefit) |   |         | NetofTax | 
|Securities available for sale:                                                   |                 |                           |          |                     |  |   |          |   |  |                 |         |   |                     |   |         |          |  |   |        |   |  |   |         |  
|Net unrealized losses arising during the year                                    |                 | $                         | (105,089 | )                   |  | $ | (40,567  | ) |  | $               | (64,522 | ) |                     | $ | (21,491 | )        |  | $ | (8,471 | ) |  | $ | (13,020 | )
|Reclassification of net gains (losses) realized in net income                    |                 |                           | 63,403   |                     |  |   | 24,473   |   |  |                 | 38,930  |   |                     |   | (399    | )        |  |   | (157   | ) |  |   | (242    | )
|                                                                                 |                 |                           |          |                     |  |   |          |   |  |                 |         |   |                     |   |         |          |  |   |        |   |  |   |         |  
|Net unrealized losses on securities arising during the year                      |                 |                           | (41,686  | )                   |  |   | (16,094  | ) |  |                 | (25,592 | ) |                     |   | (21,890 | )        |  |   | (8,628 | ) |  |   | (13,262 | )
|Net unrealized gains (losses) from derivative activities arising during the year |                 |                           | 1,152    |                     |  |   | 436      |   |  |                 | 716     |   |                     |   | (824    | )        |  |   | (508   | ) |  |   | (316    | )
|                                                                                 |                 |                           |          |                     |  |   |          |   |  |                 |         |   |                     |   |         |          |  |   |        |   |  |   |         |  
|Other comprehensive loss                                                         |                 | $                         | (40,534  | )                   |  | $ | (15,658  | ) |  |                 | (24,876 | ) |                     | $ | (22,714 | )        |  | $ | (9,136 | ) |  |   | (13,578 | )
|                                                                                 |                 |                           |          |                     |  |   |          |   |  |                 |         |   |                     |   |         |          |  |   |        |   |  |   |         |  
|Net income (loss)                                                                |                 |                           |          |                     |  |   |          |   |  |                 | (7,398  | ) |                     |   |         |          |  |   |        |   |  |   | 31,636  |  
|                                                                                 |                 |                           |          |                     |  |   |          |   |  |                 |         |   |                     |   |         |          |  |   |        |   |  |   |         |  
|Comprehensive income (loss)                                                      |                 |                           |          |                     |  |   |          |   |  | $               | (32,274 | ) |                     |   |         |          |  |   |        |   |  | $ | 18,058  |  
|                                                                                 |                 |                           |          |                     |  |   |          |   |  |                 |         |   |                     |   |         |          |  |   |        |   |  |   |         |  



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NOTE 18EMPLOYEE BENEFIT PLANS

The actuarially estimated net benefit cost includes the following components for the periods indicated:



|                                                       |  |                            |        |   |                           |   |                            |      |  |      |     |      |   |       |      |   |    |   |  |   |    |  
|------------------------------------------------------ |  | -------------------------- | ------ | - | ------------------------- | - | -------------------------- | ---- |  | ---- | --- | ---- | - | ----- | ---- | - | -- | - |  | - | -- | -
|                                                       |  | Three Months EndedJune 30, |       
|                                                       |  | QualifiedPension Plan      |        |   | Non-qualifiedPension Plan |   | PostretirementBenefit Plan |     
|(in thousands)                                         |  | 2008                       |        |   | 2007                      |   |                            | 2008 |  | 2007 |     | 2008 |   |       | 2007 |  
|Service cost - benefits earned during the period       |  | $                          | 636    |   |                           | $ | 632                        |      |  | $    | 189 |      | $ | 256   |      | $ | 1  |   |  | $ | 2  |  
|Interest cost on projected benefit obligation          |  |                            | 817    |   |                           |   | 724                        |      |  |      | 95  |      |   | 215   |      |   | 5  |   |  |   | 5  |  
|Expected return on plan assets                         |  |                            | (1,217 | ) |                           |   | (1,106                     | )    |  |      |    |      |   |      |      |   |   |   |  |   |   |  
|Net amortization and deferral of loss (gain)           |  |                            | 238    |   |                           |   | 210                        |      |  |      | 106 |      |   | 68    |      |   | (1 | ) |  |   | (2 | )
|                                                       |  |                            |        |   |                           |   |                            |      |  |      |     |      |   |       |      |   |    |   |  |   |    |  
|Net pension cost included in employee benefits expense |  | $                          | 474    |   |                           | $ | 460                        |      |  | $    | 390 |      | $ | 539   |      | $ | 5  |   |  | $ | 5  |  
|                                                       |  |                            |        |   |                           |   |                            |      |  |      |     |      |   |       |      |   |    |   |  |   |    |  
|                                                       | 
|                                                       |  | Six Months EndedJune 30,   |       
|                                                       |  | QualifiedPension Plan      |        |   | Non-qualifiedPension Plan |   | PostretirementBenefit Plan |     
|(in thousands)                                         |  | 2008                       |        |   | 2007                      |   |                            | 2008 |  | 2007 |     | 2008 |   |       | 2007 |  
|Service cost - benefits earned during the period       |  | $                          | 1,272  |   |                           | $ | 1,264                      |      |  | $    | 377 |      | $ | 513   |      | $ | 2  |   |  | $ | 3  |  
|Interest cost on projected benefit obligation          |  |                            | 1,634  |   |                           |   | 1,448                      |      |  |      | 190 |      |   | 430   |      |   | 10 |   |  |   | 11 |  
|Expected return on plan assets                         |  |                            | (2,434 | ) |                           |   | (2,213                     | )    |  |      |    |      |   |      |      |   |   |   |  |   |   |  
|Net amortization and deferral of loss (gain)           |  |                            | 476    |   |                           |   | 421                        |      |  |      | 212 |      |   | 136   |      |   | (2 | ) |  |   | (4 | )
|                                                       |  |                            |        |   |                           |   |                            |      |  |      |     |      |   |       |      |   |    |   |  |   |    |  
|Net pension cost included in employee benefits expense |  | $                          | 948    |   |                           | $ | 920                        |      |  | $    | 779 |      | $ | 1,079 |      | $ | 10 |   |  | $ | 10 |  
|                                                       |  |                            |        |   |                           |   |                            |      |  |      |     |      |   |       |      |   |    |   |  |   |    |  

The minimum required contribution in 2008 for the qualified plan is estimated to be zero. The decision to
contribute further amounts is dependent on other factors, including the actual investment performance of the plan assets and the requirements of the Internal Revenue Code. The Corporation contributed $2.8 million to the qualified pension plan during
the second quarter of 2008. No contributions were made during the first quarter of 2008.

For the unfunded non-qualified pension and postretirement benefit
plans, the Corporation will contribute the minimum required amount in 2008, which is equal to the benefits paid under the plans.

NOTE 19BUSINESS
SEGMENT INFORMATION

The Corporations lines of business are structured according to the channels through which its products and services are
delivered to its customers. For management purposes the lines are divided into the following segments: Consumer Banking, Commercial Banking, and Treasury and Administration.

The Corporation offers consumer and commercial banking products and services through its wholly owned subsidiary, Provident Bank. The Bank offers its services to customers in the key metropolitan areas of Baltimore,
Washington D.C. and Richmond, Virginia, through 79 traditional and 63 in-store banking offices in Maryland, Virginia and southern York County, Pennsylvania. Additionally, the Bank offers its customers 24-hour banking services through 196 Bank owned
ATMs, telephone banking and the Internet. The Bank is also a member of the MoneyPass network which provides customers with free access to more than 11,000 ATMs nationwide. Consumer banking services include a broad array of small business and
consumer loan, deposit and investment products offered to retail and commercial customers through the retail branch network and direct channel sales center. Commercial Banking provides an array of commercial financial services including asset-based
lending, equipment leasing, real estate financing, cash management and structured financing to middle market commercial customers. Treasury and Administration is comprised of balance sheet management activities that include managing the investment
portfolio, discretionary funding, utilization of derivative financial instruments and optimizing the Corporations equity position.



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##### Table of Contents

The financial performance of each business segment is monitored using an internal profitability measurement system. This
system utilizes policies that ensure the results reflect the economics for each segment compiled on a consistent basis. Line of business information is based on management accounting practices that support the current management structure and is not
necessarily comparable with similar information for other financial institutions. This profitability measurement system uses internal management accounting policies that generally follow the policies described in Note 1. The Corporations funds
transfer pricing system utilizes a matched maturity methodology that assigns a cost of funds to earning assets and a value to the liabilities of each business segment with an offset in the Treasury and Administration business segment. The provision
for loan losses is charged to the consumer and commercial segments based on actual charge-offs with the balance to the Treasury and Administration segment. Operating expense is charged on a fully absorbed basis. Income tax expense is calculated
based on the segments taxable income and the Corporations effective tax rate. Revenues from no individual customer exceeded 10% of consolidated total revenues.

For the three months ended June 30, 2008, the business segments income tax expense reflects the impact from the change in the Corporations year-to-date annual effective tax rate.

The table below summarizes results by each business segment for the periods indicated.



|                                                    |  |                     |           |                 |       |                            |  |                     |         |                   |  |                 |           |                            |  |   |           |  |   |           |  |   |         |  |   |          
|--------------------------------------------------- |  | ------------------- | --------- | --------------- | ----- | -------------------------- |  | ------------------- | ------- | ----------------- |  | --------------- | --------- | -------------------------- |  | - | --------- |  | - | --------- |  | - | ------- |  | - | ---------
|Three Months Ended June 30,                         |  | -------2008-------  |           |                 | Total |                            |  | -------2007-------  |         | Total            
|(in thousands)                                      |  | CommercialBanking   |           | ConsumerBanking |       | Treasury andAdministration |  |                     |         | CommercialBanking |  | ConsumerBanking |           | Treasury andAdministration | 
|Net interest income                                 |  | $                   | 16,341    |                 | $     | 24,219                     |  | $                   | 5,443   |                   |  | $               | 46,003    |                            |  | $ | 15,760    |  | $ | 25,438    |  | $ | 7,350   |  | $ | 48,548   
|Provision for loan losses                           |  |                     | 1,653     |                 |       | 1,599                      |  |                     | 3,148   |                   |  |                 | 6,400     |                            |  |   | 3,749     |  |   | 613       |  |   | 430     |  |   | 4,792    
|                                                    |  |                     |           |                 |       |                            |  |                     |         |                   |  |                 |           |                            |  |   |           |  |   |           |  |   |         |  |   |          
|Net interest income after provision for loan losses |  |                     | 14,688    |                 |       | 22,620                     |  |                     | 2,295   |                   |  |                 | 39,603    |                            |  |   | 12,011    |  |   | 24,825    |  |   | 6,920   |  |   | 43,756   
|Non-interest income                                 |  |                     | 5,522     |                 |       | 23,752                     |  |                     | (12,957 | )                 |  |                 | 16,317    |                            |  |   | 5,162     |  |   | 25,760    |  |   | 163     |  |   | 31,085   
|Non-interest expense                                |  |                     | 6,678     |                 |       | 36,460                     |  |                     | 7,235   |                   |  |                 | 50,373    |                            |  |   | 6,099     |  |   | 39,479    |  |   | 7,050   |  |   | 52,628   
|                                                    |  |                     |           |                 |       |                            |  |                     |         |                   |  |                 |           |                            |  |   |           |  |   |           |  |   |         |  |   |          
|Income (loss) before income taxes                   |  |                     | 13,532    |                 |       | 9,912                      |  |                     | (17,897 | )                 |  |                 | 5,547     |                            |  |   | 11,074    |  |   | 11,106    |  |   | 33      |  |   | 22,213   
|Income tax expense (benefit)                        |  |                     | 12,937    |                 |       | 8,455                      |  |                     | (26,069 | )                 |  |                 | (4,677    | )                          |  |   | 3,336     |  |   | 3,345     |  |   | 10      |  |   | 6,691    
|                                                    |  |                     |           |                 |       |                            |  |                     |         |                   |  |                 |           |                            |  |   |           |  |   |           |  |   |         |  |   |          
|Net income (loss)                                   |  | $                   | 595       |                 | $     | 1,457                      |  | $                   | 8,172   |                   |  | $               | 10,224    |                            |  | $ | 7,738     |  | $ | 7,761     |  | $ | 23      |  | $ | 15,522   
|                                                    |  |                     |           |                 |       |                            |  |                     |         |                   |  |                 |           |                            |  |   |           |  |   |           |  |   |         |  |   |          
|                                                    |  |                     |           |                 |       |                            |  |                    
|Total assets                                        |  | $                   | 2,416,267 |                 | $     | 3,046,721                  |  | $                   | 919,067 |                   |  | $               | 6,382,055 |                            |  | $ | 2,208,392 |  | $ | 3,163,410 |  | $ | 891,577 |  | $ | 6,263,379
|                                                    |  |                     |           |                 |       |                            |  |                     |         |                   |  |                 |           |                            |  |   |           |  |   |           |  |   |         |  |   |          
|                                                    |  |                     |           |                
|Six Months Ended June 30,                           |  | -------2008 ------- |           |                 | Total |                            |  | -------2007 ------- |         | Total            
|                                                    |  | CommercialBanking   |           | ConsumerBanking |       | Treasury andAdministration |  |                     |         | CommercialBanking |  | ConsumerBanking |           | Treasury andAdministration | 
|Net interest income                                 |  | $                   | 33,831    |                 | $     | 46,716                     |  | $                   | 10,445  |                   |  | $               | 90,992    |                            |  | $ | 31,413    |  | $ | 50,409    |  | $ | 15,661  |  | $ | 97,483   
|Provision for loan losses                           |  |                     | 3,713     |                 |       | 2,478                      |  |                     | 3,323   |                   |  |                 | 9,514     |                            |  |   | 3,766     |  |   | 1,195     |  |   | 883     |  |   | 5,844    
|                                                    |  |                     |           |                 |       |                            |  |                     |         |                   |  |                 |           |                            |  |   |           |  |   |           |  |   |         |  |   |          
|Net interest income after provision for loan losses |  |                     | 30,118    |                 |       | 44,238                     |  |                     | 7,122   |                   |  |                 | 81,478    |                            |  |   | 27,647    |  |   | 49,214    |  |   | 14,778  |  |   | 91,639   
|Non-interest income (loss)                          |  |                     | 10,543    |                 |       | 46,602                     |  |                     | (55,952 | )                 |  |                 | 1,193     |                            |  |   | 10,015    |  |   | 49,741    |  |   | 1,198   |  |   | 60,954   
|Non-interest expense                                |  |                     | 12,982    |                 |       | 73,677                     |  |                     | 15,145  |                   |  |                 | 101,804   |                            |  |   | 12,241    |  |   | 80,423    |  |   | 14,732  |  |   | 107,396  
|                                                    |  |                     |           |                 |       |                            |  |                     |         |                   |  |                 |           |                            |  |   |           |  |   |           |  |   |         |  |   |          
|Income (loss) before income taxes                   |  |                     | 27,679    |                 |       | 17,163                     |  |                     | (63,975 | )                 |  |                 | (19,133   | )                          |  |   | 25,421    |  |   | 18,532    |  |   | 1,244   |  |   | 45,197   
|Income tax expense (benefit)                        |  |                     | 16,977    |                 |       | 10,527                     |  |                     | (39,239 | )                 |  |                 | (11,735   | )                          |  |   | 7,627     |  |   | 5,561     |  |   | 373     |  |   | 13,561   
|                                                    |  |                     |           |                 |       |                            |  |                     |         |                   |  |                 |           |                            |  |   |           |  |   |           |  |   |         |  |   |          
|Net income (loss)                                   |  | $                   | 10,702    |                 | $     | 6,636                      |  | $                   | (24,736 | )                 |  | $               | (7,398    | )                          |  | $ | 17,794    |  | $ | 12,971    |  | $ | 871     |  | $ | 31,636   
|                                                    |  |                     |           |                 |       |                            |  |                     |         |                   |  |                 |           |                            |  |   |           |  |   |           |  |   |         |  |   |          
|                                                    |  |                     |           |                 |       |                            |  |                    
|Total assets                                        |  | $                   | 2,416,267 |                 | $     | 3,046,721                  |  | $                   | 919,067 |                   |  | $               | 6,382,055 |                            |  | $ | 2,208,392 |  | $ | 3,163,410 |  | $ | 891,577 |  | $ | 6,263,379
|                                                    |  |                     |           |                 |       |                            |  |                     |         |                   |  |                 |           |                            |  |   |           |  |   |           |  |   |         |  |   |          

NOTE 20SUBSEQUENT EVENT

On July 1, 2008, the Corporation transferred $346.7 million par value of primarily A-rated (or higher) bank pooled trust preferred securities from its securities available for sale portfolio to its securities
held to maturity portfolio. The transferred securities had a fair value of $270.2 million at June 30, 2008, a weighted average maturity of twenty-seven years and a weighted average call date of seven years. The Corporation has the intent and
ability to retain these securities until maturity. As a result of the transfer, $76.5 million of net unrealized pre-tax losses associated with the transferred securities, that were previously recorded in net accumulated other comprehensive income
(loss) will continue to be reflected in stockholders equity and be reflected as a discount on investment securities. The discount and amount reflected in net accumulated other comprehensive income (loss) will be amortized using the effective
interest method over the remaining life of the securities. These amortization amounts will increase the securities available for sale and stockholders equity balances over the maturity period of the securities with no impact to net income.
Additionally, as a result of this transfer, it is expected that there will be no negative future impact on earnings, net accumulated other comprehensive income, or capital unless the transferred securities are determined to be other than temporarily
impaired.



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|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

GENERAL

Provident Bankshares Corporation (the Corporation), a Maryland corporation, is the holding
company for Provident Bank (Provident or the Bank); a Maryland chartered stock commercial bank. At June 30, 2008, the Bank is the largest independent commercial bank, in asset size, headquartered in Maryland, with $6.4
billion in assets. Provident is a regional bank serving Maryland, Virginia and Southern York County, PA, with emphasis on the key urban centers within these states  the Baltimore, Washington, D.C. and Richmond metropolitan areas.

Providents principal business is to acquire deposits from individuals and businesses and to use these deposits to fund loans to individuals and businesses.
Provident focuses on providing its products and services to three segments of customers  individuals, small businesses and middle market businesses. The Corporation offers consumer and commercial lending products and services through the
Consumer Banking group and the Commercial Banking group. Provident also offers related financial services through wholly-owned subsidiaries. Securities brokerage, investment management and related insurance services are available through Provident
Investment Company and leases through Court Square Leasing.

Providents mission is to exceed customer expectations by delivering superior service,
products and banking convenience. Every employees commitment to serve the Banks customers in this fashion will assist in establishing Provident as the primary bank of choice of individuals, families, small businesses and middle market
businesses throughout its chosen markets. To achieve this mission and to improve financial fundamentals, the strategic priorities of the organization are to:

Maximize Providents position as the right size bank in the marketplace. Providents position as the largest bank headquartered in Maryland provides a unique opportunity as the right size
bank in its market areas, or footprint. The Bank provides the service of a community bank combined with the convenience and wide array of products and services that a major regional bank offers. In addition, the 63 in-store banking offices
throughout its footprint reinforce its right size strategy through convenient locations, hours and a full line of products and services. Provident currently has 142 banking offices concentrated in the Baltimore-Washington, D.C. corridor and beyond
to Richmond, Virginia. Of the 142 banking offices, 49% are located in the Greater Baltimore region and 51% are located in the Greater Washington, D.C. and Central Virginia regions, reflecting the successful development of the Bank into a highly
competitive regional commercial bank. Provident also offers its customers 24-hour banking services through ATMs, telephone banking and the Internet. The Banks network of 196 ATMs enhances the banking office network by providing customers
increased opportunities to access their funds. In addition, the Bank is a member of the MoneyPass network, which provides free access to more than 11,000 ATMs nationwide for its customers.

Profitably grow and deepen customer relationships in all four key market segments: Commercial Business, Commercial Real Estate, Consumer and Business
Banking. Consumer banking continues to be an important component of the Banks strategic priorities. Consumer banking services include a broad array of consumer loan, deposit and investment products offered to consumer and commercial
customers through Providents banking office network and ProvidentDirect, the Banks direct channel sales center. In addition, the Bank has significantly expanded its online deposit account capabilities, including the introduction of
mobile banking services in early 2008, allowing customers to perform banking transactions via mobile devices such as cellular phones. The business banking segment is further supported by relationship managers who provide comprehensive business
product and sales support to expand existing customer relationships and acquire new clients. Commercial banking is the other key component to the Corporations regional presence in its market area. Commercial banking provides lending services
through its commercial business division and its commercial real estate division. The commercial business division provides customized banking solutions to middle market commercial customers while the commercial real estate division provides lending
expertise and financing options to real estate customers. The Bank has an experienced team of relationship managers with expertise in business and real estate lending to companies in various industries in the region. It also has a suite of cash
management products managed by responsive account teams that deepen customer relationships through competitively priced deposit based services, responsive service and frequent personal contact with each customer.

Consistently execute a higher-performance, customer relationship-focused sales culture.The Corporations transition to a customer
relationship driven sales culture requires deepening relationships through cross-selling and the continuing emphasis on retention of valued customers. The Bank has segmented its customers to better understand and anticipate their financial needs and
provide Providents sales force with a targeted approach to customers and prospects. The successful execution of this strategic priority will be centered on the right size bank commitmentproviding the service of a community bank combined
with the convenience and wide array of products and services that a major regional bank offers. This strategy is measured and monitored by a number of actions such as the utilization of individual performance and incentive plans.

Sustain a culture that attracts and retains employees who provide the differentiating Provident Way customer experience.Provident has
always placed a high priority on its employees and has approached employee development and training with renewed emphasis. Employee development is viewed as a critical part of executing Providents strategic priority as the right size bank and
transforming the Corporations sales culture with a focus on the employees development and approach with Providents customers. This strategy is measured and monitored by a number of actions, such as utilization of individual
development plans for every employee and tracking individual employee learning activities through our learning management system.



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Expand delivery (branch and non-branch) within the market Provident serves; supplement with
acquisitions within pricing discipline. Provident supplements organic growth opportunities with acquisitions if they are a strategic fit and are within the Corporations pricing model. Over the past five years, Provident has expanded its
branch network by a net 28 in-store or traditional branches.

FINANCIAL REVIEW

The principal objective of this Financial Review is to provide an overview of the financial condition and results of operations of Provident Bankshares Corporation and its subsidiaries year over year, unless otherwise
indicated. This discussion and tabular presentations should be read in conjunction with the accompanying unaudited Condensed Consolidated Financial Statements and Notes.

Overview of Income and Expenses

Income

The Corporation has two primary sources of pre-tax income. The first is net interest income. Net interest income is the difference between interest incomewhich is the income that the Corporation earns on its
loans and investmentsand interest expensewhich is the interest that the Corporation pays on its deposits and borrowings.

The second principal
source of pre-tax income is non-interest incomethe compensation received from providing products and services. The majority of the non-interest income comes from service charges on deposit accounts. The Corporation also earns income from
insurance commissions, mortgage banking fees and other fees and charges.

The Corporation recognizes gains or losses as a result of sales of investment
securities or the disposition of loans, foreclosed property, fixed assets or early extinguishment of debt. In addition, the Corporation also recognizes gains or losses on its outstanding derivative financial instruments or impairment on investment
securities that are considered other-than-temporarily impaired. Gains and losses are not a regular part of the Corporations primary source of income.

Expenses

The expenses the Corporation incurs in operating its business consist of salaries and employee benefits expense, occupancy
expense, furniture and equipment expense, external processing fees, deposit insurance premiums, advertising expenses, and other miscellaneous expenses.

Salaries and employee benefits expense consists primarily of the salaries and wages paid to employees, payroll taxes, and expenses for health care, retirement and other employee benefits.

Occupancy expenses, which are fixed or variable costs associated with premises and equipment, consist primarily of lease payments, real estate taxes, depreciation
charges, maintenance and cost of utilities.

Furniture and equipment include expenses and depreciation charges related to office and banking equipment.
Depreciation of furniture and equipment is computed using the straight-line method based on the useful lives of related assets. Estimated lives are 2 to 15 years for building and leasehold improvements, and 3 to 10 years for furniture and equipment.

External processing fees are fees paid to third parties mainly for data processing services.

Restructuring activities are incremental expenses associated with corporate-wide efficiency and infrastructure initiatives implemented to simplify the Corporations
business model as is discussed further in the Notes to the Condensed Consolidated Financial Statements.

Other expenses include expenses for attorneys,
accountants and consultants, fees paid to directors, franchise taxes, charitable contributions, insurance, office supplies, postage, telephone and other miscellaneous operating expenses.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The unaudited Condensed Consolidated Financial Statements of the
Corporation are prepared in accordance with U.S. generally accepted accounting principles (GAAP). The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities for the reporting periods. Management evaluates estimates on an on-going basis, and believes the following represent its more significant
judgments and estimates used in preparation of its consolidated financial statements: allowance for loan losses, non-accrual loans, other real estate owned, estimates of fair value and intangible assets associated with mergers, other-than-temporary
impairment of investment securities, pension and post-retirement benefits, asset prepayment rates, goodwill and intangible assets, share-based payment, derivative financial instruments, litigation and income taxes. Management bases its estimates on
historical experience and various other factors and assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Management believes the following critical accounting policies affect its more significant judgments and estimates used in preparation of its unaudited Condensed Consolidated Financial Statements: allowance for
loan losses, other-than-temporary-impairment of investment securities, derivative financial instruments, goodwill and intangible assets, asset prepayment rates, and income taxes. Each



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estimate and its financial impact, to the extent significant to financial results, are discussed in the Notes to the Condensed Consolidated Financial
Statements. It is at least reasonably possible that each of the Corporations estimates could change in the near term or that actual results may differ from these estimates under different assumptions or conditions, resulting in a change that
could be material to the Condensed Consolidated Financial Statements.

FINANCIAL CONDITION

Capital growth, liquidity and earnings are a major focus for the Corporation during these uncertain economic times. During the second quarter of 2008, the Corporation was
successful in raising and growing capital, maintaining sufficient liquidity and providing solid earnings. The financial condition of the Corporation reflects the strengthening of the Corporations franchise in the key major markets of Greater
Baltimore, Greater Washington, D.C. and Central Virginia, through expanded business development and the execution of the Corporations strategic priorities and the strengthening of the balance sheet by growing capital, loans and deposits along
with maintaining loan credit quality in an uncertain economic environment. Growth in relationship-based loan portfolios (loans other than the Corporations originated and acquired residential mortgage loans) is a reflection of the
Corporations ability to grow the loan portfolio in these key markets through its lending expertise and focus on its premier loan programs  home equity, commercial real estate, and commercial business.

The Corporation also grew deposits, mainly from the use of brokered certificates of deposit, which offset the decline in deposits resulting from the sale of six branches
and associated deposits to Union Bankshares in September 2007, increased competition for deposits and the significant decline in real estate related activity, which affects the related escrow deposits.

The core banking performance resulted in a decline in non-interest expense of $1.9 million, stable loan credit quality and an increase in average relationship-based
loans of $331.5 million, or 9.2%, for the quarter ended June 30, 2008 when compared to the same period a year ago. In addition, the Corporation increased its tangible capital ratio and its already well capitalized regulatory capital
ratios in the second quarter of 2008 when compared to the first quarter of 2008. At June 30, 2008, total assets were $6.4 billion, while total loans and deposits were $4.2 billion and $4.4 billion, respectively.

Stockholders Equity and Capital

Long-term capital growth is a
specific focus for the Corporation. To provide capital growth, the Corporation successfully completed a multi-tiered capital plan in April 2008 to strengthen the Corporations capital base, including the issuance of $64.8 million in equity
securities and $50 million in subordinated debt. In addition, beginning with the dividend that was paid in May 2008, the quarterly dividend payment was reduced by 66% and is expected to result in an annual savings of approximately $29 million,
providing the least costly source to re-build tangible common equity.

On April 9, 2008, the Corporation entered into a Stock Purchase Agreement (the
Agreement) with certain institutional and individual accredited investors and certain officers of the Corporation and members of Corporations Board of Directors in connection with the private placement of approximately $64.8
million of its capital stock. The Agreement provided for the sale of 1,422,110 shares of the Corporations common stock at a price of $9.50 per share ($10.80 for officers and directors of the Corporation, which was the closing bid price on
April 8, 2008, the date prior to the execution of the Agreement), and 51,215 shares of a newly created class of Series A Mandatory Convertible Non-Cumulative Preferred Stock (the Series A Preferred) at a purchase price and
liquidation preference of $1,000 per share. The transaction closed on April 14, 2008. Net proceeds from the equity offering totaled $62.4 million.

On April 24, 2008, the Corporations wholly owned subsidiary, Provident Bank, completed a private placement of $50.0 million of subordinated unsecured notes that are rated BBB to qualified institutional buyers and accredited
investors. The purchase price of the subordinated notes was 97.651% of the principal amount. The subordinated notes bear interest at a fixed rate of 9.5% and mature on May 1, 2018, with semi-annual interest payments payable on May 1 and
November 1 of each year beginning on November 1, 2008. The subordinated notes are not convertible. Net proceeds from the debt offering totaled $47.7 million and qualifies for Tier II regulatory capital.

Total stockholders equity was $573.2 million at June 30, 2008, an increase of $17.4 million from December 31, 2007. Stockholders equity increased
by $13.6 million from the issuance of common stock and $51.2 million from the issuance of preferred stock, partially offset by $2.4 million of costs associated with the issuance of the equity raised in the second quarter of 2008. Net accumulated
other comprehensive loss increased $24.9 million during the period primarily due to the impact on the market value of the debt securities portfolio from the current illiquid market. In addition, the change in stockholders equity for the period
was attributable to a $7.4 million net loss for the six months ended June, 2008, common stock dividends of $13.9 million, a $1.5 million increase due to share based payment activity and a $300 thousand decline in other activities.

The equity raised from the capital activities discussed above and the equity preserved from the dividend reduction along with growth in net income in the second quarter
2008 has improved the Corporations tangible common equity, Tier I risk-based capital and total risk-based capital ratios in the second quarter of 2008.



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The Companys tangible common equity ratio increased from 5.48% at March 31, 2008 to 5.81% at June 30,
2008. The tangible common equity ratio is a non-GAAP measure used by management to evaluate capital adequacy. Tangible common equity is total equity less net accumulated other comprehensive income (OCI), goodwill and deposit-based
intangibles and preferred stock. Tangible assets are total assets less goodwill and deposit-based intangibles. The tangible common equity ratio is calculated by removing the impact of OCI, preferred stock and certain intangible assets from total
equity and total assets. Management and many stock analysts use the tangible common equity ratio in conjunction with more traditional bank capital ratios to compare the capital adequacy of banking organizations with significant amounts of goodwill
or other intangible assets, typically stemming from the use of the purchase accounting method accounting for mergers and acquisitions. Management believes this is an important benchmark for the Corporation and for investors. Neither tangible common
equity, tangible assets nor the related measures should be considered in isolation or as a substitute for stockholders equity, total assets or any other measure calculated in accordance with GAAP. Moreover, the manner in which the Corporation
calculates its tangible common equity, tangible assets and the related measures may differ from that of other companies reporting measures with similar names. The following table is a reconciliation of the Corporations tangible common equity
and tangible assets for the periods ended June 30, 2008, December 31, 2007 and June 30, 2007, respectively.



|                                                           |  |              |           |   |                  |   |           |              |  |   |           |  
|---------------------------------------------------------- |  | ------------ | --------- | - | ---------------- | - | --------- | ------------ |  | - | --------- | -
|(dollars in thousands)                                     |  | June 30,2008 |           |   | December 31,2007 |   |           | June 30,2007 | 
|Total equity capital per consolidated financial statements |  | $            | 573,166   |   |                  | $ | 555,771   |              |  | $ | 624,167   |  
|Accumulated other comprehensive loss                       |  |              | 93,053    |   |                  |   | 68,177    |              |  |   | 35,685    |  
|Goodwill                                                   |  |              | (253,906  | ) |                  |   | (253,906  | )            |  |   | (253,906  | )
|Deposit-based intangible                                   |  |              | (5,519    | ) |                  |   | (6,152    | )            |  |   | (8,065    | )
|Preferred stock                                            |  |              | (51,215   | ) |                  |   |          |              |  |   |          |  
|                                                           |  |              |           |   |                  |   |           |              |  |   |           |  
|Tangible common equity                                     |  | $            | 355,579   |   |                  | $ | 363,890   |              |  | $ | 397,881   |  
|                                                           |  |              |           |   |                  |   |           |              |  |   |           |  
|                                                           |  |              |          
|Total assets per consolidated financial statements         |  | $            | 6,382,055 |   |                  | $ | 6,465,046 |              |  | $ | 6,263,379 |  
|Goodwill                                                   |  |              | (253,906  | ) |                  |   | (253,906  | )            |  |   | (253,906  | )
|Deposit-based intangible                                   |  |              | (5,519    | ) |                  |   | (6,152    | )            |  |   | (8,065    | )
|                                                           |  |              |           |   |                  |   |           |              |  |   |           |  
|Tangible assets                                            |  | $            | 6,122,630 |   |                  | $ | 6,204,988 |              |  | $ | 6,001,408 |  
|                                                           |  |              |           |   |                  |   |           |              |  |   |           |  
|                                                           |  |              |          
|Tangible common equity ratio                               |  |              | 5.81      | % |                  |   | 5.86      | %            |  |   | 6.63      | %



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The Corporation is required to maintain minimum amounts and ratios of core capital to adjusted quarterly average assets
(leverage ratio) and of Tier 1 and total regulatory capital to risk-weighted assets. The actual regulatory capital ratios and required ratios for capital adequacy purposes under FIRREA and the ratios to be categorized as well
capitalized under prompt corrective action regulations are summarized in the following table.



|                                                           |  |              |           |   |                  |   |           |                               |  |      |                         |  |       |  
|---------------------------------------------------------- |  | ------------ | --------- | - | ---------------- | - | --------- | ----------------------------- |  | ---- | ----------------------- |  | ----- | -
|                                                           |  | June 30,2008 |           |   | December 31,2007 |   |           |                               |  |      |                         | 
|(dollars in thousands)                                     |  |              |           |   |                  |   |           |                              
|Total equity capital per consolidated financial statements |  | $            | 573,166   |   |                  | $ | 555,771   |                               |  |      |                         |  |       |  
|Qualifying trust preferred securities                      |  |              | 129,000   |   |                  |   | 129,000   |                               |  |      |                         |  |       |  
|                                                           |  |              |           |  
|Accumulated other comprehensive loss                       |  |              | 93,053    |   |                  |   | 68,177    |                               |  |      |                         |  |       |  
|                                                           |  |              |           |   |                  |   |           |                               |  |      |                         |  |       |  
|Adjusted capital                                           |  |              | 795,219   |   |                  |   | 752,948   |                               |  |      |                         |  |       |  
|Adjustments for tier 1 capital:                            |  |              |           |   |                  |   |           |                               |  |      |                         |  |       |  
|Goodwill and disallowed intangible assets                  |  |              | (259,526  | ) |                  |   | (260,186  | )                             |  |      |                         |  |       |  
|                                                           |  |              |           |   |                  |   |           |                               |  |      |                         |  |       |  
|Total tier 1 capital                                       |  |              | 535,693   |   |                  |   | 492,762   |                               |  |      |                         |  |       |  
|                                                           |  |              |           |   |                  |   |           |                               |  |      |                         |  |       |  
|Adjustments for tier 2 capital:                            |  |              |           |   |                  |   |           |                               |  |      |                         |  |       |  
|Allowance for loan losses                                  |  |              | 58,174    |   |                  |   | 55,269    |                               |  |      |                         |  |       |  
|Subordinated debt                                          |  |              | 50,000    |   |                  |   |          |                               |  |      |                         |  |       |  
|Allowance for letter of credit losses                      |  |              | 707       |   |                  |   | 635       |                               |  |      |                         |  |       |  
|                                                           |  |              |           |   |                  |   |           |                               |  |      |                         |  |       |  
|Total tier 2 capital adjustments                           |  |              | 108,881   |   |                  |   | 55,904    |                               |  |      |                         |  |       |  
|                                                           |  |              |           |   |                  |   |           |                               |  |      |                         |  |       |  
|Total regulatory capital                                   |  | $            | 644,574   |   |                  | $ | 548,666   |                               |  |      |                         |  |       |  
|                                                           |  |              |           |   |                  |   |           |                               |  |      |                         |  |       |  
|                                                           |  |              |           |  
|Risk-weighted assets                                       |  | $            | 5,057,059 |   |                  | $ | 5,057,463 |                               |  |      |                         |  |       |  
|Quarterly regulatory average assets                        |  |              | 6,176,542 |   |                  |   | 6,145,549 |                               |  |      |                         |  |       |  
|                                                           |  |              |           |  
|                                                           |  |              |           |   |                  |   |           | MinimumRegulatoryRequirements |  |      | To be WellCapitalized | 
|Ratios:                                                    |  |              |           |   |                  |   |           |                               |  |      |                         |  |       |  
|Tier 1 leverage                                            |  |              | 8.67      | % |                  |   | 8.02      | %                             |  | 4.00 | %                       |  | 5.00  | %
|Tier 1 capital to risk-weighted assets                     |  |              | 10.59     |   |                  |   | 9.74      |                               |  | 4.00 |                         |  | 6.00  |  
|Total regulatory capital to risk-weighted assets           |  |              | 12.75     |   |                  |   | 10.85     |                               |  | 8.00 |                         |  | 10.00 |  

As of June 30, 2008, the Corporation is considered well capitalized for regulatory purposes.

Liquidity

An important component of the
Corporations asset/liability structure is the level of liquidity available to meet the needs of customers and creditors. Traditional sources of bank liquidity include deposit growth, loan repayments, investment maturities, asset sales,
borrowings and interest received. Management believes the Corporation has sufficient liquidity to meet future funding needs.

The Corporations chief
source of liquidity are the assets it possesses, which can either be pledged as collateral for secured borrowings or sold outright. At June 30, 2008, over $150 million of the Corporations investment portfolio was immediately saleable at a
market value equaling or exceeding its amortized cost basis. As an alternative to asset sales, the Corporation has the ability to pledge assets to raise secured borrowings. At June 30, 2008, $1.0 billion of secured borrowings were employed,
with sufficient collateral available to raise over $600 million from the FHLBAtlanta, the Federal Reserves term auction facility, and securities sold under repurchase agreements. Additionally, over $400 million of borrowing capacity
exists at the Federal Reserve discount window as a contingent funding source. The Corporation also employs unsecured funding sources such as fed funds and brokered certificates of deposit. At June 30, 2008, $175.0 million of fed funds were
employed, compared with funding lines in place of approximately $1.0 billion. At June 30, 2008, the Corporation had $838.3 million of brokered certificates of deposit outstanding.

A significant use of the Corporations liquidity is the dividends paid to stockholders. The Corporation is a one-bank holding company that relies upon the Banks performance to generate capital growth
through Bank earnings. A portion of the Banks earnings is passed to the Corporation in the form of cash dividends. As a commercial bank under the Maryland Financial Institution Law, the Bank may declare cash dividends from undivided profits
or, with the prior approval of the Commissioner of Financial Regulation, out of paid-in capital in excess of 100% of its required capital stock, and after providing for due or accrued expenses, losses, interest and taxes. The dividends paid to the
Corporation by the Bank are utilized to pay dividends to stockholders, repurchase shares and pay interest on junior subordinated debentures. The Corporation and the Bank, in declaring and paying dividends, are also limited by the minimum regulatory
capital requirements. The Corporation and the Bank are in compliance with these capital requirements. If the Corporation or the Bank were unable to comply with the minimum capital requirements, it could result in regulatory actions that could have a
material impact on the Corporation.



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##### Table of Contents

Lending

Total
average loan balances increased to $4.2 billion in the second quarter of 2008, an increase of $294.8 million, or 7.6%, over the second quarter of 2007. The following table summarizes the composition of the Corporations average loans for the
periods indicated.



|                                             |  |                            |           |      |   |           |   |   |          |   |  |       |   
|-------------------------------------------- |  | -------------------------- | --------- | ---- | - | --------- | - | - | -------- | - |  | ----- | --
|                                             |  | Three Months EndedJune 30, |           | $    |   |           | % |  
|(dollars in thousands)                       |  | 2008                       |           | 2007 |   | Variance  |   |   | Variance |  
|Residential real estate:                     |  |                            |           |      |   |           |   |   |          |   |  |       |   
|Originated and acquired residential mortgage |  | $                          | 274,357   |      | $ | 311,122   |   | $ | (36,765  | ) |  | (11.8 | )%
|Home equity                                  |  |                            | 1,089,274 |      |   | 1,014,915 |   |   | 74,359   |   |  | 7.3   |   
|Other consumer:                              |  |                            |           |      |   |           |   |   |          |   |  |       |   
|Marine                                       |  |                            | 360,297   |      |   | 367,880   |   |   | (7,583   | ) |  | (2.1  | ) 
|Other                                        |  |                            | 23,537    |      |   | 26,731    |   |   | (3,194   | ) |  | (11.9 | ) 
|                                             |  |                            |           |      |   |           |   |   |          |   |  |       |   
|Total consumer                               |  |                            | 1,747,465 |      |   | 1,720,648 |   |   | 26,817   |   |  | 1.6   |   
|                                             |  |                            |           |      |   |           |   |   |          |   |  |       |   
|Commercial real estate:                      |  |                            |           |      |   |           |   |   |          |   |  |       |   
|Commercial mortgage                          |  |                            | 501,953   |      |   | 446,898   |   |   | 55,055   |   |  | 12.3  |   
|Residential construction                     |  |                            | 578,600   |      |   | 584,719   |   |   | (6,119   | ) |  | (1.0  | ) 
|Commercial construction                      |  |                            | 452,556   |      |   | 376,151   |   |   | 76,405   |   |  | 20.3  |   
|Commercial business                          |  |                            | 917,765   |      |   | 775,142   |   |   | 142,623  |   |  | 18.4  |   
|                                             |  |                            |           |      |   |           |   |   |          |   |  |       |   
|Total commercial                             |  |                            | 2,450,874 |      |   | 2,182,910 |   |   | 267,964  |   |  | 12.3  |   
|                                             |  |                            |           |      |   |           |   |   |          |   |  |       |   
|Total loans                                  |  | $                          | 4,198,339 |      | $ | 3,903,558 |   | $ | 294,781  |   |  | 7.6   |   
|                                             |  |                            |           |      |   |           |   |   |          |   |  |       |   

The Corporation continues to produce solid loan growth in its internally generated loan portfolios, mainly in the
commercial portfolio. Relationship-based loans increased in the aggregate $331.5 million, or 9.2%, over the same quarter in 2007. The Corporations focus on developing lending relationships provided by the market opportunity, combined with the
experience of lending officers in the market, has been demonstrated by the consistent growth in the commercial real estate and commercial business loan portfolios.

Total average loans increased by 7.6%, primarily due to an increase of $74.4 million, or 7.3%, in average home equity loans, $76.4 million, or 20.3%, in commercial construction loans, $55.1 million, or 12.3%, in average commercial mortgage
loans and $142.6 million, or 18.4%, in average commercial business loans. These increases more than offset the $6.1 million market driven decline in average residential construction loans and the planned reductions in marine lending of $7.6 million
and $36.8 million in the originated and acquired residential portfolios. These results reflect the effectiveness of the Corporations strategy to grow and deepen customer relationships in all four key market segments: commercial, commercial
real estate, consumer and small business. The overall result is a strategically balanced mix of lending revenue sources between consumer and commercial loan products with $1.7 billion, or 41.6%, in consumer loans, and $2.5 billion, or 58.4%, in
commercial loans. The diversity of lending products should provide the Corporation with opportunities to emphasize or de-emphasize certain product lines as market conditions change.

Commercial loans are a key component to the Corporations regional presence in its market area. Average total commercial loans increased $268.0 million, or 12.3%, compared to the second quarter of 2007.
Commercial construction loans posted an increase compared to the same quarter of 2007 of $76.4 million and residential construction loans declined by $6.1 million reflecting the contraction in the regional residential construction markets. During
this same period, commercial business loans increased by $142.6 million, or 18.4% and commercial mortgage loans by $55.1 million, or 12.3%. The growth is largely within the Corporations market footprint and is a reflection of the relative
strength in the Corporations markets and its ability to deepen lending relationships with seasoned borrowers in familiar markets and the creation of new lending relationships. These expanded relationships and associated risks are managed
through disciplined loan administration and credit monitoring by an experienced credit management staff.

The variety of home equity loan products, along
with the Corporations relationship sales approach and competitive pricing have proven to be successful in the markets of Maryland, Washington, D.C. and Virginia. Home equity loans are mainly located in these markets and 85% of this portfolio
has been originated through the Corporations internal production network. This strategy resulted in the increase in average home equity loan balances over the same period a year ago. The production of direct consumer loans, primarily home
equity loans and lines, is generated through the Banks retail banking offices, phone center and internet channels. The growth in home equity lending was partially offset by a decline in marine and other consumer loans. Currently, management
has chosen to limit marine lending loan growth due to low margins in the industry.



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##### Table of Contents

Asset Quality

The
following table presents information with respect to non-performing assets and 90-day delinquencies as of the dates indicated.



|                                                  |  |              |        |   |                  |   |        |  
|------------------------------------------------- |  | ------------ | ------ | - | ---------------- | - | ------ | -
|                                                  |  | June 30,2008 |        |   | December 31,2007 |  
|(dollars in thousands)                            |  |             
|Non-Performing Assets:                            |  |              |        |   |                  |   |        |  
|Originated and acquired residential mortgage      |  | $            | 8,207  |   |                  | $ | 7,511  |  
|Home equity                                       |  |              | 1,993  |   |                  |   | 1,737  |  
|Other consumer                                    |  |              | 788    |   |                  |   |       |  
|Commercial mortgage                               |  |              | 1,745  |   |                  |   | 1,335  |  
|Residential real estate construction              |  |              | 1,466  |   |                  |   | 7,923  |  
|Commercial business                               |  |              | 10,477 |   |                  |   | 12,742 |  
|                                                  |  |              |        |   |                  |   |        |  
|Total non-accrual loans                           |  |              | 24,676 |   |                  |   | 31,248 |  
|Total renegotiated loans                          |  |              |       |   |                  |   |       |  
|                                                  |  |              |        |   |                  |   |        |  
|Total non-performing loans                        |  |              | 24,676 |   |                  |   | 31,248 |  
|Non-performing investments                        |  |              | 2,858  |   |                  |   |       |  
|Total other assets and real estate owned          |  |              | 11,095 |   |                  |   | 2,664  |  
|                                                  |  |              |        |   |                  |   |        |  
|Total non-performing assets                       |  | $            | 38,629 |   |                  | $ | 33,912 |  
|                                                  |  |              |        |   |                  |   |        |  
|90-Day Delinquencies:                             |  |              |        |   |                  |   |        |  
|Originated and acquired residential mortgage      |  | $            | 1,842  |   |                  | $ | 2,149  |  
|Home equity                                       |  |              | 2,777  |   |                  |   | 1,281  |  
|Other consumer                                    |  |              | 1,618  |   |                  |   | 321    |  
|Residential real estate construction              |  |              | 300    |   |                  |   |       |  
|Commercial business                               |  |              | 486    |   |                  |   | 79     |  
|                                                  |  |              |        |   |                  |   |        |  
|Total 90-day delinquencies                        |  | $            | 7,023  |   |                  | $ | 3,830  |  
|                                                  |  |              |        |   |                  |   |        |  
|Asset Quality Ratios:                             |  |              |        |   |                  |   |        |  
|Non-performing loans to loans                     |  |              | 0.59   | % |                  |   | 0.74   | %
|Non-performing investments to investments         |  |              | 0.21   | % |                  |   |       |  
|Non-performing assets to assets                   |  |              | 0.61   | % |                  |   | 0.52   | %
|Allowance for loan losses to loans                |  |              | 1.38   | % |                  |   | 1.31   | %
|Net charge-offs in quarter to average loans       |  |              | 0.33   | % |                  |   | 0.58   | %
|Allowance for loan losses to non-performing loans |  |              | 235.75 | % |                  |   | 176.87 | %

Recent economic data has shown that the Mid-Atlantic region, while sluggish, remains one of the better performing
markets in the nation in terms of preserving real estate values and lower delinquency levels. In comparison to the prior quarter of 2008, new housing inventories are down in both Maryland and Virginia while unemployment levels in the region continue
to be below the national average. With the majority of the home equity and commercial real estate portfolios concentrated with in the Washington D.C., Virginia and Maryland region, the overall credit quality for the second quarter of 2008 did not
reveal any significant deterioration and is evidenced by non-performing loans to loans of 0.59% at June 30, 2008 compared to 0.74% at December 31, 2007, while net charge-offs to average loans was 0.33%, a decline from 0.58% for the quarter
ending December 31, 2007 and a slight increase from 0.30% for the quarter ended March 31, 2008. The decline in non-performing loans is due mainly to the transfer of foreclosed properties to other real estate owned totaling $6.7 million. At
June 30, 2008, the allowance for loan losses to total loans was 1.38%, while the allowance for loan losses to non-performing loans was 235.8%, compared to 1.31% and 176.9%, respectively at December 31, 2007. The level of 90-day delinquent
loans increased during the same period, increasing $3.2 million to $7.0 million over the $3.8 million level at December 31, 2007. The increase in 90-day delinquent loans was spread through all the internally generated portfolios and was not
concentrated in any one portfolio.

During the current quarter, the Corporation did not experience any broad-based deterioration within its loan
portfolios. The diversification of the commercial real estate portfolio between commercial mortgages, commercial construction and residential construction along with the geographically different markets of Baltimore, suburban Washington, D.C. and
Richmond, Virginia continue to support these results. In addition, the home equity portfolio has continued to perform reasonably well under the current market conditions. The success in maintaining loan asset quality above the national average is a
reflection of managements high credit standards, in-house administration and strong oversight procedures along with the majority of the portfolio focused within the Washington D.C, Virginia and Maryland region which remains one of the better
performing markets in the nation. Because events affecting borrowers and collateral are constantly changing and cannot be reliably predicted, present portfolio quality may not be an indication of future performance.



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Non-performing loans as a percentage of each portfolios outstanding balance were as follows:



|                                           |  |              |   |  |                  |  
|------------------------------------------ |  | ------------ | - |  | ---------------- | -
|                                           |  | June 30,2008 |   |  | December 31,2007 |  
|                                           |  |             
|Originated & acquired residential mortgage |  | 3.06         | % |  | 2.53             | %
|Home equity                                |  | 0.18         |   |  | 0.16             |  
|Other consumer                             |  | 0.21         |   |  |                 |  
|Total consumer                             |  | 0.63         |   |  | 0.53             |  
|Commercial mortgage                        |  | 0.34         |   |  | 0.30             |  
|Residential real estate construction       |  | 0.27         |   |  | 1.26             |  
|Commercial real estate construction        |  |             |   |  |                 |  
|Commercial business                        |  | 1.11         |   |  | 1.36             |  
|Total commercial                           |  | 0.56         |   |  | 0.90             |  
|Total loans                                |  | 0.59         |   |  | 0.74             |  

Overall, the asset quality ratios of the Corporation are relatively stable when compared to December 31,
2007. Non-performing assets were $38.6 million at June 30, 2008, a 13.9% increase over the level at December 31, 2007. The level of non-performing assets to total assets was 0.61% at June 30, 2008, a slight increase compared to 0.52%
at December 31, 2007. Non-performing investment balances were $2.9 million at June 30, 2008 and relate to certain investment securities that were other-than-temporarily impaired. The increase in non-performing assets was mainly
attributable to the investment securities that were classified as non-performing during the first six months of 2008.

Allowance for Loan Losses

The Corporation maintains an allowance for loan losses (the allowance), which is intended to be managements best estimate of probable
inherent losses in the outstanding loan portfolio. The allowance is reduced by actual credit losses and is increased by the provision for loan losses and recoveries of previous losses. The provisions for loan losses are charges to earnings to bring
the total allowance to a level considered necessary by management.

The allowance is based on managements continuing review and credit risk
evaluation of the loan portfolio. This process provides an allowance consisting of two components, allocated and unallocated. To arrive at the allocated component of the allowance, the Corporation combines estimates of the allowances needed for
loans analyzed individually and on a pooled basis. The allocated component of the allowance is supplemented by an unallocated component.

The portion of
the allowance that is allocated to individual internally criticized and non-accrual loans is determined by estimating the inherent loss on each problem credit after giving consideration to the value of underlying collateral. Management emphasizes
loan quality and close monitoring of potential problem credits. Credit risk identification and review processes are utilized in order to assess and monitor the degree of risk in the loan portfolio. The Corporations lending and credit
administration staff are charged with reviewing the loan portfolio and identifying changes in the economy or in a borrowers circumstances which may affect the ability to repay debt or the value of pledged collateral. A loan classification and
review system exists that identifies those loans with a higher than normal risk of uncollectibility. Each commercial loan is assigned a grade based upon an assessment of the borrowers financial capacity to service the debt and the presence and
value of collateral for the loan.

In addition to being used to categorize risk, the Banks internal ten-point risk rating system is used to determine
the allocated allowance for the commercial portfolio. Reserve factors, based on the actual loss history for a 5-year period for criticized loans, are assigned. If the factor, based on loss history for classified credits is lower than the minimum
established factor, the higher factor is applied. For loans with satisfactory risk profiles, the factors are based on the rating profile of the portfolio and the consequent historic losses of bonds with equivalent ratings.

For the consumer portfolios, the determination of the allocated allowance is conducted at an aggregate, or pooled, level. Each quarter, historical rolling loss rates for
homogenous pools of loans in these portfolios provide the basis for the allocated reserve. For any portfolio where the Bank lacks sufficient historic experience, industry loss rates are used. If recent history is not deemed to reflect the inherent
losses existing within a portfolio, older historic loss rates during a period of similar economic or market conditions are used.

The Banks credit
administration group adjusts the indicated loss rates based on qualitative factors. Factors that are considered in adjusting loss rates include risk characteristics, credit concentration trends and general economic conditions, including job growth
and unemployment rates. For commercial and real estate portfolios, additional factors include the level and trend of watched and criticized credits within those portfolios; commercial real estate vacancy, absorption and rental rates; and the number
and volume of syndicated credits, construction loans, or other portfolio segments deemed to carry higher levels of risk. Upon completion of the qualitative adjustments, the overall allowance is allocated to the components of the portfolio based on
the adjusted loss factors.



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The unallocated component of the allowance exists to mitigate the imprecision inherent in managements estimates of
expected credit losses and includes its judgmental determination of the amounts necessary for concentrations, economic uncertainties and other subjective factors that may not have been fully considered in the allocated allowance. The relationship of
the unallocated component to the total allowance may fluctuate from period to period. Although management has allocated the majority of the allowance to specific loan categories, the evaluation of the allowance is considered in its entirety.

Lending management meets at least quarterly with executive management to review the credit quality of the loan portfolios and to evaluate the allowance.
The Corporation has an internal risk analysis and review staff that continuously reviews loan quality and reports the results of its reviews to executive management and the Board of Directors. Such reviews also assist management in establishing the
level of the allowance.

Management believes that it uses relevant information available to make determinations about the allowance and that it has
established its existing allowance in accordance with GAAP. If circumstances differ substantially from the assumptions used in making determinations, adjustments to the allowance may be necessary and results of operations could be affected. Because
events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that increases to the allowance will not be necessary should the quality of any loans deteriorate.

The FDIC examines the Bank periodically and, accordingly, as part of this examination, the allowance is reviewed for adequacy utilizing specific guidelines. Based upon
their review, the regulators may from time to time require reserves in addition to those previously provided.

At June 30, 2008, the allowance for
loan losses was $58.2 million, or 1.38% of total loans outstanding, compared to an allowance for loan losses at December 31, 2007 of $55.3 million, or 1.31% of total loans outstanding. The allowance coverage was 235.8% of non-performing loans
at June 30, 2008 compared to 176.9% at December 31, 2007. Portfolio-wide, net charge-offs represented 0.33% of average loans in second quarter of 2008, compared to 0.47% in second quarter of 2007 and 0.58% in the fourth quarter of 2007.

Deposits

The following table summarizes the
composition of the Corporations average deposit balances for the periods indicated.



|                         |  |                            |           |      |   |           |   |   |          |   |  |       |   
|------------------------ |  | -------------------------- | --------- | ---- | - | --------- | - | - | -------- | - |  | ----- | --
|                         |  | Three Months EndedJune 30, |           | $    |   |           | % |  
|(dollars in thousands)   |  | 2008                       |           | 2007 |   | Variance  |   |   | Variance |  
|Transaction accounts:    |  |                            |           |      |   |           |   |   |          |   |  |       |   
|Noninterest-bearing      |  | $                          | 665,638   |      | $ | 743,185   |   | $ | (77,547  | ) |  | (10.4 | )%
|Interest-bearing         |  |                            | 478,235   |      |   | 529,568   |   |   | (51,333  | ) |  | (9.7  | ) 
|Savings/money market:    |  |                            |           |      |   |           |   |   |          |   |  |       |   
|Savings                  |  |                            | 567,121   |      |   | 597,538   |   |   | (30,417  | ) |  | (5.1  | ) 
|Money market             |  |                            | 642,107   |      |   | 598,547   |   |   | 43,560   |   |  | 7.3   |   
|Certificates of deposit: |  |                            |           |      |   |           |   |   |          |   |  |       |   
|Direct                   |  |                            | 1,119,852 |      |   | 1,199,855 |   |   | (80,003  | ) |  | (6.7  | ) 
|Brokered                 |  |                            | 835,071   |      |   | 500,263   |   |   | 334,808  |   |  | 66.9  |   
|                         |  |                            |           |      |   |           |   |   |          |   |  |       |   
|Total deposits           |  | $                          | 4,308,024 |      | $ | 4,168,956 |   | $ | 139,068  |   |  | 3.3   |   
|                         |  |                            |           |      |   |           |   |   |          |   |  |       |   
|Deposits by source:      |  |                            |           |      |   |           |   |   |          |   |  |       |   
|Consumer                 |  | $                          | 2,740,340 |      | $ | 2,871,690 |   | $ | (131,350 | ) |  | (4.6  | ) 
|Commercial               |  |                            | 732,613   |      |   | 797,003   |   |   | (64,390  | ) |  | (8.1  | ) 
|Brokered                 |  |                            | 835,071   |      |   | 500,263   |   |   | 334,808  |   |  | 66.9  |   
|                         |  |                            |           |      |   |           |   |   |          |   |  |       |   
|Total deposits           |  | $                          | 4,308,024 |      | $ | 4,168,956 |   | $ | 139,068  |   |  | 3.3   |   
|                         |  |                            |           |      |   |           |   |   |          |   |  |       |   

Average total deposits increased $139.1 million, or 3.3%, in the second quarter of 2008 compared to the same
period a year ago. Brokered deposits increased $334.8 million during this period, as these deposits provided funding for loan growth as a result of the decline in consumer and commercial deposits. Consumer deposits declined by 4.6%, or $131.4
million to $2.7 billion and commercial deposits declined $64.4 million, or 8.1%.

The decline in consumer deposits of $131.4 million includes $46.1 million
of consumer deposits that were sold in September 2007. Market conditions and the intense competition for deposits also contributed to the decline in consumer deposits. During the second quarter of 2008, consumer money market accounts increased by
$25.5 million from the same period a year ago and were offset by a $156.9 million net decline in all other sources of consumer deposits. During the past twelve months, the Corporation has been



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successful in growing its online savings balances to mitigate the decline in other consumer deposits. For the quarter ended June 30, 2008, the online
savings increased $46.5 million over the same period a year ago. Commercial deposits declined $64.4 million in the quarter ending June 30, 2008 when compared to the same period a year ago. The decline in commercial deposits is mainly attributed
to lower real estate related activity, repo sweeps and the increase in customer utilization of their deposits versus obtaining financing.

Treasury
Activities

The Treasury Division manages the wholesale segments of the balance sheet, including investments, purchased funds, long-term debt and
derivatives. Managements objective is to achieve the maximum level of stable earnings over the long term, while controlling the level of interest rate, credit risk and liquidity risk, and optimizing capital utilization. In managing the
investment portfolio to achieve its stated objective, the Corporation invests predominately in U.S. Treasury and Agency securities, mortgage-backed securities (MBS), asset-backed securities (ABS), including trust preferred
securities, corporate bonds and municipal bonds. Treasury strategies and activities are overseen by the Banks Asset / Liability Committee (the ALCO), which also reviews all investment and funding transactions. ALCO activities are
summarized and reviewed monthly with the Corporations Board of Directors.

At June 30, 2008, the investment securities portfolio totaled $1.4
billion, or 21.6% of total assets, compared to 22.7% of total assets at year-end 2007. The portfolio declined $87.6 million from the level at year-end 2007, primarily due to the decline in market values in the available for sale portfolios. In the
first six months of 2008, management invested $71.2 million in fixed rate, U.S. agency backed mortgage-backed securities and $6.6 million in Federal Home Loan Bank (FHLB) Stock offsetting investment prepayments and maturities totaling
$59.6 million.

Management wrote-down the value of investment securities by $20.7 million in the quarter ended June 30, 2008 due to
other-than-temporary impairment of its non-agency MBS and REIT trust preferred securities. The REIT trust preferred securities were written down from $19.8 million to $5.0 million. The non-agency MBS previously valued at $10.2 million were written
down to $4.3 million.

Investment Portfolio Credit Quality

Investment allocations at June 30, 2008 include agency MBS (43.7%), ABS (29.6%), municipal (10.9%), corporate (6.8%), non-agency MBS (5.6%) and U.S. Government securities (3.4%). The charts below summarize the credit quality of
the Corporations investment portfolio, using the lowest of the ratings of Moodys, Standard and Poors, or Fitch Ratings and the portfolio distribution.



|                                   |  |        |           |               |                        |   |  |  |                |                              |        |   |               |  |       |  
|---------------------------------- |  | ------ | --------- | ------------- | ---------------------- | - |  |  | -------------- | ---------------------------- | ------ | - | ------------- |  | ----- | -
|Credit Quality                     |  |        |           |               | Portfolio Distribution |  
|$ in thousands                     |  | Amount |           | % ofPortfolio |                        |   |  |  | $ in thousands |                              | Amount |   | % ofPortfolio | 
|U.S. Treasury                      |  | $      | 2,518     |               | 0.2                    | % |  |  |                | U.S. Treasury & Govt Agency  |        | $ | 46,287        |  | 3.4   | %
|U.S. Govt Agency (Incl Agency MBS) |  |        | 647,143   |               | 46.9                   |   |  |  |                | Mortgage backed securities:  |        |   |               |  |       |  
|AAA                                |  |        | 200,407   |               | 14.5                   |   |  |  |                | Agency backed                |        |   | 603,374       |  | 43.7  |  
|AA                                 |  |        | 138,110   |               | 10.0                   |   |  |  |                | AAA rated non-agency         |        |   | 57,931        |  | 4.2   |  
|A                                  |  |        | 335,681   |               | 24.3                   |   |  |  |                | AA or lower rated non-agency |        |   | 19,762        |  | 1.4   |  
|BBB                                |  |        | 45,004    |               | 3.3                    |   |  |  |                | Asset backed securities:     |        |   |               |  |       |  
|BB                                 |  |        | 5,988     |               | 0.4                    |   |  |  |                | Bank                         |        |   | 324,374       |  | 23.5  |  
|B                                  |  |        | 2,004     |               | 0.1                    |   |  |  |                | Insurance                    |        |   | 69,287        |  | 5.0   |  
|CCC                                |  |        | 3,354     |               | 0.2                    |   |  |  |                | REIT                         |        |   | 15,062        |  | 1.1   |  
|Not Rated                          |  |        | 737       |               | 0.1                    |   |  |  |                | Municipals & Other           |        |   | 244,869       |  | 17.7  |  
|                                   |  |        |           |               |                        |   |  |  |                |                              |        |   |               |  |       |  
|Total portfolio                    |  | $      | 1,380,946 |               | 100.0                  | % |  |  |                | Total portfolio              |        | $ | 1,380,946     |  | 100.0 | %
|                                   |  |        |           |               |                        |   |  |  |                |                              |        |   |               |  |       |  

The $681.1 million MBS portfolio includes $603.4 million of agency-backed securities, $57.9 million of senior AAA
rated non-agency MBS, and $19.8 million of AA or lower rated mezzanine level non-agency MBS. The mezzanine level securities include eight issues with a current market value of $5.9 million that have been categorized as other-than-temporarily
impaired (OTTI). On average, the OTTI securities experienced 60 day+ delinquencies of 8.42% at June 30, 2008. In contrast, the remaining $13.9 million of mezzanine non-agency MBS experienced 60 day+ delinquencies of 2.68% at
June 30, 2008. The AAA rated non-agency MBS experienced 60 day+ delinquencies of 1.99% at June 30, 2008.



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The market value of the ABS portfolio includes $324.4 million of securities backed primarily by banking institutions,
$69.3 million of securities backed by insurance companies, and $15.1 million of securities backed by real estate investment trusts (REITs). The chart below illustrates the credit ratings of the portfolio, using the lowest rating among
Moodys, S&P, and Fitch Ratings.



|                       |  |     |        |    |   |        |  |     |         |    |   |       |  |           |       |       |   |       |  |   |   |  |   |        
|---------------------- |  | --- | ------ | -- | - | ------ |  | --- | ------- | -- | - | ----- |  | --------- | ----- | ----- | - | ----- |  | - | - |  | - | -------
|(dollars in thousands) |  | AAA |        | AA |   | A      |  | BBB |         | BB |   | B/CCC |  | Not Rated |       | Total
|Bank                   |  | $   | 29,283 |    | $ | 24,900 |  | $   | 269,321 |    | $ | 870   |  | $         |      |       | $ |      |  | $ |  |  | $ | 324,374
|Insurance              |  |     | 42,123 |    |   | 8,903  |  |     | 18,261  |    |   |      |  |           |      |       |   |      |  |   |  |  |   | 69,287 
|REIT                   |  |     |       |    |   |       |  |     | 4,580   |    |   | 2,622 |  |           | 4,024 |       |   | 3,836 |  |   |  |  |   | 15,062 
|                       |  |     |        |    |   |        |  |     |         |    |   |       |  |           |       |       |   |       |  |   |   |  |   |        
|Total                  |  | $   | 71,406 |    | $ | 33,803 |  | $   | 292,162 |    | $ | 3,492 |  | $         | 4,024 |       | $ | 3,836 |  | $ |  |  | $ | 408,723
|                       |  |     |        |    |   |        |  |     |         |    |   |       |  |           |       |       |   |       |  |   |   |  |   |        

Six REIT trust preferred securities were written down in the second quarter of 2008. As of June 30, 2008, the
REIT trust preferred securities portfolio has been written down from $105 million to $23.3 million. Six REIT securities with a book value of $2.9 million are classified as non-performing investments; four of the six securities deferred their second
quarter 2008 interest payments. The remaining two securities made their payments in the second quarter of 2008.

The Corporations $150.4 million
(market value) municipal bond portfolio consists of geographically diversified, federal tax-exempt general obligation securities. The portfolio includes $132.8 million of securities insured by one of the major bond insurers; additionally, all of the
municipalities have underlying ratings of A, AA, or AAA. Other debt securities primarily include investments in single issuer corporate bonds rated investment-grade by Moodys or S&P, and U.S. Treasury and Agency securities.

In addition to credit risk, the other significant risk in the investment portfolio is duration risk. Duration measures the expected change in the market value of an
investment for a 100 basis point (or 1%) change in interest rates. The higher an investments duration, the longer the time until its rate is reset to current market rates. The Banks risk tolerance, as measured by the duration of the
investment portfolio, is typically between 2.5% and 3.5%. The portfolio duration is currently 3.5%.

Investment securities are evaluated periodically to
determine whether a decline in their value is other-than-temporary. Considerations such as the Corporations intent and ability to hold securities, recoverability of invested amount over the Corporations intended holding period and
receipt of amounts contractually due, for example, are applied in determining whether a security is other-than-temporarily impaired. Once a decline in value is determined to be otherthan-temporary, the value of the security is reduced and a
corresponding charge to earnings is recognized. As of June 30, 2008, the Corporations investment portfolio had unrealized losses of $143.3 million, or 9.4%, up from $99.8 million, or 6.4% at December 31, 2007. The increased loss
position stemmed primarily from deterioration in the market valuations of pooled trust preferred securities and non-agency MBS. The pricing for these securities has been distressed by the sub-prime mortgage crisis, which has caused a liquidity
contagion in both the mortgage and asset-backed securities markets. The Corporation continually evaluates the credit quality and market pricing of the securities portfolio. Based upon these and other factors, the securities portfolio may experience
further impairment. At June 30, 2008, management has the intent and ability to retain investment securities with unrealized losses until the decline in value has been recovered.

For the quarter ended June 30, 2008, the Corporation deemed certain securities to be other-than-temporarily impaired, and accordingly, recognized a $20.7 million write-down of the securities portfolio. The
write-down was determined based on the individual securities credit performance and the market values of those securities at June 30, 2008. Should market values and credit quality of certain securities continue to deteriorate, it is
possible that additional write-downs may be required. If economic conditions continue to deteriorate, it is possible that the securities that are currently performing satisfactorily could suffer impairment and could potentially require write-downs.
The entire securities portfolio is evaluated each quarter to determine if additional write-downs are warranted.

The current market conditions have
severely constricted the structured securities market and the secondary market for various types of securities has been limited. In addition, changes in interest rates and the economic uncertainties in the mortgage, housing and banking industries
have negatively impacted securities values. To determine the nature of the decline in the value of the investment securities, the Corporation reviews each investment security segment for other-than-temporary impairment. For further discussion on
other-than-temporary impairment, refer to Note 3.



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Fair Value Measurements

Effective January 1, 2008, the Corporation adopted SFAS No. 157  Fair Value Measurements (SFAS No. 157). This statement defines the concept of fair value, establishes a framework for measuring
fair value and expands disclosures about fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants as of the
measurement date. SFAS No.157 establishes a framework for measuring fair value that considers the attributes specific to particular assets or liabilities and establishes a three-level hierarchy for determining fair value based on the transparency of
inputs to each valuation as of the fair value measurement date. The statement also expands disclosures about financial instruments that are measured at fair value and eliminates the use of large position discounts for financial instruments quoted in
active markets.

The Corporation has an established and documented process for determining fair values. Fair value is based on quoted market prices, when
available. If listed prices or quotes are not available, fair value is based on fair value models that use market participant or independently sourced market data, which include discount rate, interest rate yield curves, prepayment speeds, bond
ratings, credit risk, loss severities, default rates and expected cash flow assumptions. In addition, valuation adjustments may be made in the determination of fair value. These fair value adjustments may include amounts to reflect counterparty
credit quality, creditworthiness, liquidity and other unobservable inputs that are applied consistently over time. These adjustments are estimated and therefore, subject to managements judgment, and at times, may be necessary to mitigate the
possibility of error or revision in the model-based estimate of the fair value provided by the model. The Corporation has various controls in place to ensure that the valuations are appropriate, including a review and approval of the valuation
models, benchmarking, comparison to similar products and reviews of actual cash settlements. The methods described above may produce fair value calculations that may not be indicative of the net realizable value or reflective of future fair values.
While the Corporation believes its valuation methods are consistent with other financial institutions, the use of different methods or assumptions to determine fair values could result in different estimates of fair value.

SFAS No. 157 establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based on the inputs used to value
the particular asset or liability at the measurement date. The three levels are defined as follows:



| |  |  | Level 1  inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 2  inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted prices of identical or similar
assets or liabilities in markets that are not active, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 3  inputs to the valuation methodology are unobservable and significant to the fair value measurement.
| | - |  | -------------------------------------------------------------------------------------------------------------

At the end of each quarter, the Corporation assesses the valuation hierarchy for each asset or liability measured. From time to time, asset or liabilities will be
transferred within hierarchy levels as a result of changes in valuation methodologies used. The Corporation prefers using quoted prices or quoted prices for similar assets if available, over the use of unobservable or Level 3 hierarchy valuations.
At June 30, 2008, the Corporation had $651.1 million, or 43.3% of total assets and liabilities valued at fair value that are considered Level 3 valuations using unobservable inputs. During the six months ended June 30, 2008, Level 3
valuations declined $30.4 million or 4.5%. The decline was due to the net change resulting from write-downs in the investment securities portfolio recorded in 2008, market value declines and principal payments. As disclosed in Note 2, $69.2 million
of net transfers were made into Level 3, which represents $121.5 million in non-agency mortgage backed securities transferred into Level 3 and $52.3 million of corporate securities transferred out of Level 3. The Corporation determined during the
current year, that non-agency mortgage backed securities have become less liquid and pricing has become less reliable along with a currently inactive market. In addition, management has determined that corporate securities have a more active market
and should be classified within the Level 2 compared to Level 3 as reported in the previous period.

The following is a description of the valuation
methodologies used for instruments measured at fair value for Level 3 assets.

Investment securities

Included in Level 3 are non-agency mortgage backed securities, pooled trust preferred securities backed by bank, insurance or REIT preferred stock and debt securities
issued to a foreign government totaling $486.8 million. The Corporation has classified these assets as Level 3 due to their inactive markets and fair value methodology. The non-agency mortgage backed securities use a combination of institutional
bids, comparable trades, dealer quotes and a future cash flow approach to determine fair value. Pooled trust preferred securities use a combination of comparable trades, dealer quotes and a future cash flow approach to determine fair value. Debt
securities issued to a foreign government use dealer quotes to determine fair value.

Cash surrender value of life insurance contracts

Cash surrender values are provided by the insurance carrier on a periodic basis. The values approximate the fair value of these policies. The
values assigned to the individual policies, which are not actively traded on any exchange, are not observable and are considered within Level 3 of the valuation hierarchy. The fair value determined by each insurance carrier is based on the cash
surrender values of each policy where the Corporation is the beneficiary.



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Loans held for sale

Loans held for sale are classified as Level 3 because they are valued based on the unobservable contractual terms established with a third party purchaser who processes and purchases the loans at their face amount.

During the six months ended June 30, 2008, assets classified as Level 3 realized $63.4 million in impairment losses on certain securities that were considered
other-than-temporarily impaired, The charge was recorded to the Condensed Consolidated Statement of Operations. Also, $29.3 million of other comprehensive loss was recorded to net accumulated other comprehensive losses for the six months ending
June 30, 2008 and is reflected in stockholders equity. The other comprehensive loss is primarily due to the decline in market value of the securities portfolio classified as Level 3 from the current illiquid market, the interest rate
environment and widening of market spreads. At June 30, 2008, management has the ability and intent to hold these securities until the unrealized loss is recovered.

Borrowings

Treasury funding, representing brokered certificates of deposit, short-term borrowings excluding
repurchase agreements (repo), long-term debt and junior subordinated debentures, averaged $2.0 billion in June 2008, down $5.0 million from the average in December 2007.

Providents funds management objectives are two-fold: to minimize the cost of borrowings while assuring sufficient funding availability to meet current and future customer requirements, and to contribute to
interest rate risk management goals through match-funding loan and investment activity. Management utilizes a variety of sources to raise borrowed funds at competitive rates, including federal funds purchased (fed funds), Federal Home
Loan Bank (FHLB) borrowings, Federal Reserve Term Auction Facility (TAF) borrowings, securities sold under repo agreements, subordinated notes and brokered and jumbo certificates of deposit (CDs). FHLB borrowings,
TAF borrowings, and repos typically are borrowed at rates approximating the LIBOR rate for the equivalent term because they are secured with investments or high quality loans. Fed funds, which are generally overnight borrowings, are typically
purchased at the Federal Reserve target rate.

The Corporation formed wholly owned statutory business trusts in 1998, 2000 and 2003. In 2004, the
Corporation also acquired three wholly owned statutory business trusts from Southern Financial as part of the merger. In all cases, the trusts issued trust preferred securities that were sold to outside third parties. The junior subordinated
debentures issued by the Corporation to the trusts are presented net of unamortized issuance costs as long-term debt in the Condensed Consolidated Statements of Condition and are includable in Tier 1 capital for regulatory capital purposes, subject
to certain limitations. Any of the junior subordinated debentures are redeemable at any time in whole, but not in part, from the date of issuance on the occurrence of certain events. There are $121.0 million of issuances callable within the next
twelve months.

Contractual Obligations, Commitments and Off Balance Sheet Arrangements

The Corporation has various contractual obligations, such as long-term borrowings, that are recorded as liabilities in the Condensed Consolidated Financial Statements.
Other items, such as certain minimum lease payments for the use of banking and operations offices under operating lease agreements, are not recognized as liabilities in the Condensed Consolidated Financial Statements, but are required to be
disclosed. Each of these arrangements affects the Corporations determination of sufficient liquidity.

The following table summarizes significant
contractual obligations at June 30, 2008 and the future periods in which such obligations are expected to be settled in cash. In addition, the table reflects the timing of principal payments on outstanding borrowings.



|                                      |  |                                    |           |       |   |         |  |         |         |       |   |         |  |   |          
|------------------------------------- |  | ---------------------------------- | --------- | ----- | - | ------- |  | ------- | ------- | ----- | - | ------- |  | - | ---------
|                                      |  | Contractual Payments Due by Period |           |      
|                                      |  | Less                               |           |       |   |         |  |         |         |      
|                                      |  | than 1                             |           | 1-3   |   | 4-5     |  | After 5 |         |      
|(in thousands)                        |  | Year                               |           | Years |   | Years   |  | Years   |         | Total
|Lease commitments                     |  | $                                  | 13,142    |       | $ | 23,997  |  | $       | 18,569  |       | $ | 25,904  |  | $ | 81,612   
|Certificates of deposit               |  |                                    | 1,228,231 |       |   | 589,790 |  |         | 106,102 |       |   | 32,778  |  |   | 1,956,901
|Long-term debt                        |  |                                    | 260,000   |       |   | 285,000 |  |         | 55,000  |       |   | 184,371 |  |   | 784,371  
|                                      |  |                                    |           |       |   |         |  |         |         |       |   |         |  |   |          
|Total contractual payment obligations |  | $                                  | 1,501,373 |       | $ | 898,787 |  | $       | 179,671 |       | $ | 243,053 |  | $ | 2,822,884
|                                      |  |                                    |           |       |   |         |  |         |         |       |   |         |  |   |          



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Arrangements to fund credit products or guarantee financing take the form of loan commitments (including lines of credit
on revolving credit structures) and letters of credit. Approvals for these arrangements are obtained in the same manner as loans. Generally, cash flows, collateral value and a risk assessment are considered when determining the amount and structure
of credit arrangements. Commitments to extend credit in the form of consumer, commercial real estate and business loans at June 30, 2008 were as follows:



|                                      |  |          |          
|------------------------------------- |  | -------- | ---------
|                                      |  | June 30,
|(in thousands)                        |  | 2008    
|Commercial business and real estate   |  | $        | 824,447  
|Consumer revolving credit             |  |          | 839,562  
|Residential mortgage credit           |  |          | 9,892    
|Performance standby letters of credit |  |          | 136,953  
|Commercial letters of credit          |  |          | 4,468    
|                                      |  |          |          
|Total loan commitments                |  | $        | 1,815,322
|                                      |  |          |          

Historically, many of the commitments expire without being fully drawn; therefore, the total commitment amounts do
not necessarily represent future cash requirements. Obligations also take the form of commitments to purchase loans. At June 30, 2008, the Corporation did not have any firm commitments to purchase loans.

Risk Management

Interest Rate Risk

The nature of the banking business, which involves paying interest on deposits at varying rates and terms and charging interest on loans at other rates and terms, creates
interest rate risk. As a result, earnings and the market value of assets and liabilities are subject to fluctuations, which arise due to changes in the level and directions of interest rates. Managements objective is to minimize the
fluctuation in the net interest margin caused by changes in interest rates using cost-effective strategies and tools. The Bank manages several forms of interest rate risk, including asset/liability mismatch, basis risk and prepayment risk.

Management continually monitors Prime/LIBOR basis risk and asset/liability mismatch. Basis risk exists as a result of having much of the Banks
earning assets priced using either the prime rate or the U.S. Treasury yield curve, while much of the liability portfolio, which finances earning assets, is priced using the certificates of deposit yield curve or LIBOR yield curve. These different
yield curves are highly correlated but do not move in lock-step with one another. Additionally, management routinely monitors and limits the mismatch between assets and liabilities subject to repricing on a monthly, quarterly, semiannual and annual
basis.

The Corporation both purchases and originates amortizing loan pools and investment securities in which the underlying assets are residential
mortgage loans subject to prepayments. The actual principal reduction on these assets varies from the expected contractual principal reduction due to principal prepayments resulting from borrowers elections to refinance the underlying
mortgages based on market and other conditions. Prepayment rate projections utilize actual prepayment speed experience and available market information on like-kind instruments. The prepayment rates form the basis for income recognition of premiums
or discounts on the related assets. Changes in prepayment estimates may cause the earnings recognized on these assets to vary over the term that the assets are held, creating volatility in the net interest margin. Prepayment rate assumptions are
monitored and updated monthly to reflect actual activity and the most recent market projections.

Measuring and managing interest rate risk is a dynamic
process that management performs continually to meet the objective of maintaining a stable net interest margin. This process relies chiefly on simulation modeling of shocks to the balance sheet under a variety of interest rate scenarios, including
parallel and non-parallel rate shifts, such as the forward yield curves for both short and long term interest rates. The results of these shocks are measured in two forms: first, the impact on the net interest margin and earnings over one and two
year time frames; and second, the impact on the market value of equity. In addition to measuring the basis risks and prepayment risks noted above, simulations also quantify the earnings impact of rate changes and the cost / benefit of hedging
strategies.



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##### Table of Contents

The following table shows the anticipated effect on net interest income in parallel shift (up or down) interest rate
scenarios. These shifts are assumed to begin on July 1, 2008 for the June 30, 2008 data and on January 1, 2008 for the December 31, 2007 data and evenly increase or decrease over a 6-month period. The effect on net interest
income would be for the next twelve months.



|                       |  |                      |   |  |                      |  
|---------------------- |  | -------------------- | - |  | -------------------- | -
|                       |  | At June 30, 2008     |   |  | At December 31, 2007 |  
|                       |  | Projected            |   |  | Projected            |  
|                       |  | Percentage Change in |   |  | Percentage Change in |  
|Interest Rate Scenario |  | Net Interest Income  |   |  | Net Interest Income  |  
|-200 basis points      |  | -6.30                | % |  | -4.80                | %
|-100 basis points      |  | -2.60                | % |  | -2.60                | %
|No change              |  |                     |   |  |                     |  
|+100 basis points      |  | +0.40                | % |  | -0.50                | %
|+200 basis points      |  | +0.40                | % |  | -0.70                | %

The percentage changes displayed in the table above relate to the Corporations projected net interest
income. Managements intent is for derivative interest income to mitigate risk to the Corporations net interest income stemming from changes in interest rates. For comparison purposes, these projections include all interest earned on
derivatives in net interest income. The analysis includes the interest income and expense relating to non-designated interest rate swaps that is classified in non-interest income as net cash settlement on swaps.

The isolated modeling environment, assuming no action by management, shows that the Corporations net interest income volatility is less than 6.4% under the assumed
single direction scenarios. Management routinely models several yield curve flattening and steepening scenarios as part of its interest rate risk management function, and this modeling discloses little risk under most yield curve twisting scenarios.
The current economic environment includes concerns about elevated inflation on one hand and a slowing housing market on the other. At this point in time there is no clear direction for the path of future interest rate changes, or changes in the
shape of the yield curve. Management is currently employing strategies to reduce the exposure to net interest margin from rising or falling interest rates.

Management employs the investment, borrowings, and derivatives portfolios in implementing the Banks interest rate strategies. To protect the Bank from rising short-term interest rates, over $400 million of the investment portfolio
reprices annually or more frequently. In the borrowings portfolio, $235.0 million of funds reset their rates quarterly with long-term interest rates, and $15.0 million are fixed rate and callable at Providents option, to mitigate the impact on
the net interest margin from falling long-term interest rates. The interest expense associated with these borrowings declines when long-term interest rates decline, either through the rate reset or the exercise of the call option. Additionally,
$269.6 million of interest rate swaps were in force to reduce interest rate risk, and $25.0 million of interest rate caps were employed specifically to protect against rising interest rates in the future.

Credit Risk

In addition to managing interest rate risk, which
applies to both assets and liabilities, the Corporation must understand and manage risks specific to lending. Much of the fundamental lending business of Provident is based upon understanding, measuring and controlling credit risk. Credit risk
entails both general risks, which are inherent in the process of lending, and risk specific to individual borrowers. Each consumer and residential lending product has a generally predictable level of credit loss based on historical loss experience.
Home mortgage and home equity loans and lines generally have the lowest credit loss experience. Loans with medium credit loss experience are primarily secured products such as auto and marine loans. Unsecured loan products such as personal revolving
credit have the highest credit loss experience; therefore the Bank has chosen not to engage in a significant amount of this type of lending. Credit risk in commercial lending varies significantly, as losses as a percentage of outstanding loans can
shift widely from period to period and are particularly sensitive to changing economic conditions. Generally improving economic conditions result in improved operating results on the part of commercial customers, enhancing their ability to meet debt
service requirements. However, this improvement in operating cash flow is often at least partially offset by rising interest rates often seen in an improving economic environment. In addition, changing economic conditions often impact various
business segments differently, giving rise to the need to manage industry concentrations within the loan portfolio.

To control and manage credit risk,
management has set high credit standards along with an in-house administration and strong oversight procedures along with a cautious approach to adopting products before they have been sufficiently tested in the market place. In addition, the
Corporation maintains a fairly balanced portfolio concentration between home equity, commercial and residential real estate and commercial business loans. The Corporations assessment of the loan portfolios credit risk and asset quality
is measured by its levels of delinquencies, non-performing asset levels and net-charge-offs. For the quarter ending June 30, 2008, the 90-day delinquency level was $7.0 million, or 0.17% of loans, up by $3.2 million from December 31, 2007.
Non-performing loans were $24.7 million, or 0.59% of total loans compared to 0.74% as of December 31, 2007. Net charge-offs as a percentage of average loans for the quarter ending June 30, 2008 were 0.33% compared to 0.58% for the fourth
quarter of 2007. Overall, the asset quality of the Corporations loan portfolio remains stable while the market conditions appear to be sluggish, but the Mid-Atlantic region remains one of the better performing markets in the nation in terms of
preserving real estate values and lower delinquency levels.



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Managing credit risk is an integral part of the investment portfolio management process for the Corporation. The
investment portfolio contains three distinct types of credit risks: risk to residential mortgage borrowers, risk to corporate entities, and risk to municipalities. Each risk is monitored and controlled separately.

Risk to residential mortgage borrowers is inherent in the non-agency MBS portfolio. This risk is controlled by purchasing securities in which the underlying loans have
favorable risk characteristics, such as low loan-to-value ratios and high borrower credit scores. The risk is further controlled through purchasing only the top two (AAA and AA) classes of securities, which contain greater levels of credit support
than the lower rated classes. Management monitors the risk through tracking the delinquencies and foreclosures of the underlying loans monthly and monitoring primary and secondary market activity for similar securities.

Risk to corporate entities is inherent in the REIT, Bank, and Insurance pooled trust preferred securities portfolios, and the individual bank trust preferred stock
investments. Risk is controlled in the pooled securities through identifying the issuer exposures for each pool, and limiting purchases to securities in the top three rating classes (AAA, AA, and A), which have significant levels of credit support.
Risk is monitored through tracking the financial performance of large issuers and issuers considered to be at risk to deferral or default of payment. Additionally, issuers actual default and deferral experience and expected future outlook are
measured against the credit support levels to evaluate the extent of risk to the securities. Market activity is monitored on an ongoing basis. Risk to individual bank debt is controlled by purchasing securities of high quality issuers as assessed
internally and corroborated by external ratings. Management monitors risk through tracking the issuers financial performance quarterly or more frequently as needed, and monitoring market activity on an ongoing basis.

Risk to municipalities is controlled through limiting purchases to general obligation bonds of municipalities rated AAA, AA, or A, limiting exposure to individual
municipalities, and limiting state concentrations. Risk is further controlled by limits placed on the exposure to individual bond insurers that provide credit enhancements. Management monitors risk through tracking the credit ratings of each
municipality monthly and tracking the financial condition of bond insurers. Market activity is also tracked on an ongoing basis.

Credit criteria and
purchase limits for all investments containing credit risk are defined in documented and frequently reviewed investment policies, and subject to approval by the Asset / Liability Committee (ALCO). The ALCO also monitors the portfolio
credit risk monthly.

Other Lending Risks

Other
lending risks include liquidity risk and specific risk. The liquidity risk of the Corporation arises from its obligation to make payment in the event of a customers contractual default. The evaluation of specific risk is a basic function of
underwriting and loan administration, involving analysis of the borrowers ability to service debt as well as the value of pledged collateral. In addition to impacting individual lending decisions, this analysis may also determine the aggregate
level of commitments the Corporation is willing to extend to an individual customer or a group of related customers.



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RESULTS OF OPERATIONS

For Three Months Ended June 30, 2008 Compared to Three Months Ended June 30, 2007

Financial Highlights

The Corporation reported net income of $10.2 million, or $0.27 per diluted share, for the quarter ended June 30, 2008 compared to $15.5 million, or $0.48 per diluted
share for the quarter ended June 30, 2007. The Corporations key performance measurements such as return on assets and return on common equity were 0.65%, and 5.77%, respectively, for the quarter ended June 30, 2008, compared to 1.00%
and 9.66%, respectively, for the same period a year ago.

The financial results for the quarter ended June 30, 2008 include a $8.7 million gain from
the sale of MasterCard stock, offset by a $20.7 million write-down of the investment securities portfolio for securities that were other-than-temporarily impaired and an increase in the provision for loan losses of $1.6 million. The decrease in
earnings was also impacted by the decline in net interest income that was negatively impacted due to the decline in benchmark interest rates during the past twelve months and the change and composition of deposits and borrowings. These and other
activities presented below resulted in a decline in net interest income of $2.5 million, an increase in the provision for loan losses of $1.6 million and a decline in non-interest income of $14.8. These declines were offset by a decrease in
non-interest expense of $2.3 million and a decline in income tax expense of $11.4 million, resulting in a $5.3 million decline in net income for the quarter ended June 30, 2008.

During the quarter ended June 30, 2008, net interest margin decreased to 3.28% from 3.57%; average total loans increased $294.8 million or 7.6% and average deposits increased $139.1 million or 3.3%. Asset credit
quality declined from the same quarter a year ago as non-performing assets to total assets increased to 0.61% from 0.36%, mainly a result of the $2.9 million of investment securities placed on non-performing status and the $7.3 million increase in
other assets owned. Non-performing loans to total loans increased to 0.59% from 0.48%, while net charge-offs to average loans declined to 0.33% for the quarter compared to 0.47% for the same period a year ago. Earnings for the quarter ended
June 30, 2008 include the following significant transactions and are included in subsequent discussions regarding the results of operations:



| |  |  | Voluntary sale of MasterCard stock:In May 2008, the Corporation elected to convert and sell a significant portion of its MasterCard Class B common stock
through a voluntary program offered by MasterCard Incorporated to all holders of Class B common stock. The Corporation recorded an $8.7 million pre-tax gain relating to this transaction.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Investment securities write-down:The Corporation recorded a $20.7 million pre-tax write-down relating to its REIT trust preferred securities portfolio and
non-agency mortgage-backed portfolio following its credit review for the period ended June 30, 2008. The Corporation wrote down four non-agency mortgage-backed securities and six REIT trust preferred securities, reducing their carrying values
to current market values at that date.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Provision for loan losses:Compared to the same quarter a year ago, the Corporation recorded a $1.6 million increase in its provision for loan losses due to
the increased uncertainties in current market conditions.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Net Interest Income

The Corporations principal source of revenue is net interest income, the difference between interest income on earning assets and interest expense on deposits and
borrowings. Interest income is presented on a tax-equivalent basis to recognize associated tax benefits in order to provide a basis for comparison of yields with taxable earning assets. The following table presents information regarding the average
balance of assets and liabilities, as well as the total dollar amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities and the resulting average yields and costs. The yields and
costs for the periods indicated are derived by dividing annualized income or expense by the average balances of assets or liabilities, respectively, for the periods presented. Nonaccrual loans are included in average loan balances; however, accrued
interest income has been excluded from these loans. The tables on the following pages also analyze the reasons for the changes from year-to-year in the principal elements that comprise net interest income. Rate and volume variances presented for
each component will not total the variances presented on totals of interest income and interest expense because of shifts from year-to-year in the relative mix of interest-earning assets and interest-bearing liabilities.



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Consolidated Average Balances and Analysis of Changes in Tax Equivalent Net Interest Income

Three Months Ended June 30, 2008 and 2007



|                                                               |  |                                 |           |                |                                 |            |  |      |                |  |                |           |            |   |        |  |      |  
|-------------------------------------------------------------- |  | ------------------------------- | --------- | -------------- | ------------------------------- | ---------- |  | ---- | -------------- |  | -------------- | --------- | ---------- | - | ------ |  | ---- | -
|                                                               |  | Three Months EndedJune 30, 2008 |           |                | Three Months EndedJune 30, 2007 |           
|(dollars in thousands) (tax-equivalent basis)                  |  | AverageBalance                  |           | Income/Expense |                                 | Yield/Rate |  |      | AverageBalance |  | Income/Expense |           | Yield/Rate |  
|Assets:                                                        |  |                                 |           |                |                                 |            |  |      |                |  |                |           |            |   |        |  |      |  
|Interest-earning assets:                                       |  |                                 |           |                |                                 |            |  |      |                |  |                |           |            |   |        |  |      |  
|Originated and acquired residential                            |  | $                               | 274,357   |                | $                               | 4,199      |  | 6.16 | %              |  | $              | 311,122   |            | $ | 4,884  |  | 6.30 | %
|Home equity                                                    |  |                                 | 1,089,274 |                |                                 | 13,856     |  | 5.12 |                |  |                | 1,014,915 |            |   | 17,389 |  | 6.87 |  
|Marine                                                         |  |                                 | 360,297   |                |                                 | 4,918      |  | 5.49 |                |  |                | 367,880   |            |   | 4,914  |  | 5.36 |  
|Other consumer                                                 |  |                                 | 23,537    |                |                                 | 425        |  | 7.26 |                |  |                | 26,731    |            |   | 527    |  | 7.91 |  
|Commercial mortgage                                            |  |                                 | 501,953   |                |                                 | 7,750      |  | 6.21 |                |  |                | 446,898   |            |   | 7,949  |  | 7.13 |  
|Residential construction                                       |  |                                 | 578,600   |                |                                 | 8,120      |  | 5.64 |                |  |                | 584,719   |            |   | 12,727 |  | 8.73 |  
|Commercial construction                                        |  |                                 | 452,556   |                |                                 | 5,891      |  | 5.24 |                |  |                | 376,151   |            |   | 7,418  |  | 7.91 |  
|Commercial business                                            |  |                                 | 917,765   |                |                                 | 14,762     |  | 6.47 |                |  |                | 775,142   |            |   | 14,458 |  | 7.48 |  
|                                                               |  |                                 |           |                |                                 |            |  |      |                |  |                |           |            |   |        |  |      |  
|Total loans                                                    |  |                                 | 4,198,339 |                |                                 | 59,921     |  | 5.74 |                |  |                | 3,903,558 |            |   | 70,266 |  | 7.22 |  
|                                                               |  |                                 |           |                |                                 |            |  |      |                |  |                |           |            |   |        |  |      |  
|Loans held for sale                                            |  |                                 | 10,753    |                |                                 | 160        |  | 5.98 |                |  |                | 12,696    |            |   | 193    |  | 6.10 |  
|Short-term investments                                         |  |                                 | 2,191     |                |                                 | 17         |  | 3.12 |                |  |                | 2,484     |            |   | 45     |  | 7.27 |  
|Taxable investment securities                                  |  |                                 | 1,380,968 |                |                                 | 19,598     |  | 5.71 |                |  |                | 1,445,776 |            |   | 20,886 |  | 5.79 |  
|Tax-advantaged investment securities                           |  |                                 | 154,138   |                |                                 | 2,290      |  | 5.98 |                |  |                | 163,878   |            |   | 2,220  |  | 5.43 |  
|                                                               |  |                                 |           |                |                                 |            |  |      |                |  |                |           |            |   |        |  |      |  
|Total investment securities                                    |  |                                 | 1,535,106 |                |                                 | 21,888     |  | 5.73 |                |  |                | 1,609,654 |            |   | 23,106 |  | 5.76 |  
|                                                               |  |                                 |           |                |                                 |            |  |      |                |  |                |           |            |   |        |  |      |  
|Total interest-earning assets                                  |  |                                 | 5,746,389 |                |                                 | 81,986     |  | 5.74 |                |  |                | 5,528,392 |            |   | 93,610 |  | 6.79 |  
|                                                               |  |                                 |           |                |                                 |            |  |      |                |  |                |           |            |   |        |  |      |  
|Less: allowance for loan losses                                |  |                                 | 55,159    |                |                                 |            |  |      |                |  |                | 45,423    |            |   |        |  |      |  
|Cash and due from banks                                        |  |                                 | 101,177   |                |                                 |            |  |      |                |  |                | 117,625   |            |   |        |  |      |  
|Other assets                                                   |  |                                 | 643,661   |                |                                 |            |  |      |                |  |                | 614,599   |            |   |        |  |      |  
|                                                               |  |                                 |           |                |                                 |            |  |      |                |  |                |           |            |   |        |  |      |  
|Total assets                                                   |  | $                               | 6,436,068 |                |                                 |            |  |      |                |  | $              | 6,215,193 |            |   |        |  |      |  
|                                                               |  |                                 |           |                |                                 |            |  |      |                |  |                |           |            |   |        |  |      |  
|Liabilities and Stockholders Equity:                          |  |                                 |           |                |                                 |            |  |      |                |  |                |           |            |   |        |  |      |  
|Interest-bearing liabilities:                                  |  |                                 |           |                |                                 |            |  |      |                |  |                |           |            |   |        |  |      |  
|Interest-bearing demand deposits                               |  | $                               | 478,235   |                |                                 | 459        |  | 0.39 |                |  | $              | 529,568   |            |   | 806    |  | 0.61 |  
|Money market deposits                                          |  |                                 | 642,107   |                |                                 | 3,207      |  | 2.01 |                |  |                | 598,547   |            |   | 5,216  |  | 3.50 |  
|Savings deposits                                               |  |                                 | 567,121   |                |                                 | 832        |  | 0.59 |                |  |                | 597,538   |            |   | 563    |  | 0.38 |  
|Direct time deposits                                           |  |                                 | 1,119,852 |                |                                 | 10,546     |  | 3.79 |                |  |                | 1,199,855 |            |   | 13,789 |  | 4.61 |  
|Brokered time deposits                                         |  |                                 | 835,071   |                |                                 | 9,966      |  | 4.80 |                |  |                | 500,263   |            |   | 6,341  |  | 5.08 |  
|Short-term borrowings                                          |  |                                 | 649,696   |                |                                 | 3,292      |  | 2.04 |                |  |                | 591,806   |            |   | 6,829  |  | 4.63 |  
|Long-term debt                                                 |  |                                 | 778,720   |                |                                 | 6,874      |  | 3.55 |                |  |                | 768,602   |            |   | 10,868 |  | 5.67 |  
|                                                               |  |                                 |           |                |                                 |            |  |      |                |  |                |           |            |   |        |  |      |  
|Total interest-bearing liabilities                             |  |                                 | 5,070,802 |                |                                 | 35,176     |  | 2.79 |                |  |                | 4,786,179 |            |   | 44,412 |  | 3.72 |  
|                                                               |  |                                 |           |                |                                 |            |  |      |                |  |                |           |            |   |        |  |      |  
|Noninterest-bearing demand deposits                            |  |                                 | 665,638   |                |                                 |            |  |      |                |  |                | 743,185   |            |   |        |  |      |  
|Other liabilities                                              |  |                                 | 46,988    |                |                                 |            |  |      |                |  |                | 41,592    |            |   |        |  |      |  
|Stockholders equity                                           |  |                                 | 652,640   |                |                                 |            |  |      |                |  |                | 644,237   |            |   |        |  |      |  
|                                                               |  |                                 |           |                |                                 |            |  |      |                |  |                |           |            |   |        |  |      |  
|Total liabilities and stockholders equity                     |  | $                               | 6,436,068 |                |                                 |            |  |      |                |  | $              | 6,215,193 |            |   |        |  |      |  
|                                                               |  |                                 |           |                |                                 |            |  |      |                |  |                |           |            |   |        |  |      |  
|Net interest-earning assets                                    |  | $                               | 675,587   |                |                                 |            |  |      |                |  | $              | 742,213   |            |   |        |  |      |  
|                                                               |  |                                 |           |                |                                 |            |  |      |                |  |                |           |            |   |        |  |      |  
|Net interest income (tax-equivalent)                           |  |                                 |           |                |                                 | 46,810     |  |      |                |  |                |           |            |   | 49,198 |  |      |  
|Less: tax-equivalent adjustment                                |  |                                 |           |                |                                 | 807        |  |      |                |  |                |           |            |   | 650    |  |      |  
|                                                               |  |                                 |           |                |                                 |            |  |      |                |  |                |           |            |   |        |  |      |  
|Net interest income                                            |  |                                 |           |                | $                               | 46,003     |  |      |                |  |                |           |            | $ | 48,548 |  |      |  
|                                                               |  |                                 |           |                |                                 |            |  |      |                |  |                |           |            |   |        |  |      |  
|Net yield on interest-earning assets on a tax-equivalent basis |  |                                 |           |                |                                 |            |  | 3.28 | %              |  |                |           |            |   |        |  | 3.57 | %



45



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##### Table of Contents

Consolidated Average Balances and Analysis of Changes in Tax Equivalent Net Interest Income (Continued)

Three Months Ended June 30, 2008 and 2007



|                                              |  |                                                  |         |   |                                                  |       |    |                |   |         |         |  |       |             |  |   |               |   |  |   |       |  
|--------------------------------------------- |  | ------------------------------------------------ | ------- | - | ------------------------------------------------ | ----- | -- | -------------- | - | ------- | ------- |  | ----- | ----------- |  | - | ------------- | - |  | - | ----- | -
|                                              |  |                                                  |         |   | 2008/2007Income/Expense VarianceDue to Change In |      
|                                              |  | 2008 Quarter to 2007 Quarter Increase/(Decrease) |         |  
|(dollars in thousands) (tax-equivalent basis) |  | AverageBalance                                   |         |   | %Change                                          |       |    | Income/Expense |   |         | %Change |  |       | AverageRate |  |   | AverageVolume |  
|Assets:                                       |  |                                                  |         |   |                                                  |       |    |                |   |         |         |  |       |             |  |   |               |   |  |   |       |  
|Interest-earning assets:                      |  |                                                  |         |   |                                                  |       |    |                |   |         |         |  |       |             |  |   |               |   |  |   |       |  
|Originated and acquired residential           |  | $                                                | (36,765 | ) |                                                  | (11.8 | )% |                | $ | (685    | )       |  | (14.0 | )%          |  | $ | (109          | ) |  | $ | (576  | )
|Home equity                                   |  |                                                  | 74,359  |   |                                                  | 7.3   |    |                |   | (3,533  | )       |  | (20.3 | )           |  |   | (4,721        | ) |  |   | 1,188 |  
|Marine                                        |  |                                                  | (7,583  | ) |                                                  | (2.1  | )  |                |   | 4       |         |  | 0.1   |             |  |   | 112           |   |  |   | (108  | )
|Other consumer                                |  |                                                  | (3,194  | ) |                                                  | (11.9 | )  |                |   | (102    | )       |  | (19.4 | )           |  |   | (41           | ) |  |   | (61   | )
|Commercial mortgage                           |  |                                                  | 55,055  |   |                                                  | 12.3  |    |                |   | (199    | )       |  | (2.5  | )           |  |   | (1,103        | ) |  |   | 904   |  
|Residential construction                      |  |                                                  | (6,119  | ) |                                                  | (1.0  | )  |                |   | (4,607  | )       |  | (36.2 | )           |  |   | (4,475        | ) |  |   | (132  | )
|Commercial construction                       |  |                                                  | 76,405  |   |                                                  | 20.3  |    |                |   | (1,527  | )       |  | (20.6 | )           |  |   | (2,831        | ) |  |   | 1,304 |  
|Commercial business                           |  |                                                  | 142,623 |   |                                                  | 18.4  |    |                |   | 304     |         |  | 2.1   |             |  |   | (2,119        | ) |  |   | 2,423 |  
|                                              |  |                                                  |         |   |                                                  |       |    |                |   |         |         |  |       |             |  |   |               |   |  |   |       |  
|Total loans                                   |  |                                                  | 294,781 |   |                                                  | 7.6   |    |                |   | (10,345 | )       |  | (14.7 | )           |  |   |               |   |  |   |       |  
|                                              |  |                                                  |         |   |                                                  |       |    |                |   |         |         |  |       |             |  |   |               |   |  |   |       |  
|Loans held for sale                           |  |                                                  | (1,943  | ) |                                                  | (15.3 | )  |                |   | (33     | )       |  | (17.1 | )           |  |   | (4            | ) |  |   | (29   | )
|Short-term investments                        |  |                                                  | (293    | ) |                                                  | (11.8 | )  |                |   | (28     | )       |  | (62.2 | )           |  |   | (23           | ) |  |   | (5    | )
|Taxable investment securities                 |  |                                                  | (64,808 | ) |                                                  | (4.5  | )  |                |   | (1,288  | )       |  | (6.2  | )           |  |   | (322          | ) |  |   | (966  | )
|Tax-advantaged investment securities          |  |                                                  | (9,740  | ) |                                                  | (5.9  | )  |                |   | 70      |         |  | 3.2   |             |  |   | 209           |   |  |   | (139  | )
|                                              |  |                                                  |         |   |                                                  |       |    |                |   |         |         |  |       |             |  |   |               |   |  |   |       |  
|Total investment securities                   |  |                                                  | (74,548 | ) |                                                  | (4.6  | )  |                |   | (1,218  | )       |  | (5.3  | )           |  |   |               |   |  |   |       |  
|                                              |  |                                                  |         |   |                                                  |       |    |                |   |         |         |  |       |             |  |   |               |   |  |   |       |  
|Total interest-earning assets                 |  |                                                  | 217,997 |   |                                                  | 3.9   |    |                |   | (11,624 | )       |  | (12.4 | )           |  |   | (15,138       | ) |  |   | 3,514 |  
|                                              |  |                                                  |         |   |                                                  |       |    |                |   |         |         |  |       |             |  |   |               |   |  |   |       |  
|Less: allowance for loan losses               |  |                                                  | 9,736   |   |                                                  | 21.4  |    |                |   |         |         |  |       |             |  |   |               |   |  |   |       |  
|Cash and due from banks                       |  |                                                  | (16,448 | ) |                                                  | (14.0 | )  |                |   |         |         |  |       |             |  |   |               |   |  |   |       |  
|Other assets                                  |  |                                                  | 29,062  |   |                                                  | 4.7   |    |                |   |         |         |  |       |             |  |   |               |   |  |   |       |  
|                                              |  |                                                  |         |   |                                                  |       |    |                |   |         |         |  |       |             |  |   |               |   |  |   |       |  
|Total assets                                  |  | $                                                | 220,875 |   |                                                  | 3.6   |    |                |   |         |         |  |       |             |  |   |               |   |  |   |       |  
|                                              |  |                                                  |         |   |                                                  |       |    |                |   |         |         |  |       |             |  |   |               |   |  |   |       |  
|Liabilities and Stockholders Equity:         |  |                                                  |         |   |                                                  |       |    |                |   |         |         |  |       |             |  |   |               |   |  |   |       |  
|Interest-bearing liabilities:                 |  |                                                  |         |   |                                                  |       |    |                |   |         |         |  |       |             |  |   |               |   |  |   |       |  
|Interest-bearing demand deposits              |  | $                                                | (51,333 | ) |                                                  | (9.7  | )  |                |   | (347    | )       |  | (43.1 | )           |  |   | (275          | ) |  |   | (72   | )
|Money market deposits                         |  |                                                  | 43,560  |   |                                                  | 7.3   |    |                |   | (2,009  | )       |  | (38.5 | )           |  |   | (2,362        | ) |  |   | 353   |  
|Savings deposits                              |  |                                                  | (30,417 | ) |                                                  | (5.1  | )  |                |   | 269     |         |  | 47.8  |             |  |   | 299           |   |  |   | (30   | )
|Direct time deposits                          |  |                                                  | (80,003 | ) |                                                  | (6.7  | )  |                |   | (3,243  | )       |  | (23.5 | )           |  |   | (2,360        | ) |  |   | (883  | )
|Brokered time deposits                        |  |                                                  | 334,808 |   |                                                  | 66.9  |    |                |   | 3,625   |         |  | 57.2  |             |  |   | (373          | ) |  |   | 3,998 |  
|Short-term borrowings                         |  |                                                  | 57,890  |   |                                                  | 9.8   |    |                |   | (3,537  | )       |  | (51.8 | )           |  |   | (4,145        | ) |  |   | 608   |  
|Long-term debt                                |  |                                                  | 10,118  |   |                                                  | 1.3   |    |                |   | (3,994  | )       |  | (36.8 | )           |  |   | (4,134        | ) |  |   | 140   |  
|                                              |  |                                                  |         |   |                                                  |       |    |                |   |         |         |  |       |             |  |   |               |   |  |   |       |  
|Total interest-bearing liabilities            |  |                                                  | 284,623 |   |                                                  | 5.9   |    |                |   | (9,236  | )       |  | (20.8 | )           |  |   | (11,720       | ) |  |   | 2,484 |  
|                                              |  |                                                  |         |   |                                                  |       |    |                |   |         |         |  |       |             |  |   |               |   |  |   |       |  
|Noninterest-bearing demand deposits           |  |                                                  | (77,547 | ) |                                                  | (10.4 | )  |                |   |         |         |  |       |             |  |   |               |   |  |   |       |  
|Other liabilities                             |  |                                                  | 5,396   |   |                                                  | 13.0  |    |                |   |         |         |  |       |             |  |   |               |   |  |   |       |  
|Stockholders equity                          |  |                                                  | 8,403   |   |                                                  | 1.3   |    |                |   |         |         |  |       |             |  |   |               |   |  |   |       |  
|                                              |  |                                                  |         |   |                                                  |       |    |                |   |         |         |  |       |             |  |   |               |   |  |   |       |  
|Total liabilities and stockholders equity    |  | $                                                | 220,875 |   |                                                  | 3.6   |    |                |   |         |         |  |       |             |  |   |               |   |  |   |       |  
|                                              |  |                                                  |         |   |                                                  |       |    |                |   |         |         |  |       |             |  |   |               |   |  |   |       |  
|Net interest-earning assets                   |  | $                                                | (66,626 | ) |                                                  | (9.0  | )  |                |   |         |         |  |       |             |  |   |               |   |  |   |       |  
|                                              |  |                                                  |         |   |                                                  |       |    |                |   |         |         |  |       |             |  |   |               |   |  |   |       |  
|Net interest income (tax-equivalent)          |  |                                                  |         |   |                                                  |       |    |                |   | (2,388  | )       |  | (4.9  | )           |  | $ | (3,418        | ) |  | $ | 1,030 |  
|Less: tax-equivalent adjustment               |  |                                                  |         |   |                                                  |       |    |                |   | 157     |         |  | 24.2  |             |  |   |               |   |  |   |       |  
|                                              |  |                                                  |         |   |                                                  |       |    |                |   |         |         |  |       |             |  |   |               |   |  |   |       |  
|Net interest income                           |  |                                                  |         |   |                                                  |       |    |                | $ | (2,545  | )       |  | (5.2  | )           |  |   |               |   |  |   |       |  
|                                              |  |                                                  |         |   |                                                  |       |    |                |   |         |         |  |       |             |  |   |               |   |  |   |       |  



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The net interest margin, on a tax-equivalent basis, decreased 29 basis points to 3.28% from 3.57% for the quarter ended
June 30, 2008. The decline was primarily caused by the 105 basis point decline in asset yields that were negatively impacted by the 325 basis point decline in the benchmark interest rates during the past twelve months. This decline was not
fully offset by the 93 basis point decline in interest-bearing liabilities. Aggressive competition for deposits throughout the industry and the issuance of $50.0 million in subordinated debt at 9.50% in April 2008 resulted in the slower decline in
rates on interest-bearing liabilities as compared to yields on interest-earning assets. In addition, higher cost brokered certificates of deposit increased during the current quarter as it was used to fund asset growth due to the decline in customer
deposits and increased the Corporations liquidity position by freeing up other available borrowing sources.

Year over year average earning assets
increased to $5.7 billion as a result of strong internally generated loan growth. The net average loan growth of $331.5 million in relationship-based loans was offset by planned reductions of $36.8 million in originated and acquired loans and a
$74.5 million reduction in investment securities due mainly to the investment write-downs in the three previous quarters and principal pay downs. The yields on investments and loans declined 3 and 148 basis points, respectively. The yield decline in
the loan and investment portfolios resulted from the decrease in year over year market interest rates and the composition of these portfolios. Interest-bearing liabilities increased by $284.6 million while the average rate paid decreased by 93 basis
points. The decrease in the average rate paid was primarily due to the shift in deposit and borrowing mix in addition to the decline in interest rates that impacted interest bearing demand deposits, money market deposits, time deposits and short and
long-term debt. Savings rates increased over the same period a year ago as a result of an increase in higher cost online saving deposit balances. Interest expense was also negatively impacted by a $77.5 million decline in average noninterest-bearing
demand deposit balances during the year as customers shifted their deposits to interest-bearing deposits or outside the institution.

The 5.74% yield on
earning assets decreased 105 basis points from the second quarter of 2007 as a result of declining interest rates and the change in asset mix, while total interest-bearing liabilities decreased by only 93 basis points to 2.79%. Net interest income
on a tax-equivalent basis was $46.8 million in the quarter ended June 30, 2008 compared to $49.2 million in the quarter ended June 30, 2007. Total interest income decreased by $11.6 million and total interest expense decreased by $9.2
million resulting in a net decline in net interest income on a tax-equivalent basis of $2.4 million. Growth in the key loan portfolios of home equity, commercial real estate and commercial banking were not enough to offset the $11.6 million decline
in total interest income that was negatively impacted from the net decline in interest rates. The impact from declining rates and the change in deposit and borrowing mix were the primary causes of the decline in interest expense of $9.2 million.

Future growth in net interest income will depend upon consumer and commercial loan demand, growth in deposits and the general level of interest rates.

Provision for Loan Losses

The provision for loan
losses was $6.4 million for the quarter ended June 30, 2008 compared to $4.8 million for the same quarter a year ago. The $1.6 million growth in the provision for loan losses in the quarter ended June 30, 2008 was the result of increased
uncertainty in the regional markets, increased non-performing loans along with overall loan growth. The allowance for loan losses to total loans was 1.38% at June 30, 2008. The Corporation continues to emphasize quality underwriting as well as
aggressive management of charge-offs and potential problem loans within this uncertain market to minimize the exposure to charge-offs. In the quarter ended June 30, 2008, net charge-offs were $3.5 million, or 0.33% of average loans, compared to
$4.5 million, or 0.47% of average loans in the quarter ended June 30, 2007. Total consumer loan net charge-offs as a percentage of average total consumer loans were 0.26% in the quarter ended June 30, 2008, compared to 0.19% in the same
period a year ago. Total commercial loan net charge-offs as a percentage of average commercial loans were 0.39%, a decline from 0.69% in the same period a year ago. The prior year period included a $3.5 million charge-off of a commercial business
loan.

Non-Interest Income

Total non-interest income
decreased $14.8 million to $16.3 million in the quarter ending June 30, 2008. The current quarter includes a gain of $8.7 million from the sale of MasterCard stock. In addition, the Corporation recorded a $20.7 million pre-tax write-down
relating to its REIT trust preferred securities portfolio and non-agency mortgage-backed portfolio.

Total non-interest income, excluding net gains and the
impairment on investment securities, declined $1.8 million to $28.9 million in the quarter ending June 30, 2008. The decline was primarily caused by lower deposit fee income, which declined $2.2 million, or 9.1%, to $22.3 million in the quarter
ended June 30, 2008. The decrease in deposit fee income reflects a $2.1 million decline in retail deposit fees mainly associated with NSF fees. The decline in consumer deposit fees was also negatively impacted by the September 2007 sale of
deposits which negatively impacted deposit fee income by $191 thousand.

Commissions and fees declined 24.1%, or $444 thousand, to $1.4 million in the
quarter ended June 30, 2008 primarily due to decreased sales by Provident Investment Company, the Banks wholly owned subsidiary which offers securities through an affiliation with a securities broker-dealer, as well as insurance products
as an agent.



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During the second quarter of 2008, the Corporation recorded a write-down of $20.7 million relating to
other-than-temporary impairment on its REIT trust preferred securities portfolio and non-agency MBS securities portfolio. Following its credit review for the period ended June 30, 2008, the Corporation wrote down the values of four non-agency
MBS securities and six REIT trust preferred securities, reducing their carrying values to current market values at that date.

The Corporation recorded
$8.2 million in net gains from the sale or disposition of assets or liabilities in the quarter ending June 30, 2008, compared to net gains of $420 thousand in the same quarter a year ago. In May 2008, the Corporation elected to convert and sell
a portion of its MasterCard Class B common stock, through a voluntary program offered by MasterCard Incorporated to all holders of Class B common stock. The Corporation recorded an $8.7 million pre-tax gain relating to this transaction which was
offset by a $539 thousand net loss, composed primarily of a $453 thousand loss on early redemption of brokered certificates of deposit and a $86 thousand loss associated with disposition of other assets. The quarter ending June 30, 2007
included securities sales that were focused on reducing sensitivity to changes in interest rates. These transactions generated net gains of $187 thousand. The prior year quarter also included net gains of $233 thousand from other asset sales.

In the quarters ending June 30, 2008 and 2007, certain derivative transactions did not qualify for hedge accounting treatment and as a result, the
gains and losses associated with these derivatives are recorded in non-interest income. The net cash settlement also related to these derivatives which represents interest income and expense on non-designated interest rate swaps are recorded as part
of non-interest income. The net derivative activities associated with these derivatives were a net gain of $57 thousand for the quarter ending June 30, 2008, compared to a net loss of $357 thousand in the quarter ended June 30, 2007.

Other non-interest income increased $504 thousand to $5.2 million, due to increased income associated with commercial loan fees of $691 thousand, lease
income of $153 thousand, offset by lower mortgage banking fees of $84 thousand and $256 thousand in other miscellaneous fees.

Non-Interest Expense

Total non-interest expense declined $2.3 million, or 4.3%, to $50.4 million in the quarter ending June 30, 2008. The significant declines in
non-interest expense in the current quarter include declines of $437 thousand in salaries and employee benefits, $1.0 million in other non-interest expense and $515 thousand in restructuring activities expense.

The $437 thousand decrease in salaries and benefits was primarily the result of lower average quarterly staffing levels of approximately 180 positions as a result of
actions taken in conjunction with the corporate-wide efficiency program. Base salary expense declined $416 thousand due to the lower number of full time equivalent employees concentrated in the consumer banking, organizational support and credit
administration groups, partially offset by annual merit increases. Salary and employee benefits expense were also positively impacted by declines of $234 thousand in incentives, $165 thousand in pension related benefits and health care costs of $115
thousand. These declines in expenses were partially offset by increases in share-based payments of $256 thousand and $270 thousand decrease in deferred salary expense associated with a decline in new loan originations.

Occupancy expense decreased $194 thousand for the quarter ended June 30, 2008 due to lower occupancy repairs and maintenance and lower building and leasehold
depreciation resulting mainly from the closure and sale of branches in 2007, partially offset by higher rent on existing locations.

Restructuring
activities costs were $(34) thousand in the second quarter of 2008 compared to $481 thousand for the same period a year ago. In the second quarter of 2008, a severance accrual associated with outplacement services was reversed. In the second quarter
of 2007, the restructuring costs were composed of severance costs and associated termination costs from the corporate-wide efficiency program.

Other
non-interest expense decreased by $1.0 million from the same period a year ago mainly as a result of a reduction in consulting fees, marketing, communication, operational losses and amortization of deposit intangibles.



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Income Taxes

The
Corporation accounts for income taxes under the asset/liability method. Deferred tax assets and liabilities are recognized for the future consequences attributable to differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases, as well as operating loss and tax credit carry forwards. A valuation allowance is established against deferred tax assets when in the judgment of management, it is more likely than not that such
deferred tax assets will not become realizable. It is at least reasonably possible that managements judgment about the need for a valuation allowance for deferred taxes could change in the near term. The valuation allowance was $4.0 million at
June 30, 2008 versus $2.9 million at June 30, 2007. The Corporations valuation allowance relates to state net operating losses that are unlikely to be utilized in the foreseeable future.

In the quarter ended June 30, 2008, the Corporation recorded an income tax benefit of $4.7 million on pre-tax income of $5.5 million, an effective tax benefit rate
of 84.3%. In the quarter ended June 30, 2007, the Corporation recorded income tax expense of $6.7 million on pre-tax income of $22.2 million, an effective tax rate of 30.1%. The change in the effective tax rate for the quarter ended
June 30, 2008 was mainly due to the significant declines in year-to-date pre-tax income and the related impact on the effective tax rate.

For Six
Months Ended June 30, 2008 Compared to Six Months Ended June 30, 2007

Financial Highlights

The Corporation reported a net loss of $7.4 million, or $(0.28) per diluted share, for the six months ended June 30, 2008 compared to net income of $31.6 million, or
$0.98 per diluted share for the six months ended June 30, 2007. The Corporations key performance measurements such as return on assets, return on common equity were (0.23)%, and (2.90)%, respectively, for the six months ended
June 30, 2008, compared to 1.03% and 9.94%, respectively, for the six months ended June 30, 2007.

The financial results for the six months ended
June 30, 2008 includes a $8.7 million gain on the sale of MasterCard stock, offset by a $63.4 million write-down of the investment securities portfolio for securities that were other-than-temporarily impaired along with an increase in the
provision for loan losses of $3.7 million due to increased charge-offs, loan growth and the increased uncertainties in the economic environment. The decrease in earnings was also impacted by the decline in asset yields that were negatively impacted
by the decline in interest rates during the past twelve months that were not fully offset by the decreased expense on interest-bearing liabilities. Year-to-date pretax income for 2007 included an additional provision for loan losses that was mainly
associated with a $3.5 million charge-off of a commercial business loan along with a $767 thousand gain from the sale of a branch facility that was completed as part of the branch rationalization effort.

Earnings for the six months ended June 30, 2008 include the following significant transactions and are included in subsequent discussions regarding the results of
operations:



| |  |  | Investment securities write-down: In the six months ended June 30, 2008, the Corporation recorded a $63.4 million pre-tax write-down relating to its
REIT trust preferred securities portfolio and non-agency mortgage-backed portfolio. Following its credit review for the periods ended March 31, 2008 and June 30, 2008, the Corporation wrote down the values of certain securities by $63.4
million by reducing their carrying values to current market values at that date. The $63.4 million was comprised of $34.3 million in the REIT trust preferred securities portfolio and $29.1 million in the non-agency mortgage-backed securities
portfolio.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Voluntary sale of MasterCard stock:In May 2008, the Corporation elected to convert and sell a portion of its MasterCard Class B common stock through a
voluntary program offered by MasterCard Incorporated to all holders of Class B common stock. The Corporation recorded an $8.7 million pre-tax gain relating to this transaction.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Net Interest Income

Tax equivalent net interest income for the six
months of 2008 decreased $6.0 million to $92.8 million compared to 2007, a 6.1% decrease from period to period. Tax equivalent interest income decreased $16.7 million and interest expense decreased $10.7 million. The decline was primarily caused by
the 89 basis point decline in asset yields that were negatively impacted by the decline in interest rates over the past 12 months and a reversal of $588 thousand of interest income related to certain investment securities that were considered
other-than-temporarily impaired. The decline in asset yields was not fully offset by the 66 basis point decline in interest-bearing liabilities due to aggressive competition for deposits throughout the industry and from a number of steps taken to
re-position the Corporations non-customer funding sources in light of the currently volatile market for funds. Interest expense was also negatively impacted by a $79.6 million decline in average noninterest-bearing demand deposit balances
during the year as customers shifted their deposits to interest-bearing deposits or outside the institution. The overall impact on the net yield on earning assets was a decrease of 38 basis points to 3.22% in 2008 from 3.60% in 2007.



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##### Table of Contents

Consolidated Average Balances and Analysis of Changes in Tax Equivalent Net Interest Income

Six Months Ended June 30, 2008 and 2007



|                                                               |  |                               |           |                |                               |            |  |      |                |  |                |           |            |   |         |  |      |  
|-------------------------------------------------------------- |  | ----------------------------- | --------- | -------------- | ----------------------------- | ---------- |  | ---- | -------------- |  | -------------- | --------- | ---------- | - | ------- |  | ---- | -
|                                                               |  | Six Months EndedJune 30, 2008 |           |                | Six Months EndedJune 30, 2007 |           
|(dollars in thousands) (tax-equivalent
basis)                  |  | AverageBalance                |           | Income/Expense |                               | Yield/Rate |  |      | AverageBalance |  | Income/Expense |           | Yield/Rate |  
|Assets:                                                        |  |                               |           |                |                               |            |  |      |                |  |                |           |            |   |         |  |      |  
|Interest-earning assets:                                       |  |                               |           |                |                               |            |  |      |                |  |                |           |            |   |         |  |      |  
|Originated and acquired residential                            |  | $                             | 282,225   |                | $                             | 8,610      |  | 6.14 | %              |  | $              | 318,211   |            | $ | 9,956   |  | 6.31 | %
|Home equity                                                    |  |                               | 1,087,513 |                |                               | 29,538     |  | 5.46 |                |  |                | 1,005,768 |            |   | 34,461  |  | 6.91 |  
|Marine                                                         |  |                               | 359,130   |                |                               | 9,845      |  | 5.51 |                |  |                | 370,561   |            |   | 9,931   |  | 5.40 |  
|Other consumer                                                 |  |                               | 24,250    |                |                               | 885        |  | 7.34 |                |  |                | 27,201    |            |   | 1,076   |  | 7.98 |  
|Commercial mortgage                                            |  |                               | 473,709   |                |                               | 15,085     |  | 6.40 |                |  |                | 448,641   |            |   | 15,940  |  | 7.16 |  
|Residential construction                                       |  |                               | 595,863   |                |                               | 18,361     |  | 6.20 |                |  |                | 585,349   |            |   | 25,342  |  | 8.73 |  
|Commercial construction                                        |  |                               | 464,219   |                |                               | 13,276     |  | 5.75 |                |  |                | 373,739   |            |   | 14,681  |  | 7.92 |  
|Commercial business                                            |  |                               | 927,349   |                |                               | 30,694     |  | 6.66 |                |  |                | 758,071   |            |   | 28,190  |  | 7.50 |  
|                                                               |  |                               |           |                |                               |            |  |      |                |  |                |           |            |   |         |  |      |  
|Total loans                                                    |  |                               | 4,214,258 |                |                               | 126,294    |  | 6.03 |                |  |                | 3,887,541 |            |   | 139,577 |  | 7.24 |  
|                                                               |  |                               |           |                |                               |            |  |      |                |  |                |           |            |   |         |  |      |  
|Loans held for sale                                            |  |                               | 10,282    |                |                               | 315        |  | 6.16 |                |  |                | 11,861    |            |   | 369     |  | 6.27 |  
|Short-term investments                                         |  |                               | 2,455     |                |                               | 53         |  | 4.34 |                |  |                | 3,257     |            |   | 142     |  | 8.79 |  
|Taxable investment securities                                  |  |                               | 1,403,026 |                |                               | 39,329     |  | 5.64 |                |  |                | 1,485,631 |            |   | 43,264  |  | 5.87 |  
|Tax-advantaged investment securities                           |  |                               | 154,448   |                |                               | 4,723      |  | 6.15 |                |  |                | 150,715   |            |   | 4,106   |  | 5.49 |  
|                                                               |  |                               |           |                |                               |            |  |      |                |  |                |           |            |   |         |  |      |  
|Total investment securities                                    |  |                               | 1,557,474 |                |                               | 44,052     |  | 5.69 |                |  |                | 1,636,346 |            |   | 47,370  |  | 5.84 |  
|                                                               |  |                               |           |                |                               |            |  |      |                |  |                |           |            |   |         |  |      |  
|Total interest-earning assets                                  |  |                               | 5,784,469 |                |                               | 170,714    |  | 5.93 |                |  |                | 5,539,005 |            |   | 187,458 |  | 6.82 |  
|                                                               |  |                               |           |                |                               |            |  |      |                |  |                |           |            |   |         |  |      |  
|Less: allowance for loan losses                                |  |                               | 55,165    |                |                               |            |  |      |                |  |                | 45,336    |            |   |         |  |      |  
|Cash and due from banks                                        |  |                               | 101,403   |                |                               |            |  |      |                |  |                | 114,873   |            |   |         |  |      |  
|Other assets                                                   |  |                               | 642,991   |                |                               |            |  |      |                |  |                | 616,250   |            |   |         |  |      |  
|                                                               |  |                               |           |                |                               |            |  |      |                |  |                |           |            |   |         |  |      |  
|Total assets                                                   |  | $                             | 6,473,698 |                |                               |            |  |      |                |  | $              | 6,224,792 |            |   |         |  |      |  
|                                                               |  |                               |           |                |                               |            |  |      |                |  |                |           |            |   |         |  |      |  
|                                                               |  |                               |           |                |                               |           
|Liabilities and Stockholders Equity:                          |  |                               |           |                |                               |            |  |      |                |  |                |           |            |   |         |  |      |  
|Interest-bearing liabilities:                                  |  |                               |           |                |                               |            |  |      |                |  |                |           |            |   |         |  |      |  
|Interest-bearing demand deposits                               |  | $                             | 468,147   |                |                               | 1,002      |  | 0.43 |                |  | $              | $523,874  |            |   | 1,458   |  | 0.56 |  
|Money market deposits                                          |  |                               | 647,901   |                |                               | 7,684      |  | 2.39 |                |  |                | 570,802   |            |   | 9,688   |  | 3.42 |  
|Savings deposits                                               |  |                               | 542,745   |                |                               | 1,340      |  | 0.50 |                |  |                | 598,062   |            |   | 1,154   |  | 0.39 |  
|Direct time deposits                                           |  |                               | 1,102,480 |                |                               | 22,018     |  | 4.02 |                |  |                | 1,192,141 |            |   | 27,084  |  | 4.58 |  
|Brokered time deposits                                         |  |                               | 854,714   |                |                               | 21,176     |  | 4.98 |                |  |                | 513,512   |            |   | 12,885  |  | 5.06 |  
|Short-term borrowings                                          |  |                               | 730,674   |                |                               | 9,381      |  | 2.58 |                |  |                | 627,065   |            |   | 14,571  |  | 4.69 |  
|Long-term debt                                                 |  |                               | 775,195   |                |                               | 15,361     |  | 3.98 |                |  |                | 781,218   |            |   | 21,833  |  | 5.64 |  
|                                                               |  |                               |           |                |                               |            |  |      |                |  |                |           |            |   |         |  |      |  
|Total interest-bearing liabilities                             |  |                               | 5,121,856 |                |                               | 77,962     |  | 3.06 |                |  |                | 4,806,674 |            |   | 88,673  |  | 3.72 |  
|                                                               |  |                               |           |                |                               |            |  |      |                |  |                |           |            |   |         |  |      |  
|Noninterest-bearing demand deposits                            |  |                               | 654,400   |                |                               |            |  |      |                |  |                | 734,046   |            |   |         |  |      |  
|Other liabilities                                              |  |                               | 61,168    |                |                               |            |  |      |                |  |                | 42,023    |            |   |         |  |      |  
|Stockholders equity                                           |  |                               | 636,274   |                |                               |            |  |      |                |  |                | 642,049   |            |   |         |  |      |  
|                                                               |  |                               |           |                |                               |            |  |      |                |  |                |           |            |   |         |  |      |  
|Total liabilities and stockholders equity                     |  | $                             | 6,473,698 |                |                               |            |  |      |                |  | $              | 6,224,792 |            |   |         |  |      |  
|                                                               |  |                               |           |                |                               |            |  |      |                |  |                |           |            |   |         |  |      |  
|Net interest-earning assets                                    |  | $                             | 662,613   |                |                               |            |  |      |                |  | $              | 732,331   |            |   |         |  |      |  
|                                                               |  |                               |           |                |                               |            |  |      |                |  |                |           |            |   |         |  |      |  
|Net interest income (tax-equivalent)                           |  |                               |           |                |                               | 92,752     |  |      |                |  |                |           |            |   | 98,785  |  |      |  
|Less: tax-equivalent adjustment                                |  |                               |           |                |                               | 1,760      |  |      |                |  |                |           |            |   | 1,302   |  |      |  
|                                                               |  |                               |           |                |                               |            |  |      |                |  |                |           |            |   |         |  |      |  
|Net interest income                                            |  |                               |           |                | $                             | 90,992     |  |      |                |  |                |           |            | $ | 97,483  |  |      |  
|                                                               |  |                               |           |                |                               |            |  |      |                |  |                |           |            |   |         |  |      |  
|Net yield on interest-earning assets on a tax-equivalent basis |  |                               |           |                |                               |            |  | 3.22 | %              |  |                |           |            |   |         |  | 3.60 | %



50



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##### Table of Contents

Consolidated Average Balances and Analysis of Changes in Tax Equivalent Net Interest Income (Continued)

Six Months Ended June 30, 2008 and 2007



|                                              |  |                                          |         |   |                                                  |       |    |                |   |         |         |  |       |             |  |   |               |   |  |   |        |  
|--------------------------------------------- |  | ---------------------------------------- | ------- | - | ------------------------------------------------ | ----- | -- | -------------- | - | ------- | ------- |  | ----- | ----------- |  | - | ------------- | - |  | - | ------ | -
|                                              |  |                                          |         |   | 2008/2007Income/Expense VarianceDue to Change In |      
|                                              |  | YTD 2008 to YTD 2007 Increase/(Decrease) |         |  
|(dollars in thousands) (tax-equivalent
basis) |  | AverageBalance                           |         |   | %Change                                          |       |    | Income/Expense |   |         | %Change |  |       | AverageRate |  |   | AverageVolume |  
|Assets:                                       |  |                                          |         |   |                                                  |       |    |                |   |         |         |  |       |             |  |   |               |   |  |   |        |  
|Interest-earning assets:                      |  |                                          |         |   |                                                  |       |    |                |   |         |         |  |       |             |  |   |               |   |  |   |        |  
|Originated and acquired residential           |  | $                                        | (35,986 | ) |                                                  | (11.3 | )% |                | $ | (1,346  | )       |  | (13.5 | )%          |  | $ | (264          | ) |  | $ | (1,082 | )
|Home equity                                   |  |                                          | 81,745  |   |                                                  | 8.1   |    |                |   | (4,923  | )       |  | (14.3 | )           |  |   | (7,594        | ) |  |   | 2,671  |  
|Marine                                        |  |                                          | (11,431 | ) |                                                  | (3.1  | )  |                |   | (86     | )       |  | (0.9  | )           |  |   | 208           |   |  |   | (294   | )
|Other consumer                                |  |                                          | (2,951  | ) |                                                  | (10.8 | )  |                |   | (191    | )       |  | (17.8 | )           |  |   | (81           | ) |  |   | (110   | )
|Commercial mortgage                           |  |                                          | 25,068  |   |                                                  | 5.6   |    |                |   | (855    | )       |  | (5.4  | )           |  |   | (1,731        | ) |  |   | 876    |  
|Residential construction                      |  |                                          | 10,514  |   |                                                  | 1.8   |    |                |   | (6,981  | )       |  | (27.5 | )           |  |   | (7,434        | ) |  |   | 453    |  
|Commercial construction                       |  |                                          | 90,480  |   |                                                  | 24.2  |    |                |   | (1,405  | )       |  | (9.6  | )           |  |   | (4,530        | ) |  |   | 3,125  |  
|Commercial business                           |  |                                          | 169,278 |   |                                                  | 22.3  |    |                |   | 2,504   |         |  | 8.9   |             |  |   | (3,388        | ) |  |   | 5,892  |  
|                                              |  |                                          |         |   |                                                  |       |    |                |   |         |         |  |       |             |  |   |               |   |  |   |        |  
|Total loans                                   |  |                                          | 326,717 |   |                                                  | 8.4   |    |                |   | (13,283 | )       |  | (9.5  | )           |  |   |               |   |  |   |        |  
|                                              |  |                                          |         |   |                                                  |       |    |                |   |         |         |  |       |             |  |   |               |   |  |   |        |  
|Loans held for sale                           |  |                                          | (1,579  | ) |                                                  | (13.3 | )  |                |   | (54     | )       |  | (14.6 | )           |  |   | (6            | ) |  |   | (48    | )
|Short-term investments                        |  |                                          | (802    | ) |                                                  | (24.6 | )  |                |   | (89     | )       |  | (62.7 | )           |  |   | (60           | ) |  |   | (29    | )
|Taxable investment securities                 |  |                                          | (82,605 | ) |                                                  | (5.6  | )  |                |   | (3,935  | )       |  | (9.1  | )           |  |   | (1,649        | ) |  |   | (2,286 | )
|Tax-advantaged investment securities          |  |                                          | 3,733   |   |                                                  | 2.5   |    |                |   | 617     |         |  | 15.0  |             |  |   | 511           |   |  |   | 106    |  
|                                              |  |                                          |         |   |                                                  |       |    |                |   |         |         |  |       |             |  |   |               |   |  |   |        |  
|Total investment securities                   |  |                                          | (78,872 | ) |                                                  | (4.8  | )  |                |   | (3,318  | )       |  | (7.0  | )           |  |   |               |   |  |   |        |  
|                                              |  |                                          |         |   |                                                  |       |    |                |   |         |         |  |       |             |  |   |               |   |  |   |        |  
|Total interest-earning assets                 |  |                                          | 245,464 |   |                                                  | 4.4   |    |                |   | (16,744 | )       |  | (8.9  | )           |  |   | (24,931       | ) |  |   | 8,187  |  
|                                              |  |                                          |         |   |                                                  |       |    |                |   |         |         |  |       |             |  |   |               |   |  |   |        |  
|Less: allowance for loan losses               |  |                                          | 9,829   |   |                                                  | 21.7  |    |                |   |         |         |  |       |             |  |   |               |   |  |   |        |  
|Cash and due from banks                       |  |                                          | (13,470 | ) |                                                  | (11.7 | )  |                |   |         |         |  |       |             |  |   |               |   |  |   |        |  
|Other assets                                  |  |                                          | 26,741  |   |                                                  | 4.3   |    |                |   |         |         |  |       |             |  |   |               |   |  |   |        |  
|                                              |  |                                          |         |   |                                                  |       |    |                |   |         |         |  |       |             |  |   |               |   |  |   |        |  
|Total assets                                  |  | $                                        | 248,906 |   |                                                  | 4.0   |    |                |   |         |         |  |       |             |  |   |               |   |  |   |        |  
|                                              |  |                                          |         |   |                                                  |       |    |                |   |         |         |  |       |             |  |   |               |   |  |   |        |  
|                                              |  |                                          |         |   |                                                  |      
|Liabilities and Stockholders Equity:         |  |                                          |         |   |                                                  |       |    |                |   |         |         |  |       |             |  |   |               |   |  |   |        |  
|Interest-bearing liabilities:                 |  |                                          |         |   |                                                  |       |    |                |   |         |         |  |       |             |  |   |               |   |  |   |        |  
|Interest-bearing demand deposits              |  | $                                        | (55,727 | ) |                                                  | (10.6 | )  |                |   | (456    | )       |  | (31.3 | )           |  |   | (313          | ) |  |   | (143   | )
|Money market deposits                         |  |                                          | 77,099  |   |                                                  | 13.5  |    |                |   | (2,004  | )       |  | (20.7 | )           |  |   | (3,202        | ) |  |   | 1,198  |  
|Savings deposits                              |  |                                          | (55,317 | ) |                                                  | (9.2  | )  |                |   | 186     |         |  | 16.1  |             |  |   | 300           |   |  |   | (114   | )
|Direct time deposits                          |  |                                          | (89,661 | ) |                                                  | (7.5  | )  |                |   | (5,066  | )       |  | (18.7 | )           |  |   | (3,147        | ) |  |   | (1,919 | )
|Brokered time deposits                        |  |                                          | 341,202 |   |                                                  | 66.4  |    |                |   | 8,291   |         |  | 64.3  |             |  |   | (201          | ) |  |   | 8,492  |  
|Short-term borrowings                         |  |                                          | 103,609 |   |                                                  | 16.5  |    |                |   | (5,190  | )       |  | (35.6 | )           |  |   | (7,323        | ) |  |   | 2,133  |  
|Long-term debt                                |  |                                          | (6,023  | ) |                                                  | (0.8  | )  |                |   | (6,472  | )       |  | (29.6 | )           |  |   | (6,306        | ) |  |   | (166   | )
|                                              |  |                                          |         |   |                                                  |       |    |                |   |         |         |  |       |             |  |   |               |   |  |   |        |  
|Total interest-bearing liabilities            |  |                                          | 315,182 |   |                                                  | 6.6   |    |                |   | (10,711 | )       |  | (12.1 | )           |  |   | (16,329       | ) |  |   | 5,618  |  
|                                              |  |                                          |         |   |                                                  |       |    |                |   |         |         |  |       |             |  |   |               |   |  |   |        |  
|Noninterest-bearing demand deposits           |  |                                          | (79,646 | ) |                                                  | (10.9 | )  |                |   |         |         |  |       |             |  |   |               |   |  |   |        |  
|Other liabilities                             |  |                                          | 19,145  |   |                                                  | 45.6  |    |                |   |         |         |  |       |             |  |   |               |   |  |   |        |  
|Stockholders equity                          |  |                                          | (5,775  | ) |                                                  | (0.9  | )  |                |   |         |         |  |       |             |  |   |               |   |  |   |        |  
|                                              |  |                                          |         |   |                                                  |       |    |                |   |         |         |  |       |             |  |   |               |   |  |   |        |  
|Total liabilities and stockholders equity    |  | $                                        | 248,906 |   |                                                  | 4.0   |    |                |   |         |         |  |       |             |  |   |               |   |  |   |        |  
|                                              |  |                                          |         |   |                                                  |       |    |                |   |         |         |  |       |             |  |   |               |   |  |   |        |  
|Net interest-earning assets                   |  | $                                        | (69,718 | ) |                                                  | (9.5  | )  |                |   |         |         |  |       |             |  |   |               |   |  |   |        |  
|                                              |  |                                          |         |   |                                                  |       |    |                |   |         |         |  |       |             |  |   |               |   |  |   |        |  
|Net interest income (tax-equivalent)          |  |                                          |         |   |                                                  |       |    |                |   | (6,033  | )       |  | (6.1  | )           |  | $ | (8,602        | ) |  | $ | 2,569  |  
|Less: tax-equivalent adjustment               |  |                                          |         |   |                                                  |       |    |                |   | 458     |         |  | 35.2  |             |  |   |               |   |  |   |        |  
|                                              |  |                                          |         |   |                                                  |       |    |                |   |         |         |  |       |             |  |   |               |   |  |   |        |  
|Net interest income                           |  |                                          |         |   |                                                  |       |    |                | $ | (6,491  | )       |  | (6.7  | )           |  |   |               |   |  |   |        |  
|                                              |  |                                          |         |   |                                                  |       |    |                |   |         |         |  |       |             |  |   |               |   |  |   |        |  



51



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##### Table of Contents

Provision for Loan Losses

The provision for loan losses was $9.5 million for the six months ending June 30, 2008 compared to $5.8 million for the same period a year ago. The $3.7 million growth in the provision for loan losses for the six months ended
June 30, 2008 was the result of increased net charge-offs and non-performing assets along with overall loan growth. In the six months ended June 30, 2008, net charge-offs were $6.6 million, or 0.32% of average loans, compared to $5.3
million, or 0.27% of average loans, in the six months ended June 30, 2007.

Non-Interest Income

Total non-interest income declined $59.8 million to $1.2 million for the six months ended June 30, 2008. The current year includes an $8.7 million gain on the sale
of MasterCard stock, offset by a $63.4 million write-down of the Corporations investment securities portfolio. The prior year includes a $767 thousand gain from the sale of a branch facility that was completed as part of the branch
rationalization effort.

Total non-interest income, excluding net gains and the impairment on investment securities, declined $2.7 million to $56.6 million
for the six months ending June 30, 2008. The decline was primarily caused by lower deposit fee income, which declined $3.4 million, or 7.2%, to $43.3 million during the six months ended June 30, 2008. The decrease in deposit fee income is
directly associated with retail deposit fees mainly caused by a decline in NSF fees for the six months ended June 30, 2008. The decline in consumer deposit fees was also negatively impacted by the September 2007 sale of deposits which
negatively impacted deposit fee income by $379 thousand during the current six month period. Commissions and fees declined 15.5%, or $544 thousand, to $3.0 million in the six months ended June 30, 2008 primarily due to decreased check fees and
sales in insurance and investment products. During the first six months of 2008, the Corporation recorded write-downs of $63.4 million relating to other-than-temporary impairment on its REIT trust preferred and non-agency MBS securities portfolios.
The Corporation also recorded $8.0 million in net gains from sale or disposition of assets or liabilities in the six months ended June 30, 2008, compared to net gains of $1.6 million in the same period a year ago. The $8.0 million in net gains
includes a $8.7 million pre-tax gain from the sale of MasterCard stock, which was partially offset by a $670 thousand loss on early redemption of brokered certificates of deposit and a loss of $60 thousand from other asset losses. The six months
ended June 30, 2007 included securities sales that were focused on reducing sensitivity to changes in interest rates. These transactions generated net gains of $399 thousand. The prior year to date also included a $767 thousand gain from the
sale of a branch facility, $153 thousand from debt extinguishments of $5.8 million from FHLB borrowings and net gains of $304 thousand from other asset sales or other real estate write-downs. Net derivative activities were a net gain of $96 thousand
for the first six months ending June 30, 2008, compared to a net loss of $214 thousand for the same period in 2007. Other non-interest income increased $912 thousand to $10.3 million, due to increased income associated mainly with commercial
loan fees of $1.0 million.

Non-Interest Expense

Total
non-interest expense declined $5.6 million, or 5.2%, to $101.8 million for the six months ended June 30, 2008. The significant declines in non-interest expense in the current year include declines of $1.7 million in salaries and employee
benefits, $2.3 million in other non-interest expense and $1.3 million in restructuring activities expense.

The $1.7 million decrease in salaries and
benefits was primarily caused by lower average year-to-date staffing levels of approximately 220 positions as a result of actions taken by the corporate-wide efficiency program. Base salary expense declined $1.6 million due to the lower number of
full time equivalent employees concentrated in the consumer banking, organizational support and credit administration groups, partially offset by annual merit increases. Salary and employee benefits expense were also positively impacted by declines
of $296 thousand in payroll taxes, $220 thousand in 401K match expense and $328 thousand in pension related benefits. These declines in expenses were partially offset by increases of $352 thousand in share-based payment expense, $200 thousand in
health care costs, and a $582 thousand decrease in deferred salary expense associated with a decline in new loan originations. In addition, the six months ended June 30, 2007 included a severance expense of $400 thousand. Occupancy expense
decreased $326 thousand in the six months ending June 30, 2008 due to lower occupancy repairs and maintenance and lower building and leasehold depreciation resulting from the closure and sale of branches in 2007. Restructuring activities costs
were $40 thousand during the six months ending June 30, 2008 compared to $1.3 million for the same period a year ago. In the six months ended June 30, 2007, the restructuring costs were directly related to seven branch closures and
severance costs associated with staff reductions that were incurred through actions taken by the corporate-wide efficiency program. Other non-interest expense decreased by $2.3 million from the same period a year ago mainly as a result of a
reduction in consulting fees, marketing, communication, postage, operational losses and amortization of deposit intangibles. These declines were offset by higher legal and professional fees.

Income Taxes

The Corporation recorded an income tax benefit of $11.7
million in the first six months of 2008 based on a pre-tax loss of $19.1 million, a 61.3% effective tax benefit rate, as compared to pre-tax income of $45.2 million and an effective tax rate of 30.0% for 2007. The change in the effective tax rate is
due to a decline in the level of year-to-date pre-tax earnings and comparable permanent differences in 2008 when compared to 2007, resulting in the change in the effective tax rate for 2008.



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|Item 3. | Quantitative and Qualitative Disclosures about Market Risk
|------- | ----------------------------------------------------------

For
information regarding market risk at December 31, 2007, see Interest Sensitivity Management and Note 14 to the Consolidated Financial Statements in the Corporations Form 10-K filed with the Securities and Exchange Commission
on February 29, 2008. The market risk of the Corporation has not experienced any material changes as of June 30, 2008 from December 31, 2007. Additionally, refer to Item 2  Managements Discussion and Analysis of
Financial Condition and Results of Operations for additional quantitative and qualitative discussions about market risk at June 30, 2008.



|Item 4. | Controls and Procedures
|------- | -----------------------

The Corporations management,
including the Corporations principal executive officer and principal financial officer, have evaluated the effectiveness of the Corporations disclosure controls and procedures, as such term is defined in Rule 13a-15(e)
promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by
this report, the Corporations disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Corporation files or submits under the Exchange Act with the
Securities and Exchange Commission (the SEC) (1) is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms, and (2) is accumulated and communicated to the
Corporations management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. In addition, based on that evaluation, no change in the Corporations
internal control over financial reporting occurred during the quarter ended June 30, 2008 that has materially affected, or is reasonably likely to materially affect, the Corporations internal control over financial reporting.

PART II  OTHER INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------

The Corporation is involved in various legal
actions that arise in the ordinary course of its business. All active lawsuits entail amounts which management believes to be, individually and in the aggregate, immaterial to the financial condition and the results of operations of the Corporation.

In 2005, a lawsuit captioned Bednar v. Provident Bank of Maryland was initiated by a former Bank customer against the Bank in the Circuit Court for
Baltimore City (Maryland) asserting that, upon early payoff, the Banks recapture of home equity loan closing costs initially paid by the Bank on the borrowers behalf constituted a prepayment charge prohibited by state law. The Baltimore
City Circuit Court ruled in the Banks favor, finding that the recapture of loan closing costs was not an unlawful charge, a position consistent with that taken by the State of Maryland Commissioner of Financial Regulation. However, on
appeal, the Maryland Court of Appeals reversed this ruling and found in favor of the borrower. The case was remanded to the trial court for further proceedings. The potential damages for this individual matter are not material to the
Corporations results of operations. However, the complaint is styled as a class action complaint. To date, no class has been certified. Management believes that the Bank has meritorious defense against this action and intends to vigorously
defend the litigation. On April 8, 2008, the Governor of Maryland signed legislation that limits the potential recovery of Bank customers in the Bednar litigation to the amount of closing costs recovered by the Bank upon early payoff. As a
result, the Bank believes that, even if a class is certified, the potential damages in the Bednar litigation would not be material to the Banks results of operations.



|Item 1A. | Risk Factors
|-------- | ------------

Further decline in value in certain investment
securities held by the Corporation could require further write-downs, which would reduce the Corporations earnings.

The Corporations
investment portfolio includes pooled trust preferred securities backed by banks, insurance companies, and REITs. In the fourth quarter of 2007, the Corporation determined that the loss in value on certain of the Corporations REIT trust
preferred securities was other-than-temporary, and accordingly, recognized a $47.5 million impairment write-down related to those securities. The Corporation recognized additional impairment write-downs of $42.7 million in the first quarter of 2008
and $20.7 million in the second quarter of 2008. The impairment write-downs related primarily to securities issued by residential mortgage REITs, which are facing a difficult operating environment due to the well-publicized difficulties facing the
mortgage origination sector and homebuilders, who are also facing challenges due to declining home sales. Further loss in value in the REIT trust preferred securities held by the Corporation could result in further impairment write-downs, which
would, in turn, reduce the Corporations earnings.

The securities in the municipal bond portfolio consist of geographically diversified securities
that are insured by major bond insurers. Some of the bond insurers have been downgraded and others may follow. The recent downgrades reflect concerns about their ability to cover potential claims on issuers unable to make their principal or interest
payments. Currently, all securities in this portfolio are rated AAA, AA, or single A by the three major rating agencies.

For further information regarding
the Corporations investment portfolio, please see the Form 8-K furnished to the SEC on April 17, 2008 and Investment Portfolio Credit Quality on pages 8-10 in Item 1 of the Corporations Annual Report on Form 10-K for
the year ended December 31, 2007 and on pages 12-14 in the Corporations Form 10-Q for the quarter ended June 30, 2008. The Corporation will continue to monitor the investment ratings in the securities portfolio and the dealer price quotes.
Based upon these and other factors, the securities portfolio may experience further impairment. Management currently has the intent and ability to retain its investment securities with unrealized losses until the decline in value has been recovered.

In addition to the other information set forth in this report, the reader should carefully consider the factors discussed in Part I, Item 1A. Risk
Factors in the Corporations Annual Report on Form 10-K for the year ended December 31, 2007, which could materially affect the Corporations business, financial condition or future results. The risks described in the
Corporations Annual Report on Form 10-K are not the only risks that the Corporation faces. Additional risks and uncertainties not currently known to the Corporation or that the Corporation currently deem to be immaterial also may have a
material adverse effect on the Corporations business, financial condition and/or operating results.



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|Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds
|------- | -----------------------------------------------------------

During
1998, the Corporation initiated a stock repurchase program for its outstanding stock. Under this plan, the Corporation approved the repurchase of specific additional amounts of shares without any specific expiration date. As the Corporation
fulfilled each specified repurchase amount, additional amounts were approved. On June 17, 2005, and on January 17, 2007 the Corporation approved an additional stock repurchase of up to 1.3 million and 1.6 million shares,
respectively. Currently, the maximum number of shares remaining to be purchased under this plan is 740,343. All shares have been repurchased pursuant to the publicly announced plan. The repurchase plan is currently suspended. The timing of
repurchasing shares in the future will depend on the Corporation meeting its targeted capital ratios. No plans expired during the three months ended June 30, 2008.

The quarter ended June 30, 2008 reflects 9,831 shares repurchased which are related to share-based activity associated with restricted shares.



|                   |  |                                |  |                            |       |                                           |       |                                                            |        
|------------------ |  | ------------------------------ |  | -------------------------- | ----- | ----------------------------------------- | ----- | ---------------------------------------------------------- | -------
|Period             |  | Total Numberof SharesPurchased |  | AveragePrice Paidper Share |       | Total Number ofShares PurchasedUnder Plan |       | Maximum Numberof Shares Remainingto be PurchasedUnder Plan
|April 1 - April 30 |  |                               |  | $                          |      |                                           |      |                                                            | 750,174
|May 1 - May 30     |  |                               |  |                            |      |                                           |      |                                                            | 750,174
|June 1 - June 30   |  | 9,831                          |  |                            | 17.33 |                                           | 9,831 |                                                            | 740,343
|                   |  |                                |  |                            |       |                                           |       |                                                            |        
|Total              |  | 9,831                          |  | $                          | 17.33 |                                           | 9,831 |                                                            | 740,343
|                   |  |                                |  |                            |       |                                           |       |                                                            |        



|Item 3. | Defaults Upon Senior Securities  None
|------- | --------------------------------------



|Item 4. | Submission of Matters to a Vote of Security Holders
|------- | ---------------------------------------------------

(a) The
Company held its Annual Meeting of Shareholders on April 16, 2008. Proxies were solicited with respect to such meeting under Regulation 14A of the Securities and Exchange Act of 1934, as amended, pursuant to proxy materials dated March 12,
2008. Of the shares eligible to vote at the annual meeting, 27,733,796 were represented in person or by proxy.

(b) There was no solicitation in opposition
to the Board nominees for directors and all of such nominees were elected as follows:



|                    |  |                 |  |      |  |                      |  |    
|------------------- |  | --------------- |  | ---- |  | -------------------- |  | ---
|Director            |  | No. of VotesFor |  | %    |  | No. of VotesWithheld |  | %  
|Thomas S. Bozzuto   |  | 26,132,119      |  | 94.2 |  | 1,601,677            |  | 5.8
|James G. Davis, Jr. |  | 26,117,860      |  | 94.2 |  | 1,615,936            |  | 5.8
|Barbara B. Lucas    |  | 26,080,261      |  | 94.0 |  | 1,653,535            |  | 6.0
|Dale B. Peck        |  | 26,116,543      |  | 94.2 |  | 1,617,253            |  | 5.8
|Enos K. Fry         |  | 26,071,903      |  | 94.0 |  | 1,661,893            |  | 6.0

(c) Additional proposal submitted for a vote, with the following result:



|                                                                                                                                          |  |                 |  |                     |  |                       
|----------------------------------------------------------------------------------------------------------------------------------------- |  | --------------- |  | ------------------- |  | ----------------------
|Proposal                                                                                                                                  |  | No. of VotesFor |  | No. of VotesAgainst |  | No. of VotesAbstaining
|Ratification of the appointment of KPMG LLP as independent registered public accounting firm for the fiscal year ending December 31, 2008 |  | 27,322,673      |  | 283,797             |  | 127,326               



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|Item 5. | Other Information  None
|------- | ------------------------



|Item 6. | Exhibits
|------- | --------

The exhibits and financial statements filed as a part of
this report are as follows:



|       |  |                                                                                                                                                                                   
|------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(3.1)  |  | Articles of Incorporation of Provident Bankshares Corporation (1)                                                                                                                 
|       | 
|(3.2)  |  | Articles of Amendment to the Articles of Incorporation of Provident Bankshares Corporation (1)                                                                                    
|       | 
|(3.3)  |  | Seventh Amended and Restated By-Laws of Provident Bankshares Corporation (2)                                                                                                      
|       | 
|(4.1)  |  | Articles Supplementary to the Articles of Incorporation of Provident Bankshares Corporation. (3)                                                                                  
|       | 
|(4.2)  |  | Registrant will furnish, upon request, copies of all instruments defining the rights of holders of long-term debt instruments of the registrant and its consolidated
subsidiaries.
|       | 
|(10.1) |  | Form of Stock Purchase Agreement dated as of April 9, 2008 between Provident Bankshares Corporation and the Purchasers named therein. (3)                                         
|       | 
|(10.2) |  | Form of Registration Rights Agreement (attached as Exhibit B to the Stock Purchase Agreement attached hereto as Exhibit 10.1). (3)                                                
|       | 
|(11.0) |  | Statement re: Computation of Per Share Earnings (4)                                                                                                                               
|       | 
|(31.1) |  | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer                                                                                                                 
|       | 
|(31.2) |  | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer                                                                                                                 
|       | 
|(32.1) |  | Section 1350 Certification of Chief Executive Officer                                                                                                                             
|       | 
|(32.2) |  | Section 1350 Certification of Chief Financial Officer                                                                                                                             



|(1) | Incorporated by reference from Registrants Registration Statement on Form S-8 (File No. 33-58881) filed with the Commission on July 10, 1998.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Incorporated by reference from Registrants Current Report on Form 8-K (File No. 0-16421) filed with the Commission on October 18, 2007.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------

|(3) | Incorporated by reference from the Registrants Current report on Form 8-K (File No. 0-16421) filed with the Commission on April 11, 2008.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Included in Note 16 to the Unaudited Condensed Consolidated Financial Statements.
|--- | ---------------------------------------------------------------------------------



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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



|                |  |                              |  |                                                     
|--------------- |  | ---------------------------- |  | ----------------------------------------------------
|                |  | Principal Executive Officer:
|                |  |                             
|August 18, 2008 |  | By                           |  | /s/ Gary N. Geisel                                  
|                |  |                              |  | Gary N. Geisel                                      
|                |  |                              |  | Chairman of the Board and Chief Executive Officer   
|                | 
|                |  | Principal Financial Officer:
|                |  |                             
|August 18, 2008 |  | By                           |  | /s/ Dennis A. Starliper                             
|                |  |                              |  | Dennis A. Starliper                                 
|                |  |                              |  | Executive Vice President and Chief Financial Officer



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|        |  |                                                                  
|------- |  | -----------------------------------------------------------------
|EXHIBIT |  | DESCRIPTION                                                      
|31.1    |  | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
|        | 
|31.2    |  | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
|        | 
|32.1    |  | Section 1350 Certification of Chief Executive Officer            
|        | 
|32.2    |  | Section 1350 Certification of Chief Financial Officer            



57