UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20459

FORM 10-Q

(Mark One)


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

For the quarterly period ended ~~September 30, 2005~~ March 31, 2006, or


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

For the transition period from to

Commission File No. 0-10587

FULTON FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

(717) 291-2411

(Registrant’s telephone number, including area code)

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

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

Large accelerated filer þ NoAccelerated 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 Exchange Act). Yes o No þ

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

Common Stock, $2.50 Par Value – ~~156,972,200~~165,313,000 shares outstanding as of ~~October 31, 2005~~April 30, 2006.

Item 1. Financial Statements

FULTON FINANCIAL CORPORATION

CONSOLIDATED BALANCE SHEETS ~~(UNAUDITED)~~

(dollars in thousands, except per-share data)


							Mar. 31, 2006			December 31
	September 30			December 31			(unaudited)			2005
	2005			2004
ASSETS
Cash and due from banks	$	403,032		$	278,065		$	398,111		$	368,043
Interest-bearing deposits with other banks		48,472			4,688			24,623			31,404
Federal funds sold		47,000			32,000			11,034			528
Loans held for sale		233,977			158,872			202,751			243,378
Investment securities:
Held to maturity (estimated fair value of $25,244 in 2005 and $25,413 in 2004)		25,061			25,001
Held to maturity (estimated fair value of $13,960 in 2006 and $18,317 in 2005)								13,900			18,258
Available for sale		2,464,514			2,424,858			2,776,722			2,543,887

Loans, net of unearned income		8,325,683			7,584,547			9,718,710			8,424,728
Less: Allowance for loan losses		(93,936	)		(89,627	)		(106,195	)		(92,847	)

Net Loans		8,231,747			7,494,920			9,612,515			8,331,881


Premises and equipment		166,991			146,911			182,115			170,254
Accrued interest receivable		47,398			40,633			60,145			53,261
Goodwill		418,466			364,019			620,734			418,735
Intangible assets		30,107			25,303			46,653			29,687
Other assets		189,162			164,878			225,182			192,239


Total Assets	$	12,305,927		$	11,160,148		$	14,174,485		$	12,401,555


LIABILITIES
Deposits:
Non-interest bearing	$	1,678,923		$	1,507,799
Noninterest-bearing							$	1,958,958		$	1,672,637
Interest-bearing		7,137,098			6,387,725			7,994,888			7,132,202

Total Deposits		8,816,021			7,895,524			9,953,846			8,804,839


Short-term borrowings:
Federal funds purchased		736,376			676,922			1,001,366			939,096
Other short-term borrowings		428,917			517,602			529,015			359,866

Total Short-Term Borrowings		1,165,293			1,194,524			1,530,381			1,298,962


Accrued interest payable		37,598			27,279			46,092			38,604
Other liabilities		113,865			114,498			137,027			115,834
Federal Home Loan Bank advances and long-term debt		897,944			684,236			1,058,800			860,345

Total Liabilities		11,030,721			9,916,061			12,726,146			11,118,584


SHAREHOLDERS’ EQUITY
Common stock, $2.50 par value, 600 million shares authorized, 172.3 million shares issued in 2005 and 160.6 million shares issued in 2004		430,655			335,604
Common stock, $2.50 par value, 600 million shares authorized, 181.1 million shares issued in 2006 and 172.3 million shares issued in 2005								452,774			430,827
Additional paid-in capital		995,847			1,018,403			1,133,967			996,708
Retained earnings		120,446			60,924			158,368			138,529
Accumulated other comprehensive loss		(30,934	)		(10,133	)		(51,709	)		(42,285	)
Treasury stock, 15.3 million shares in 2005 and 10.7 million shares in 2004, at cost		(240,808	)		(160,711	)
Treasury stock, 15.4 million shares in 2006 and 15.3 million shares in 2005, at cost								(245,061	)		(240,808	)


Total Shareholders’ Equity		1,275,206			1,244,087			1,448,339			1,282,971


Total Liabilities and Shareholders’ Equity	$	12,305,927		$	11,160,148		$	14,174,485		$	12,401,555

FULTON FINANCIAL CORPORATION ~~AND SUBSIDIARIES~~

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(dollars in thousands, except per-share data)


									Three months ended
	Three Months Ended				Nine Months Ended				March 31
	September 30				September 30				2006		2005
	2005		2004		2005		2004
INTEREST INCOME

Loans, including fees	$	136,092	$	103,033	$	376,029	$	288,358	$	161,114	$	115,938
Investment securities:
Taxable		18,947		18,247		55,465		59,635		22,539		18,261
Tax-exempt		3,213		2,407		8,905		7,480		3,533		2,849
Dividends		1,125		1,035		3,364		2,979		1,345		1,084
Mortgage loans held for sale		4,194		2,199		8,705		4,400
Loans held for sale										3,458		2,502
Other interest income		542		26		1,066		55		663		176

Total Interest Income		164,113		126,947		453,534		362,907		192,652		140,810

INTEREST EXPENSE

Deposits		38,480		22,644		97,392		65,339		50,190		27,808
Short-term borrowings		8,655		3,840		23,393		10,302		15,306		6,824
Long-term debt		10,482		7,962		28,080		23,092		12,113		7,930

Total Interest Expense		57,617		34,446		148,865		98,733		77,609		42,562


Net Interest Income		106,496		92,501		304,669		264,174		115,043		98,248
PROVISION FOR LOAN LOSSES		815		1,125		2,340		3,665		1,000		800


Net Interest Income After Provision for Loan Losses		105,681		91,376		302,329		260,509		114,043		97,448


OTHER INCOME
Investment management and trust services		8,730		8,650		26,715		25,932		10,032		9,019
Service charges on deposit accounts		10,488		10,182		29,780		29,616		10,247		9,332
Other service charges and fees		5,808		5,367		18,506		15,363		6,654		5,556
Gain on sale of mortgage loans		7,624		5,694		19,963		13,458
Gains on sales of mortgage loans										4,772		6,049
Investment securities gains		905		3,336		5,638		14,513		2,665		3,315
Other		2,597		1,764		9,718		4,811		2,237		2,582

Total Other Income		36,152		34,993		110,320		103,693		36,607		35,853


OTHER EXPENSES
Salaries and employee benefits		46,761		45,812		136,294		124,536		49,929		44,297
Net occupancy expense		7,459		6,159		21,506		17,536		8,589		7,498
Equipment expense		3,203		2,705		9,161		8,095		3,593		3,070
Data processing		3,100		2,915		9,590		8,602		2,909		3,169
Advertising		1,995		1,631		6,244		5,073		2,253		1,973
Intangible amortization		1,510		1,233		3,857		3,580		1,852		1,179
Other		17,509		13,581		46,902		39,555		18,891		12,642

Total Other Expenses		81,537		74,036		233,554		206,977		88,016		73,828


Income Before Income Taxes		60,296		52,333		179,095		157,225		62,634		59,473
INCOME TAXES		18,168		16,324		53,927		47,638		18,755		18,037


Net Income	$	42,128	$	36,009	$	125,168	$	109,587	$	43,879	$	41,436


PER-SHARE DATA:

Net income (basic)	$	0.27	$	0.24	$	0.80	$	0.74	$	0.27	$	0.26
Net income (diluted)		0.27		0.23		0.79		0.73		0.27		0.26
Cash dividends		0.145		0.132		0.422		0.386		0.145		0.132

FULTON FINANCIAL CORPORATION

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

~~NINE~~THREE MONTHS ENDED ~~SEPTEMBER 30,~~MARCH 31, 2006 AND 2005 ~~AND 2004~~

Accumulated
Other
Number of Additional Comprehen-
Shares Common Paid-In Retained sive Income Treasury
Outstanding Stock Capital Earnings (Loss) Stock Total
(dollars in thousands, except per-share data)
Balance at December 31, 2004 157,150,000 $ 335,604 $ 1,018,403 $ 60,924 $ (10,133 ) $ (160,711 ) $ 1,244,087
Comprehensive income: ��
Net income 125,168 125,168
Unrealized loss on securities (net of $7.4 million tax effect) (14,015 ) (14,015 )
Unrealized loss on derivative financial instruments (net of $1.7 million tax effect) (3,122 ) (3,122 )
Less – reclassification adjustment for gains included in net income (net of $2.1 million tax expense) (3,664 ) (3,664 )

Total comprehensive income
104,367

Stock split paid in the form of a 25% stock dividend 84,046 (84,114 ) (68 )
Stock issued 1,056,000 1,637 3,698 5,071 10,406
Stock-based compensation expense 618 618
Shares issued for acquisition of SVB Financial Services, Inc. 3,747,000 9,368 57,242 66,610
Acquisition of treasury stock (5,000,000 ) (85,168 ) (85,168 )
Cash dividends — $0.422 per share (65,646 ) (65,646 )

Balance at September 30, 2005 156,953,000 $ 430,655 $ 995,847 $ 120,446 $ (30,934 ) $ (240,808 ) $ 1,275,206

Balance at December 31, 2003 142,085,000 $ 284,480 $ 648,155 $ 104,187 $ 12,267 $ (100,772 ) $ 948,317
Comprehensive income:
Net income 109,587 109,587
Unrealized loss on securities (net of $2.6 million tax effect) (4,906 ) (4,906 )
Less – reclassification adjustment for gains included in net income (net of $5.1 million tax expense) (9,433 ) (9,433 )

Total comprehensive income
95,248

Stock dividend – 5% 15,278 100,247 (115,615 ) (90 )
Stock issued 1,158,000 (8,729 ) 16,742 8,013
Stock-based compensation expense 3,834 3,834
Shares issued for acquisition of Resource Bankshares Corporation 11,287,000 21,498 164,365 185,863
Acquisition of treasury stock (3,277,000 ) (53,853 ) (53,853 )
Cash dividends — $0.386 per share (57,482 ) (57,482 )

Balance at September 30, 2004 151,253,000 $ 321,256 $ 907,872 $ 40,677 $ (2,072 ) $ (137,883 ) $ 1,129,850


												Accumulated
	Number of					Additional						Other Com-
	Shares			Common		Paid-in			Retained			prehensive			Treasury
	Outstanding			Stock		Capital			Earnings			(Loss) Income			Stock			Total
	(dollars in thousands)
Balance at December 31, 2005		157,017,000		$	430,827	$	996,708		$	138,529		$	(42,285	)	$	(240,808	)	$	1,282,971
Comprehensive income:
Net income										43,879									43,879
Unrealized loss on securities (net of $3.4 million tax effect)													(6,297	)					(6,297	)
Unrealized loss on derivative financial instrument (net of $751,000 tax effect)													(1,394	)					(1,394	)
Less — reclassification adjustment for gains included in net income (net of $933,000 tax expense)													(1,733	)					(1,733	)

Total comprehensive income																			34,455

Stock issued, including related tax benefits		569,000			1,424		3,307												4,731
Stock-based compensation awards							344												344
Stock issued for acquisition of Columbia Bancorp		8,209,000			20,523		133,608												154,131
Acquisition of treasury stock		(49,000	)													(830	)		(830	)
Accelerated share repurchase settlement																(3,423	)		(3,423	)
Cash dividends — $0.145 per share										(24,040	)								(24,040	)


Balance at March 31, 2006		165,746,000		$	452,774	$	1,133,967		$	158,368		$	(51,709	)	$	(245,061	)	$	1,448,339


Balance at December 31, 2004		157,150,000		$	335,604	$	1,018,403		$	60,924		$	(10,133	)	$	(160,711	)	$	1,244,087
Comprehensive income:
Net income										41,436									41,436
Unrealized loss on securities (net of $10.9 million tax effect)													(20,170	)					(20,170	)
Less — reclassification adjustment for gains included in net income (net of $1.2 million tax expense)													(2,155	)					(2,155	)

Total comprehensive income																			19,111

Stock issued, including related tax benefits		590,000			418		(950	)								5,469			4,937
Stock-based compensation awards							96												96
Acquisition of treasury stock		(400,000	)													(6,923	)		(6,923	)
Cash dividends — $0.132 per share										(20,797	)								(20,797	)


Balance at March 31, 2005		157,340,000		$	336,022	$	1,017,549		$	81,563		$	(32,458	)	$	(162,165	)	$	1,240,511

See Notes to Consolidated Financial Statements

~~See Notes to Consolidated Financial Statements~~

FULTON FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)


							Three months ended
	Nine months ended						March 31
	September 30						2006			2005
	2005			2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income	$	125,168		$	109,587		$	43,879		$	41,436

Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		2,340			3,665			1,000			800
Depreciation and amortization of premises and equipment		10,337			9,297			4,009			3,263
Net amortization of investment security premiums		3,879			8,187			1,015			1,256
Investment securities gains		(5,638	)		(14,513	)		(2,665	)		(3,315	)
Net increase in loans held for sale		(54,719	)		(23,145	)
Net decrease (increase) in loans held for sale								40,627			(18,114	)
Amortization of intangible assets		3,857			3,580			1,852			1,179
Stock-based compensation		618			3,834
Stock-based compensation expense								344			96
Increase in accrued interest receivable		(4,638	)		(4,244	)		(228	)		(1,581	)
Increase in other assets		(6,606	)		(7,282	)		(24,109	)		(5,064	)
Increase (decrease) in accrued interest payable		10,319			(151	)
(Decrease) increase in other liabilities		(7,359	)		4,976
Increase in accrued interest payable								6,441			2,267
Increase in other liabilities								16,596			8,645

Total adjustments		(47,610	)		(15,796	)		44,882			(10,568	)

Net cash provided by operating activities		77,558			93,791			88,761			30,868


CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale		128,310			217,577			64,225			56,380
Proceeds from maturities of securities held to maturity		4,041			7,579			4,355			1,525
Proceeds from maturities of securities available for sale		509,082			643,176			197,541			153,488
Purchase of securities held to maturity		(4,398	)		(4,694	)		—			(4,383	)
Purchase of securities available for sale		(590,940	)		(174,278	)		(319,199	)		(196,144	)
Decrease (increase) in short-term investments		14,725			(2,785	)		13,129			(47,435	)
Net increase in loans		(457,893	)		(418,447	)		(228,950	)		(149,072	)
Net cash paid for acquisitions		(3,877	)		(6,404	)		(105,266	)		—
Net purchase of premises and equipment		(21,138	)		(9,122	)		(7,966	)		(5,844	)

Net cash (used in) provided by investing activities		(422,088	)		252,602
Net cash used in investing activities								(382,131	)		(191,485	)


CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand and savings deposits		56,047			267,629			45,118			48,989
Net increase (decrease) in time deposits		391,071			(157,731	)
Increase (decrease) in long-term debt		189,121			(22,481	)
Decrease in short-term borrowings		(29,231	)		(328,345	)
Net increase in time deposits								134,953			31,649
Addition to long-term debt								172,642			99,350
Repayment of long-term debt								(54,323	)		(10,457	)
Increase in short-term borrowings								47,336			70,836
Dividends paid		(62,749	)		(54,896	)		(22,766	)		(19,790	)
Net proceeds from issuance of common stock		10,406			8,013			4,731			4,937
Acquisition of treasury stock		(85,168	)		(53,853	)		(4,253	)		(6,923	)

Net cash provided by (used in) financing activities		469,497			(341,664	)
Net cash provided by financing activities								323,438			218,591


Net Increase in Cash and Due From Banks		124,967			4,729			30,068			57,974
Cash and Due From Banks at Beginning of Period		278,065			300,966			368,043			278,065


Cash and Due From Banks at End of Period	$	403,032		$	305,695		$	398,111		$	336,039


Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest	$	138,546		$	98,884		$	71,168		$	40,295
Income taxes		43,356			40,151			2,500			799

FULTON FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE A —– Basis of Presentation

The accompanying unaudited consolidated financial statements of Fulton Financial Corporation (the Corporation) have been prepared in accordance with United States (U.S.) generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the ~~three and nine-month periods~~three-month period ended ~~September 30, 2005~~March 31, 2006 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2005.~~

The Corporation adopted Statement of Financial Accounting Standards No. 123R, “Share-Based Payment” (Statement 123R) in the third quarter of 2005, using modified retrospective application. As a result, all prior period information has been restated. As a result of the retrospective adoption of this new standard, as of December 31, 2003 retained earnings decreased $13.2 million, additional paid in capital increased $14.6 million and deferred tax assets increased $1.4 million. These changes reflect a combination of compensation expense for prior stock option grants to employees and related tax benefits. See also, Note E “Stock-Based Compensation”.2006.

NOTE B —– Net Income Per Share and Comprehensive Income

The Corporation’s basic net income per share is calculated as net income divided by the weighted average number of shares outstanding. For diluted net income per share, net income is divided by the weighted average number of shares outstanding plus the incremental number of shares added as a result of converting common stock equivalents, calculated using the treasury stock method. The Corporation’s common stock equivalents consist solely of outstanding stock options. Excluded from the calculation were 1.3 million anti-dilutive options for the three months ended March 31, 2006.

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


	Three months ended				Nine months ended				Three months ended
	September 30				September 30				March 31
	2005		2004		2005		2004		2006		2005
	(in thousands)								(in thousands)
Weighted average shares outstanding (basic)		156,815		151,870		156,223		148,888		162,732		157,351
Impact of common stock equivalents		1,862		1,638		1,919		1,578		2,188		2,037

Weighted average shares outstanding (diluted)		158,677		153,508		158,142		150,466		164,920		159,388

NOTE D – Stock Dividend

The Corporation declared a 5% stock dividend on April 18, 2006, which will be paid on June 8, 2006 to shareholders of record on May 19, 2006. Since the market price of the Corporation’s stock will not adjust as a result of the stock dividend until subsequent to the filing of these financial statements, the stock dividend has not been recorded in shareholders’ equity, and share and per-share information has not been restated. The following table provides share and per-share amounts reflecting the impact of the stock dividend:


	Three months ended
	March 31
	2006		2005
	(shares in thousands)
As Reported:
Net income per share (basic)	$	0.27	$	0.26
Net income per share (diluted)		0.27		0.26
Weighted average shares outstanding (basic)		162,732		157,351
Weighted average shares outstanding (diluted)		164,920		159,388
Ending shares outstanding (at March 31)		165,746		157,340

Pro-forma:
Net income per share (basic)	$	0.26	$	0.25
Net income per share (diluted)		0.25		0.25
Weighted average shares outstanding (basic)		170,869		165,219
Weighted average shares outstanding (diluted)		173,166		167,357
Ending shares outstanding (at March 31)		174,033		165,207

NOTE E —– Stock-Based Compensation

Statement ~~123R~~of Financial Accounting Standards No.123R, “Share-Based Payment” (Statement 123R), requires that the fair value of equity awards to employees be recognized as compensation expense over the period during which an employee is required to provide service in exchange for such award. ~~The~~During the third quarter of 2005, the Corporation adopted Statement 123R using “modified retrospective application”, electing to restate all prior ~~periods.~~periods including all per-share amounts. The Corporation’s equity awards consist of stock options and restricted stock granted under its Stock Option and Compensation Plans (Option Plans) and shares purchased by employees under its Employee Stock Purchase ~~Plan (ESPP).~~Plan.

~~The following table summarizes the impact of modified retrospective application on the previously reported results for the periods shown:~~

Nine
months
Three months ended ended
June 30, Mar. 31, Sept. 30, Sept. 30,
2005 2005 2004 2004
(in thousands, except per-share data)
Income before income taxes, originally reported $ 59,409 $ 59,570 $ 56,035 $ 161,059
Stock-based compensation expense under the fair value method (2) (83 ) (96 ) (3,702 ) (3,834 )

Income before income taxes, restated $ 59,326 $ 59,474 $ 52,333 $ 157,225

Net income, originally reported $ 41,580 $ 41,531 $ 39,120 $ 112,830
Stock-based compensation expense under the fair value method, net of tax (2) 24 (94 ) (3,111 ) (3,243 )

Net income, restated $ 41,604 $ 41,437 $ 36,009 $ 109,587

Net income per share (basic), originally reported (1) $ 0.27 $ 0.26 $ 0.26 $ 0.76
Net income per share (basic), restated 0.27 0.26 0.24 0.74

Net income per share (diluted), originally reported (1) $ 0.27 $ 0.26 $ 0.26 $ 0.75
Net income per share (diluted), restated 0.27 0.26 0.23 0.73


~~(1)~~		~~Originally reported amounts have been restated for the impact of the 5-for-4 stock split paid in June 2005.~~

~~(2)~~		~~Stock-based compensation expense, originally reported, was $0.~~

The following table presents compensation expense and related tax benefits for equity awards recognized in the consolidated income statements:


	Three months ended						Nine months ended						Three months ended
	September 30						September 30						March 31
	2005			2004			2005			2004			2006			2005
	(in thousands)												(in thousands)
Compensation expense	$	439		$	3,702		$	618		$	3,834		$	344		$	96
Tax benefit		(100	)		(591	)		(208	)		(591	)		(133	)		(2	)

Net income effect	$	339		$	3,111		$	410		$	3,243		$	211		$	94

the July 1, 2005 grant, a three-year ~~cliff vesting~~cliff-vesting feature was added and, as a result, compensation expense associated with this grant will be recognized over the three year vesting period. This change in vesting resulted in a significant decrease in stock-based compensation expense in the third quarter of 2005 as compared to 2004.added. Certain events, as ~~defined~~specified in the Option Plans, ~~including a change of control,~~ would result in the acceleration of the ~~vesting.~~vesting period. As of ~~September 30, 2005,~~March 31, 2006, the Option Plans had 14.9 million shares reserved for the future grants through 2013.

~~The following table provides information about options outstanding for the nine months ended September 30, 2005:~~

Weighted
Average Aggregate
Weighted Remaining Intrinsic
Stock Average Contractual Value
Options Exercise Price Term (in millions)
Outstanding at December 31, 2004 6,591,053 $ 10.74
Granted 1,092,500 17.98
Exercised (1,005,416 ) 7.41
Assumed from SVB Financial 166,218 13.08
Forfeited (17,039 ) 16.31

Outstanding at September 30, 2005 6,827,316 $ 12.43 6.4 years $ 29.7

Exercisable at September 30, 2005 5,722,256 $ 11.40 5.8 years $ 30.8

~~The following table provides information about nonvested options for the nine months ended September 30, 2005:~~

Weighted
Average
Stock Grant Date
Options Fair Value
Nonvested at December, 2004 — $ —
Granted 1,092,500 2.52
Vested — —
Forfeited (5,100 ) 2.52

Nonvested at September 30, 2005 1,087,400 $ 2.52

~~As of September 30, 2005, total unrecognized compensation cost related to nonvested options was $2.4 million. This cost is expected to be recorded over a weighted average period of 2.8 years.~~

~~The following table presents information about options exercised:~~

Three months ended Nine months ended
September 30 September 30
2005 2004 2005 2004
(dollars in thousands)
Number of options exercised 201,385 330,355 1,005,416 1,258,643
Total intrinsic value of options exercised $ 1,747 $ 3,681 $ 10,346 $ 12,567
Cash received from options exercised $ 1,863 $ 1,389 $ 6,423 $ 5,053
Tax deduction realized from options exercised $ 1,606 $ 2,143 $ 6,924 $ 5,806

~~Upon exercise, the Corporation issues shares from its authorized, but unissued, common stock to satisfy the options.~~

The fair value of option awards under the Option Plans is estimated on the date of grant using the Black-Scholes valuation methodology, which is dependent upon certain assumptions, as summarized in the following table.

Grant Date
07/01/05 07/01/04
Risk-free interest rate 3.76 % 4.22 %
Volatility of Corporation’s stock 16.17 18.12
Expected dividend yield 3.23 3.27
Expected life of options 6 Years 7 Years

The expected life of the options was estimated based on historical employee behavior and represents the period of time that options granted are expected to be outstanding. Volatility of the Corporation’s stock was based on historical volatility for the period commensurate with the expected life of the options. The risk-free interest rate is the U.S. Treasury rate commensurate with the expected life of the options on the date of the grant.

Based on the assumptions used in the model, the Corporation calculated an estimated fair value per option of $2.52 for the July 1, 2005 grant and $2.78 for the July 1, 2004 grant. Approximately 1.1 million options were granted on July 1, 2005 and 1.3 million options were granted on July 1, 2004.

Under the ESPP, eligible employees can purchase stock of the Corporation at 85% of the fair market value of the stock on the date of purchase. The ESPP is considered to be a compensatory plan under Statement 123R and, as such, compensation expense is recognized for the 15% discount on shares purchased. The following table summarizes activity under the ESPP for the indicated periods.

Three months ended Nine months ended
September 30 September 30
2005 2004 2005 2004
ESPP shares purchased 34,439 28,331 102,918 81,087
Average purchase price (85% of market value) $ 14.71 $ 14.68 $ 14.81 $ 14.32
Compensation expense recognized (in thousands) $ 89 $ 73 $ 269 $ 205

NOTE F —– Employee Benefit Plans

The Corporation maintains a defined benefit pension plan (Pension Plan) for certain employees. Contributions to the Pension Plan are actuarially determined and funded annually. Pension Plan assets are invested in money markets, fixed income securities, including corporate bonds, U.S. Treasury securities and common trust funds, and equity securities, including common stocks and common stock mutual funds. The Pension Plan has been closed to new participants, but existing participants continue to accrue benefits according to the terms of the plan. The Corporation ~~contributed~~expects to contribute approximately ~~$10.6~~$4.1 million to the Pension Plan in ~~the quarter ended September 30, 2005.~~2006.

The Corporation currently provides medical and life insurance benefits under a post-retirement benefits plan (Post-Retirement Plan) to certain retired full-time employees who were employees of the Corporation prior to

January 1, 1998. ~~Other certain~~Certain other full-time employees may become eligible for these discretionary benefits if they reach retirement age while working for the Corporation. Benefits are based on a graduated scale for years of service after attaining the age of 40.

The net periodic benefit cost for the Corporation’s Pension Plan and Post-Retirement Plan, as determined by consulting actuaries, consisted of the following components for the ~~three and nine-month periods~~quarters ended ~~September 30:~~March 31:

Pension Plan
Three months ended Nine months ended
September 30 September 30
2005 2004 2005 2004
(in thousands)
Service cost $ 622 $ 577 $ 1,864 $ 1,730
Interest cost 843 776 2,528 2,327
Expected return on plan assets (818 ) (750 ) (2,455 ) (2,249 )
Net amortization and deferral 222 166 665 498

Net periodic benefit cost $ 869 $ 769 $ 2,602 $ 2,306


	Post-Retirement Plan
	Three months ended						Nine months ended
	September 30						September 30						Pension Plan						Post-Retirement Plan
	2005			2004			2005			2004			2006			2005			2006			2005
				(in thousands)												(in thousands)
Service cost	$	88		$	91		$	265		$	273		$	609		$	622		$	143		$	89
Interest cost		115			119			346			356			864			843			185			117
Expected return on plan assets		—			(1	)		(1	)		(2	)		(1,057	)		(818	)		(1	)		—
Net amortization and deferral		(56	)		(58	)		(168	)		(173	)		202			222			(80	)		(57	)

Net periodic benefit cost	$	147		$	151		$	442		$	454		$	618		$	869		$	247		$	149

As a result of the acquisition, ~~SVB~~Columbia was merged into the Corporation, and ~~Somerset Valley~~The Columbia Bank became a wholly owned subsidiary. The acquisition is being accounted for using purchase accounting, which requires the Corporation to allocate the total purchase price of the acquisition to the assets acquired and liabilities assumed, based on their respective fair values at the acquisition date, with any remaining purchase price being recorded as goodwill. Resulting goodwill balances are then subject to an impairment ~~test~~review on at least an annual basis. The results of ~~Somerset Valley’s~~Columbia’s operations are included in the Corporation’s financial statements prospectively from the ~~July~~February 1, ~~2005~~2006 acquisition date.

The following is a summary of the ~~preliminary~~ purchase price allocation based on estimated fair values on the acquisition ~~date. These preliminary amounts may be revised when final fair values are determined~~date (in thousands):


Cash and due from banks	$	20,035	$	46,407
Other earning assets		61,046		16,854
Investment securities available for sale		124,916		113,771
Loans, net of allowance		301,660		1,052,684
Premises and equipment		9,279		7,904
Accrued interest receivable		2,127
Goodwill and intangible assets		63,284
Core deposit intangible asset				17,953
Trade name intangible asset				865
Goodwill				200,110
Other assets		8,442		91,608

Total assets acquired		590,789		1,548,156


Deposits		473,379		968,936
Short-term borrowings				184,083
Long-term debt		24,587		80,136
Other liabilities		2,301		9,223

Total liabilities assumed		500,267		1,242,378

Net assets acquired	$	90,522	$	305,778

The following table summarizes unaudited pro-forma information assuming the acquisitions of ~~Resource, First Washington~~Columbia and SVB had occurred on January 1, ~~2004.~~2005. This pro-forma information includes certain adjustments, including amortization related to fair value adjustments recorded in purchase accounting (in thousands, except per-share information):

Three months ended Nine months ended
September 30 September 30
2005 2004 2005 2004
Net interest income $ 106,496 $ 101,328 $ 313,911 $ 297,146
Other income 36,152 36,905 111,180 112,553
Net income 42,128 38,706 126,988 117,689

Per Share:
Net income (basic) $ 0.27 $ 0.24 $ 0.80 $ 0.71
Net income (diluted) 0.27 0.23 0.79 0.70

~~Pending Acquisition~~

On July 26, 2005, the Corporation entered into a merger agreement to acquire Columbia Bancorp (Columbia), of Columbia, Maryland. Columbia is a $1.3 billion bank holding company whose primary subsidiary is The Columbia Bank, which operates 19 full-service community banking offices and five retirement community offices in Howard, Montgomery, Prince George’s and Baltimore Counties and Baltimore City.

Under the terms of the merger agreement, each of the approximately 6.9 million shares of Columbia’s common stock will be acquired based on a “cash election merger” structure. Each Columbia shareholder will have the ability to elect to receive 100% of the merger consideration in stock, 100% in cash, or a combination of stock and cash. Their elections will be subject to prorating to achieve a result where a minimum of 20% and a maximum of 50% of Columbia’s outstanding shares will receive cash consideration. Those shares that will be converted into Corporation common stock would be exchanged based on a fixed exchange ratio of 2.325 shares of Corporation stock for each share of Columbia stock. Shareholders electing cash will receive a fixed price of $42.48 per share of Columbia stock. In addition, each of the options to acquire Columbia’s stock will be converted to options to purchase the Corporation’s stock or will be settled in cash.

The acquisition is subject to approval by both the Columbia shareholders and applicable bank regulatory authorities and is expected to be completed during the first quarter of 2006. As a result of the acquisition, Columbia will be merged into the Corporation and The Columbia Bank will become a wholly-owned subsidiary.

The acquisition will be accounted for as a purchase. Purchase accounting requires the Corporation to allocate the total purchase price of the acquisition to the assets acquired and liabilities assumed, based on their respective fair values at the acquisition date, with any remaining acquisition cost being recorded as goodwill. Resulting goodwill balances are then subject to an impairment review on at least an annual basis. The results of Columbia’s operations will be included in the Corporation’s financial statements prospectively from the date of the acquisition.

The total purchase price is estimated to be approximately $295 million, which includes cash expected to be paid, the value of the Corporation’s stock expected to be issued, the value of Columbia’s options to be converted and certain acquisition-related costs. This purchase price is subject to change since the price used to value the shares issued in this transaction will be set on the date when the number of shares issued are fixed and determinable. The net assets of Columbia as of September 30, 2005 were $94.4 million and, therefore, the estimated purchase price exceeded the carrying value of the net assets by $200.6 million. The total purchase

price will be allocated to the net assets acquired as of the merger effective date, based on fair market values at that date. The Corporation expects to record a core deposit intangible asset and goodwill as a result of the acquisition accounting.


	Three months ended March 31
	2006		2005
Net interest income	$	120,541	$	115,625
Other income		35,874		37,688
Net income		44,686		45,955

Per Share:
Net income (basic)	$	0.27	$	0.27
Net income (diluted)		0.27		0.27

~~NOTE~~Note H —– Derivative Financial Instruments ~~— Interest Rate Swaps~~

As of ~~September 30, 2005,~~March 31, 2006, interest rate swaps with a notional amount of ~~$270~~$280 million were used to hedge certain long-term fixed rate ~~certificate~~certificates of ~~deposit liabilities held at one of the Corporation’s affiliate banks.~~deposit. The terms of the certificates of deposit and the interest rate swaps mirror each other and were committed to simultaneously. Under the terms of the swap agreements, the Corporation is the fixed rate receiver and the floating rate payer (generally tied to the three month London Interbank Offering Rate, or LIBOR, a common index used for setting rates between financial institutions). The ~~combination~~interest rate swaps are classified as fair value hedges and both the interest rate swaps and the certificates of deposit are recorded at fair value, with changes in the fair values during the period recorded as income or expense. For interest rate swaps accounted for as a fair value hedge, ineffectiveness is the difference between the changes in the fair value of the interest rate swap and the hedged item, in this case the certificates of deposit.

The Corporation’s analysis of hedge effectiveness indicated they were highly effective as of March 31, 2006. For the quarter ended March 31, 2006, a $61,000 net charge to expense was recorded representing the net impact of the change in fair values of the interest rate swaps and the ~~issuance of the~~ certificates of deposit generates long-term floating rate funding for the Corporation. The interest rate swaps are classified as cash flow hedges and the fair values of the derivatives are recorded as other assets or other liabilities. Changes in the fair values during the period are recorded in other comprehensive income (loss) to the extent the hedge is effective. Ineffectiveness resulting from differences between the changes in fair value or cash flows of the certificate of deposits and the interest rate swaps must be recorded in current period earnings.

The Corporation’s analysis of the effectiveness of the hedges indicated they were 97.4% effective as of September 30, 2005. As a result, a $112,000 and $66,000 charge to income was recorded for the three and nine-month periods ended September 30, 2005, respectively. During the nine months ended September 30, 2005, the Corporation also recorded a $3.1 million other comprehensive loss (net of $1.7 million tax effect) to recognize the fair value changes of derivatives.deposit.

The Corporation entered into a forward-starting interest rate swap with a notional amount of $150 million in October 2005 in anticipation of anthe issuance of $150 million of trust preferred securities in ~~December 2005.~~January 2006. This ~~will be~~was accounted for as a cash flow hedge as it ~~hedges~~hedged the variability of interest payments attributable to changes in interest rates on the forecasted issuance of fixed-rate debt. As of December 31, 2005, $2.2 million had been recorded as an other comprehensive loss representing the estimated fair value of the swap on that date, net of a $1.2 million tax effect. The Corporation settled this derivative on its contractual maturity date in January 2006 with a total payment of $5.5 million to the counterparty that resulted in an additional $1.4 million charge to other comprehensive loss (net of $751,000 tax effect) during the quarter. The total amount recorded in other comprehensive loss is being amortized to interest expense over the life of the related securities using the effective interest method. The total amount of net losses in accumulated other comprehensive income that will be reclassified into earnings during the next twelve months is expected to be approximately $185,000.

NOTE I ~~— Financial Instruments With Off-Balance Sheet Risk~~– Commitments and Contingencies

The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. Those financial instruments include commitments to extend credit and letters of credit, which involve, to varying degrees, elements of credit and interest rate risk in excess of the ~~amount~~amounts recognized in the Corporation’s Consolidated Balance Sheets. Exposure to credit

NOTE ~~K —~~L – New Accounting ~~for Certain Loans or Debt Securities Acquired in a Transfer:~~Standards

In ~~December 2003,~~March 2006, the Financial Accounting Standards ~~Executive Committee~~Board (FASB) issued Statement of ~~Position 03-3 (SOP 03-3),~~Financial Accounting Standards No. 156, “Accounting for ~~Certain Loans~~Servicing of Financial Assets — an amendment of FASB Statement No. 140” (Statement 156). Statement 156 requires recognition of a servicing asset or ~~Debt Securities Acquired~~liability at fair value each time an obligation is undertaken to service a financial asset by entering into a servicing contract. Statement 156 also provides guidance on subsequent measurement methods for each class of separately recognized servicing assets and liabilities and specifies financial statement presentation and disclosure requirements. This statement is effective for fiscal years beginning after September 15, 2006, or January 1, 2007 for the Corporation. The Corporation is currently evaluating the impact of Statement 156 on the consolidated financial statements.

In April 2006, the FASB issued Staff Position FIN 46(R)-6, “Determining the Variability to Be Considered in ~~a Transfer”~~Applying FASB Interpretation No. 46(R)” (Staff Position FIN 46(R)-6). ~~SOP 03-3~~This staff position addresses ~~accounting for differences between contractual cash flows and cash flows expected~~how an entity should determine the variability to be ~~collected from an investor’s initial investment~~considered in ~~loans~~applying FASB Interpretation No. FIN 46(R) (FIN 46). The variability that is to be considered in applying FIN 46 affects the determination of (a) whether the entity is a variable interest entity (VIE), (b) which interests are “variable interests” in the entity and (c) which party, if any, is the primary beneficiary of the VIE. The requirements prescribed by this staff position are to be applied prospectively for all new arrangements at the commencement of the first reporting period that begins after June 15, 2006, or ~~debt securities acquired in a transfer, including business combinations, if those differences are attributable, at least in part, to credit quality.~~

~~SOP 03-3 became effective~~July 1, 2006 for the Corporation. The new requirements need not be applied to entities that have previously been analyzed under FIN 46 unless a reconsideration event occurs. The Corporation ~~on January 1, 2005 and was applicable to~~is currently evaluating the ~~July 2005 acquisition~~impact of ~~SVB. Few of the loans acquired from SVB met the scope of SOP 03-3 and, as such, there was no material impact~~Staff Position FIN 46(R)-6 on the ~~accounting for this acquisition.~~consolidated financial statements.

NOTE ~~L —~~M – Reclassifications

Certain amounts in the ~~2004~~2005 consolidated financial statements and notes have been reclassified to conform to the ~~2005~~2006 presentation.

1513

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

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

FORWARD-LOOKING STATEMENTS

The Corporation has made, and may continue to make, certain forward-looking statements with respect to its acquisition and growth strategies, management of net interest income and margin, the ability to realize gains on equity investments, allowance and provision for loan losses, expected levels of certain non-interest expenses and the liquidity position of the Corporation and Parent Company. The Corporation cautions that these forward-looking statements are subject to various assumptions, risks and uncertainties. Because of the possibility of changes in these assumptions, risks and uncertainties, actual results could differ materially from forward-looking statements.

In addition to the factors identified herein, the following risk factors could cause actual results to differ materially from such forward-looking statements: pricing pressures on loan and deposit products, actions of bank and non-bank competitors, changes in local and national economic conditions, changes in regulatory requirements, actions of the Federal Reserve Board (FRB), creditworthiness of current borrowers, customers’ acceptance of the Corporation’s products and services and acquisition pricing and the ability of the Corporation to continue making acquisitions .

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

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

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

•		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.

•		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.

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

•		The supervision and regulation by various regulatory authorities to which the Corporation is subject can be a competitive disadvantage.

The Corporation’s forward-looking statements are relevant only as of the date on which such statements are made. By making any forward-looking statements, the Corporation assumes no duty to update them to reflect new, changing or unanticipated events or circumstances.

RESULTS OF OPERATIONS

Overview

~~As a financial institution with a focus on traditional banking activities, the~~The Corporation ~~generates~~currently derives the majority of its ~~revenue through~~earnings from traditional banking activities, with net interest income, or the difference between interest income earned on loans and investments and interest paid on deposits and ~~borrowings.~~borrowings, accounting for approximately 75% of revenues. Growth in net interest income is

dependent upon balance sheet growth ~~and maintaining~~ or increasing the net interest margin, which is net interest income 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, other operating expenses and income taxes.

The Corporation adopted Statement of Financial Accounting Standards No. 123R, “Share-Based Payment” (Statement 123R) in the quarter ended September 30, 2005. Statement 123R requires that the fair value of equity awards to employees be recognized as compensation expense over the period during which an employee is required to provide service in exchange for such award. The Corporation adopted Statement 123R using “modified retrospective application”, electing to restate all prior periods. As a result of adopting Statement 123R, net income and diluted net income per share for the third quarter of 2004 were reduced by $3.1 million and $0.03, respectively.

~~The~~ Corporation’s net income for the ~~third~~first quarter of ~~2005~~2006 increased ~~$6.1~~$2.4 million, or ~~17.0%~~5.9%, from ~~$36.0~~$41.4 million in ~~2004~~2005 to ~~$42.1~~$43.9 million in ~~2005.~~2006. Diluted net income per share increased ~~$0.04,~~$0.01, or ~~17.4%~~3.8%, from ~~$0.23~~$0.26 in ~~2004~~2005 to $0.27 in ~~2005.~~2006. The Corporation realized annualized returns on average assets of ~~1.37%~~1.32% and average equity of

~~13.08%~~ 12.83% during the ~~third~~first quarter of ~~2005.~~2006. The annualized return on average tangible equity, which is net income, as adjusted for intangible amortization (net of tax), divided by average shareholders’ equity, excluding goodwill and intangible assets, was ~~20.62%~~23.01% for the quarter.

The increase in net income compared to the ~~third~~first quarter of ~~2004~~2005 resulted from a ~~$14.3~~$16.8 million, or 17.1%, increase in net interest income ~~after provision for loan losses~~due primarily to external growth through acquisitions and partially due to internal growth, offset by a ~~$3.6~~decline in net interest margin. Also contributing to the increase in earnings was a $1.4 million increase in other income (excluding security gains), offset by a ~~$2.4 million~~$650,000 decrease in security gains, a ~~$7.5~~$14.2 million increase in other expenses and a ~~$1.8 million~~$718,000 increase in income taxes.

The following summarizes some of the more significant factors that influenced the Corporation’s ~~third~~results for the first quarter ~~2005 results.~~of 2006.

Interest Rates – —Changes in the interest rate environment generally impact both the Corporation’s net interest income and certain components of its non-interest income. The interest rate environment reflects both the level of short-term rates and the slope of the U. S. Treasury yield curve, ~~(Yield Curve),~~ which plots the yields on treasury issues over various maturity periods. During the ~~past year,~~first three months of 2006, the ~~Yield Curve has flattened, with~~flat to negatively sloping yield curve, resulting from short-term rates increasing at a faster pace than longer-term ~~rates.~~rates, negatively impacted the Corporation’s earnings.

Floating rate loans, short-term borrowings and savings and time deposit rates are generally influenced by short-term rates. The ~~FRB~~Federal Reserve Board (FRB) raised the Federal funds rate eight times since ~~September 2004,~~March 31, 2005, for a total increase of 200 basis points (from ~~1.75%~~2.75% to ~~3.75%~~4.75%). The Corporation’s prime lending rate had a corresponding increase, from ~~4.75%~~5.75% to ~~6.75%. The~~7.75%, resulting in an increase in the rates on floating rate loans as well as the rates on new fixed-rate loans. However, the increase in short-term rates ~~initially benefited the Corporation as floating rate loans quickly adjusted~~also resulted in increased funding costs, with short-term borrowings immediately repricing to higher rates ~~while increases in~~and deposit rates – ~~which are~~although more discretionary – ~~were less pronounced. As~~increasing due to competitive pressures. The increase in rates on deposits was more pronounced than loans and other earning assets and, as a result, the Corporation realized ~~an increase~~a decrease in net interest margin in the ~~third and fourth quarters of 2004 and the~~ first quarter of 2006 compared to 2005.

~~During the second~~ Customers have begun to shift funds from floating rate core demand and ~~third quarters~~savings accounts to fixed rate certificates of ~~2005, competitive pressures resulted~~deposit in ~~increases in deposit~~order to lock into higher rates. In addition, the Corporation issued $100 million of subordinated debt at 5.35% at the end of March 2005. As a result, the net interest margin decreased three basis points to 3.92% in the second quarter of 2005 and remained at 3.92% in the third quarter of 2005.

With respect to longer-term rates, the 10-year treasury yield, which is a common benchmark for evaluating residential mortgage rates, increased to ~~4.33%~~4.86% at ~~September 30, 2005~~March 31, 2006, as compared to ~~4.12%~~4.50% at ~~September 30, 2004. Mortgage~~March 31, 2005. Higher mortgage rates have ~~been generally low over the past several years, generating strong~~resulted in slower refinance activity and ~~significant~~lower margins and, therefore, lower net gains for the Corporation ason fixed-rate residential mortgages which are generally sold in the secondary market. With only a minimal increase in long-term rates from the prior year, origination volume and the resulting gains on sales of these loans remained strong, continuing to contribute to the Corporation’s non-interest income.

The Corporation manages its risk associated with changes in interest rates through the techniques described in the “Market Risk” section of Management’s Discussion. ~~As of September 30, 2005, the Corporation projects improvements in net interest income in a rising rate environment.~~ Increases in long-term rates ~~however,~~ may also have a continued detrimental impact on mortgage loan origination volumes and related gains on sales of mortgage loans.

~~Earning Assets~~ – The Corporation’s interest-earning assets increased from 2004 to 2005 as a result of acquisitions, as well as internal loan growth. This growth also contributed to the increase in net interest income.

From 2004 to 2005, the Corporation experienced a shift in its composition of interest-earning assets from investments (22.9% of total average interest-earning assets in 2005, compared to 25.1% in 2004) to loans (74.2% in 2005, compared to 73.6% in 2004). This change resulted from strong loan demand being funded with the proceeds from maturing investment securities, primarily mortgage-backed securities. The movement to higher-yielding loans has had a positive effect on the Corporation’s net interest income and net interest margin.

1715

~~Asset Quality~~ – Asset quality refers to the underlying credit characteristics of borrowers and the likelihood that defaults on contractual 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 continued to maintain excellent asset quality, attributable to its credit culture and underwriting policies. Annualized net charge-offs to average loans decreased to 0.02% in the third quarter of 2005, compared to 0.06% in 2004, contributing to a lower provision for loan losses. While overall asset quality has remained strong, deterioration in quality of one or several significant accounts could have a detrimental impact and result in losses that may not be foreseeable based on current information. In addition, rising interest rates could increase the total payments of borrowers and could have a negative impact on the ability of some to pay according to the terms of their loans.

~~Equity Markets~~ – As noted 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, although realized gains have decreased in recent quarters. Declines in bank stock portfolio values could have a detrimental impact on the Corporation’s ability to recognize gains in the future.

Acquisitions –— In February 2006, the Corporation acquired Columbia Bancorp (Columbia), of Columbia, Maryland, a $1.3 billion bank holding company whose primary subsidiary was The Columbia Bank. 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. In December 2004, the Corporation acquired First Washington FinancialCorp (First Washington), a $490 million bank holding company located in Windsor, New Jersey whose primary subsidiary was First Washington State Bank. In April 2004, the Corporation acquired Resource Bankshares Corporation (Resource), an $890 million financial holding company located in Virginia Beach, Virginia whose primary subsidiary was Resource Bank. Results for ~~2005~~2006 in comparison to ~~2004~~2005 were impacted by these acquisitions, as documented in the appropriate sections of Management’s Discussion.

On July 26, 2005, the Corporation entered into a merger agreement to acquire Columbia Bancorp (Columbia), of Columbia, Maryland. Columbia is a $1.3 billion bank holding company whose primary subsidiary is The Columbia Bank, which operates 19 full-service community-banking offices and five retirement community offices in Howard, Montgomery, Prince George’s and Baltimore Counties and Baltimore City. For additional information on the terms of this pending acquisition, see Note G in the Notes to Consolidated Financial Statements.

Acquisitions have long been a supplement to the Corporation’s internal growth. These recent acquisitions provide the opportunity for additional growth, as they will allow 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 good asset quality, among other factors. Under ~~its~~the Corporation’s “super-community” banking philosophy, acquired organizations generally retain their status as separate legal entities, unless consolidation with an existing affiliate 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 ~~must have~~implemented strategies ~~in place~~ to maintain appropriate levels of capital and to provide

necessary cash resources. In January 2006, the Corporation issued $154.6 million of junior subordinated deferrable interest debentures in order to fund the Columbia acquisition. In March 2005, the Corporation issued $100 million of subordinated debt, ~~in part~~primarily to ~~support~~fund treasury stock repurchases related to acquisitions. ~~This financing instrument also qualifies as a component of total regulatory capital.~~ See additional information in the ~~“liquidity”~~“Liquidity” section of Management’s Discussion.

Earning Assets — The Corporation’s interest-earning assets increased from 2005 to 2006 as a result of acquisitions, as well as internal loan growth.

From 2005 to 2006, the Corporation experienced a slight shift in its composition of interest-earning assets from investments (22.6% of total average interest-earning assets in 2006, compared to 23.8% in 2005) to loans (75.3% in 2006, compared to 74.1% in 2005). This change resulted from moderate loan demand being funded with the proceeds from maturing investment securities, primarily mortgage-backed securities. The movement to higher-yielding loans has mitigated some of the factors that have had a negative effect on the Corporation’s net interest income and net interest margin. Slower growth in loans could result in a future shift in the composition of interest-earning assets from loans to investments as cash flows are reinvested into investments.

Asset Quality — Asset quality refers to the underlying credit characteristics of borrowers and the likelihood that defaults on contractual 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 continued to maintain excellent asset quality, attributable to its credit culture and underwriting policies as well as general economic conditions. Annualized net charge-offs to average loans increased to 0.03% in the first quarter of 2006, compared to 0.02% in 2005, although the total level of net charge-offs in both periods remained 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 and result in losses that may not be foreseeable based on current information. In addition, rising interest rates could

increase the total payments of borrowers and could have a negative impact on the ability of some to pay according to the terms of their loans.

Equity Markets — As noted 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, although realized gains have decreased in recent periods. Declines in bank stock portfolio values could have a detrimental impact on the Corporation’s ability to recognize gains in the future.

Quarter Ended ~~September 30, 2005~~March 31, 2006 versus Quarter Ended ~~September 30, 2004~~March 31, 2005

Results for the ~~third~~first quarter of ~~2005~~2006 compared to the results of the ~~third~~first quarter of ~~2004~~2005 were impacted by the ~~December 2004~~February 2006 acquisition of ~~First Washington~~Columbia and the July 2005 acquisition of SVB, whose results are included in ~~2005~~2006 amounts, but not in ~~2004. Results were also impacted by the adoption of Statement 123R (See Note E in the Notes to Consolidated Financial Statements).~~2005.

Net Interest Income

Net interest income increased ~~$14.0~~$16.8 million, or ~~15.1%~~17.1%, to ~~$106.5~~$115.0 million in ~~2005~~2006 from ~~$92.5~~$98.2 million in ~~2004.~~2005. The increase was due to ~~both~~ average balance growth, with total ~~earning~~interest-earning assets increasing ~~14.2%~~19.5%, ~~and~~offset by a ~~higher~~lower net interest margin. The average ~~taxable equivalent~~fully taxable-equivalent (FTE) yield on ~~earning~~interest-earning assets increased 6781 basis points (a ~~12.6%~~14.4% increase) over ~~2004~~2005 while the cost of interest-bearing liabilities increased 78102 basis points (a ~~45.3%~~49.3% increase). ~~Despite~~Due to the sharper increase in costs of interest-bearing liabilities, the net interest margin ~~increased four~~decreased eight basis ~~points as non-interest bearing deposits also increased relative to total funding sources.~~points. The Corporation continues to manage its asset/liability position and interest rate risk through the methods discussed in the “Market Risk” section of Management’s Discussion.

1917

The following table provides a comparative average balance sheet and net interest income analysis for the ~~third~~first quarter of ~~2005~~2006 as compared to the same period in ~~2004.~~2005. Interest income and yields are presented on ~~a fully taxable-equivalent (FTE)~~an FTE basis, using a 35% Federal tax rate. The discussion following this table is based on these ~~tax-equivalent~~FTE amounts. All dollar amounts are in thousands.


																			Quarter Ended March 31
	Quarter Ended September 30, 2005									Quarter Ended September 30, 2004									2006									2005
	Average						Yield/			Average						Yield/			Average						Yield/			Average						Yield/
	Balance			Interest (1)			Rate (1)			Balance			Interest (1)			Rate (1)			Balance			Interest			Rate			Balance			Interest			Rate
ASSETS
Interest-earning assets:
Loans and leases	$	8,234,531		$	136,915			6.60	%	$	7,159,211		$	103,903			5.79	%
Taxable investment securities		2,015,378			18,947			3.74			2,037,040			18,247			3.56
Tax-exempt investment securities		387,233			4,761			4.92			262,962			3,618			5.50
Equity securities		137,873			1,317			3.80			138,264			1,329			3.83
Loans and leases (1)																			$	9,227,642		$	161,883			7.11	%	$	7,605,523		$	116,691			6.21	%
Taxable investment securities (2)																				2,186,073			22,539			4.13			1,984,864			18,261			3.67
Tax-exempt investment securities (2)																				435,959			5,185			4.76			335,355			4,254			5.07
Equity securities (2)																				145,011			1,559			4.33			124,822			1,270			4.22

Total investment securities		2,540,484			25,025			3.92			2,438,266			23,194			3.78			2,767,043			29,283			4.24			2,445,041			23,785			3.89
Mortgage loans held for sale		266,588			4,194			6.29			119,983			2,199			7.29
Loans held for sale																				199,441			3,458			6.94			182,130			2,502			5.49
Other interest-earning assets		62,406			542			3.43			6,106			26			1.73			63,388			663			4.23			28,699			176			2.49

Total interest-earning assets		11,104,009			166,676			5.97	%		9,723,566			129,322			5.30	%		12,257,514			195,287			6.45	%		10,261,393			143,154			5.64	%
Noninterest-earning assets:
Non-interest-earning assets:
Cash and due from banks		370,531									326,204									358,481									322,793
Premises and equipment		164,447									130,776									177,761									149,017
Other assets		638,195									454,529
Other assets (2)																				786,918									571,335
Less: Allowance for loan losses		(94,527	)								(87,148	)								(101,999	)								(90,489	)

Total Assets	$	12,182,655								$	10,547,927								$	13,478,675								$	11,214,049


LIABILITIES AND EQUITY
Interest-bearing liabilities:
Demand deposits	$	1,586,338		$	4,169			1.04	%	$	1,399,005		$	1,863			0.53	%	$	1,666,506		$	5,738			1.40	%	$	1,494,984		$	2,970			0.81	%
Savings deposits		2,162,030			7,640			1.40			1,868,650			2,972			0.63			2,272,788			10,398			1.85			1,911,820			4,466			0.95
Time deposits		3,303,240			26,671			3.20			2,764,597			17,809			2.56			3,744,503			34,054			3.69			2,996,321			20,372			2.76

Total interest-bearing deposits		7,051,608			38,480			2.16			6,032,252			22,644			1.49			7,683,797			50,190			2.65			6,403,125			27,808			1.76
Short-term borrowings		1,115,122			8,655			3.05			1,208,379			3,840			1.26			1,487,295			15,306			4.13			1,239,454			6,824			2.21
Long-term debt		952,372			10,482			4.33			654,969			7,962			4.84			995,478			12,113			4.93			683,472			7,930			4.71

Total interest-bearing liabilities		9,119,102			57,617			2.50	%		7,895,600			34,446			1.72	%		10,166,570			77,609			3.09	%		8,326,051			42,562			2.07	%
Noninterest-bearing liabilities:
Non-interest-bearing liabilities:
Demand deposits		1,651,787									1,429,259									1,765,880									1,509,118
Other		133,664									119,551									159,401									127,187

Total Liabilities		10,904,553									9,444,410									12,091,851									9,962,356
Shareholders’ equity		1,278,102									1,103,517									1,386,824									1,251,693

Total Liabilities and Shareholders’ Equity	$	12,182,655								$	10,547,927								$	13,478,675								$	11,214,049

Net interest income/ net interest margin (FTE)					109,059			3.92	%					94,876			3.88	%
Net interest income/net interest margin (FTE)																							117,678			3.88	%					100,592			3.96	%

Tax equivalent adjustment					(2,563	)								(2,375	)								(2,635	)								(2,344	)

Net interest income				$	106,496								$	92,501								$	115,043								$	98,248

The following table summarizes the changes in FTE interest income and expense due to changes in average balances (volume) and changes in rates:


	2005 vs. 2004									2006 vs. 2005
	Increase (decrease) due									Increase (decrease) due
	To change in									To change in
	Volume			Rate			Net			Volume		Rate			Net
	(in thousands)									(in thousands)
Interest income (FTE) on:
Interest income on:
Loans and leases	$	17,171		$	15,841		$	33,012		$	26,884	$	18,308		$	45,192
Taxable investment securities		(197	)		897			700			1,913		2,365			4,278
Tax-exempt investment securities		1,566			(423	)		1,143			1,200		(269	)		931
Equity securities		(3	)		(9	)		(12	)		248		41			289
Mortgage loans held for sale		2,337			(342	)		1,995
Loans held for sale											253		703			956
Other interest-earning assets		467			49			516			309		178			487


Total interest-earning assets	$	21,341		$	16,013		$	37,354
Total interest income										$	30,807	$	21,326		$	52,133


Interest expense on:
Demand deposits	$	280		$	2,026		$	2,306		$	375	$	2,393		$	2,768
Savings deposits		534			4,134			4,668			985		4,947			5,932
Time deposits		3,882			4,980			8,862			5,817		7,865			13,682
Short-term borrowings		(314	)		5,129			4,815			1,588		6,894			8,482
Long-term debt		3,411			(891	)		2,520			3,779		404			4,183


Total interest-bearing liabilities	$	7,793		$	15,378		$	23,171
Total interest expense										$	12,544	$	22,503		$	35,047

Three months ended
September 30 Increase (decrease)
2005 2004 $ %
(dollars in thousands)
Commercial – industrial and financial $ 2,046,919 $ 1,824,842 $ 222,077 12.2 %
Commercial – agricultural 323,216 320,544 2,672 0.8
Real estate – commercial mortgage 2,725,748 2,276,774 448,974 19.7
Real estate – commercial construction 455,935 318,959 136,976 42.9
Real estate – residential mortgage 582,847 531,973 50,874 9.6
Real estate – residential construction 347,724 258,946 88,778 34.3
Real estate – home equity 1,172,208 1,027,252 144,956 14.1
Consumer 512,016 529,479 (17,463 ) (3.3 )
Leasing and other 67,918 70,442 (2,524 ) (3.6 )

Total
$ 8,234,531 $ 7,159,211 $ 1,075,320 15.0 %


	Three months ended
	March 31				Increase
	2006		2005		$		%
			(dollars in thousands)
Commercial — industrial and financial	$	2,278,597	$	2,004,879	$	273,718		13.7	%
Commercial — agricultural		327,929		326,699		1,230		0.4
Real estate — commercial mortgage		2,944,676		2,439,800		504,876		20.7
Real estate — residential mortgage and home equity		1,925,542		1,654,281		271,261		16.4
Real estate — construction		1,163,368		638,281		525,087		82.3
Consumer		516,350		478,615		37,735		7.9
Leasing and other		71,180		62,968		8,212		13.0

Total	$	9,227,642	$	7,605,523	$	1,622,119		21.3	%

~~First Washington~~The acquisitions of Columbia and SVB contributed ~~$555.0~~approximately $995.5 million to the increase in average ~~loans, presented~~balances. The following table presents the average balance impact of acquisitions, by ~~type in the following table:~~type:

Three months ended
September 30
2005 2004 Increase
(in thousands)
Commercial – industrial and financial $ 114,624 $ — $ 114,624
Commercial – agricultural — — —
Real estate – commercial mortgage 272,401 — 272,401
Real estate – commercial construction 60,542 — 60,542
Real estate – residential mortgage 39,986 — 39,986
Real estate – residential construction 190 — 190
Real estate – home equity 61,463 — 61,463
Consumer 5,340 — 5,340
Leasing and other 441 — 441

Total
$ 554,987 $ — $ 554,987


	Three months ended
	March 31
	2006		2005
	(in thousands)
Commercial — industrial and financial	$	245,522	$	—
Commercial — agricultural		—		—
Real estate — commercial mortgage		234,549		—
Real estate — residential mortgage and home equity		196,864		—
Real estate — construction		314,152		—
Consumer		3,798		—
Leasing and other		588		—

Total	$	995,473	$	—

The following table presents the growth in average loans, by type, excluding the average balances contributed by ~~First Washington~~the acquisitions of Columbia and SVB:

Three months ended
September 30 Increase (decrease)
2005 2004 $ %
(dollars in thousands)
Commercial – industrial and financial $ 1,932,295 $ 1,824,842 $ 107,453 5.9 %
Commercial – agricultural 323,216 320,544 2,672 0.8
Real estate – commercial mortgage 2,453,347 2,276,774 176,573 7.8
Real estate – commercial construction 395,393 318,959 76,434 24.0
Real estate – residential mortgage 542,861 531,973 10,888 2.0
Real estate – residential construction 347,534 258,946 88,588 34.2
Real estate – home equity 1,110,745 1,027,252 83,493 8.1
Consumer 506,676 529,479 (22,803 ) (4.3 )
Leasing and other 67,477 70,442 (2,965 ) (4.2 )

Total
$ 7,679,544 $ 7,159,211 $ 520,333 7.3 %


	Three months ended
	March 31				Increase (decrease)
	2006		2005		$		%
			(dollars in thousands)
Commercial — industrial and financial	$	2,033,075	$	2,004,879	$	28,196		1.4	%
Commercial — agricultural		327,929		326,699		1,230		0.4
Real estate — commercial mortgage		2,710,127		2,439,800		270,327		11.1
Real estate — residential mortgage and home equity		1,728,678		1,654,281		74,397		4.5
Real estate — construction		849,216		638,281		210,935		33.0
Consumer		512,552		478,615		33,937		7.1
Leasing and other		70,592		62,968		7,624		12.1

Total	$	8,232,169	$	7,605,523	$	626,646		8.2	%

Excluding the impact of ~~First Washington and SVB,~~acquisitions, loan growth ~~continued to be~~was particularly strong in the commercial mortgage and ~~commercial mortgage~~construction categories, which ~~generated the most growth in terms of dollars. Commercial~~together increased $481.3 million, or 15.6%. Residential mortgage and residential construction increased the most on a percentage basis due to a focus on these lines of business by certain affiliate banks. Home equity loans showed strong growth due to promotional efforts and customers using home equity loans ~~as a cost-effective refinance alternative. Consumer loans decreased, reflecting repayment of these loans with tax-advantaged residential mortgage~~increased $74.4 million, or 4.5%, primarily due to increases in home equity loans.

The average yield on loans during the ~~third~~first quarter of ~~2005~~2006 was ~~6.60%~~7.11%, ~~an 81~~a 90 basis point, or ~~14.0%~~14.5%, increase over ~~2004.~~2005. This ~~increase~~ reflects the impact of a significant portfolio of floating rate loans, which immediately reprice to higher rates when interest rates ~~rise.~~rise, as they have over the past twelve months.

Average investment securities increased ~~$102.2~~$322.0 million, or ~~4.2%~~13.2%. Excluding the impact of ~~First Washington and SVB, average investment securities showed a decrease of $254.1~~acquisitions, this increase was $51.6 million, or ~~10.4%. Maturities~~2.1%, funded by both reinvestments of ~~investment securities exceeded purchases of new investments since the beginning of 2004, with the resulting~~

The following table summarizes the growth in average deposits by category:


	Three months ended
	March 31				Increase
	2006		2005		$		%
	(dollars in thousands)
Noninterest-bearing demand	$	1,765,880	$	1,509,118	$	256,762		17.0	%
Interest-bearing demand		1,666,506		1,494,984		171,522		11.5
Savings/money market		2,272,788		1,911,820		360,968		18.9
Time deposits		3,744,503		2,996,321		748,182		25.0

Total	$	9,449,677	$	7,912,243	$	1,537,434		19.4	%

The acquisitions of Columbia and SVB accounted for approximately $1.1 billion of the increase in average balances. The following table presents the average balance impact of acquisitions, by type:


	Three months ended
	March 31
	2006		2005
	(in thousands)
Noninterest-bearing demand	$	225,022	$	—
Interest-bearing demand		156,633		—
Savings/money market		245,778		—
Time deposits		461,801		—

Total	$	1,089,234	$	—

The following table presents the growth in average deposits, by type, excluding the contribution of the acquisitions of Columbia and SVB:


	Three months ended
	March 31				Increase
	2006		2005		$		%
	(dollars in thousands)
Noninterest-bearing demand	$	1,540,858	$	1,509,118	$	31,740		2.1	%
Interest-bearing demand		1,509,873		1,494,984		14,889		1.0
Savings/money market		2,027,010		1,911,820		115,190		6.0
Time deposits		3,282,702		2,996,321		286,381		9.6

Total	$	8,360,443	$	7,912,243	$	448,200		5.7	%

Interest expense increased ~~$23.2~~$35.0 million, or ~~67.3%~~82.3%, to ~~$57.6~~$77.6 million in the ~~third~~first quarter of ~~2005,~~2006 from ~~$34.4~~$42.6 million in the ~~third~~first quarter of ~~2004.~~2005. Interest expense increased ~~$15.4~~$12.5 million ~~as a result of~~due to the 78$1.8 billion, or 22.1%, increase in average balances and $22.5 million due to the 102 basis point, or 49.3%, increase in the cost of total interest-bearing ~~liabilities, with the remaining $7.8 million increase due to an increase in average balances.~~liabilities. The cost of interest-bearing deposits increased 6789 basis points, or ~~45.0%~~50.6%, from ~~1.49%~~1.76% in ~~2004~~2005 to ~~2.16%~~2.65% in ~~2005.~~2006. This increase was due to rising rates in general as a result of the FRB’s rate increases over the past ~~year~~twelve months. Additional increases have resulted from customers becoming increasingly price-sensitive and ~~competitive pricing pressures.~~

~~The following table presents average~~shifting from core demand and savings accounts to higher cost certificates of deposits, ~~by category:~~

Three months ended
September 30 Increase
2005 2004 $ %
(dollars in thousands)
Noninterest-bearing demand $ 1,651,785 $ 1,429,259 $ 222,526 15.6 %
Interest-bearing demand 1,586,338 1,399,005 187,333 13.4
Savings/money market 2,162,030 1,868,650 293,380 15.7
Time deposits 3,303,242 2,764,597 538,645 19.5

Total
$ 8,703,395 $ 7,461,511 $ 1,241,884 16.6 %

~~The First Washington and SVB acquisitions accounted for approximately $879.5 million~~a trend that may continue throughout the remainder of the year.

Average borrowings increased $559.8 million from the first quarter of 2005. Excluding the impact of acquisitions, average short-term borrowings increased $111.2 million, or 9.0%, to $1.4 billion, while average long-term debt increased $282.0 million, or 41.3%, to $965.4 million. The increase in ~~average balances. The following table presents the average balance impact of the acquisition, by type:~~

Three months ended
September 30
2005 2004 Increase
(in thousands)
Noninterest-bearing demand $ 145,158 $ — $ 145,158
Interest-bearing demand 154,275 — 154,275
Savings/money market 208,712 — 208,712
Time deposits 371,333 — 371,333

Total
$ 879,478 $ — $ 879,478

~~The following table presents the growth in average deposits, by type, excluding the contribution of First Washington and SVB:~~

Three months ended
September 30 Increase
2005 2004 $ %
(dollars in thousands)
Noninterest-bearing demand $ 1,506,627 $ 1,429,259 $ 77,368 5.4 %
Interest-bearing demand 1,432,063 1,399,005 33,058 2.4
Savings/money market 1,953,318 1,868,650 84,670 4.5
Time deposits 2,931,909 2,764,597 167,310 6.1

Total
$ 7,823,917 $ 7,461,511 $ 362,406 4.9 %

Deposit growth occurred in all categories. While in the past, customers were hesitant to invest in time deposits, there is currently more of an interest in these products as available rates have increased.short-term

2321

~~Average short-term~~ borrowings decreased $99.3 million, or 7.7%, to $1.1 billion in the third quarter of 2005. The First Washington and SVB acquisitions added $61.7 million to short-term borrowings. Excluding those, average short-term borrowings decreased $154.9 million, or 12.8%. Average long-term debt increased $297.4 million, or 45.4%, to $952.4 million. The First Washington and SVB acquisitions added $27.5 million to long-term debt, with the remaining increasewas mainly due to ~~the Corporation’s issuance of $100.0 million of ten-year subordinated notes in March 2005 and~~ an increase in Federal ~~Home Loan Bank Advances, as~~funds purchased and additional borrowings under the ~~Corporation locked~~Corporation’s revolving line of credit to fund investment purchases and loan growth. The increase in ~~longer-term rates~~long-term debt was primarily due to the issuance of $154.6 million of junior subordinated deferrable interest debentures in ~~anticipation~~connection with the Columbia acquisition and $100 million of ~~increasing rates.~~subordinated debt issued in March 2005.

Provision and Allowance for Loan Losses

The following table ~~summarizes~~presents ending balances of loans outstanding (net of unearned income):


	September 30		December 31		September 30		March 31		December 31		March 31
	2005		2004		2004		2006		2005		2005
	(in thousands)						(in thousands)
Commercial — industrial and financial	$	2,049,330	$	1,946,962	$	1,848,058	$	2,412,836	$	2,044,010	$	1,975,980
Commercial — agricultural		327,249		326,176		316,323		325,140		331,659		319,647
Real-estate — commercial mortgage		2,734,432		2,461,016		2,284,755		3,020,376		2,831,405		2,540,554
Real-estate — commercial construction		486,124		348,846		327,985
Real-estate — residential mortgage		593,233		543,072		528,421
Real-estate — residential construction		357,546		277,940		252,338
Real estate — home equity		1,183,596		1,108,249		1,053,333
Real-estate — residential mortgage and home equity								2,020,213		1,774,260		1,660,890
Real-estate — construction								1,343,364		851,451		652,819
Consumer		529,409		506,290		529,413		515,236		519,094		475,126
Leasing and other		64,764		65,996		72,536		81,545		72,849		57,671

Total	$	8,325,683	$	7,584,547	$	7,213,162
							$	9,718,710	$	8,424,728	$	7,682,687

The following table ~~summarizes~~presents the activity in the Corporation’s allowance for loan losses:


	Three months ended						Three months ended
	September 30						March 31
	2005			2004			2006			2005
	(dollars in thousands)						(dollars in thousands)
Loans outstanding at end of period (net of unearned)	$	8,325,683		$	7,213,162		$	9,718,710		$	7,682,687

Daily average balance of loans and leases	$	8,234,531		$	7,159,211		$	9,227,642		$	7,605,523


Balance at beginning of period	$	90,402		$	86,539		$	92,847		$	89,627

Loans charged-off:
Loans charged off:
Commercial, financial and agricultural		863			832			879			822
Real estate – mortgage		49			166			81			187
Consumer		639			933			461			766
Leasing and other		74			125			79			44

Total loans charged-off		1,625			2,056
Total loans charged off								1,500			1,819


Recoveries of loans previously charged-off:
Recoveries of loans previously charged off:
Commercial, financial and agricultural		711			548			381			697
Real estate – mortgage		242			181			94			450
Consumer		245			278			331			366
Leasing and other		38			12			51			6

Total recoveries		1,236			1,019			857			1,519


Net loans charged-off		389			1,037
Net loans charged off								643			300

Provision for loan losses		815			1,125			1,000			800

Allowance purchased		3,108			200			12,991			—


Balance at end of period	$	93,936		$	86,827		$	106,195		$	90,127


Net charge-offs to average loans (annualized)		0.02	%		0.06	%		0.03	%		0.02	%

Allowance for loan losses to loans outstanding		1.13	%		1.20	%		1.09	%		1.17	%

The provision for loan losses for the ~~third~~first quarter of ~~2005~~2006 totaled ~~$815,000, a decrease~~$1.0 million, an increase of ~~$310,000,~~$200,000, or ~~27.6%~~25.0%, from the same period in ~~2004.~~2005. Net charge-offs totaled ~~$389,000,~~$643,000, or ~~0.02%~~0.03% of average loans on an annualized basis, during the ~~third~~first quarter of ~~2005, compared to $1.0 million,~~2006, a $343,000 increase over the $300,000, or ~~0.06%~~0.02%, in net charge-offs for the ~~third~~first quarter of ~~2004. Nonperforming~~2005. Non-performing assets increased to ~~$48.1~~$49.9 million, or ~~0.39%~~0.35% of total assets, at ~~September 30, 2005,~~March 31, 2006, from ~~$35.7~~$29.0 million, or ~~0.34%~~0.25% of total assets, at September 30, 2004. Despite this increase, nonperforming assets in absolute dollars and as a percentage of total assets continue to compare favorably to the Corporation’s historical levels and the industry as a whole.March 31, 2005.

Management believes that the allowance balance of ~~$93.9~~$106.2 million at ~~September 30, 2005~~March 31, 2006 is sufficient to cover losses inherent in the loan portfolio on that date and is appropriate based on applicable accounting standards.

Other Income

The following table presents the components of other income:


	Three months ended										Three months ended
	September 30				Increase (decrease)						March 31				Increase (decrease)
	2005		2004		$			%			2006		2005		$			%
	(in thousands)												(dollars in thousands)
Investment management and trust services	$	8,730	$	8,650	$	80			0.9	%	$	10,032	$	9,019	$	1,013			11.2	%
Service charges on deposit accounts		10,488		10,182		306			3.0			10,247		9,332		915			9.8
Other service charges and fees		5,808		5,367		441			8.2			6,654		5,556		1,098			19.8
Gain on sale of mortgage loans		7,624		5,694		1,930			33.9
Gains on sales of mortgage loans												4,772		6,049		(1,277	)		(21.1	)
Investment securities gains		905		3,336		(2,431	)		(72.9	)		2,665		3,315		(650	)		(19.6	)
Other		2,597		1,764		833			47.2			2,237		2,582		(345	)		(13.4	)

Total	$	36,152	$	34,993	$	1,159			3.3	%	$	36,607	$	35,853	$	754			2.1	%

The discussion that follows addresses changes in other income, excluding the acquisitions of ~~$1.2 million, or 3.3%, over the comparable period in 2004.~~ Columbia and SVB.

Excluding investment securities gains, which decreased from $3.3 million in ~~2004~~2005 to ~~$905,000~~$2.7 million in ~~2005,~~2006, total other income increased ~~$3.6 million,~~$172,000, or ~~11.3%.~~

~~Service charges~~0.5%, as growth in some fee components were offset by decreases in gains on ~~deposit accounts increased $306,000, or 3.0%, with First Washington and SVB contributing $355,000 to the increase. Gains~~sales of mortgage loans. The reduction in gains on sales of mortgage loans ~~increased $1.9 million, or 33.9%,~~resulted from the increase in longer-term mortgage rates and lower margins.

The increase in investment management and trust services was due to increases in both brokerage revenue and trust commission income. Brokerage revenue increased $441,000, or 12.8%, while trust commission income increased $413,000, or 7.4%. The increases were due to positive trends within equity markets resulting in a ~~significant~~greater demand for the services provided by these lines of businesses.

The increase in ~~mortgage loan activity, particularly at the Corporation’s Virginia mortgage loan unit.~~service charges on deposit accounts was due to increases of $391,000 and $263,000 in overdraft fees and cash management fees, respectively, offset by a $204,000 decrease in other service charges on deposit accounts. The ~~$833,000~~ increase in other ~~income resulted from~~service charges and fees was due to growth in ~~various categories.~~merchant fees ($481,000, or 31.1%), debit card fees ($236,000, or 16.1%) and letter of credit fees ($210,000, or 21.6%).

Investment securities gains decreased ~~$2.4 million,~~$650,000, or ~~72.9%~~19.6%. Investment securities gains ~~for both~~during the ~~third~~first quarter of ~~2005 and 2004~~2006 consisted ~~almost entirely~~ of net realized gains of $2.7 million on the sale of equity securities. Investment securities gains during the first quarter of 2005 consisted of net realized gains of $2.5 million on the sale of equity securities and $790,000 on the sale of available for sale debt securities.

The discussion that follows addresses changes in other expenses, excluding ~~FWSB~~the acquisitions of Columbia and ~~Somerset Valley.~~SVB.

Salaries and employee benefits ~~decreased $2.0 million,~~increased $491,000, or ~~4.4%~~1.1%, in comparison to the ~~third~~first quarter of ~~2004.~~2005. The salary expense component decreased $2.2 million, or 5.8%, mainly due to the adoption of Statement SFAS 123R, which resulted in a $3.3 million, or 88.1%, decrease in stock-based compensation expense in the third quarter of 2005. See Note E in the Notes to Consolidated Financial Statements for additional information on SFAS 123R. Excluding stock-based compensation expense, salary expense increased ~~$1.1 million, or 3.2%~~1.9%, driven by ~~salary increases for existing employees and an~~a slight increase in total average full-time equivalent employees ~~from 3,315 in the third quarter of 2004 to 3,395 in the third quarter of 2005.~~and normal increases for existing employees. Employee benefits ~~increased $149,000,~~decreased $187,000, or ~~1.8%~~2.2%, in comparison to the ~~third~~first quarter of ~~2004.~~

Net occupancy expense increased $478,000, or 7.8%, to $6.6 million in 2005. The increase resulted from the expansion of the branch network and the addition of new office space for existing affiliates. Equipment expense increased $221,000, or 8.2%, also2005 due to ~~the branch network and office expansions.~~a reduction in healthcare costs related to favorable claims experience.

~~Data~~The decrease in data processing expense, which consists mainly of fees paid for outsourced ~~back-office services, decreased $175,000, or 6.0%,~~back office systems, was mainly due to ~~favorable renegotiations~~the renegotiation of key processing contracts with certain ~~contracts~~vendors, most notably an automated teller service provider.

The increase in other expenses was mainly as a result of non-recurring items in both 2006 and 2005. In the first quarter of 2006, $1.6 million was expensed to increase the reserve for ~~data processing services. Advertising expense increased $242,000, or 14.8%, due to promotional campaigns, particularly~~losses associated with the settlement of a previously reported lawsuit, which is more fully described in ~~retail lines of business. Intangible amortization decreased $270,000, or 21.9%,~~Note I, “Commitments and Contingencies” in the ~~third~~Notes to Consolidated Financial Statements. In the first quarter of ~~2005. Intangible amortization consists of~~2005, the ~~amortization of unidentifiable intangible assets related~~Corporation had several reductions to ~~branch~~expenses, including an adjustment to legal reserves and ~~loan acquisitions, core deposit intangible assets, and~~an adjustment to deferred origination costs. Additional increases in other identified intangible assets. Since many of these intangibles are amortized using accelerated methods, amortization expense of existing intangibles decreases over time. Other expense increased $2.2 million, or 16.4%, due to an increase in miscellaneous expenses ~~associated with loan growth and also in~~resulted from the ~~timing of certain other expenses.~~Corporation’s growth.

Income Taxes

Income tax expense for the ~~third~~first quarter of ~~2005~~2006 was ~~$18.2~~$18.8 million, a ~~$1.8 million,~~$718,000, or ~~11.3%~~4.0%, increase from ~~$16.3~~$18.0 million in ~~2004.~~2005. The Corporation’s effective tax rate ~~for the third quarter of 2005~~ was approximately ~~30.1%,~~29.9% in 2006, as compared to ~~31.2%~~30.3% in ~~the third quarter of 2004.~~2005. The effective rate is lower than the Federal statutory rate of 35% due mainly to investments in tax-free municipal securities and federal tax credits from investments in low and ~~moderate income housing partnerships.~~

~~Nine Months Ended September 30, 2005 versus Nine Months Ended September 30, 2004~~

Results for the first nine months of 2005 when compared to the results of 2004 were impacted by the acquisitions of Resource in April 2004, First Washington in December 2004 and SVB in July 2005. In the following discussion these are collectively referred to as the “Acquisitions”.

~~Net Interest Income~~

Net interest income increased $40.5 million, or 15.3%, to $304.7 million in 2005 from $264.2 million in 2004. This increase was due to both an improving net interest margin and average balance growth, with total earning assets increasing 11.6%, primarily due to the Acquisitions. The average yield on earning assets increased 61 basis points (an 11.8% increase) over 2004 while the cost of interest-bearing liabilities increased 59 basis points (a 34.7% increase). This resulted in an 13 basis point increase in net interest margin compared to the same period in 2004. The Corporation continues to manage its asset/liability position and interest rate risk through the methods discussed in the “Market Risk” section of Management’s Discussion.

The following table provides a comparative average balance sheet and net interest income analysis for the first nine months of 2005 as compared to the same period in 2004. Interest income and yields are presented

~~on an FTE basis, using a 35% Federal tax rate. The discussion following this table is based on these FTE amounts. All dollar amounts are in thousands.~~

Nine months ended September 30, 2005 Nine months ended September 30, 2004
Average Yield/ Average Yield/
Balance Interest (1) Rate (1) Balance Interest (1) Rate (1)
ASSETS

Interest-earning assets:
Loans and leases $ 7,902,614 $ 378,377 6.40 % $ 6,766,049 $ 290,904 5.75 %
Taxable investment securities 1,988,425 55,466 3.71 2,245,667 59,635 3.55
Tax-exempt investment securities 354,734 13,243 4.98 270,637 11,248 5.54
Equity securities 130,602 3,927 4.02 135,791 3,718 3.65

Total investment securities 2,473,761 72,636 3.91 2,652,095 74,601 3.73
Mortgage loans held for sale 188,337 8,705 6.16 83,749 4,400 7.02
Other interest-earning assets 46,432 1,066 3.05 5,525 55 1.33

Total interest-earning assets 10,611,144 460,784 5.80 % 9,507,418 369,960 5.19 %
Noninterest-earning assets:
Cash and due from banks 345,480 319,905
Premises and equipment 155,253 127,660
Other assets 588,265 407,099
Less: Allowance for loan losses (92,089 ) (84,237 )

Total Assets
$ 11,608,053 $ 10,277,845

LIABILITIES AND EQUITY

Interest-bearing liabilities:
Demand deposits $ 1,522,366 $ 10,448 0.92 % $ 1,343,681 $ 4,852 0.48 %
Savings deposits 2,021,169 17,964 1.19 1,828,788 8,115 0.59
Time deposits 3,107,603 68,980 2.97 2,679,615 52,372 2.61

Total interest-bearing deposits 6,651,138 97,392 1.96 5,852,084 65,339 1.49
Short-term borrowings 1,178,061 23,393 2.63 1,278,517 10,302 1.08
Long-term debt 826,150 28,080 4.52 627,384 23,092 4.92

Total interest-bearing liabilities 8,655,349 148,865 2.29 % 7,757,985 98,733 1.70 %
Noninterest-bearing liabilities:
Demand deposits 1,576,695 1,358,118
Other 133,591 109,078

Total Liabilities
10,365,635 9,225,181
Shareholders’ equity 1,242,418 1,052,664

Total Liabilities and Shareholders’ Equity
$ 11,608,053 $ 10,277,845

Net interest income/ net interest margin (FTE) 311,919 3.93 % 271,227 3.80 %

Tax equivalent adjustment (7,250 ) (7,053 )

Net interest income $ 304,669 $ 264,174


~~(1)~~		~~Presented on a fully taxable equivalent (FTE) basis using a 35% Federal tax rate.~~

~~The following table summarizes the changes in FTE interest income and expense due to changes in average balances (volume) and changes in rates:~~

2005 vs. 2004
Increase (decrease) due
To change in
Volume Rate Net
(in thousands)
Interest income (FTE) on:
Loans and leases $ 52,348 $ 35,125 $ 87,473
Taxable investment securities (6,875 ) 2,706 (4,169 )
Tax-exempt investment securities 3,217 (1,222 ) 1,995
Equity securities (150 ) 359 209
Mortgage loans held for sale 4,901 (596 ) 4,305
Other interest-earning assets 861 150 1,011

Total interest-earning assets
$ 54,302 $ 36,522 $ 90,824

Interest expense on:
Demand deposits $ 719 $ 4,877 $ 5,596
Savings deposits 933 8,916 9,849
Time deposits 8,947 7,661 16,608
Short-term borrowings (861 ) 13,952 13,091
Long-term debt 6,925 (1,937 ) 4,988

Total interest-bearing liabilities
$ 16,663 $ 33,469 $ 50,132

Interest income increased $90.8 million, or 24.5%, due to a combination of increases in average interest-earning assets, which contributed $54.3 million to the increase, and increases in average yields, which resulted in a $36.5 million increase.

Average interest-earning assets increased $1.1 billion, or 11.6%, mainly as a result of the Acquisitions. Internal growth in average loans was offset by a decrease in average investments. However, this change in the mix of earning assets contributed to the 61 basis point increase in average yields.

~~The Corporation’s average loans increased $1.1 billion, or 16.8%, as shown by type in the following table:~~

Nine months ended
September 30 Increase (decrease)
2005 2004 $ %
(dollars in thousands)
Commercial — industrial and financial $ 2,007,729 $ 1,736,307 $ 271,422 15.6 %
Commercial — agricultural 323,244 333,724 (10,480 ) (3.1 )
Real estate — commercial mortgage 2,568,766 2,169,353 399,413 18.4
Real estate — commercial construction 402,675 295,119 107,556 36.4
Real estate — residential mortgage 560,658 497,850 62,808 12.6
Real estate — residential construction 334,288 181,438 152,850 84.2
Real estate — home equity 1,135,697 961,935 173,762 18.1
Consumer 504,879 519,919 (15,040 ) (2.9 )
Leasing and other 64,678 70,404 (5,726 ) (8.1 )

Total
$ 7,902,614 $ 6,766,049 $ 1,136,565 16.8 %

~~The Acquisitions contributed approximately $704.5 million to the increase in average balances. The following table presents the average balance impact of the Acquisitions, by type:~~

Nine months ended
September 30
2005 2004 Increase
( in thousands)
Commercial — industrial and financial $ 200,203 $ 73,481 $ 126,722
Commercial — agricultural 1,484 353 1,131
Real estate — commercial mortgage 353,910 114,517 239,393
Real estate — commercial construction 124,275 50,079 74,196
Real estate — residential mortgage 99,108 46,433 52,675
Real estate — residential construction 280,559 134,454 146,105
Real estate — home equity 62,071 7,693 54,378
Consumer 6,672 1,671 5,001
Leasing and other 7,375 2,433 4,942

Total
$ 1,135,657 $ 431,114 $ 704,543

~~The following table presents the growth in average loans, by type, excluding the average balances contributed by the Acquisitions:~~

Nine months ended
September 30 Increase (decrease)
2005 2004 $ %
(dollars in thousands)
Commercial — industrial and financial $ 1,807,526 $ 1,662,826 $ 144,700 8.7 %
Commercial — agricultural 321,760 333,371 (11,611 ) (3.5 )
Real estate — commercial mortgage 2,214,856 2,054,836 160,020 7.8
Real estate — commercial construction 278,400 245,040 33,360 13.6
Real estate — residential mortgage 461,550 451,417 10,133 2.2
Real estate — residential construction 53,729 46,984 6,745 14.4
Real estate — home equity 1,073,626 954,242 119,384 12.5
Consumer 498,207 518,248 (20,041 ) (3.9 )
Leasing and other 57,303 67,971 (10,668 ) (15.7 )

Total
$ 6,766,957 $ 6,334,935 $ 432,022 6.8 %

Excluding the impact of the Acquisitions, average loan growth continued to be particularly strong in the commercial and commercial mortgage categories, which together increased $304.7 million, or 8.2%. Commercial agricultural loans decreased $11.6 million, or 3.5%, due to agricultural customers using excess funds to pay down loans, instead of expanding their facilities. Home equity loans increased $119.4 million, or 12.5%, due to promotional efforts and customers using home equity loans as a cost-effective refinance alternative. Consumer and leasing loans decreased slightly, reflecting repayment of these loans with tax-advantaged residential mortgage or home equity loans.

The average yield on loans during the first nine months of 2005 was 6.4%, a 65 basis point, or 11.3%, increase over 2004. This reflects the impact of a significant portfolio of floating rate loans, which reprice to higher rates when interest rates rise, as they have over the past year.

Average investment securities decreased $178.3 million, or 6.7%. Excluding the impact of the Acquisitions, this decrease was $495.2 million, or 19.2%. Since the beginning of 2004, maturities of investment securities exceeded purchases as funds were used to support loan growth. The average yield on investment securities increased 18 basis points from 3.73% in 2004 to 3.91% in 2005.

Interest expense increased $50.1 million, or 50.8%, to $148.9 million in the first nine months of 2005 from $98.7 million in the first nine months of 2004. Interest expense increased $33.5 million as a result of the 59 basis point increase in the cost of total interest-bearing liabilities, with the remaining increase of $16.7 million due to an increase in average balances. The cost of interest-bearing deposits increased 47 basis points, or 31.5%, from 1.49% in 2004 to 1.96% in 2005. This increase was due to rising rates in general as a result of the FRB’s rate increases over the past year and competitive pricing pressures.

~~The following table presents the growth in average deposits by category:~~

Nine months ended
September 30 Increase
2005 2004 $ %
(dollars in thousands)
Noninterest-bearing demand $ 1,576,695 $ 1,358,118 $ 218,577 16.1 %
Interest-bearing demand 1,522,366 1,343,681 178,685 13.3
Savings/money market 2,021,169 1,828,788 192,381 10.5
Time deposits 3,107,603 2,679,615 427,988 16.0

Total
$ 8,227,833 $ 7,210,202 $ 1,017,631 14.1 %

~~The Acquisitions accounted for approximately $908.5 million of the increase in average balances. The following table presents the average balance impact of the Acquisitions, by type:~~

Nine months ended
September 30
2005 2004 Increase
(in thousands)
Noninterest-bearing demand $ 142,255 $ 26,101 $ 116,154
Interest-bearing demand 132,139 39,875 92,264
Savings/money market 241,717 30,178 211,539
Time deposits 769,533 281,017 488,516

Total
$ 1,285,644 $ 377,171 $ 908,473

~~The following table presents the growth in average deposits, by type, excluding the contribution of the Acquisitions:~~

Nine months ended
September 30 Increase (decrease)
2005 2004 $ %
(dollars in thousands)
Noninterest-bearing demand $ 1,434,440 $ 1,332,017 $ 102,423 7.7 %
Interest-bearing demand 1,390,227 1,303,806 86,421 6.6
Savings/money market 1,779,452 1,798,610 (19,158 ) (1.1 )
Time deposits 2,338,070 2,398,598 (60,528 ) (2.5 )

Total
$ 6,942,189 $ 6,833,031 $ 109,158 1.6 %

Average short-term borrowings decreased $100.5 million, or 7.9%, to $1.2 billion for the first nine months of 2005. The Acquisitions added $120.5 million to the change in short-term borrowings. Excluding those, average short-term borrowings decreased $221.0 million, or 19.0%. Average long-term debt increased $198.8 million, or 31.7%, to $826.2 million. The Acquisitions added $66.5 million to the

increase in long-term debt, with the remaining increase due to the Corporation’s issuance of $100.0 million of ten-year subordinated notes in March 2005 and an increase in Federal Home Loan Bank Advances as the Corporation locked in longer-term rates in anticipation of increasing rates.

~~Provision and Allowance for Loan Losses~~

~~The following table summarizes the activity in the Corporation’s allowance for loan losses:~~

Nine months ended
September 30
2005 2004
(dollars in thousands)
Loans outstanding at end of period (net of unearned) $ 8,325,683 $ 7,213,162

Daily average balance of loans and leases $ 7,902,614 $ 6,766,049

Balance at beginning of period
$ 89,627 $ 77,700

Loans charged-off:
Commercial, financial and agricultural 2,414 2,321
Real estate – mortgage 290 1,134
Consumer 2,241 2,528
Leasing and other 159 306

Total loans charged-off
5,104 6,289

Recoveries of loans previously charged-off:
Commercial, financial and agricultural 1,887 1,640
Real estate – mortgage 1,159 741
Consumer 853 1,189
Leasing and other 66 69

Total recoveries
3,965 3,639

Net loans charged-off 1,139 2,650

Provision for loan losses 2,340 3,665

Allowance purchased 3,108 8,112

Balance at end of period
$ 93,936 $ 86,827

Net charge-offs to average loans (annualized) 0.02 % 0.05 %

Allowance for loan losses to loans outstanding 1.13 % 1.20 %

The provision for loan losses for the first nine months of 2005 totaled $2.3 million, a decrease of $1.3 million, or 36.2%, from the same period in 2004. Net charge-offs totaled $1.1 million, or 0.02% of average loans on an annualized basis, during the first nine months of 2005, a $1.5 million improvement over the $2.7 million, or 0.05%, in net charge-offs for the first nine months of 2004. Nonperforming assets increased to $48.1 million, or 0.39% of total assets, at September 30, 2005, from $35.7 million, or 0.34% of total assets, at September 30, 2004.

Management believes that the allowance balance of $93.9 million at September 30, 2005 is sufficient to cover losses inherent in the loan portfolio on that date and is appropriate based on applicable accounting standards.

~~Other Income~~

~~The following table presents the components of other income:~~

Nine months ended
September 30 Increase (decrease)
2005 2004 $ %
(dollars in thousands)
Investment management and trust services $ 26,715 $ 25,932 $ 783 3.0 %
Service charges on deposit accounts 29,780 29,616 164 0.6
Other service charges and fees 18,506 15,363 3,143 20.5
Gain on sale of mortgage loans 19,963 13,458 6,505 48.3
Investment securities gains 5,638 14,513 (8,875 ) (61.2 )
Gains on sale of deposits 2,200 — 2,200 100.0
Other 7,518 4,811 2,707 56.3

Total
$ 110,320 $ 103,693 $ 6,627 6.4 %

Total other income for the nine months ended September 30, 2005 was $110.3 million, an increase of $6.6 million, or 6.4%, over the comparable period in 2004. Excluding investment securities gains, which decreased from $14.5 million in 2004 to $5.6 million in 2005, other income increased $15.5 million, or 17.4%. The Acquisitions contributed $9.4 million to this increase.

Gains on sale of mortgage loans increased $6.5 million with the Acquisitions, mainly Resource Bank, contributing $5.7 million to the increase. Service charges on deposit accounts increased $164,000, or 0.6%, (excluding the Acquisitions, service charges on deposit accounts decreased $724,000). The decrease was mainly due to increases in existing customers’ balances resulting in lower service charges for those accounts. Other service charges and fees increased $3.1 million, or 20.5%, due mainly to a one-time increase in credit card merchant fee income and letter of credit fees.

During the first nine months of 2005, the Corporation sold three branches and related deposits in two separate transactions. The sales resulted in $2.2 million of gains primarily from the premiums paid on the deposits, which totaled $36.7 million. Other income increased $2.7 million, or 56.2%, with the Acquisitions accounting for approximately $980,000 of the increase. Approximately $560, 000 of the remaining increase resulted from gains on student loan forward sale commitments.

Investment securities gains decreased $8.9 million, or 61.2%. These gains during the first nine months of 2005 consisted of net realized gains of $4.8 million on the sale of equity securities and $845,000 on the sale of debt securities. Investment securities gains during the first nine months of 2004 consisted of net realized gains of $11.4 million on the sale of equity securities and $3.1 million on the sale of debt securities. See the “Market Risk” section of Management’s Discussion for information on the risks associated with the Corporation’s portfolio of equity securities.

~~Other Expenses~~

~~The following table presents the components of other expenses:~~

Nine months ended
September 30 Increase
2005 2004 $ %
(dollars in thousands)
Salaries and employee benefits $ 136,294 $ 124,536 $ 11,758 9.4 %
Net occupancy expense 21,506 17,536 3,970 22.6
Equipment expense 9,161 8,095 1,066 13.2
Data processing 9,590 8,602 988 11.5
Advertising 6,244 5,073 1,171 23.1
Intangible amortization 3,857 3,580 277 7.7
Other 46,902 39,555 7,347 18.6

Total
$ 233,554 $ 206,977 $ 26,577 12.8 %

~~Total other expenses increased $26.6 million, or 12.8%, in 2005, including $24.4 million due to the Acquisitions, as follows:~~

Nine months ended
September 30
2005 2004 Increase
(in thousands)
Salaries and employee benefits $ 20,576 $ 9,252 $ 11,324
Net occupancy expense 3,832 1,309 2,523
Equipment expense 1,852 746 1,106
Data processing 1,598 473 1,125
Advertising 993 402 591
Intangible amortization 1,173 254 919
Other 10,363 3,530 6,833

Total
$ 40,387 $ 15,966 $ 24,421

~~The following table presents the components of other expenses, excluding the amounts contributed by the Acquisitions:~~

Nine months ended
September 30 Increase (decrease)
2005 2004 $ %
(dollars in thousands)
Salaries and employee benefits $ 115,718 $ 115,284 $ 434 0.4 %
Net occupancy expense 17,674 16,227 1,447 8.9
Equipment expense 7,309 7,349 (40 ) (0.5 )
Data processing 7,992 8,129 (137 ) (1.7 )
Advertising 5,251 4,671 580 12.4
Intangible amortization 2,684 3,326 (642 ) (19.3 )
Other 36,539 36,025 514 1.4

Total
$ 193,167 $ 191,011 $ 2,156 1.1 %

~~The discussion that follows addresses changes in other expenses, excluding the Acquisitions.~~

Salaries and employee benefits increased $434,000, or 0.4%, in comparison to the first nine months of 2004. The salary expense component decreased $738,000, or 0.7%, mainly due to the adoption of Statement 123R, which resulted in a $3.3 million, or 83.9% decrease in stock-based compensation expense in comparison to the first nine months of 2004. See Note E in the Notes to Consolidated Financial Statements for additional information on the SFAS 123R restatement. Excluding stock-based compensation expense, salary expense increased $2.5 million, or 2.5%, driven by salary increases for existing employees and an increase in average full-time equivalent employees from 3,175 in 2004 to 3,200 in 2005. Employee benefits increased $1.2 million, or 5.1%, in comparison to the first nine months of 2004 driven mainly by increases in pension and healthcare costs.

Net occupancy expense increased $1.4 million, or 8.9%, to $17.7 million in 2005. The increase resulted from the expansion of the branch network and the addition of new office space for existing affiliates. Equipment expense decreased $40,000, or 0.5%, due to lower depreciation expense as certain equipment became fully depreciated, offset partially by increases due to the branch network and office expansions.

Data processing expense, which consists mainly of fees paid for outsourced back-office services, decreased $137,000, or 1.7%, due to the renegotiation of the Corporation’s automated teller machine service provider, beginning in July 2005. Advertising expense increased $580,000, or 12.4%, due to the timing of promotional campaigns. Intangible amortization decreased $642,000, or 19.3%, in the first nine months of 2005. Intangible amortization consists of the amortization of unidentifiable intangible assets related to branch and loan acquisitions, core deposit intangible assets, and other identified intangible assets. Since many of these intangibles are amortized using accelerated methods, amortization expense of existing intangibles decreases over time. Other expense decreased $514,000, or 1.4%, mainly as a result of several non-recurring items, including a reduction of the reserve for legal contingencies.

~~Income Taxes~~

Income tax expense for the first nine months of 2005 was $53.9 million, a $6.3 million, or 13.2%, increase from $47.6 million in 2004. The Corporation’s effective tax rate was approximately 30.1% in 2005 as compared to 30.3 % in 2004. The effective rate is lower than the Federal statutory rate of 35% due mainly to investments in tax-free municipal securities and federal tax credits from investments in low and moderate incomemoderate-income housing partnerships.

FINANCIAL CONDITION

The changes in the Corporation’s consolidated ending balance sheet from December 31, 2004 to September 30, 2005 were partially due to the acquisition of SVB in July 2005. The table in Note G in the Notes to Consolidated Financial Statements summarizes the balances of SVB that were added to the Corporation on the acquisition date.

Total assets of the Corporation increased ~~$1.1~~$1.8 billion, or ~~10.3%~~14.3%, to ~~$12.3~~$14.2 billion at ~~September 30, 2005,~~March 31, 2006, compared to ~~$11.2~~$12.4 billion at December 31, ~~2004.~~2005. The acquisition of ~~SVB~~Columbia added ~~$590.8 million~~$1.5 billion to total assets. ~~Increases, excluding SVB,~~Excluding the acquisition of Columbia, increases occurred in loans ($~~436.4~~228.3 million, or ~~5.8%~~2.7%) and investment securities ($127.6 million, or 4.9%), offset by a decrease in loans held for sale ~~($75.1~~of $44.0 million, or ~~47.3%) and cash balances ($104.9 million, or 37.7%), while investment securities decreased ($85.2 million, or 3.5%) and other earnings assets decreased $4.5 million.~~18.1%.

~~The~~Unless otherwise noted, the discussion that follows addresses the changes in the consolidated ~~ending~~ balance sheet excluding the impact of ~~SVB.~~the Columbia acquisition.

The Corporation experienced modest loan growth across all loan types, excluding consumer loans, due to continued favorable economic conditions. Commercial loans and mortgages ~~grew $269.2~~increased $137.0 million, or ~~5.3%~~2.6%, construction loans grew $57.0 million, or 6.7%, and residential mortgages and home equity loans increased $33.7 million, or 1.9%. Consumer loans decreased $7.3 million, or 1.4%.

Funds provided by increases in deposits and borrowings exceeded net funds used for new loans during the ~~nine-month period, while residential mortgages increased $105.4 million, or 12.9%, mainly in construction loans.~~ first quarter of 2006. These excess funds were generally used to purchase investment securities.

The ~~increase~~decrease in loans held for sale ~~resulted from the continued expansion~~was due a decrease in mortgage banking activity in comparison to recent quarters, mainly as a result of the ~~Corporation’s mortgage banking business. The $104.9 million~~ increase in ~~cash and due from banks was due to the nature of these accounts as daily balances can fluctuate in the normal course of business.~~interest rates.

Deposits increased ~~$381.2~~$180.1 million, or ~~4.8%~~2.0%, from December 31, ~~2004 to $8.3 billion at September 30,~~ 2005. Noninterest-bearing deposits increased ~~$105.2~~$36.9 million, or ~~7.0%~~2.2%, while interest-bearing demand deposits decreased ~~$30.2~~$37.4 million, or ~~2.0%~~2.3%, and savings deposits increased ~~$63.8~~$45.6 million, or ~~3.3%~~2.1%. Time deposits increased ~~$242.4~~$135.0 million, or ~~8.2%~~4.0%, reflecting a significant shift by customers to longer term investments as rates on time deposits have ~~become more attractive~~increased due to ~~consumers.~~competitive pressures resulting from the FRB’s two short-term interest rate increases during the first quarter of 2006.

Short-term borrowings, which consist mainly of Federal funds purchased and customer cash management accounts, ~~decreased $29.2~~increased $47.3 million, or ~~2.4%~~3.6%, during the first ~~nine months~~quarter of ~~2005. The decrease in short-term borrowings~~2006. This increase was mainly due to ~~a decrease~~an increase in Federal funds purchased ~~as funds from other sources including deposits~~ and ~~investment maturities, were sufficient to fund increases in loans.~~

increased borrowings outstanding under the Corporation’s revolving line of credit. Long-term debt increased ~~$189.1~~$118.3 million, or ~~27.6%~~13.8%, ~~partially~~primarily due to ~~$100.0~~the Corporation’s issuance of $154.6 million of junior subordinated ~~debt issued~~deferrable interest debentures in ~~March 2005.~~January 2006. See the “Liquidity” section of Management’s Discussion for a summary of the terms of this debt. ~~The remaining increase was mainly due to an increase in Federal Home Loan Bank Advances as the Corporation locked in longer-term rates in anticipation of increasing rates.~~

Capital Resources

Total shareholders’ equity increased ~~$31.1~~$165.4 million, or ~~2.5%~~12.9%, during the first ~~nine~~three months of ~~2005. Increases~~2006. Stock issued in connection with the acquisition of Columbia accounted for $154.1 million, or 93.2%, of the increase. In addition, equity increased due to net income of ~~$125.2~~$43.9 million, ~~$10.4 million in stock issuances, and $66.6 million from stock issued for the SVB acquisition were~~ offset by ~~$85.2 million in stock repurchases, $65.6~~$24.0 million in cash dividends to shareholders, ~~$17.7~~$9.4 million in ~~unrealized~~other comprehensive losses ~~on securities, predominantly mortgage-backed securities~~ and ~~$3.1~~$4.3 million in ~~unrealized losses on derivative financial instruments.~~treasury stock purchases.

The Corporation periodically implements stock repurchase plans for various corporate purposes. In addition to evaluating the financial benefits of implementing repurchase plans, management also considers liquidity needs, the current market price per share and regulatory limitations. ~~In December 2004,~~

Under an “Accelerated Share Repurchase” program (ASR), the ~~Board~~Corporation repurchases shares immediately from an investment bank rather than over time. The investment bank, in turn, repurchases shares on the open market over a period that is determined by the average daily trading volume of ~~Directors approved an extension~~the Corporation’s shares, among other factors. For the ASR in effect at the beginning of ~~an existing repurchase plan from December 31, 2004 to June 30, 2005 and increased the total number of shares that could be repurchased to 5.0 million. During~~2006, which was implemented in the second quarter of 2005, the Corporation ~~repurchased 4.3~~settled its position with the investment bank at the termination of the ASR by paying the investment bank a total of $3.4 million, representing the difference between the initial price paid and the actual price of the shares repurchased.

In March 2006, the Corporation’s Board of Directors approved a stock repurchase plan for 2.0 million shares ~~under an “accelerated share repurchase” plan (ASR), bringing the total~~through December 31, 2006. The Corporation expects to purchase these shares ~~purchased during~~through open market acquisitions. During the first ~~nine months~~quarter of ~~2005 to 5.0 million and completing the board-approved repurchase plan.~~2006, 49,000 shares were repurchased under this plan

The Corporation and its subsidiary banks are subject to various regulatory capital requirements administered by banking regulators. Failure to meet minimum capital requirements can initiate certain actions by regulators that could have a material effect on the Corporation’s financial statements. The regulations require that banks maintain minimum amounts and ratios of total and Tier I capital (as defined in the regulations) to risk weighted assets (as ~~defined in the regulations)~~defined), and Tier I capital to average assets (as ~~defined in the regulations)~~defined). As of ~~September 30, 2005,~~March 31, 2006, the Corporation and each of its bank subsidiaries met the minimum requirements. In addition, ~~as of September 30, 2005~~ the Corporation and each of its bank subsidiaries’ capital ratios exceeded the amounts required to be considered “well-capitalized” as defined in the regulations. The following table summarizes the Corporation’s capital ratios in comparison to regulatory requirements as of ~~September 30:~~March 31:


							Regulatory Minimum												Regulatory Minimum
	September 30			December 31			Capital			Well			March 31			December 31			Capital			Well
	2005			2004			Adequacy			Capitalized			2006			2005			Adequacy			Capitalized
Total Capital (to Risk Weighted Assets)		12.1	%		11.7	%		8.0	%		10.0	%		11.8	%		12.1	%		8.0	%		10.0	%
Tier I Capital to (Risk Weighted Assets)		9.9	%		10.6	%		4.0	%		6.0	%		9.9	%		10.0	%		4.0	%		6.0	%
Tier I Capital (to Average Assets)		7.6	%		8.7	%		3.0	%		5.0	%		8.0	%		7.7	%		3.0	%		5.0	%

outstanding loans and investments and through the availability of deposits and borrowings. In addition, the Corporation can borrow on a secured basis from the Federal Home Loan Bank to meet short-term liquidity needs.

The Corporation’s sources and uses of cash were discussed in general terms in the net interest income section of Management’s Discussion. The Consolidated Statements of Cash Flows provide additional information. The Corporation generated ~~$77.6~~$88.8 million in cash from operating activities during the first ~~nine months~~quarter of ~~2005. Operating cash flows were lower than net income of $125.2 million,~~2006, mainly due to ~~cash outflows to fund~~net income and a decrease in loans ~~originated~~held for ~~sale that had not yet been sold as of September 30, 2005.~~sale. Investing activities resulted in a net cash outflow of ~~$422.1~~$382.1 million, asdue to purchases of investment securities and loan originations ~~exceeded~~exceeding sales and maturities of investment ~~securities.~~securities, and cash used for the acquisition of Columbia. Finally, financing activities resulted in a net inflow of ~~$469.5~~$323.4 million due additional borrowings related to the acquisition of Columbia and increases in ~~both deposits and borrowings, offset by dividends paid to shareholders and repurchases of treasury stock.~~time deposits.

Liquidity must also be managed at the Fulton Financial Corporation Parent Company level. For safety and soundness reasons, banking regulations limit the amount of cash that can be transferred from subsidiary

banks to the Parent Company in the form of loans and dividends. Generally, these limitations are based on the subsidiary banks’ regulatory capital levels and their net income. ~~Until 2004, the Parent Company had been able to meet its cash needs through normal, allowable dividends and loans. However, as~~As a result of increased acquisition activity and stock repurchase ~~plans,~~plans; the Parent Company’s cash needs have increased in recent years, requiring additional sources of funds.

In January 2006, the Corporation purchased all of the common stock of a new subsidiary, Fulton Capital Trust I, which was formed for the purpose of issuing $150.0 million of trust preferred securities at an effective rate of approximately 6.50%. In connection with this transaction, $154.6 million of junior subordinated deferrable interest debentures were issued to the trust. These debentures carry the same rate and mature on February 1, 2036.

In 2005, the Corporation issued $100 million of ten-year subordinated notes, which mature April 1, 2015 and carry a fixed rate of 5.35%. The ~~Parent Company~~Corporation also has a revolving line of credit agreement with an unaffiliated bank. Under the terms of the agreement, the ~~Parent Company~~Corporation can borrow up to $50.0 million ~~(which may be increased to $100.0 million upon request),~~ with interest calculated at the one-month London Interbank Offering Rate (LIBOR) plus ~~0.625%~~0.35%. The credit agreement requires the Corporation to maintain certain financial ratios related to capital strength and earnings. ~~At September 30, 2005, the~~The Corporation ~~had borrowed $7.5 million on the line and~~ was in compliance with all required covenants under the credit ~~agreement.~~

Inagreement as of March ~~2005, the Parent Company issued $100~~31, 2006. As of March 31, 2006, there was $19.0 million of ten year subordinated notes at a fixed rate of 5.35%. Interest is paid semi-annually, beginning in October 2005 and the notes mature on April 1, 2015. In addition to providing funds to the Parent Company, subordinated debt is also a component of total regulatory capital.

The Parent Company intends to issue up to $150 million of trust preferred securities in the fourth quarter of 2005. This offering will provide funds for general corporate purposes, including acquisitions and stock repurchases, and will also supplement Tier I Capital.borrowed against this line.

These borrowing arrangements supplement the liquidity available from subsidiaries through dividends and borrowings and provide some flexibility in Parent Company cash management. Management continues to monitor the liquidity and capital needs of the Parent Company and will implement appropriate strategies, as necessary, to remain well capitalized and to meet its cash needs.

3829

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk is the exposure to economic loss that arises from changes in the values of certain financial instruments. The types of market risk exposures generally faced by financial institutions include interest rate risk, equity market price risk, foreign currency risk and commodity price risk. Due to the nature of its operations, only equity market price risk and interest rate risk are significant to the Corporation.

Equity Market Price Risk

Equity market price risk is the risk that changes in the values of equity investments could have a material impact on the financial position or results of operations of the Corporation. The Corporation’s equity investments consist primarily of common stocks of publicly traded financial institutions (cost basis of approximately ~~$75.6~~$66.7 million and fair value of ~~$74.2~~$66.8 million at ~~September 30, 2005)~~March 31, 2006). The Corporation’s financial institutions stock portfolio had gross unrealized gains of approximately ~~$2.1~~$2.4 million at ~~September 30, 2005.~~March 31, 2006.

Although the carrying value of equity investments accounted for ~~only 0.6%~~less than 1.0% of the Corporation’s total assets, the unrealized gains on the portfolio represent a potential source of revenue. The Corporation has a history of periodically realizing gains from this portfolio and, if values were to decline significantly, this revenue source could be lost.

Management continuously monitors the fair value of its equity investments and evaluates current market conditions and operating results of the companies. Periodic sale and purchase decisions are made based on this monitoring process. None of the Corporation’s equity securities are classified as trading. Future cash flows from these investments are not provided in the table on page 3831 as such investments do not have maturity dates.

The Corporation has evaluated, based on existing accounting guidance, whether any unrealized losses on individual equity investments constituted “other-than-temporary” impairment, which would require a write-down through a charge to earnings. Based on the results of such evaluations, ~~the Corporation recorded~~there were no write-downs ~~of $65,000 in 2005, $137,000 in 2004 and $3.3 million in 2003~~ for specific equity securities which were deemed to exhibit other-than-temporary impairment in ~~value.~~value for the first quarter of 2006. Through ~~September 30,~~December 31, 2005, the Corporation had recorded cumulative write-downs of approximately $3.9 million. Through March 31, 2006, gains of approximately ~~$2.5~~$2.6 million had been realized on the sale of investments previously written down. Additional impairment charges may be necessary depending upon the performance of the equity markets in general and the performance of the individual investments held by the Corporation.

In addition to its equity portfolio, the Corporation’s investment management and trust services revenue could be impacted by fluctuations in the securities markets. A portion of the Corporation’s trust revenue is based on the value of the underlying investment portfolios. If securities markets contract, the Corporation’s revenue could be negatively impacted. In addition, the ability of the Corporation to sell its equities brokerage services is dependent, in part, upon consumers’ level of confidence in the outlook for rising securities prices.

Interest Rate Risk

Interest rate risk creates exposure in two primary areas. First, changes in rates have an impact on the Corporation’s liquidity position and could affect its ability to meet obligations and continue to grow. Second, movements in interest rates can create fluctuations in the Corporation’s net income and changes in the economic value of its equity.

personnel, meets on a weekly basis. The ALCO is responsible for reviewing the interest rate sensitivity position of the Corporation, approving asset and liability management policies, and overseeing the formulation and implementation of strategies regarding balance sheet positions and earnings. The primary goal of asset/liability management is to address the liquidity and net income risks noted above.

The following table provides information about the Corporation’s interest rate sensitive financial instruments. The table provides expected cash flows and weighted average rates for each significant interest rate sensitive financial instrument, by expected maturity period. None of the Corporation’s financial instruments are classified as trading.


	Expected Maturity Period																					Estimated		Expected Maturity Period																					Estimated
	2005			2006			2007			2008			2009			Beyond			Total			Fair Value		2006			2007			2008			2009			2010			Beyond			Total			Fair Value
Fixed rate loans (1)	$	771,046		$	534,530		$	424,058		$	309,488		$	188,341		$	408,200			2,635,663		$	2,581,586	$	785,340		$	570,852		$	480,050		$	350,567		$	247,903		$	576,197		$	3,010,909		$	2,929,013
Average rate (2)		6.18	%		6.08	%		6.00	%		6.14	%		6.27	%		5.93	%		6.10	%
Floating rate loans (8)		1,568,651			717,044			560,656			467,440			392,536			1,971,781			5,678,108			5,651,748
Average rate																									6.27	%		6.09	%		6.17	%		6.33	%		6.56	%		6.19	%		6.24	%
Floating rate loans (7) (8)																									1,960,980			855,167			643,719			557,898			457,725			2,210,423			6,685,912			6,638,550
Average rate		6.96	%		6.78	%		6.74	%		6.79	%		6.41	%		6.37	%		6.66	%				7.83	%		7.47	%		7.45	%		7.49	%		7.11	%		6.92	%		7.37	%

Fixed rate investments ~~(3)~~(2)		570,094			352,530			389,677			267,683			510,438			231,732			2,322,154			2,281,431		586,834			392,201			429,110			473,827			438,612			317,952			2,638,536			2,565,364
Average rate		3.57	%		3.68	%		3.64	%		3.64	%		3.68	%		4.99	%		3.76	%				3.93	%		3.96	%		4.00	%		4.03	%		4.02	%		4.75	%		4.08	%
Floating rate investments ~~(3)~~(2)		—			152			726			2,418			120			62,239			65,655			65,732		80			162			2,208			—			500			80,432			83,382			83,103
Average rate		—			3.91	%		4.22	%		3.96	%		3.80	%		3.92	%		3.92	%				3.93	%		4.58	%		4.68	%		—			5.50	%		4.85	%		4.85	%

Other interest-earning assets		329,449			—			—			—			—			—			329,449			329,449		238,406			—			—			—			—			—			238,406			238,406
Average rate		5.59	%		—			—			—			—			—			5.59	%				6.61	%		—			—			—			—			—			6.61	%


Total	$	3,239,240		$	1,604,256		$	1,375,117		$	1,047,029		$	1,091,435		$	2,673,952		$	11,031,029		$	10,909,946	$	3,571,640		$	1,818,382		$	1,555,087		$	1,382,292		$	1,144,740		$	3,185,004		$	12,657,145		$	12,454,436
*Average rate*		6.04	%		5.87	%		5.63	%		5.78	%		5.11	%		6.13	%		5.87	%				6.76	%		6.28	%		6.10	%		6.01	%		5.80	%		6.52	%		6.38	%


Fixed rate deposits ~~(4)~~(3)	$	1,739,806		$	805,195		$	231,188		$	89,840		$	114,142		$	283,147			3,263,318		$	3,254,357	$	2,495,994		$	743,032		$	234,686		$	107,414		$	95,028		$	260,240		$	3,936,394		$	3,895,457
Average rate		2.99	%		3.83	%		3.59	%		3.78	%		4.44	%		4.23	%		3.42	%				3.59	%		4.06	%		4.01	%		4.20	%		4.44	%		4.26	%		3.79	%
Floating rate deposits ~~(5)~~(4)		2,356,542			208,283			203,938			203,938			203,938			2,375,023			5,551,662			5,551,542		2,068,493			241,698			247,088			236,308			241,698			2,981,464			6,016,749			6,016,750
Average rate		1.87	%		.39	%		.35	%		.35	%		.35	%		.27	%		.96	%				2.39	%		0.54	%		0.52	%		0.55	%		0.54	%		0.49	%		1.15	%

Fixed rate borrowings ~~(6)~~(5)		683,922			69,435			230,225			91,314			119,336			129,897			1,324,129			1,338,331		889,136			181,751			96,965			50,374			84,578			261,636			1,564,440			1,573,587
Average rate		2.73	%		3.54	%		5.03	%		4.42	%		5.59	%		5.14	%		3.78	%				3.92	%		4.46	%		4.60	%		5.67	%		5.92	%		5.88	%		4.52	%
Floating rate borrowings ~~(7)~~(6)		736,376			—			—			—			—			—			736,376			736,376		1,020,366			—			—			—			—			1,720			1,022,086			1,022,086
Average rate		3.87	%		—			—			—			—			—			3.87	%				4.88	%		—			—			—			—			8.23	%		4.88	%


Total	$	5,516,646		$	1,082,913		$	665,351		$	385,092		$	437,416		$	2,788,067		$	10,875,485		$	10,880,606	$	6,473,989		$	1,166,481		$	578,739		$	394,096		$	421,304		$	3,505,060		$	12,539,669		$	12,507,880
*Average rate*		2.60	%		3.15	%		3.09	%		2.11	%		2.84	%		.90	%		2.24	%				3.45	%		3.40	%		2.62	%		2.20	%		2.50	%		1.18	%		2.70	%

The preceding table and discussion addressed the liquidity implications of interest rate risk and focused on expected contractual cash flows from financial instruments. Expected maturities, however, do not necessarily estimate the net interest income impact of interest rate changes. Certain financial instruments, such as adjustable rate loans, have repricing periods that differ from expected cash flows. Fair value adjustments related to acquisitions are not included in the preceding table.

The Corporation uses three complementary methods to measure and manage interest rate risk. They are static gap analysis, simulation of earnings, and estimates of economic value of equity. Using these measurements in tandem provides a reasonably comprehensive summary of the magnitude of interest rate risk in the Corporation, level of risk as time evolves, and exposure to changes in interest rate relationships.

Static gap provides a measurement of repricing risk in the Corporation’s balance sheet as of a point in time. This measurement is accomplished through stratification of the Corporation’s assets and liabilities into predetermined repricing periods. The sum of assets and liabilities in each of these periods are summed and compared for mismatches within that maturity segment. Core deposits having ~~noncontractual~~no contractual maturities are placed into repricing periods based upon historical balance performance. Repricing for mortgage loans ~~held~~ and for mortgage-backed securities includes the effect of expected cash flows. Estimated prepayment effects are applied to these balances based upon industry projections for prepayment speeds. The Corporation’s policy limits the cumulative ~~6-month~~six-month gap to plus or minus 15% of total rate sensitive earning assets. The cumulative ~~6-month~~six-month gap as of ~~September 30, 2005~~March 31, 2006 was ~~minus 2.2%. The~~a negative 0.73% and the cumulative six-month ratio of rate sensitive assets to rate sensitive liabilities ~~for the nine-month period ended September 30, 2005~~(RSA/RSL) was ~~0.95.~~0.98.

Simulation of net interest income and of net income is performed for the next twelve-month period. A variety of interest rate scenarios are used to measure the effects of sudden and gradual movements upward and downward in the yield curve. These results are compared to the results obtained in a flat or unchanged interest rate scenario. Simulation of earnings is used primarily to measure the Corporation’s short-term earnings exposure to rate ~~movements.~~movements given a static balance sheet. The Corporation’s policy limits the potential exposure of net interest income to 10% of the base case net interest income for every 100 basis point “shock” in interest rates. A “shock’ is an immediate upward or downward movement of interest rates across the yield curve based upon changes in the prime rate. The shocks do not take into account changes in customer behavior that could result in changes to mix and/or volumes in balance sheet nor do they account for competitive pricing over the forward 12-month period. The following table summarizes the expected impact of interest rate shocks on net interest income:


	Annual change
	in net interest
Rate Shock	income	% Change
+300 bp	+ ~~$22.9~~$16.3 million		+ ~~5.6%~~3.4	%
+200 bp	+ ~~15.6~~$11.0 million		+ ~~3.8%~~2.3	%
+100 bp	+ ~~8.2~~$5.6 million		+ ~~2.0%~~1.2	%
-100 bp	- ~~12.4~~$12.1 million	~~- 3.0%~~	-2.5	%
-200 bp	- ~~24.4~~$25.7 million		-5.4	%
-300 bp	- ~~6.0%~~$45.9 million		-9.6	%

Item 4. Controls and Procedures

The Corporation carried out an evaluation, under the supervision and with the participation of the Corporation’s management, including the Corporation’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Corporation’s Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this quarterly report, the Corporation’s disclosure controls and procedures are effective. Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in Corporation reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

There have been no changes in our internal control over financial reporting during the fiscal quarter covered by this quarterly report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

4333

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

Not applicable

Item 1A. Risk Factors

Information responsive to this item as of December 31, 2005 appears as Exhibit 99.1 to the Corporation’s Form 10-K for the year ended December 31, 2005. There was no material change in such information as of March 31, 2006.

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

Total number of

Maximum

shares purchased

number of shares

Total

as part of a

that may yet be

number of

Average price

publicly

purchased under

paid per

announced plan

the plan or

Period

purchased

or program

program

(01/01/06 – 01/31/06)

—

(02/01/06 – 02/28/06)

—

(03/01/06 – 03/31/06)

48,800

17.00

48,800

1,951,200

On March 21, 2006 a stock repurchase plan was approved by the Board of Directors to repurchase up to 2.0 million shares through December 31, 2006. As of March 31, 2006, 48,800 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 3. Defaults Upon Senior Securities and Use of Proceeds

Not applicable

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

Not applicable

Item 5. Other Information

Not applicable

Item 6. Exhibits

See Exhibit Index for a list of the exhibits required by Item 601 of Regulation S-K and filed as part of this report.

4434

EXHIBIT INDEX

Exhibits Required Pursuant
to Item 601 of Regulation S-K

~~3.1~~		Articles of incorporation, as amended and restated, of the Fulton Financial Corporation as amended — Incorporated by reference to Exhibit 3.1 of the S-4 Registration Statement filed on October 7, 2005.

~~3.2~~		~~Bylaws of Fulton Financial Corporation as amended — Incorporated by reference to Exhibit 3.2 of the S-4 Registration Statement filed on April 13, 2005.~~

~~4.1~~		Rights Agreement dated June 20, 1989, as amended and restated on April 27, 1999 between Fulton Financial Corporation and Fulton Bank — Incorporated by reference to Exhibit 1 of the Fulton Financial Corporation Current Report on Form 8-K dated April 27, 1999.

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

4636


Description	Page

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited):

(a) Consolidated Balance Sheets - ~~September 30, 2005~~— March 31, 2006 and December 31, ~~2004~~2005		3

(b) Consolidated Statements of Income - — Three ~~and nine~~ months ended ~~September 30,~~March 31, 2006 and 2005 ~~and 2004~~		4

(c) Consolidated Statements of Shareholders’ Equity - ~~Nine~~and Comprehensive Income — Three months ended ~~September 30,~~March 31, 2006 and 2005 ~~and 2004~~		5

(d) Consolidated Statements of Cash Flows - ~~Nine~~— Three months ended ~~September 30,~~March 31, 2006 and 2005 ~~and 2004~~		6

(e)Notes to Consolidated Financial Statements ~~– September 30, 2005~~		7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		1614

Item 3. Quantitative and Qualitative Disclosures about Market Risk		3930

Item 4. Controls and Procedures		4333

PART II. OTHER INFORMATION

Item 1. Legal Proceedings		34

Item 1A. Risk Factors		34

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		34

Item 3. Defaults Upon Senior Securities		34

Item 4. Submission of Matters to a Vote of Security Holders		34

Item 5. Other Information		34

Item 6. Exhibits		4434

Signatures		4535

Exhibit Index		4636

Certifications		4737
~~Certification of Chief Executive Officer pursuant to Section~~CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 ~~of the Sarbanes-Oxley Act of 2002~~
~~Certification of Chief Financial Officer pursuant to Section~~CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 ~~of the Sarbanes-Oxley Act of 2002~~
~~Certification of Chief Executive Officer pursuant to Section~~CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 906 ~~of the Sarbanes-Oxley Act of 2002~~
~~Certification of Chief Financial Officer pursuant to Section~~CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 906 ~~of the Sarbanes-Oxley Act of 2002~~


	September 30				March 31
	2005		2004		2006		2005
	(in thousands)				(in thousands)
Commitments to extend credit		3,717,938		3,308,678	$	4,268,227	$	3,492,011
Standby letters of credit		572,636		550,761		689,842		532,287
Commercial letters of credit		21,539		20,842		26,334		24,654


(1)		~~Presented on a fully taxable equivalent (FTE) basis using a 35% Federal tax rate.~~Includes non-performing loans.

(2)		Balances include amortized historical cost for available for sale securities. The related unrealized holding gains (losses) are included in other assets.


	September 30			December 31			September 30
	2005			2004			2004
	(dollars in thousands)
Non accrual loans	$	30,669		$	22,574		$	23,422
Loans 90 days past due and accruing		13,350			8,318			10,962
Other real estate owned (OREO)		4,042			2,209			1,325

Total nonperforming assets	$	48,061		$	33,101		$	35,709


Nonaccrual loans/Total loans		0.37	%		0.30	%		0.32	%
Nonperforming assets/Total assets		0.39	%		0.30	%		0.34	%
Allowance/Nonperforming loans		213	%		290	%		253	%


	March 31			December 31			March 31
	2006			2005			2005
	(dollars in thousands)
Non-accrual loans	$	34,716		$	36,560		$	19,232
Loans 90 days past due and accruing		13,126			9,012			6,545
Other real estate owned		2,011			2,072			3,244

Total non-performing assets	$	49,853		$	47,644		$	29,021


Non-accrual loans/Total loans		0.36	%		0.43	%		0.25	%
Non-performing assets/Total assets		0.35	%		0.38	%		0.25	%
Allowance/Non-performing loans		222	%		204	%		350	%


										Nine
										months
	Three months ended									ended
	June 30,			Mar. 31,			Sept. 30,			Sept. 30,
	2005			2005			2004			2004
	(in thousands, except per-share data)
Income before income taxes, originally reported	$	59,409		$	59,570		$	56,035		$	161,059
Stock-based compensation expense under the fair value method (2)		(83	)		(96	)		(3,702	)		(3,834	)

Income before income taxes, restated	$	59,326		$	59,474		$	52,333		$	157,225


Net income, originally reported	$	41,580		$	41,531		$	39,120		$	112,830
Stock-based compensation expense under the fair value method, net of tax (2)		24			(94	)		(3,111	)		(3,243	)

Net income, restated	$	41,604		$	41,437		$	36,009		$	109,587


Net income per share (basic), originally reported (1)	$	0.27		$	0.26		$	0.26		$	0.76
Net income per share (basic), restated		0.27			0.26			0.24			0.74

Net income per share (diluted), originally reported (1)	$	0.27		$	0.26		$	0.26		$	0.75
Net income per share (diluted), restated		0.27			0.26			0.23			0.73


						Weighted
						Average	Aggregate
				Weighted		Remaining	Intrinsic
	Stock			Average		Contractual	Value
	Options			Exercise Price		Term	(in millions)
Outstanding at December 31, 2004		6,591,053		$	10.74
Granted		1,092,500			17.98
Exercised		(1,005,416	)		7.41
Assumed from SVB Financial		166,218			13.08
Forfeited		(17,039	)		16.31

Outstanding at September 30, 2005		6,827,316		$	12.43	6.4 years	$	29.7


Exercisable at September 30, 2005		5,722,256		$	11.40	5.8 years	$	30.8


	Grant Date
	07/01/05			07/01/04
Risk-free interest rate		3.76	%		4.22	%
Volatility of Corporation’s stock		16.17			18.12
Expected dividend yield		3.23			3.27
Expected life of options	6 Years			7 Years


	Nine months ended September 30, 2005									Nine months ended September 30, 2004
	Average						Yield/			Average						Yield/
	Balance			Interest (1)			Rate (1)			Balance			Interest (1)			Rate (1)
ASSETS
Interest-earning assets:
Loans and leases	$	7,902,614		$	378,377			6.40	%	$	6,766,049		$	290,904			5.75	%
Taxable investment securities		1,988,425			55,466			3.71			2,245,667			59,635			3.55
Tax-exempt investment securities		354,734			13,243			4.98			270,637			11,248			5.54
Equity securities		130,602			3,927			4.02			135,791			3,718			3.65

Total investment securities		2,473,761			72,636			3.91			2,652,095			74,601			3.73
Mortgage loans held for sale		188,337			8,705			6.16			83,749			4,400			7.02
Other interest-earning assets		46,432			1,066			3.05			5,525			55			1.33

Total interest-earning assets		10,611,144			460,784			5.80	%		9,507,418			369,960			5.19	%
Noninterest-earning assets:
Cash and due from banks		345,480									319,905
Premises and equipment		155,253									127,660
Other assets		588,265									407,099
Less: Allowance for loan losses		(92,089	)								(84,237	)

Total Assets	$	11,608,053								$	10,277,845


LIABILITIES AND EQUITY
Interest-bearing liabilities:
Demand deposits	$	1,522,366		$	10,448			0.92	%	$	1,343,681		$	4,852			0.48	%
Savings deposits		2,021,169			17,964			1.19			1,828,788			8,115			0.59
Time deposits		3,107,603			68,980			2.97			2,679,615			52,372			2.61

Total interest-bearing deposits		6,651,138			97,392			1.96			5,852,084			65,339			1.49
Short-term borrowings		1,178,061			23,393			2.63			1,278,517			10,302			1.08
Long-term debt		826,150			28,080			4.52			627,384			23,092			4.92

Total interest-bearing liabilities		8,655,349			148,865			2.29	%		7,757,985			98,733			1.70	%
Noninterest-bearing liabilities:
Demand deposits		1,576,695									1,358,118
Other		133,591									109,078

Total Liabilities		10,365,635									9,225,181
Shareholders’ equity		1,242,418									1,052,664

Total Liabilities and Shareholders’ Equity	$	11,608,053								$	10,277,845

Net interest income/ net interest margin (FTE)					311,919			3.93	%					271,227			3.80	%

Tax equivalent adjustment					(7,250	)								(7,053	)

Net interest income				$	304,669								$	264,174


*Assumptions*:

(1)		Amounts are based on contractual payments and maturities, adjusted for expected prepayments.

(2)		~~Average rates are shown on a fully taxable equivalent basis using an effective tax rate of 35%.~~

~~(3)~~		Amounts are based on contractual maturities; adjusted for expected prepayments on mortgage-backed securities and expected calls on agency and municipal securities.

~~(4)~~(3)		Amounts are based on contractual maturities of time deposits.

~~(5)~~(4)		~~Money market, Super NOW, NOW and savings~~These deposit accounts are placed based on history of deposit flows.

~~(6)~~(5)		Amounts are based on contractual maturities of Federal Home Loan Bank advances, adjusted for possible calls.

~~(7)~~(6)		Amounts ~~are~~include Federal Funds purchased and securities sold under agreements to repurchase, which mature in less than 90 ~~days.~~days, and junior subordinated deferrable interest debentures.

~~(8)~~(7)		Floating rate loans include adjustable rate ~~commercial~~ mortgages.

(8)		Line of credit amounts are based on historical cash flow assumptions, with an average life of approximately 5 years.


	Change in
	economic value
Rate Shock	of equity	% Change
+300 bp	+ ~~$55.4~~$41.3 million		+ ~~3.5%~~2.3	%
+200 bp	+ ~~39.9~~$30.2 million		+ ~~2.5%~~1.6	%
+100 bp	+ ~~22.3~~$15.7 million		+ ~~1.4%~~0.9	%
- 100 bp	- ~~43.9~~$35.1 million	~~- 2.7%~~	-1.9	%
- 200 bp	- ~~128.7~~$103.7 million		-5.6	%
- ~~8.0%~~300 bp	-$199.0 million		-10.8	%


~~FULTON FINANCIAL CORPORATION~~

Date:~~November 8, 2005~~May 10, 2006	/s/	~~Rufus A. Fulton,~~ R. Scott Smith, Jr.

		~~Rufus A. Fulton,~~R. Scott Smith, Jr.
		Chairman, ~~and~~ Chief Executive Officer and President

Date:~~November 8, 2005~~May 10, 2006	/s/	Charles J. Nugent

		Charles J. Nugent
		Senior Executive Vice President and
		Chief Financial Officer

PENNSYLVANIA

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

~~(I.R.S. Employer~~
Identification No.)