UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20459

FORM 10-Q

(Mark One)

For the quarterly period ended March 31,June 30, 2004,

or

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  x    No  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  x    No  ¨

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 – 116,418,000121,640,000 shares outstanding as of April 30,July 31, 2004.

FULTON FINANCIAL CORPORATION

FORM 10-Q FOR THE QUARTER ENDED MARCH 31,JUNE 30, 2004

INDEX

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Item 1. Financial Statements

FULTON FINANCIAL CORPORATION

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(Dollars in thousands, except per-share data)

See Notes to Consolidated Financial Statements

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FULTON FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(Dollars in thousands, except per-share data)

See Notes to Consolidated Financial Statements

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FULTON FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)

THREESIX MONTHS ENDED MARCH 31,JUNE 30, 2004 AND 2003

(Dollars in thousands, except per-share data)

See Notes to Consolidated Financial Statements

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FULTON FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In thousands)

See Notes to Consolidated Financial Statements

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FULTON FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE A – Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with 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 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-month periodthree and six-month periods ended March 31,June 30, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004.

NOTE B – Net Income Per Share

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.

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

NOTE C – Stock Dividend

The Corporation declaredpaid a 5% stock dividend on April 22, 2004, which will be paid on June 4, 2004 to shareholders of record on May 14, 2004. 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 andAll share and per-share information has not been restated. The following table provides share and per-share amounts reflectingrestated to reflect the impact of thethis stock dividend:dividend.

		Three Months Ended March 31
		2004			2003
		(shares in thousands)
As Reported:
Net Income (Basic)		$	0.33		$	0.32
Net Income (Diluted)			0.33			0.32
Weighted average shares outstanding (basic)			108,277			105,922
Weighted average shares outstanding (diluted)			109,220			106,635
Ending Shares Outstanding (at March 31)			108,322			105,598
Pro-Forma:
Net Income (Basic)		$	0.32		$	0.31
Net Income (Diluted)			0.31			0.30
Weighted average shares outstanding (basic)			113,691			111,218
Weighted average shares outstanding (diluted)			114,681			111,967
Ending Shares Outstanding (at March 31)			113,738			110,878

NOTE D – Disclosures about Segments of an Enterprise and Related Information

The Corporation does not have any operating segments which require disclosure of additional information. While the Corporation owns twelve separate banks, each engages in similar activities and provides similar products and services, and operates in the same general geographical area.services. The Corporation’s non-banking activities are immaterial and therefore, separate information has not been disclosed.

NOTE E – Stock-Based Compensation

In December 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure” (Statement 148). Statement 148 clarifies the accounting for options issued in prior periods when a company elects to transition from Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25) accounting to Statement 123, “Accounting for Stock-Based Compensation” (Statement 123) accounting. It also requires additional disclosures with respect to accounting for stock-based compensation. Finally, Statement No. 148 amends Accounting Principles Board Opinion No. 28, “Interim Financial Reporting,” to require disclosure about those effects in interim financial information.

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The Corporation has elected to continue application of APB 25 and related interpretations in accounting for its stock-based employee compensation plans and, accordingly, no compensation expense is reflected in net income. Had compensation cost for these plans been recorded consistent with the fair value provisions of Statements 123 and 148, the Corporation’s net income and net income per share would have been reduced to the following pro-forma amounts:

		Three Months Ended March 31
		2004			2003
		(In thousands except per-share data)
Net income as reported		$	35,846		$	34,043
Stock based employee compensation expense under the fair value method, net of tax			70			65
Pro-forma net income		$	35,776		$	33,978
Net income per share (basic)		$	0.33		$	0.32
Pro-forma net income per share			0.33			0.32
Net income per share (diluted)		$	0.33		$	0.32
Pro-forma net income per share			0.33			0.32

On April 22, 2004, the Corporation’s shareholders approved the “Fulton Financial Corporation 2004 Stock Option and Compensation Plan,” (the Plan) which reserved 13.9 million shares of the Corporation’s stock for future issuance as options or restricted stock awards. The total number of options eligible for grant in any calendar year is determined based on the Corporation’s stock performance relative to its peer group. The exercise price of options to be granted under the Plan is the market value of the Corporation’s stock on the grant date. Specific individual grants of options and restricted stock are at the discretion of the Executive Compensation Committee of the Board of Directors. Under the Plan, the Corporation granted 1.0 million options on July 1, 2004.

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 expects to contribute approximately $2.6 million to the Pension Plan in 2004.

The Corporation currently provides medical and life insurance benefits under a post-retirement benefits plan to retired full-time employees who were employees of the Corporation prior to January 1, 1998. Full-time employees may become eligible for these discretionary benefits if they reach retirement while working for the Corporation. Benefits are based on a graduated scale for years of service after attaining the age of 40.

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The net periodic benefit cost for the Corporation’s Pension Plan and Post-Retirement Plan,post-retirement benefits plan, as determined by consulting actuaries, consisted of the following components for the quarters ended March 31:components:

NOTE G – New Accounting Standards

Variable Interest Entities: In January 2003, the FASBFinancial Accounting Standards Board (FASB) issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities – An Interpretation of ARB No. 51”, which was revised in December 2003 (FIN-46). FIN-46 provides guidance on when to consolidate certain Variable Interest Entities (VIE’s) in the financial statements of the Corporation. VIE’s are entities in which equity investors do not have a controlling financial interest or do not have sufficient equity at risk for the entity to finance activities without additional financial support from other parties. Under FIN-46, a company must consolidate a VIE if the company has a variable interest that will absorb a majority of the VIE’s losses, if they occur, and/or receive a majority of the VIE’s residual returns, if they occur.

The provisions of FIN-46 which relate to the Corporation’s investments in low and moderate income partnerships (LIH Investments) were effective as of December 31, 2003 for LIH Investments made by the Corporation after January 31, 2003 and March 31, 2004 for all other partnerships.others. Based on its review, the Corporation concluded that none of its LIH Investments met the criteria for consolidation and, as such, did not consolidate any LIH Investments as of March 31,June 30, 2004 or December 31, 2003.

LIH Investments continue to be amortized under the effective interest method over the life of the Federal income tax credits generated as a result of such investments, generally ten years. At March 31,June 30, 2004 and December 31, 2003, the Corporation’s LIH Investments totaled $43.9$45.9 million and $40.0 million, respectively. The net income tax benefit associated with these investments was $1.1 million and $1.0 million for the quartersthree months ended March 31,June 30, 2004 and 2003, respectively, and $2.2 million and $2.0 million for the six months ended June 30, 2004 and June 30, 2003, respectively.

Accounting for Certain Loans or Debt Securities Acquired in a Transfer: In December 2003, the Accounting Standards Executive Committee issued Statement of Position 03-3 (SOP 03-3), “Accounting for Certain Loans or Debt Securities Acquired in a Transfer”. SOP 03-3 addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investor’s initial investment in loans or debt securities acquired in a transfer, including business combinations, if those differences are attributable, at least in part, to credit quality.

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SOP 03-3 is effective for loans or debt securities acquired in fiscal years beginning after December 15, 2004. The Corporation intends to adopt the provisions of SOP 03-3 effective January 1, 2005, and does not expect the initial implementation to have a material effect on the Corporation’s consolidated financial statements.

Application of Accounting Principles to Loan Commitments.: In March 2004, the SEC staff issued Staff Accounting Bulletin No. 105 (SAB 105), “Application of Accounting Principles to Loan Commitments”. SAB 105 provides specific guidance on fair value measurement of mortgage loan commitments that are accounted for as derivatives. SAB 105 must be applied to mortgage loan commitments that are accounted for as derivatives entered into after March 31, 2004. The Corporation does not expectadoption of SAB 105 todid not have a material effect on itsthe Corporation’s consolidated financial statements.

NOTE H – Reclassifications

Certain amounts in the 2003 consolidated financial statements and notes have been reclassified to conform to the 2004 presentation.

NOTE I – Acquisition of Resource Bankshares CorporationAcquisitions

On April 1,June 15, 2004, the Corporation completed its acquisition of Resource Bankshares Corporation (Resource)entered into a merger agreement to acquire First Washington FinancialCorp (First Washington), of Virginia Beach, Virginia. Resource was an $885Windsor, New Jersey. First Washington is a $483 million financial holding company whose primary subsidiary was Resourceis First Washington State Bank, which operates six community bankingsixteen community-banking offices in Newport News, Chesapeake, Herndon, Virginia Beach,Mercer, Monmouth, and Richmond, VA and 14 loan production and residential mortgage officesOcean Counties in Virginia, North Carolina, Maryland and Florida.New Jersey.

Under the terms of the merger agreement, each of the approximately 6.14.0 million shares of Resource’sFirst Washington’s common stock waswill be exchanged for 1.46671.35 shares of the Corporation’s common stock. In addition, each of the options to acquire Resource’sFirst Washington’s stock waswill be converted to options to purchase the Corporation’s stock. The acquisition is subject to approval by bank regulatory authorities and First Washington’s shareholders, and is expected to be completed on or before April 15, 2005. As a result of the acquisition, Resource wasFirst Washington will be merged into the Corporation and ResourceFirst Washington State Bank becamewill become a wholly owned subsidiary.

The acquisition is beingwill 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 Resource’sFirst Washington’s operations will be included in the Corporation’s financial statements prospectively from the date of the acquisition.

The total purchase price ofis estimated to be approximately $200$124.0 million, which includes the value (based on the price as of the announcement date) of the Corporation’s stock to be issued, ResourceFirst Washington’s options to be converted and certain acquisition related costs. The carrying value of the net assets of ResourceFirst Washington as of April 1,June 30, 2004 was approximately $60were $33.8 million and accordingly, the purchase price exceeds the carrying value of the net assets by $140 million.$90.2 million as of this date. The total purchase price will be allocated to the net assets acquired as of the merger effective date, based on fair market values.values at that date. The Corporation expects to record a core deposit intangible asset and goodwill as a result of the acquisition accounting.

On April 1, 2004, the Corporation acquired all of the outstanding common stock of Resource Bankshares Corporation (Resource), an $885 million financial holding company and its primary subsidiary, Resource Bank. The total purchase price was $196.0 million, including $185.9 million in stock issued, $7.1 million in Resource stock purchased for cash and $3.0 million of direct acquisition costs. The Corporation issued 1.54 shares of its stock for each of the 5.9 million shares of Resource outstanding on the acquisition date. The purchase price was determined based on the value of the Corporation’s stock on the date when the final terms of the acquisition were agreed to and announced.

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Resource Bank is located in Virginia Beach, Virginia, and operates six community-banking offices in Newport News, Chesapeake, Herndon, Virginia Beach, and Richmond, Virginia and 14 loan production and residential mortgage offices in Virginia, North Carolina, Maryland and Florida.

The acquisition was accounted for as a purchase and the Corporation’s results of operations include Resource from the date of acquisition. 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 (in thousands):

On August 1, 2003, the Corporation acquired all of the outstanding common stock of Premier Bancorp, Inc. (Premier), a $600 million financial holding company, and its wholly-owned subsidiary, Premier Bank. The total purchase price was $92.0 million, including $2.1 million of direct acquisition costs. The Corporation issued 1.477 shares of its stock for each of the 3.4 million shares of Premier outstanding on the acquisition date. The purchase price was determined based on the value of the Corporation’s stock on the date when the final terms of the acquisition were agreed to and announced.

Premier Bank is located in Doylestown, Pennsylvania and the eight community banking offices in Bucks, Northampton and Montgomery Counties, Pennsylvania acquired by the Corporation in this transaction complement its existing retail banking network. The acquisition was accounted for as a purchase and the Corporation’s results of operations include Premier from the date of the acquisition.

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The following table summarizes unaudited pro-forma information assuming the acquisitions of Resource and Premier had occurred on January 1, 2004 and 2003. This pro-forma information includes certain adjustments, including amortization related to fair value adjustments recorded in purchase accounting (in thousands, except per-share information):

Note I – Derivative Financial Instruments – Interest Rate Swaps

Through the acquisition of Resource, the Corporation acquired interest rate swaps, which are being used to hedge certain long term fixed rate certificate of deposit liabilities held at Resource Bank. As of June 30, 2004 Resource Bank had utilized interest rate swaps with a notional amount of $210 million as a hedge against these liabilities. The terms of the certificates of deposit and the interest rate swaps mirror each other and are committed to simultaneously. Under the terms of the swap agreements, Resource Bank 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 of the interest rate swaps and the issuance of the certificates of deposit generates long term floating rate funding for the Corporation. Both the interest rate swap and the certificate of deposit are recorded at fair value, with changes in fair value included in the processConsolidated Statements of completing its fair value analysis and will determineIncome as interest expense. Risk management results indicate that the allocationhedges were 99.16% effective as of the purchase priceJune 30, 2004 resulting in an adjustment to the fair valueinterest expense to reflect hedge ineffectiveness of net assets acquired and goodwill during$32,000 for the second quarter of 2004.

NOTE J – Reclassifications

Certain amounts in the 2003 consolidated financial statements and notes have been reclassified to conform to the 2004 presentation.

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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 other financial informationnotes presented in this report.

FORWARD-LOOKINGFORWARD 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 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 and regulatory oversight of the Corporation, actions of the Federal Reserve Board (FRB) and the Corporation’s success in merger and acquisition integration.

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, Fulton Financial Corporation generates the majority of its revenue through net interest income, or the difference between interest income earned on loans and investments and interest paid on deposits and borrowings. 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 or investments. Offsetting these revenue sources are provisions for credit losses on loans, administrative expenses and income taxes.

The Corporation’s net income for the firstsecond quarter of 2004 increased $1.8$3.8 million, or 5.3%11.2%, from $34.0$34.1 million in 2003 to $35.8$37.9 million in 2004. DilutedAlthough net income increased from period to period, diluted net income per share increased $0.01, or 3.1%, from $0.32 per shareremained the same due to an increase in 2003 to $0.33 per share in 2004. In 2004, the number of outstanding shares issued, mainly for acquisitions. The Corporation realized annualized returns on average assets of 1.49%1.44% and average equity of 15.18%13.82% during the second quarter of 2004. The annualized return on tangible average equity, which is net income divided by average shareholder’s equity, excluding intangible assets, was 17.84%.

The increase in net income compared to the firstsecond quarter of 2003 resulted from a $7.3$14.3 million increase in net interest income, a $3.6$2.5 million increase in investment securities gainsother income and a $1.1$1.7 million decrease in the provision for loan losses, offset by a $3.0 million decrease in other income, primarily mortgage banking income, and a $6.6$12.8 million increase in other expenses.expenses and a $1.9 million increase in income taxes. Net interest income growth resulted from increases in average earning assets, largely due to the acquisition acquisitions

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of Premier Bank (Premier) in the third quarter of 2003.August 2003 and Resource Bank (Resource) in April 2004 (see “Acquisitions” below). While the net interest margin decreased compared to the firstsecond quarter of 2003, it has increased in each ofremained fairly stable for the last twothree calendar quarters.

The following summarizes some of the more significant factors that influenced the Corporation’s firstsecond quarter 2004 results.

Interest Rates -Short-term interest rates remained low throughout the second quarter and the first quartersix months of 2004, with the average overnight borrowing rate, or Federal funds rate, and the average prime lending rate at 1.00% and 4.00%, respectively, both historic lows. Over the past year, the low short-term interest rates had a negative impact on the Corporation’s net interest income and net interest margin, as reducing the rates paid on deposits became exceedingly difficult. As a result, average rates on earning assets decreased more than the average rates paid on liabilities, andcausing the decrease in net interest margin and net interest income both decreased in 2004 compared to 2003.

Longer-term interest rates, including residential mortgage rates, while remaining relatively low during 2004, were higher than the historic lows reached during 2003. Lower long-term interestAs a result, mortgage loan refinance activity slowed, resulting in lower mortgage sale gains.

Generally low rates, however, continued to affectimpact the Corporation’s deposit mixcomposition as funds from maturing time deposits were deposited in core demand and savings accounts as customers were reluctant to lock into the relatively low rates being offered on time deposit products.

IfOn June 30, 2004 the current interestFederal Reserve raised the Federal funds rate environment continues,from 1.00% to 1.25% and the Corporation will be challengedraised its prime-lending rate from 4.00% to maintain and grow its net interest margin and to increase net interest income. Most of the Corporation’s balance sheet has repriced to current rates, however, and management does not expect further significant erosion of the net interest margin if rates remain low. In such an environment, however, growth in net interest income will be more reliant on growth in balances than changes in rates.4.25%. In a rising rate environment, the Corporation expects improvements in net interest income, as discussed in the “Market Risk” section of Management’s Discussion. Increasing long-term rates, however, tendmay continue to have a detrimental impact on mortgage loan origination volumes and related gains on sales of mortgage loans.

Earning Assets -The Corporation experienced significant earning asset growth due to the acquisition of Premier Bank (Premier) in August 2003 and Resource. In addition, the purchase ofCorporation purchased a $165 million agricultural loan portfoiloportfolio in December 2003. Internal growth in average earning assets was $418.0 million, or 5.3%, from the second quarter of 2003 as well asto the second quarter of 2004. The growth in earning assets, both internal growth.and through acquisitions, caused a significant increase in net interest income.

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 continues to maintain excellent asset quality, attributable to its credit culture and underwriting policies. Asset quality measures such as non-performing assets to total assets and net charge-offs to average loans improved in comparison to 2003, resulting in a lower provision for loan losses in the second quarter and first quartersix months of 2004. 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 their ability to pay according to the terms of their loans.

Equity Markets -–During much ofIn recent months, the first quarter of 2004,broader equity markets have leveled off from the increases they experienced in general remained strong and, specifically, bank stocks showed very strong valuations. This resultedthe preceding 12 months. As noted in decisions to sell certain securities, which allowed additional gains to be realized.the “Market Risk” section of Management’s

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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. Gains on sales of these equities have been a recurring component of the Corporation’s earnings for many years. The contributionyears, including 2004, with total gains of these gains to earnings in$5.3 million for the second quarter and $11.2 million for the first quarter of 2004, however, exceeded the first quarter of 2003 due to the aforementioned improving values.six months. If equity markets dothis portfolio does not continue to perform, this component of earnings could contract.

Acquisitions -–During 2003, theThe Corporation completed the acquisitions of two acquisitions.banks in the past year. In August 2003, Premier Bank of Doylestown, Pennsylvania became a wholly-ownedwholly owned subsidiary and strengthened the Corporation’s presence in eastern Pennsylvania markets. In December, the Corporation acquired approximately $165 million of agricultural loans in Central Pennsylvania and Delaware. Both acquisitions strengthen the Corporation’s core banking franchise and contributed to balance sheet and earnings growth in 2004 compared to 2003.

On April 1, 2004, the Corporation completed its acquisition of Resource Bankshares Corporation, located in Virginia Beach, Virginia. This is the Corporation’s first acquisition in Virginia, allowing it to enter a new geographic market. Results for 2004 in comparison to 2003 were dramatically impacted by these acquisitions.

On June 15, 2004, the Corporation entered into a merger agreement to acquire First Washington FinancialCorp (First Washington), of Windsor, New Jersey. First Washington is a $483 million financial holding company whose primary subsidiary is First Washington State Bank, which operates sixteen community-banking offices in Mercer, Monmouth, and Ocean Counties in New Jersey.

Under the terms of the merger agreement, each of the approximately 4.0 million shares of First Washington’s common stock will be exchanged for 1.35 shares of the Corporation’s common stock. In addition, each of the options to acquire First Washington’s stock will be converted to options to purchase the Corporation’s stock. The acquisition is subject to approval by bank regulatory authorities and First Washington’s shareholders, and is expected to be completed on or before April 15, 2005. As a result of the acquisition, First Washington will be merged into the Corporation and First Washington State 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 First Washington’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 $124.0 million, which includes the value of the Corporation’s stock to be issued, First Washington’s options to be converted and certain acquisition related costs. The net assets of First Washington as of June 30, 2004 were $33.8 million and accordingly, the purchase price exceeds the carrying value of the net assets by $90.2 million as of this date. 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.

Acquisitions have long been a supplement to the Corporation’s internal growth. These recent acquisitions provide 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 “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 become very competitive and the prices paid for certain acquisitions have increased recently. 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.

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Quarter ended June 30, 2004 versus quarter ended June 30, 2003

Net Interest Income

Net interest income increased $7.3$14.3 million, from $75.6to $88.7 million in 2003 to $83.02004 from $74.4 million in 2004.2003. This increase was due primarily to average balance growth, with total earningsearning assets increasing 16.6%24.6%, and was offset by the impact of the low interest rate environment. The Corporation’s average prime lending rate decreased from 4.25% in the firstsecond quarter of 2003 to 4.00% in the firstsecond quarter of 2004 as a result of FRB actions. This reduction in an already low interest rate environment negatively impacted the Corporation’s net interest margin as average yields on earning-assets decreased further than the average cost of deposits.

The average yield on earning assets decreased 7046 basis points (a 12.1(an 8.4 % decline) during the period while the cost of interest-bearing liabilities decreased 5542 basis points (a 24.6%20.1% decline). This resulted in a 27an 18 basis point decrease in net interest margin compared to the same period in 2003. 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.

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The following table provides a comparative average balance sheet and net interest income analysis for the firstsecond quarter of 2004 as compared to the same period in 2003 (dollars in thousands):