UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-K

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

For the fiscal year ended December 31, 2006, or

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

Commission File Number: 0-10587

FULTON FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

PENNSYLVANIA		23-2195389
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
One Penn Square, P. O. Box 4887, Lancaster, Pennsylvania		17604
(Address of principal executive offices)		(Zip Code)

(717) 291-2411

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Name of exchange on which registered
Common Stock, $2.50 par value		The NASDAQ Stock Market, LLC

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No o

Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check One):

Large accelerated filed þ       Accelerated filer o       Non-accelerated filer o

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

The aggregate market value of the voting Common Stock held by non-affiliates of the registrant, based on the average bid and asked prices on June 30, 2006, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $2.6 billion. The number of shares of the registrant’s Common Stock outstanding on February 28, 2007 was 172,991,000.

Portions of the Definitive Proxy Statement of the Registrant for the Annual Meeting of Shareholders to be held on May 7, 2007 are incorporated by reference in Part III.

 

 

TABLE OF CONTENTS

		Description		Page
PART I
Item 1.		Business			3
Item 1A.		Risk Factors			9
Item 1B.		Unresolved Staff Comments			11
Item 2.		Properties			12
Item 3.		Legal Proceedings			13
Item 4.		Submission of Matters to a Vote of Security Holders			13
PART II
Item 5.		Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			14
Item 6.		Selected Financial Data			17
Item 7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			17
Item 7A.		Quantitative and Qualitative Disclosures About Market Risk			44
Item 8.		Financial Statements and Supplementary Data:
		Consolidated Balance Sheets			50
		Consolidated Statements of Income			51
		Consolidated Statements of Shareholders’ Equity and Comprehensive Income			52
		Consolidated Statements of Cash Flows			53
		Notes to Consolidated Financial Statements			54
		Management Report On Internal Control Over Financial Reporting			83
		Reports of Independent Registered Public Accounting Firm			84
		Quarterly Consolidated Results of Operations (unaudited)			86
Item 9.		Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			87
Item 9A.		Controls and Procedures			87
Item 9B.		Other Information			87
PART III
Item 10.		Directors, Executive Officers and Corporate Governance			88
Item 11.		Executive Compensation			88
Item 12.		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			88
Item 13.		Certain Relationships and Related Transactions, and Director Independence			88
Item 14.		Principal Accounting Fees and Services			88
PART IV
Item 15.		Exhibits and Financial Statement Schedules			89
		Signatures			92
		Exhibit Index			94
Employment Agreement
Employment Agreement
Deferred Compensation Agreement
Employment Agreement
Employment Agreement
Employment Agreement
Employment Agreement
Death Benefit only Agreement
Subsidiaries of the Registrant
Consent of Independent Registered Public Accounting Firm
Certification of Chief Executive Officer
Certification of Chief Executive Officer
Certification of Chief Executive Officer
Certification of Chief Financial Officer

PART I

Item 1. Business

General

Fulton Financial Corporation (the Corporation) was incorporated under the laws of Pennsylvania on February 8, 1982 and became a bank holding company through the acquisition of all of the outstanding stock of Fulton Bank on June 30, 1982. In 2000, the Corporation became a financial holding company as defined in the Gramm-Leach-Bliley Act (GLB Act), which allowed the Corporation to expand its financial services activities under its holding company structure (See “Competition” and “Regulation and Supervision”). The Corporation directly owns 100% of the common stock of fourteen community banks, two financial services companies and fifteen non-bank entities. As of December 31, 2006, the Corporation had approximately 4,400 employees.

The common stock of Fulton Financial Corporation is listed for quotation on the Global Select Market of The NASDAQ Stock Market under the symbol FULT. The Corporation’s internet address is www.fult.com. Electronic copies of the Corporation’s 2006 Annual Report on Form 10-K are available free of charge by visiting the “Investor Information” section of www.fult.com. Electronic copies of quarterly reports on Form 10-Q and current reports on Form 8-K are also available at this internet address. These reports are posted as soon as reasonably practicable after they are electronically filed with the Securities and Exchange Commission (SEC).

Bank and Financial Services Subsidiaries

The Corporation’s 14 subsidiary banks are located primarily in suburban or semi-rural geographical markets throughout a five state region (Pennsylvania, Maryland, New Jersey, Delaware and Virginia). Pursuant to its “super-community” banking strategy, the Corporation operates the banks autonomously to maximize the advantage of community banking and service to its customers. Where appropriate, operations are centralized through common platforms and back-office functions; however, decision-making generally remains with the local bank management. The Corporation is committed to a decentralized operating philosophy; however in some markets, merging one bank into another creates operating and marketing efficiencies by leveraging existing brand awareness over a larger geographic area. During 2006, the Corporation merged its Premier Bank subsidiary into its Fulton Bank subsidiary. Additionally, in February 2007 the Corporation merged its First Washington State Bank subsidiary into The Bank. The Corporation has announced plans for two additional affiliate mergers that will take place during 2007.

The subsidiary banks are located in areas that are home to a wide range of manufacturing, distribution, health care and other service companies. The Corporation and its banks are not dependent upon one or a few customers or any one industry and the loss of any single customer or a few customers would not have a material adverse impact on any of the subsidiary banks.

Each of the subsidiary banks offers a full range of consumer and commercial banking services in its local market area. Personal banking services include various checking and savings products, certificates of deposit and individual retirement accounts. The subsidiary banks offer a variety of consumer lending products to creditworthy customers in their market areas. Secured loan products include home equity loans and lines of credit, which are underwritten based on loan-to-value limits specified in the lending policy. Subsidiary banks also offer a variety of fixed and variable-rate products, including construction loans and jumbo loans. Residential mortgages are offered through Fulton Mortgage Company, which operates as a division of each subsidiary bank (except for Resource Bank and The Columbia Bank, which maintain their own mortgage lending operations). Residential mortgages are generally underwritten based on secondary market standards. Consumer loan products also include automobile loans, automobile and equipment leases, credit cards, personal lines of credit and checking account overdraft protection.

Commercial banking services are provided to small and medium sized businesses (generally with sales of less than $100 million) in the subsidiary banks’ market areas. Loans to one borrower are generally limited to $33 million in total commitments, which is below the Corporation’s regulatory lending limit. Commercial lending options include commercial, financial, and agricultural and real estate loans. Both floating and fixed rate loans are provided, with floating rate loans generally tied to an index such as the Prime Rate or LIBOR (London Interbank Offering Rate). The Corporation’s commercial lending policy encourages relationship banking and provides strict guidelines related to customer creditworthiness and collateral requirements. In addition, construction lending, equipment leasing, credit cards, letters of credit, cash management services and traditional deposit products are offered to commercial customers.

Through its financial services subsidiaries, the Corporation offers investment management, trust, brokerage, insurance and investment advisory services in the market areas serviced by the subsidiary banks.

The Corporation’s subsidiary banks deliver their products and services through traditional branch banking, with a network of full service branch offices. Electronic delivery channels include a network of automated teller machines, telephone banking and online banking through the internet. The variety of available delivery channels allows customers to access their account information and perform certain transactions such as transferring funds and paying bills at virtually any hour of the day.

The following table provides certain information for the Corporation’s banking and financial services subsidiaries as of December 31, 2006.

		Main Office		Total				Total
Subsidiary		Location		Assets				Deposits				Branches (1)
				(in millions)
Fulton Bank		Lancaster, PA		$	5,003			$	3,341				83
Lebanon Valley Farmers Bank		Lebanon, PA			786				602				12
Swineford National Bank		Hummels Wharf, PA			266				202				7
Lafayette Ambassador Bank		Easton, PA			1,328				990				24
FNB Bank, N.A		Danville, PA			304				219				8
Hagerstown Trust		Hagerstown, MD			518				407				12
Delaware National Bank		Georgetown, DE			411				271				12
The Bank		Woodbury, NJ			1,318				1,058				31
The Peoples Bank of Elkton		Elkton, MD			111				96				2
Skylands Community Bank		Hackettstown, NJ			609				467				12
Resource Bank		Virginia Beach, VA			1,448				832				7
First Washington State Bank		Windsor, NJ			589				428				16
Somerset Valley Bank		Somerville, NJ			575				403				13
The Columbia Bank		Columbia, MD			1,678				1,035				25
Fulton Financial Advisors, N.A. and Fulton Insurance Services Group, Inc (2)		Lancaster, PA			—				—				—
													264

Non-Bank Subsidiaries

The Corporation owns 100% of the common stock of six non-bank subsidiaries which are consolidated for financial reporting purposes: (i) Fulton Reinsurance Company, which engages in the business of reinsuring credit life and accident and health insurance directly related to extensions of credit by the banking subsidiaries of the Corporation; (ii) Fulton Financial Realty Company, which holds title to or leases certain properties upon which Corporation branch offices and other facilities are located; (iii) Central Pennsylvania Financial Corp., which owns certain limited partnership interests in partnerships invested in low and moderate income housing projects; (iv) FFC Management, Inc., which owns certain investment securities and other passive investments; (v) Virginia Financial Services, which engages in business consulting activities; (iv) FFC Penn Square, Inc. which owns $44.0 million of trust preferred securities issued by a subsidiary of the Corporation’s largest bank subsidiary.

The Corporation owns 100% of the common stock of nine non-bank subsidiaries which are not consolidated for financial reporting purposes: (i) Premier Capital Trust, a Delaware business trust whose sole asset is $10.3 million of junior subordinated deferrable interest debentures from the Corporation; (ii) PBI Capital Trust II, a Delaware business trust whose sole asset is $15.5 million of junior subordinated deferrable interest debentures from the Corporation; (iii) Resource Capital Trust III, a Delaware business trust

whose sole asset is $3.1 million of junior subordinated deferrable interest debentures from the Corporation; (iv) Bald Eagle Statutory Trust I, a Connecticut business trust whose sole asset is $4.1 million of junior subordinated deferrable interest debentures from the Corporation; (v) Bald Eagle Statutory Trust II, a Connecticut business trust whose sole asset is $2.6 million of junior subordinated deferrable interest debentures from the Corporation; (vi) Columbia Capital Trust I, a Delaware business trust whose sole asset is $6.2 million of junior subordinated deferrable interest debentures from the Corporation; (vii) Columbia Capital Trust II, a Delaware business trust whose sole asset is $4.1 million of junior subordinated deferrable interest debentures from the Corporation; (viii) Columbia Capital Trust III, a Delaware business trust whose sole asset is $6.2 million of junior subordinated deferrable interest debentures from the Corporation; and (ix) Fulton Capital Trust I, a Pennsylvania business trust whose sole asset is $154.6 million of junior subordinated deferrable interest debentures from the Corporation.

Competition

The banking and financial services industries are highly competitive. Within its geographical region, the Corporation’s subsidiaries face direct competition from other commercial banks, varying in size from local community banks to larger regional and national banks, credit unions and non-bank entities. With the growth in electronic commerce and distribution channels, the banks also face competition from banks not physically located in the Corporation’s geographical markets.

The competition in the industry is also highly competitive due to the GLB Act. Under the GLB Act, banks, insurance companies or securities firms may affiliate under a financial holding company structure, allowing expansion into non-banking financial services activities that were previously restricted. These include a full range of banking, securities and insurance activities, including securities and insurance underwriting, issuing and selling annuities and merchant banking activities. While the Corporation does not currently engage in all of these activities, the ability to do so without separate approval from the Federal Reserve Board (FRB) enhances the ability of the Corporation – and financial holding companies in general – to compete more effectively in all areas of financial services.

As a result of the GLB Act, there is a great deal of competition for customers that were traditionally served by the banking industry. While the GLB Act increased competition, it also provided opportunities for the Corporation to expand its financial services offerings, such as insurance products through Fulton Insurance Services Group, Inc. The Corporation also competes through the variety of products that it offers and the quality of service that it provides to its customers. However, there is no guarantee that these efforts will insulate the Corporation from competitive pressure, which could impact its pricing decisions for loans, deposits and other services and could ultimately impact financial results.

Market Share

Although there are many ways to assess the size and strength of banks, deposit market share continues to be an important industry statistic. This publicly available information is compiled, as of June 30^th of each year, by the Federal Deposit Insurance Corporation (FDIC). The Corporation’s banks maintain branch offices in 48 counties across five states. In ten of these counties, the Corporation ranks in the top three in deposit market share (based on deposits as of June 30, 2006). The following table summarizes information about the counties in which the Corporation has branch offices and its market position in each county.

												No. of Financial								Deposit Market
												Institutions								Share (6/30/06)
						Population				Banking		Banks/				Credit
County		State				(2006 Est.)				Subsidiary		Thrifts				Unions				Rank				%
Lancaster		PA					493,000			Fulton Bank			21				12				1				19.2	%
Centre		PA					142,000			Fulton Bank			15				4				19				0.06	%
Dauphin		PA					254,000			Fulton Bank			17				10				7				4.6	%
Cumberland		PA					224,000			Fulton Bank			19				6				14				0.7	%
York		PA					410,000			Fulton Bank			17				23				4				9.8	%
Chester		PA					477,000			Fulton Bank			41				5				16				1.2	%
Delaware		PA					556,000			Fulton Bank			39				15				41				0.1	%

												No. of Financial								Deposit Market
												Institutions								Share (6/30/06)
						Population				Banking		Banks/				Credit
County		State				(2006 Est.)				Subsidiary		Thrifts				Unions				Rank				%
Montgomery		PA					781,000			Fulton Bank			44				28				37				0.2	%
Berks		PA					398,000			Fulton Bank			21				13				9				3.1	%
Bucks		PA					624,000			Fulton Bank			33				11				14				2.3	%
										Lebanon Valley Farmers Bank											22				0.4	%
Lebanon		PA					126,000			Lebanon Valley Farmers Bank			9				2				1				29.0	%
Schuylkill		PA					147,000			Lebanon Valley Farmers Bank			18				6				9				3.5	%
Snyder		PA					38,000			Swineford National Bank			8				—				1				30.0	%
Union		PA					43,000			Swineford National Bank			7				1				5				5.0	%
Northumberland		PA					92,000			Swineford National Bank			17				3				14				1.8	%
										FNB Bank, N.A.											9				4.7	%
Montour		PA					18,000			FNB Bank, N.A.			5				3				1				27.8	%
Columbia		PA					65,000			FNB Bank, N.A.			7				—				6				4.6	%
Lycoming		PA					118,000			FNB Bank, N.A.			11				10				16				0.6	%
Northampton		PA					289,000			Lafayette Ambassador Bank			18				12				2				16.6	%
Lehigh		PA					332,000			Lafayette Ambassador Bank			20				14				8				0.6	%
Washington		MD					143,000			Hagerstown Trust			10				3				2				20.4	%
Frederick		MD					225,000			The Columbia Bank			15				3				17				0.1	%
Montgomery		MD					935,000			The Columbia Bank			34				20				30				0.3	%
Howard		MD					272,000			The Columbia Bank			21				23				2				13.9	%
Prince Georges		MD					855,000			The Columbia Bank			21				22				13				1.6	%
Baltimore		MD					790,000			The Columbia Bank			44				16				25				0.9	%
Baltimore City		MD					632,000			The Columbia Bank			39				21				24				0.3	%
Cecil		MD					99,000			Peoples Bank of Elkton			7				3				5				10.0	%
Sussex		DE					178,000			Delaware National Bank			17				4				7				1.1	%
New Castle		DE					526,000			Delaware National Bank			30				24				29				0.1	%
Camden		NJ					520,000			The Bank			22				9				15				1.1	%
Gloucester		NJ					278,000			The Bank			22				4				2				13.1	%
Salem		NJ					66,000			The Bank			8				4				1				31.8	%
Atlantic		NJ					275,000			The Bank			17				6				17				0.7	%
Warren		NJ					112,000			Skylands Community Bank			12				3				3				10.1	%
Sussex		NJ					155,000			Skylands Community Bank			13				1				11				0.7	%
Morris		NJ					495,000			Skylands Community Bank			40				14				16				1.3	%
Hunterdon		NJ					132,000			Skylands Community Bank			17				3				15				0.7	%
										Somerset Valley Bank											20				0.4	%
Middlesex		NJ					797,000			Somerset Valley Bank			46				24				47				0.1	%
Somerset		NJ					323,000			Somerset Valley Bank			26				10				8				3.9	%
Mercer		NJ					371,000			First Washington State Bank			27				29				12				1.7	%

												No. of Financial								Deposit Market
												Institutions								Share (6/30/06)
						Population				Banking		Banks/				Credit
County		State				(2006 Est.)				Subsidiary		Thrifts				Unions				Rank				%
Monmouth		NJ					643,000			First Washington State Bank			28				9				23				0.9	%
Ocean		NJ					566,000			First Washington State Bank			23				5				16				1.0	%
Chesapeake		VA					217,000			Resource Bank			15				6				11				1.7	%
Fairfax		VA					1,018,000			Resource Bank			35				13				21				0.4	%
Newport News		VA					183,000			Resource Bank			12				7				14				0.8	%
Richmond City		VA					191,000			Resource Bank			15				18				15				0.2	%
Virginia Beach		VA					441,000			Resource Bank			17				8				4				8.8	%

Supervision and Regulation

The Corporation operates in an industry that is subject to various laws and regulations that are enforced by a number of Federal and state agencies. Changes in these laws and regulations, including interpretation and enforcement activities, could impact the cost of operating in the financial services industry, limit or expand permissible activities or affect competition among banks and other financial institutions. The Corporation cannot predict the changes in laws and regulations that might occur, however, it is likely that the current high level of enforcement and compliance-related activities of Federal and state authorities will continue or potentially increase.

The following discussion summarizes the current regulatory environment for financial holding companies and banks, including a summary of the more significant laws and regulations.

Regulators – The Corporation is a registered financial holding company and its subsidiary banks are depository institutions whose deposits are insured by the FDIC. The Corporation and its subsidiaries are subject to various regulations and examinations by regulatory authorities. The following table summarizes the charter types and primary regulators for each of the Corporation’s subsidiary banks.

				Primary
Entity		Charter		Regulator(s)
Fulton Bank		PA		PA/FDIC
Lebanon Valley Farmers Bank		PA		PA/FRB
Swineford National Bank		National		OCC (1)
Lafayette Ambassador Bank		PA		PA/FRB
FNB Bank, N.A		National		OCC
Hagerstown Trust		MD		MD/FDIC
Delaware National Bank		National		OCC
The Bank		NJ		NJ/FDIC
Peoples Bank of Elkton		MD		MD/FDIC
Skylands Community Bank		NJ		NJ/FDIC
Resource Bank		VA		VA/FRB
First Washington State Bank		NJ		NJ/FDIC
Somerset Valley Bank		NJ		NJ/FDIC
The Columbia Bank		MD		MD/FDIC
Fulton Financial Advisors, N.A		National (2)		OCC
Fulton Financial (Parent Company)		N/A		FRB

Federal statutes that apply to the Corporation and its subsidiaries include the GLB Act, the Bank Holding Company Act (BHCA), the Federal Reserve Act and the Federal Deposit Insurance Act. In general, these statutes establish the eligible business activities of the Corporation, certain acquisition and merger restrictions, limitations on inter-company transactions such as loans and dividends, and capital adequacy requirements, among other regulations.

The Corporation is subject to regulation and examination by the FRB, and is required to file periodic reports and to provide additional information that the FRB may require. In addition, the FRB must approve certain proposed changes in organizational structure or other business activities before they occur. The BHCA imposes certain restrictions upon the Corporation regarding the acquisition of substantially all of the assets of or direct or indirect ownership or control of any bank of which it is not already the majority owner.

Capital Requirements – There are a number of restrictions on financial and bank holding companies and FDIC-insured depository subsidiaries that are designed to minimize potential loss to depositors and the FDIC insurance funds. If an FDIC-insured depository subsidiary is “undercapitalized”, the bank holding company is required to ensure (subject to certain limits) the subsidiary’s compliance with the terms of any capital restoration plan filed with its appropriate banking agency. Also, a bank holding company is required to serve as a source of financial strength to its depository institution subsidiaries and to commit resources to support such institutions in circumstances where it might not do so absent such policy. Under the BHCA, the FRB has the authority to require a bank holding company to terminate any activity or to relinquish control of a non-bank subsidiary upon the FRB’s determination that such activity or control constitutes a serious risk to the financial soundness and stability of a depository institution subsidiary of the bank holding company.

Bank holding companies are required to comply with the FRB’s risk-based capital guidelines that require a minimum ratio of total capital to risk-weighted assets of 8%. At least half of the total capital is required to be Tier 1 capital. In addition to the risk-based capital guidelines, the FRB has adopted a minimum leverage capital ratio under which a bank holding company must maintain a level of Tier 1 capital to average total consolidated assets of at least 3% in the case of a bank holding company which has the highest regulatory examination rating and is not contemplating significant growth or expansion. All other bank holding companies are expected to maintain a leverage capital ratio of at least 1% to 2% above the stated minimum.

Dividends and Loans from Subsidiary Banks – There are also various restrictions on the extent to which the Corporation and its non-bank subsidiaries can receive loans from its banking subsidiaries. In general, these restrictions require that such loans be secured by designated amounts of specified collateral and are limited, as to any one of the Corporation or its non-bank subsidiaries, to 10% of the lending bank’s regulatory capital (20% in the aggregate to all such entities).

The Corporation is also limited in the amount of dividends that it may receive from its subsidiary banks. Dividend limitations vary, depending on the subsidiary bank’s charter and whether or not it is a member of the Federal Reserve System. Generally, subsidiaries are prohibited from paying dividends when doing so would cause them to fall below the regulatory minimum capital levels. Additionally, limits exist on paying dividends in excess of net income for specified periods. See “Note J – Regulatory Matters” in the Notes to Consolidated Financial Statements for additional information regarding regulatory capital and dividend and loan limitations.

Federal Deposit Insurance – Substantially all of the deposits of the Corporation’s subsidiary banks are insured up to the applicable limits by the Bank Insurance Fund of the FDIC, generally up to $100,000 per insured depositor and up to $250,000 for retirement accounts. The subsidiary banks pay deposit insurance premiums to the FDIC based on an assessment rate established by the FDIC for Bank Insurance Fund member institutions. The FDIC has established a risk-based assessment system under which institutions are classified and pay premiums according to their perceived risk to the federal deposit insurance funds. The FDIC is not required to charge deposit insurance premiums when the ratio of deposit insurance reserves to insured deposits is maintained above specified levels. During the past several years, the ratio has been above the minimum level and, accordingly, the Corporation has not been required to pay premiums. However, in 2006 legislation was passed reforming the bank deposit insurance system. The reform act allowed the FDIC to raise the minimum reserve ratio and allowed eligible insured institutions an initial one-time credit to be used against premiums due. As a result, beginning in 2007 the Corporation will be assessed insurance premiums, which may be partly offset by the one-time credit.

USA Patriot Act – Anti-terrorism legislation enacted under the USA Patriot Act of 2001 (Patriot Act) expanded the scope of anti-money laundering laws and regulations and imposed significant new compliance obligations for financial institutions, including the

Corporation’s subsidiary banks. These regulations include obligations to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing.

Failure to comply with the Patriot Act’s requirements could have serious legal, financial and reputational consequences for the institution. The Corporation has adopted appropriate policies, procedures and controls to address compliance with the Patriot Act and will continue to revise and update its policies, procedures and controls to reflect changes required, as necessary.

Sarbanes-Oxley Act of 2002 – The Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley), which was signed into law in July 2002, impacts all companies with securities registered under the Securities Exchange Act of 1934, including the Corporation. Sarbanes-Oxley created new requirements in the areas of corporate governance and financial disclosure including, among other things, (i) increased responsibility for Chief Executive Officers and Chief Financial Officers with respect to the content of filings with the SEC; (ii) enhanced requirements for audit committees, including independence and disclosure of expertise; (iii) enhanced requirements for auditor independence and the types of non-audit services that auditors can provide; (iv) accelerated filing requirements for SEC reports; (v) disclosure of a code of ethics (vi) increased disclosure and reporting obligations for companies, their directors and their executive officers; and (vii) new and increased civil and criminal penalties for violations of securities laws. Many of the provisions became effective immediately, while others became effective as a result of rulemaking procedures delegated by Sarbanes-Oxley to the SEC.

Section 404 of Sarbanes Oxley became effective for the year ended December 31, 2004. This section required management to issue a report on the effectiveness of its internal controls over financial reporting. In addition, the Corporation’s independent registered public accountants were required to issue an opinion on management’s assessment and an opinion on the effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2004. These reports can be found in Item 8, “Financial Statements and Supplementary Information”. Certifications of the Chief Executive Officer and the Chief Financial Officer as required by Sarbanes-Oxley and the resulting SEC rules can be found in the “Signatures” and “Exhibits” sections.

Monetary and Fiscal Policy – The Corporation and its subsidiary banks are affected by fiscal and monetary policies of the Federal government, including those of the FRB, which regulates the national money supply in order to manage recessionary and inflationary pressures. Among the techniques available to the FRB are engaging in open market transactions of U.S. Government securities, changing the discount rate and changing reserve requirements against bank deposits. These techniques are used in varying combinations to influence the overall growth of bank loans, investments and deposits. Their use may also affect interest rates charged on loans and paid on deposits. The effect of monetary policies on the earnings of the Corporation cannot be predicted.

Item 1A. Risk Factors

An investment in the Corporation’s common stock involves certain risks, including, among others, the risks described below. In addition to the other information contained in this report, you should carefully consider the following risk factors.

Changes in interest rates may have an adverse effect on the Corporation’s profitability.

The Corporation is affected by fiscal and monetary policies of the federal government, including those of the Federal Reserve Board (FRB), which regulates the national money supply in order to manage recessionary and inflationary pressures. Among the techniques available to the FRB are engaging in open market transactions of U.S. Government securities, changing the discount rate and changing reserve requirements against bank deposits. The use of these techniques may also affect interest rates charged on loans and paid on deposits.

Net interest income is the most significant component of the Corporation’s net income, accounting for approximately 78% of total revenues in 2006. The narrowing of interest rate spreads, the difference between interest rates earned on loans and investments and interest rates paid on deposits and borrowings, could adversely affect the Corporation’s net income and financial condition. Based on the current interest rate environment and the price sensitivity of customers, loan demand could continue to outpace the growth of core demand and savings accounts, resulting in compression of net interest margin. Furthermore, the U. S. Treasury yield curve, which is a plot of the yields on treasury securities over various maturity terms was relatively flat, and at times, downward sloping, with minimal differences between long and short-term rates during 2006, resulting in a negative impact to the Corporation’s net interest income and net interest margin. Finally, regional and local economic conditions as well as fiscal and monetary policies of the federal government, including those of the FRB, may affect prevailing interest rates. The Corporation cannot predict or control changes in interest rates.

Changes in economic conditions and the composition of the Corporation’s loan portfolio could lead to higher loan charge-offs or an increase in the Corporation’s provision for loan losses and may reduce the Corporation’s net income.

Changes in national and regional economic conditions could impact the loan portfolios of the Corporation’s subsidiary banks. For example, an increase in unemployment, a decrease in real estate values or increases in interest rates, as well as other factors, could weaken the economies of the communities the Corporation serves. Weakness in the market areas served by the Corporation’s subsidiary banks could depress its earnings and consequently its financial condition because:

	•		customers may not want or need the Corporation’s products or services;
	•		borrowers may not be able to repay their loans;
	•		the value of the collateral securing the Corporation’s loans to borrowers may decline; and
	•		the quality of the Corporation’s loan portfolio may decline.

Any of the latter three scenarios could require the Corporation to charge-off a higher percentage of its loans and/or increase its provision for loan losses, which would reduce its net income.

In addition, the amount of the Corporation’s provision for loan losses and the percentage of loans it is required to charge-off may be impacted by the overall risk composition of the loan portfolio. In recent years, the amount of the Corporation’s commercial loans (including agricultural loans) and commercial mortgages has increased, comprising a greater percentage of its overall loan portfolio. These loans are inherently more risky than certain other types of loans, such as residential mortgage loans. While the Corporation believes that its allowance for loan losses as of December 31, 2006 is sufficient to cover losses inherent in the loan portfolio on that date, the Corporation may be required to increase its loan loss provision or charge-off a higher percentage of loans due to changes in the risk characteristics of the loan portfolio, thereby reducing its net income. To the extent any of the Corporation’s subsidiary banks rely more heavily on loans secured by real estate, a decrease in real estate values could cause higher loan losses and require higher loan loss provisions.

Fluctuations in the value of the Corporation’s equity portfolio, or assets under management by the Corporation’s investment management and trust services, could have an impact on the Corporation’s results of operations.

At December 31, 2006, the Corporation’s investments consisted of $72.3 million of FHLB and other government agency stock, $72.3 million of stocks of other financial institutions and $13.5 million of mutual funds. The Corporation’s equity portfolio consists primarily of common stocks of publicly traded financial institutions. The Corporation realized net gains on sales of financial institutions stocks of $7.0 million in 2006, $5.8 million in 2005 and $14.8 million in 2004. The value of the securities in the Corporation’s equity portfolio may be affected by a number of factors, including factors that impact the performance of the U.S. securities market in general and, due to the concentration in stocks of financial institutions in the Corporation’s equity portfolio, specific risks associated with that sector. If the value of one or more equity securities in the portfolio were to decline significantly, the unrealized gains in the portfolio could be reduced or lost in their entirety. In addition to the Corporation’s equity portfolio, the Corporation’s investment management and trust services income could be impacted by fluctuations in the securities market. A portion of the Corporation’s trust revenue is based on the value of the underlying investment portfolios. If the values of those investment portfolios decrease, whether due to factors influencing U.S. securities markets in general, or otherwise, the Corporation’s revenue could be negatively impacted. In addition, the Corporation’s ability to sell its brokerage services is dependent, in part, upon consumers’ level of confidence in the outlook for rising securities prices.

If the Corporation is unable to acquire additional banks on favorable terms or if it fails to successfully integrate or improve the operations of acquired banks, the Corporation may be unable to execute its growth strategies.

The Corporation has historically supplemented its internal growth with strategic acquisitions of banks, branches and other financial services companies. There can be no assurance that the Corporation will be able to complete future acquisitions on favorable terms or that it will be able to assimilate acquired institutions successfully. In addition, the Corporation may not be able to achieve anticipated cost savings or operating results associated with acquisitions. Acquired institutions also may have unknown or contingent liabilities or deficiencies in internal controls that could result in material liabilities or negatively impact the Corporation’s ability to complete the internal control procedures required under federal securities laws, rules and regulations or by certain laws, rules and regulations applicable to the banking industry.

If the goodwill that the Corporation has recorded in connection with its acquisitions becomes impaired, it could have a negative impact on the Corporation’s profitability.

Applicable accounting standards require that the purchase method of accounting be used for all business combinations. Under purchase accounting, if the purchase price of an acquired company exceeds the fair value of the company’s net assets, the excess is carried on the acquirer’s balance sheet as goodwill. At December 31, 2006, the Corporation had approximately $626.0 million of goodwill on its balance sheet. Companies must evaluate goodwill for impairment at least annually. Write-downs of the amount of any impairment, if necessary, are to be charged to the results of operations in the period in which the impairment occurs. Based on tests of goodwill impairment conducted to date, the Corporation has concluded that there has been no impairment, and no write-downs have been recorded. However, there can be no assurance that the future evaluations of goodwill will not result in findings of impairment and write-downs.

The competition the Corporation faces is increasing and may reduce the Corporation’s customer base and negatively impact the Corporation’s results of operations.

There is significant competition among commercial banks in the market areas served by the Corporation’s subsidiary banks. In addition, as a result of the deregulation of the financial industry, the Corporation’s subsidiary banks also compete with other providers of financial services such as savings and loan associations, credit unions, consumer finance companies, securities firms, insurance companies, commercial finance and leasing companies, the mutual funds industry, full service brokerage firms and discount brokerage firms, some of which are subject to less extensive regulations than the Corporation is with respect to the products and services they provide. Some of the Corporation’s competitors, including certain super-regional and national bank holding companies that have made acquisitions in its market area, have greater resources than the Corporation has, and as such, may have higher lending limits and may offer other services not offered by the Corporation.

The Corporation also experiences competition from a variety of institutions outside its market areas. Some of these institutions conduct business primarily over the internet and may thus be able to realize certain cost savings and offer products and services at more favorable rates and with greater convenience to the customer.

Competition may adversely affect the rates the Corporation pays on deposits and charges on loans, thereby potentially adversely affecting the Corporation’s profitability. The Corporation’s profitability depends upon its continued ability to successfully compete in the market areas it serves while achieving its objectives.

The supervision and regulation to which the Corporation is subject can be a competitive disadvantage.

The Corporation is a registered financial holding company, and its subsidiary banks are depository institutions whose deposits are insured by the Federal Deposit Insurance Corporation (FDIC). As a result, the Corporation and its subsidiaries are subject to regulations and examinations by various regulatory authorities. In general, statutes establish the eligible business activities for the Corporation, certain acquisition and merger restrictions, limitations on inter-company transactions such as loans and dividends, capital adequacy requirements, requirements for anti-money laundering programs and other compliance matters, among other regulations. The Corporation is extensively regulated under federal and state banking laws and regulations that are intended primarily for the protection of depositors, federal deposit insurance funds and the banking system as a whole. Compliance with these statutes and regulations is important to the Corporation’s ability to engage in new activities and to consummate additional acquisitions. In addition, the Corporation is subject to changes in federal and state tax laws as well as changes in banking and credit regulations, accounting principles and governmental economic and monetary policies. The Corporation cannot predict whether any of these changes may adversely and materially affect it. Federal and state banking regulators also possess broad powers to take supervisory actions, as they deem appropriate. These supervisory actions may result in higher capital requirements, higher insurance premiums and limitations on the Corporation’s activities that could have a material adverse effect on its business and profitability. While these statutes are generally designed to minimize potential loss to depositors and the FDIC insurance funds, they do not eliminate risk, and compliance with such statutes increases the Corporation’s expense, requires management’s attention and can be a disadvantage from a competitive standpoint with respect to non-regulated competitors.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

The following table summarizes the Corporation’s branch properties, by subsidiary bank as of December 31, 2006. Remote service facilities (mainly stand-alone automated teller machines) are excluded.

										Total
Bank		Owned				Leased				Branches
Fulton Bank			56				27				83
Lebanon Valley Farmers Bank			11				1				12
Swineford National Bank			5				2				7
Lafayette Ambassador Bank			14				10				24
FNB Bank, N.A			6				2				8
Hagerstown Trust			9				3				12
Delaware National Bank			11				1				12
The Bank			25				6				31
The Peoples Bank of Elkton			2				—				2
Skylands Community Bank			5				7				12
Resource Bank			2				5				7
Somerset Valley Bank			—				13				13
First Washington State Bank			7				9				16
The Columbia Bank			4				21				25
Total			157				107				264

The following table summarizes the Corporation’s other significant properties (administrative headquarters locations generally include a branch; these are also reflected in the preceding table):

						Owned/
Bank		Property		Location		Leased
Fulton Financial Corp.		Operations Center		East Petersburg, PA		Owned
Fulton Bank/Fulton Financial Corp.		Admin. Headquarters		Lancaster, PA			(1	)
Fulton Bank		Operations Center		Mantua, NJ		Owned
Fulton Bank, Drovers Division		Admin. Headquarters		York, PA		Leased (2)
Fulton Bank, Great Valley Division		Admin. Headquarters		Reading, PA		Leased (5)
Fulton Bank, Premier Division		Admin. Headquarters		Doylestown, PA		Owned
Lebanon Valley Farmers Bank		Admin. Headquarters		Lebanon, PA		Owned
Swineford National Bank		Admin. Headquarters		Hummels Wharf, PA		Owned
Lafayette Ambassador Bank		Admin. Headquarters		Easton, PA		Owned
Lafayette Ambassador Bank		Operations Center		Bethlehem, PA		Owned
Lafayette Ambassador Bank		Corp Service Center		Bethlehem, PA		Leased (6)
FNB Bank, N.A		Admin. Headquarters		Danville, PA		Owned
Hagerstown Trust		Admin. Headquarters		Hagerstown, MD		Owned
Delaware National Bank		Admin. Headquarters		Georgetown, DE		Leased (3)
The Bank		Admin. Headquarters		Woodbury, NJ		Owned
Peoples Bank of Elkton		Admin. Headquarters		Elkton, MD		Owned
Skylands Community Bank		Admin. Headquarters		Hackettstown, NJ		Leased (4)
Resource Bank		Admin. Headquarters		Herndon, VA		Owned
Somerset Valley Bank		Admin. Headquarters		Somerville, PA		Owned
First Washington State Bank		Admin. Headquarters		Windsor, NJ		Owned
The Columbia Bank		Admin. Headquarters		Columbia, MD		Leased (7)

Item 3. Legal Proceedings

There are no legal proceedings pending against Fulton Financial Corporation or any of its subsidiaries which are expected to have a material impact upon the financial position and/or the operating results of the Corporation.

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

No matters were submitted to a vote of security holders of Fulton Financial Corporation during the fourth quarter of 2006.

PART II

Item 5.		Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Common Stock

As of December 31, 2006, the Corporation had 173.6 million shares of $2.50 par value common stock outstanding held by 51,000 holders of record. The common stock of the Corporation is traded on The NASDAQ Stock Market under the symbol FULT.

The following table presents the quarterly high and low prices of the Corporation’s common stock and per-share cash dividends declared for each of the quarterly periods in 2006 and 2005. Per-share amounts have been retroactively adjusted to reflect the effect of stock dividends and splits.

		Price Range								Per-Share
		High				Low				Dividend
2006
First Quarter		$	17.35			$	16.07			$	0.138
Second Quarter			16.47				15.36				0.1475
Third Quarter			16.99				15.55				0.1475
Fourth Quarter			16.88				15.65				0.1475
2005
First Quarter		$	17.92			$	16.00			$	0.126
Second Quarter			17.14				15.68				0.138
Third Quarter			18.00				15.43				0.138
Fourth Quarter			16.90				14.87				0.138

Securities Authorized for Issuance under Equity Compensation Plans

The following table provides information about options outstanding under the Corporation’s 1996 Incentive Stock Option Plan and 2004 Stock Option and Compensation Plan as of December 31, 2006:

Number of securities

remaining available for

future issuance under

Number of securities to

Weighted-average

equity compensation

be issued upon exercise

exercise price of

plans (excluding

of outstanding options,

outstanding options,

securities reflected in

Plan Category

warrants and rights

warrants and rights

first column)

Equity compensation plans approved by security holders

7,996,776

$

12.65

14,864,642

Equity compensation plans not approved by security holders

—

—

—

Total

7,996,776

$

12.65

14,864,642

Performance Graph

The graph below shows cumulative investment returns to shareholders based on the assumptions that (A) an investment of $100.00 was made on December 31, 2001, in each of the following: (i) Fulton Financial Corporation common stock; (ii) the stock of all U. S. companies traded on The NASDAQ Stock Market and (iii) common stock of the performance peer group approved by the Board of Directors on September 21, 2004 consisting of bank and financial holding companies located throughout the United States with assets between $6-20 billion which were not a party to a merger agreement as of the end of the period and (B) all dividends were reinvested in such securities over the past five years. The graph is not indicative of future price performance.

The graph below is furnished under this Part II Item 5 of this Form 10-K shall not be deemed to be “soliciting material” or to be “filed” with the Commission or subject to Regulation 14A or 14C, or to the liabilities of Section 18 of the Exchange Act of 1934, as amended.

		Period Ending December 31
Index		2001				2002				2003				2004				2005				2006
Fulton Financial Corporation		$	100.00			$	104.42			$	140.24			$	161.58			$	157.56			$	162.67
NASDAQ Composite		$	100.00			$	68.76			$	103.67			$	113.16			$	115.57			$	127.58
Fulton Financial Peer Group		$	100.00			$	100.53			$	130.70			$	151.98			$	151.50			$	165.31

Issuer Purchases of Equity Securities

Total number of

shares purchased

Maximum number of

Total

as part of a

shares that may yet

number of

Average price

publicly

be

shares

paid per

announced plan

purchased under the

Period

purchased

share

or program

plan or program

(10/01/06 - 10/31/06)

—

—

—

1,043,490

(11/01/06 - 11/30/06)

—

—

—

1,043,490

(12/01/06 - 12/31/06)

5,000

$

15.99

5,000

1,038,490

On March 21, 2006 a stock repurchase plan was approved by the Board of Directors to repurchase up to 2.1 million shares through December 31, 2006. On December 19, 2006 the Board of Directors extended the stock repurchase plan through June 30, 2007. As of December 31, 2006, 1.1 million shares were repurchased under this plan. No stock repurchases were made outside the plans and all were made under the guidelines of Rule 10b-18 and in compliance with Regulation M.

Item 6. Selected Financial Data

5-YEAR CONSOLIDATED SUMMARY OF FINANCIAL RESULTS
(dollars in thousands, except per-share data and ratios)

		For the Year
		2006				2005				2004				2003				2002
SUMMARY OF INCOME
Interest income		$	864,507			$	625,768			$	493,643			$	435,531			$	469,288
Interest expense			378,944				213,220				135,994				131,094				158,219
Net interest income			485,563				412,548				357,649				301,437				311,069
Provision for loan losses			3,498				3,120				4,717				9,705				11,900
Other income			149,875				144,298				138,864				134,370				114,012
Other expenses			365,991				316,291				277,515				233,651				226,046
Income before income taxes			265,949				237,435				214,281				195,451				187,135
Income taxes			80,422				71,361				64,673				59,084				56,181
Net income		$	185,527			$	166,074			$	149,608			$	136,367			$	130,954
PER-SHARE DATA (1)
Net income (basic)		$	1.07			$	1.01			$	0.95			$	0.93			$	0.88
Net income (diluted)			1.06				1.00				0.94				0.92				0.88
Cash dividends			0.581				0.540				0.493				0.452				0.405
RATIOS
Return on average assets			1.30	%			1.41	%			1.45	%			1.55	%			1.66	%
Return on average equity			12.84				13.24				13.98				15.23				15.61
Return on average tangible equity (2)			23.87				20.28				18.58				17.33				17.25
Net interest margin			3.82				3.93				3.83				4.35				4.27
Efficiency ratio			56.00				55.50				56.90				54.00				53.10
Average equity to average assets			10.10				10.60				10.30				10.20				10.60
Dividend payout ratio			54.80				54.00				52.50				49.20				46.00
PERIOD-END BALANCES
Total assets		$	14,918,964			$	12,401,555			$	11,160,148			$	9,768,669			$	8,388,915
Investment securities			2,878,238				2,562,145				2,449,859				2,927,150				2,407,344
Loans, net of unearned income			10,374,323				8,424,728				7,533,915				6,140,200				5,295,459
Deposits			10,232,469				8,804,839				7,895,524				6,751,783				6,245,528
Federal Home Loan Bank advances and long-term debt			1,304,148				860,345				684,236				568,730				535,555
Shareholders’ equity			1,516,310				1,282,971				1,244,087				948,317				864,879
AVERAGE BALANCES
Total assets		$	14,297,681			$	11,781,618			$	10,347,290			$	8,805,807			$	7,903,920
Investment securities			2,869,862				2,498,671				2,562,165				2,569,421				1,949,635
Loans, net of unearned income			9,892,082				7,981,604				6,857,386				5,564,806				5,381,950
Deposits			9,955,247				8,364,435				7,285,134				6,505,371				6,052,667
Federal Home Loan Bank advances and long-term debt			1,069,868				839,827				640,176				568,959				478,937
Shareholders’ equity			1,444,793				1,254,476				1,069,904				895,616				839,111

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s Discussion and Analysis of Financial Condition and Results of Operations (Management’s Discussion) concerns Fulton Financial Corporation (the Corporation), a financial holding company registered under the Bank Holding Company Act and incorporated under the laws of the Commonwealth of Pennsylvania in 1982, and its wholly owned subsidiaries. This discussion and analysis should be read in conjunction with the consolidated financial statements and other financial information presented in this report.

FORWARD-LOOKING STATEMENTS

The Corporation has made, and may continue to make, certain forward-looking statements with respect to acquisition and growth strategies, market risk, the effect of competition and interest rates on net interest margin and net interest income, investment strategy and income growth, investment securities gains, other-than-temporary impairment of investment securities, deposit and loan growth, asset quality, balances of risk-sensitive assets to risk-sensitive liabilities, employee benefits and other expenses, amortization of intangible assets, goodwill impairment, capital and liquidity strategies and other financial and business matters for future periods. The Corporation cautions that these forward-looking statements are subject to various assumptions, risks and uncertainties. Because of the possibility that the underlying assumptions may change, actual results could differ materially from these forward-looking statements.

OVERVIEW

As a financial institution with a focus on traditional banking activities, the Corporation generates the majority of its revenue through net interest income, or the difference between interest earned on loans and investments and interest paid on deposits and borrowings. Growth in net interest income is dependent upon balance sheet growth and/or maintaining or increasing the net interest margin, which is net interest income (fully taxable-equivalent) as a percentage of average interest-earning assets. The Corporation also generates revenue through fees earned on the various services and products offered to its customers and through sales of assets, such as loans, investments, or properties. Offsetting these revenue sources are provisions for credit losses on loans, operating expenses and income taxes.

The Corporation’s net income for 2006 increased $19.5 million, or 11.7%, from $166.1 million in 2005 to $185.5 million in 2006. Diluted net income per share increased $0.06, or 6.0%, from $1.00 per share in 2005 to $1.06 per share in 2006. In 2006, the Corporation realized a return on average assets of 1.30% and a return on average tangible equity of 23.87%, compared to 1.41% and 20.28%, respectively, in 2005. Net income for 2005 increased $16.5 million, or 11.0%, from $149.6 million in 2004. Diluted net income per share for 2005 increased $0.06, or 6.4%, from $0.94 per share in 2004.

The 2006 increase in net income was driven by a $72.6 million, or 17.7%, increase in net interest income after the provision for loan losses, primarily due to external growth through acquisitions, which contributed $60.4 million to the increase. Also contributing to the increase was a $4.8 million, or 3.5%, increase in other income (excluding securities gains), primarily as a result of acquisitions. These items were offset by a $49.7 million, or 15.7%, increase in other expenses, also primarily due to acquisitions, and a $9.1 million increase in income tax expense.

In 2006, the Corporation experienced a decline in net interest margin of 11 basis points. Significant increases in loans and investments, due to both external and internal growth, were funded by higher cost certificates of deposits and short-term borrowings, as opposed to lower cost core demand and savings accounts. If loan demand continues to outpace the growth of core demand and savings accounts based upon the continuation of the current interest rate environment and price sensitivity of customers, then further compression of the net interest margin may occur.

The following summarizes some of the more significant factors that influenced the Corporation’s 2006 results.

Interest Rates – Changes in the interest rate environment can impact both the Corporation’s net interest income and its non-interest income. The term “interest rate environment” generally refers to both the level of interest rates and the shape of the U. S. Treasury yield curve, which is a plot of the yields on treasury securities over various maturity terms. Typically, the shape of the yield curve is upward sloping, with longer-term rates exceeding short-term rates. However, during 2006, the yield curve was relatively flat, and at times, downward sloping, with minimal differences between long and short-term rates, resulting in a negative impact to the Corporation’s net interest income and net interest margin.

Floating rate loans, short-term borrowings and savings and time deposit rates are generally influenced by short-term rates. During 2006, the FRB raised the Federal funds rate four times, for a total increase of 100 basis points since December 31, 2005, with the overnight borrowing, or Federal funds, rate ending the year at 5.25%. The Corporation’s prime lending rate had a corresponding increase, from 7.25% to 8.25%, resulting in an increase in the rates on floating rate loans as well as the rates on new fixed-rate loans. More significantly, the increase in short-term rates also resulted in increased funding costs, with short-term borrowings immediately repricing to higher rates and deposit rates, although more discretionary, increasing due to competitive pressures. Additionally, as rates increased, customers shifted funds from lower rate core demand and savings accounts to fixed rate certificates of deposit in order to

lock into higher rates. As a result, the net interest margin was negatively impacted when compared to the prior year, as shown in the following table:

		2006				2005
1st Quarter			3.88	%			3.96	%
2nd Quarter			3.90				3.92
3rd Quarter			3.85				3.91
4th Quarter			3.68				3.92
Year to Date			3.82				3.93

With respect to longer-term rates, the 10-year treasury yield, which is a common benchmark for evaluating residential mortgage rates, increased to 4.71% at December 31, 2006 as compared to 4.39% at December 31, 2005. Higher mortgage rates resulted in slower refinance activity and origination volumes and, therefore, lower net gains for the Corporation on fixed rate residential mortgages, which are generally sold in the secondary market. While absolute longer-term rates increased, the 32 basis point increase in the 10-year treasury yield was significantly less than the 100 basis point increase in short-term rates, resulting in a flattened and, at times, downward sloping, yield curve during 2006. If rates continue to rise and the yield curve steepens, residential mortgage volume could decrease even further, resulting in a greater negative impact on non-interest income, as gains on sales would decline. The “Market Risk” section of Management’s Discussion summarizes the expected impact of rate changes on net interest income.

Acquisitions – In February 2006, the Corporation acquired Columbia Bancorp (Columbia) of Columbia, Maryland. Columbia was a $1.3 billion bank holding company whose primary subsidiary was The Columbia Bank, which operates 20 full-service community banking offices and five retirement community offices in Frederick, Howard, Montgomery, Prince George’s and Baltimore Counties and Baltimore city. In July 2005, the Corporation acquired SVB Financial Services, Inc. (SVB) of Somerville, New Jersey, a $530 million bank holding company whose primary subsidiary was Somerset Valley Bank. Period-to-period comparisons in the “Results of Operations” section of Management’s Discussion are impacted by these acquisitions when 2006 results are compared to 2005. Results for 2005 in comparison to 2004 were impacted by the acquisition of SVB, Resource Bancshares Corporation (Resource) in April 2004 and First Washington FinancialCorp (First Washington) in December 2004. The discussion and tables within the “Results of Operations” section of Management’s Discussion highlight the contributions of these acquisitions in addition to internal changes.

Acquisitions have long been a supplement to the Corporation’s internal growth. These recent acquisitions provide the opportunity for additional growth, as they have allowed the Corporation’s existing products and services to be sold in new markets. The Corporation’s acquisition strategy focuses on high growth areas with strong market demographics and targets organizations that have a comparable corporate culture, strong performance and sound asset quality, among other factors. Under the Corporation’s “super-community” banking philosophy, acquired organizations generally retain their status as separate legal entities, unless consolidation with an existing subsidiary bank is practical. Back office functions are generally consolidated to maximize efficiencies.

Merger and acquisition activity in the financial services industry has been very competitive in recent years, as evidenced by the prices paid for certain acquisitions. While the Corporation has been an active acquirer, management is committed to basing its pricing on rational economic models. Management will continue to focus on generating growth in the most cost-effective manner.

Merger and acquisition activity has also impacted the Corporation’s capital and liquidity. In order to complete acquisitions, the Corporation implemented strategies to maintain appropriate levels of capital and to provide necessary cash resources. See additional information in the “Liquidity” section of Management’s Discussion.

Deposits and Borrowings – The Corporation’s interest-bearing liabilities increased from 2005 to 2006 in order to fund acquisitions and loan growth.

During 2006, the Corporation experienced a shift from lower cost interest-bearing demand and savings deposit accounts (36.9% of total interest-bearing liabilities in 2006, compared to 40.9% in 2005) to higher cost certificates of deposit and short-term borrowings (53.2% in 2006, compared to 49.5% in 2005). The shift to higher cost liabilities has contributed to the decline in net interest margin. Obtaining cost-effective funding will continue to be a challenge for the Corporation and the financial institutions industry in general.

Asset Quality – Asset quality refers to the underlying credit characteristics of borrowers and the likelihood that defaults on contractual loan payments will result in charge-offs of account balances. Asset quality is generally a function of economic conditions, but can be managed through conservative underwriting and sound collection policies and procedures.

The Corporation has been able to maintain strong asset quality through different economic cycles, attributable to its credit culture and underwriting policies. This trend continued in 2006 with net charge-offs to average loans decreasing from 0.04% in 2005 to 0.02% in 2006. Non-performing assets to total assets slightly increased to 0.39% at December 31, 2006, from 0.38% at December 31, 2005; however, this level is still relatively low in absolute terms. While overall asset quality has remained strong, deterioration in quality of one or several significant accounts could have a detrimental impact on the ability of some to pay according to the terms of their loans. In addition, rising interest rates could increase the total payments of borrowers and could have a negative impact on their ability to pay according to the terms of their loans. Finally, decreases in the values of underlying collateral as a result of market or economic conditions could negatively affect asset quality.

Equity Markets – As disclosed in the “Market Risk” section of Management’s Discussion, equity valuations can have an impact on the Corporation’s financial performance. In particular, bank stocks account for a significant portion of the Corporation’s equity investment portfolio. Historically, gains on sales of these equities have been a recurring component of the Corporation’s earnings. Declines in bank stock portfolio values could have a detrimental impact on the Corporation’s ability to recognize gains in the future.

RESULTS OF OPERATIONS

Net Interest Income

Net interest income is the most significant component of the Corporation’s net income. The ability to manage net interest income over changing interest rate and economic environments is important to the success of a financial institution. Growth in net interest income is generally dependent upon balance sheet growth and/or maintaining or increasing the net interest margin. The “Market Risk” section of Management’s Discussion provides additional information on the policies and procedures used by the Corporation to manage net interest income. The following table provides a comparative average balance sheet and net interest income analysis for 2006 compared to 2005 and 2004. Interest income and yields are presented on a fully taxable-equivalent (FTE) basis, using a 35% Federal tax rate. The discussion following this table is based on these tax-equivalent amounts.

		Year Ended December 31
(dollars in thousands)		2006												2005												2004
		Average								Yield/				Average								Yield/				Average								Yield/
		Balance				Interest				Rate				Balance				Interest				Rate				Balance				Interest				Rate
ASSETS
Interest-earning assets:
Loans and leases (1)		$	9,892,082			$	731,057				7.39	%		$	7,981,604			$	520,565				6.52	%		$	6,857,386			$	398,190				5.82	%
Taxable inv. securities (2)			2,268,209				97,652				4.31				1,996,240				74,921				3.75				2,162,695				76,792				3.54
Tax-exempt inv. securities (2)			447,000				21,770				4.87				368,845				17,971				4.87				264,578				14,353				5.43
Equity securities (2)			154,653				7,341				4.75				133,586				5,562				4.16				134,892				4,974				3.92
Total investment securities			2,869,862				126,763				4.42				2,498,671				98,454				3.94				2,562,165				96,119				3.76
Loans held for sale			215,255				15,564				7.23				241,996				14,940				6.17				135,758				8,407				6.19
Other interest-earning assets			53,211				2,530				4.73				48,357				1,586				3.27				6,067				103				1.70
Total interest-earning assets			13,030,410				875,914				6.73				10,770,628				635,545				5.90				9,561,376				502,819				5.26
Noninterest-earning assets:
Cash and due from banks			335,935												346,535												316,170
Premises and equipment			185,084												158,526												128,902
Other assets (2)			852,186												598,709												425,825
Less: Allowance for loan losses			(105,934	)											(92,780	)											(84,983	)
Total Assets		$	14,297,681											$	11,781,618											$	10,347,290
LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing liabilities:
Demand deposits		$	1,673,407			$	25,112				1.50	%		$	1,547,766			$	15,370				0.99	%		$	1,364,953			$	7,201				0.53	%
Savings deposits			2,340,402				51,394				2.19				2,055,503				27,116				1.32				1,846,503				11,928				0.65
Time deposits			4,134,190				170,435				4.12				3,171,901				98,288				3.10				2,693,414				70,650				2.62
Total interest-bearing deposits			8,147,999				246,941				3.03				6,775,170				140,774				2.08				5,904,870				89,779				1.52
Short-term borrowings			1,653,974				78,043				4.67				1,186,464				34,414				2.87				1,238,073				15,182				1.23
Long-term debt			1,069,868				53,960				5.04				839,827				38,031				4.53				640,176				31,033				4.85
Total interest-bearing liabilities			10,871,841				378,944				3.48				8,801,461				213,219				2.42				7,783,119				135,994				1.75
Noninterest-bearing liabilities:
Demand deposits			1,807,248												1,589,265												1,380,264
Other			173,799												136,416												114,003
Total Liabilities			12,852,888												10,527,142												9,277,386
Shareholders’ equity			1,444,793												1,254,476												1,069,904
Total Liabs. and Equity		$	14,297,681											$	11,781,618											$	10,347,290
Net interest income/net interest margin (FTE)							496,970				3.82	%							422,326				3.93	%							366,825				3.83	%
Tax equivalent adjustment							(11,407	)											(9,778	)											(9,176	)
Net interest income						$	485,563											$	412,548											$	357,649

The following table sets forth a summary of changes in FTE interest income and expense resulting from changes in average balances (volumes) and changes in rates:

		2006 vs. 2005												2005 vs. 2004
		Increase (decrease) due												Increase (decrease) due
		to change in												to change in
		Volume				Rate				Net				Volume				Rate				Net
		(in thousands)
Interest income on:
Loans and leases		$	135,262			$	75,230			$	210,492			$	69,877			$	52,457			$	122,334
Taxable investment securities			10,929				11,802				22,731				(6,194	)			4,638				(1,556	)
Tax-exempt investment securities			3,805				(6	)			3,799				5,192				(1,700	)			3,492
Equity securities			942				837				1,779				(51	)			326				275
Loans held for sale			(1,762	)			2,386				624				6,532				1				6,533
Short-term investments			173				771				944				1,305				178				1,483
Total interest-earning assets		$	149,349			$	91,020			$	240,369			$	76,661			$	55,900			$	132,561
Interest expense on:
Demand deposits		$	1,335			$	8,407			$	9,742			$	1,076			$	7,093			$	8,169
Savings deposits			4,229				20,049				24,278				1,488				13,700				15,188
Time deposits			34,536				37,611				72,147				13,676				13,962				27,638
Short-term borrowings			16,848				26,781				43,629				(645	)			19,877				19,232
Long-term debt			11,254				4,675				15,929				9,152				(2,154	)			6,998
Total interest-bearing liabilities		$	68,202			$	97,523			$	165,725			$	24,747			$	52,478			$	77,225