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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
     
þ   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2006, or
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-10587
FULTON FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
     
PENNSYLVANIA   23-2195389
 
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
 
One Penn Square, P. O. Box 4887, Lancaster, Pennsylvania   17604
 
(Address of principal executive offices)   (Zip Code)
(717) 291-2411
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
     
Title of each class   Name of exchange on which registered
     
Common Stock, $2.50 par value   The NASDAQ Stock Market, LLC
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No o
Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check One):
Large accelerated filed þ       Accelerated filer o       Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ
The aggregate market value of the voting Common Stock held by non-affiliates of the registrant, based on the average bid and asked prices on June 30, 2006, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $2.6 billion. The number of shares of the registrant’s Common Stock outstanding on February 28, 2007 was 172,991,000.
Portions of the Definitive Proxy Statement of the Registrant for the Annual Meeting of Shareholders to be held on May 7, 2007 are incorporated by reference in Part III.
 
 

 


 

TABLE OF CONTENTS
             
    Description   Page  
PART I  
 
       
   
 
       
Item 1.       3  
Item 1A.       9  
Item 1B.       11  
Item 2.       12  
Item 3.       13  
Item 4.       13  
   
 
       
PART II  
 
       
   
 
       
Item 5.       14  
Item 6.       17  
Item 7.       17  
Item 7A.       44  
Item 8.          
        50  
        51  
        52  
        53  
        54  
        83  
        84  
        86  
Item 9.       87  
Item 9A.       87  
Item 9B.       87  
   
 
       
PART III  
 
       
   
 
       
Item 10.       88  
Item 11.       88  
Item 12.       88  
Item 13.       88  
Item 14.       88  
   
 
       
PART IV  
 
       
   
 
       
Item 15.       89  
   
 
       
        92  
        94  
 Employment Agreement
 Employment Agreement
 Deferred Compensation Agreement
 Employment Agreement
 Employment Agreement
 Employment Agreement
 Employment Agreement
 Death Benefit only Agreement
 Subsidiaries of the Registrant
 Consent of Independent Registered Public Accounting Firm
 Certification of Chief Executive Officer
 Certification of Chief Executive Officer
 Certification of Chief Executive Officer
 Certification of Chief Financial Officer

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PART I
Item 1. Business
General
Fulton Financial Corporation (the Corporation) was incorporated under the laws of Pennsylvania on February 8, 1982 and became a bank holding company through the acquisition of all of the outstanding stock of Fulton Bank on June 30, 1982. In 2000, the Corporation became a financial holding company as defined in the Gramm-Leach-Bliley Act (GLB Act), which allowed the Corporation to expand its financial services activities under its holding company structure (See “Competition” and “Regulation and Supervision”). The Corporation directly owns 100% of the common stock of fourteen community banks, two financial services companies and fifteen non-bank entities. As of December 31, 2006, the Corporation had approximately 4,400 employees.
The common stock of Fulton Financial Corporation is listed for quotation on the Global Select Market of The NASDAQ Stock Market under the symbol FULT. The Corporation’s internet address is www.fult.com. Electronic copies of the Corporation’s 2006 Annual Report on Form 10-K are available free of charge by visiting the “Investor Information” section of www.fult.com. Electronic copies of quarterly reports on Form 10-Q and current reports on Form 8-K are also available at this internet address. These reports are posted as soon as reasonably practicable after they are electronically filed with the Securities and Exchange Commission (SEC).
Bank and Financial Services Subsidiaries
The Corporation’s 14 subsidiary banks are located primarily in suburban or semi-rural geographical markets throughout a five state region (Pennsylvania, Maryland, New Jersey, Delaware and Virginia). Pursuant to its “super-community” banking strategy, the Corporation operates the banks autonomously to maximize the advantage of community banking and service to its customers. Where appropriate, operations are centralized through common platforms and back-office functions; however, decision-making generally remains with the local bank management. The Corporation is committed to a decentralized operating philosophy; however in some markets, merging one bank into another creates operating and marketing efficiencies by leveraging existing brand awareness over a larger geographic area. During 2006, the Corporation merged its Premier Bank subsidiary into its Fulton Bank subsidiary. Additionally, in February 2007 the Corporation merged its First Washington State Bank subsidiary into The Bank. The Corporation has announced plans for two additional affiliate mergers that will take place during 2007.
The subsidiary banks are located in areas that are home to a wide range of manufacturing, distribution, health care and other service companies. The Corporation and its banks are not dependent upon one or a few customers or any one industry and the loss of any single customer or a few customers would not have a material adverse impact on any of the subsidiary banks.
Each of the subsidiary banks offers a full range of consumer and commercial banking services in its local market area. Personal banking services include various checking and savings products, certificates of deposit and individual retirement accounts. The subsidiary banks offer a variety of consumer lending products to creditworthy customers in their market areas. Secured loan products include home equity loans and lines of credit, which are underwritten based on loan-to-value limits specified in the lending policy. Subsidiary banks also offer a variety of fixed and variable-rate products, including construction loans and jumbo loans. Residential mortgages are offered through Fulton Mortgage Company, which operates as a division of each subsidiary bank (except for Resource Bank and The Columbia Bank, which maintain their own mortgage lending operations). Residential mortgages are generally underwritten based on secondary market standards. Consumer loan products also include automobile loans, automobile and equipment leases, credit cards, personal lines of credit and checking account overdraft protection.
Commercial banking services are provided to small and medium sized businesses (generally with sales of less than $100 million) in the subsidiary banks’ market areas. Loans to one borrower are generally limited to $33 million in total commitments, which is below the Corporation’s regulatory lending limit. Commercial lending options include commercial, financial, and agricultural and real estate loans. Both floating and fixed rate loans are provided, with floating rate loans generally tied to an index such as the Prime Rate or LIBOR (London Interbank Offering Rate). The Corporation’s commercial lending policy encourages relationship banking and provides strict guidelines related to customer creditworthiness and collateral requirements. In addition, construction lending, equipment leasing, credit cards, letters of credit, cash management services and traditional deposit products are offered to commercial customers.

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Through its financial services subsidiaries, the Corporation offers investment management, trust, brokerage, insurance and investment advisory services in the market areas serviced by the subsidiary banks.
The Corporation’s subsidiary banks deliver their products and services through traditional branch banking, with a network of full service branch offices. Electronic delivery channels include a network of automated teller machines, telephone banking and online banking through the internet. The variety of available delivery channels allows customers to access their account information and perform certain transactions such as transferring funds and paying bills at virtually any hour of the day.
The following table provides certain information for the Corporation’s banking and financial services subsidiaries as of December 31, 2006.
                             
    Main Office   Total     Total        
Subsidiary   Location   Assets     Deposits     Branches (1)  
        (in millions)          
Fulton Bank
  Lancaster, PA   $ 5,003     $ 3,341       83  
Lebanon Valley Farmers Bank
  Lebanon, PA     786       602       12  
Swineford National Bank
  Hummels Wharf, PA     266       202       7  
Lafayette Ambassador Bank
  Easton, PA     1,328       990       24  
FNB Bank, N.A
  Danville, PA     304       219       8  
Hagerstown Trust
  Hagerstown, MD     518       407       12  
Delaware National Bank
  Georgetown, DE     411       271       12  
The Bank
  Woodbury, NJ     1,318       1,058       31  
The Peoples Bank of Elkton
  Elkton, MD     111       96       2  
Skylands Community Bank
  Hackettstown, NJ     609       467       12  
Resource Bank
  Virginia Beach, VA     1,448       832       7  
First Washington State Bank
  Windsor, NJ     589       428       16  
Somerset Valley Bank
  Somerville, NJ     575       403       13  
The Columbia Bank
  Columbia, MD     1,678       1,035       25  
Fulton Financial Advisors, N.A. and Fulton Insurance Services Group, Inc (2)
  Lancaster, PA                  
 
                         
 
                        264  
 
                         
 
(1)   See additional information in “Item 2. Properties”.
 
(2)   Dearden, Maguire, Weaver and Barrett LLC, an investment management and advisory company, is a wholly owned subsidiary of Fulton Financial Advisors, N.A.
Non-Bank Subsidiaries
The Corporation owns 100% of the common stock of six non-bank subsidiaries which are consolidated for financial reporting purposes: (i) Fulton Reinsurance Company, which engages in the business of reinsuring credit life and accident and health insurance directly related to extensions of credit by the banking subsidiaries of the Corporation; (ii) Fulton Financial Realty Company, which holds title to or leases certain properties upon which Corporation branch offices and other facilities are located; (iii) Central Pennsylvania Financial Corp., which owns certain limited partnership interests in partnerships invested in low and moderate income housing projects; (iv) FFC Management, Inc., which owns certain investment securities and other passive investments; (v) Virginia Financial Services, which engages in business consulting activities; (iv) FFC Penn Square, Inc. which owns $44.0 million of trust preferred securities issued by a subsidiary of the Corporation’s largest bank subsidiary.
The Corporation owns 100% of the common stock of nine non-bank subsidiaries which are not consolidated for financial reporting purposes: (i) Premier Capital Trust, a Delaware business trust whose sole asset is $10.3 million of junior subordinated deferrable interest debentures from the Corporation; (ii) PBI Capital Trust II, a Delaware business trust whose sole asset is $15.5 million of junior subordinated deferrable interest debentures from the Corporation; (iii) Resource Capital Trust III, a Delaware business trust

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whose sole asset is $3.1 million of junior subordinated deferrable interest debentures from the Corporation; (iv) Bald Eagle Statutory Trust I, a Connecticut business trust whose sole asset is $4.1 million of junior subordinated deferrable interest debentures from the Corporation; (v) Bald Eagle Statutory Trust II, a Connecticut business trust whose sole asset is $2.6 million of junior subordinated deferrable interest debentures from the Corporation; (vi) Columbia Capital Trust I, a Delaware business trust whose sole asset is $6.2 million of junior subordinated deferrable interest debentures from the Corporation; (vii) Columbia Capital Trust II, a Delaware business trust whose sole asset is $4.1 million of junior subordinated deferrable interest debentures from the Corporation; (viii) Columbia Capital Trust III, a Delaware business trust whose sole asset is $6.2 million of junior subordinated deferrable interest debentures from the Corporation; and (ix) Fulton Capital Trust I, a Pennsylvania business trust whose sole asset is $154.6 million of junior subordinated deferrable interest debentures from the Corporation.
Competition
The banking and financial services industries are highly competitive. Within its geographical region, the Corporation’s subsidiaries face direct competition from other commercial banks, varying in size from local community banks to larger regional and national banks, credit unions and non-bank entities. With the growth in electronic commerce and distribution channels, the banks also face competition from banks not physically located in the Corporation’s geographical markets.
The competition in the industry is also highly competitive due to the GLB Act. Under the GLB Act, banks, insurance companies or securities firms may affiliate under a financial holding company structure, allowing expansion into non-banking financial services activities that were previously restricted. These include a full range of banking, securities and insurance activities, including securities and insurance underwriting, issuing and selling annuities and merchant banking activities. While the Corporation does not currently engage in all of these activities, the ability to do so without separate approval from the Federal Reserve Board (FRB) enhances the ability of the Corporation – and financial holding companies in general – to compete more effectively in all areas of financial services.
As a result of the GLB Act, there is a great deal of competition for customers that were traditionally served by the banking industry. While the GLB Act increased competition, it also provided opportunities for the Corporation to expand its financial services offerings, such as insurance products through Fulton Insurance Services Group, Inc. The Corporation also competes through the variety of products that it offers and the quality of service that it provides to its customers. However, there is no guarantee that these efforts will insulate the Corporation from competitive pressure, which could impact its pricing decisions for loans, deposits and other services and could ultimately impact financial results.
Market Share
Although there are many ways to assess the size and strength of banks, deposit market share continues to be an important industry statistic. This publicly available information is compiled, as of June 30th of each year, by the Federal Deposit Insurance Corporation (FDIC). The Corporation’s banks maintain branch offices in 48 counties across five states. In ten of these counties, the Corporation ranks in the top three in deposit market share (based on deposits as of June 30, 2006). The following table summarizes information about the counties in which the Corporation has branch offices and its market position in each county.
                                                     
                        No. of Financial   Deposit Market
                        Institutions   Share (6/30/06)
            Population   Banking   Banks/   Credit        
County   State   (2006 Est.)   Subsidiary   Thrifts   Unions   Rank   %
Lancaster
  PA     493,000     Fulton Bank     21       12       1       19.2 %
Centre
  PA     142,000     Fulton Bank     15       4       19       0.06 %
Dauphin
  PA     254,000     Fulton Bank     17       10       7       4.6 %
Cumberland
  PA     224,000     Fulton Bank     19       6       14       0.7 %
York
  PA     410,000     Fulton Bank     17       23       4       9.8 %
Chester
  PA     477,000     Fulton Bank     41       5       16       1.2 %
Delaware
  PA     556,000     Fulton Bank     39       15       41       0.1 %

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

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                        No. of Financial   Deposit Market
                        Institutions   Share (6/30/06)
            Population   Banking   Banks/   Credit        
County   State   (2006 Est.)   Subsidiary   Thrifts   Unions   Rank   %
Monmouth
  NJ     643,000     First Washington State Bank     28       9       23       0.9 %
Ocean
  NJ     566,000     First Washington State Bank     23       5       16       1.0 %
Chesapeake
  VA     217,000     Resource Bank     15       6       11       1.7 %
Fairfax
  VA     1,018,000     Resource Bank     35       13       21       0.4 %
Newport News
  VA     183,000     Resource Bank     12       7       14       0.8 %
Richmond City
  VA     191,000     Resource Bank     15       18       15       0.2 %
Virginia Beach
  VA     441,000     Resource Bank     17       8       4       8.8 %
Supervision and Regulation
The Corporation operates in an industry that is subject to various laws and regulations that are enforced by a number of Federal and state agencies. Changes in these laws and regulations, including interpretation and enforcement activities, could impact the cost of operating in the financial services industry, limit or expand permissible activities or affect competition among banks and other financial institutions. The Corporation cannot predict the changes in laws and regulations that might occur, however, it is likely that the current high level of enforcement and compliance-related activities of Federal and state authorities will continue or potentially increase.
The following discussion summarizes the current regulatory environment for financial holding companies and banks, including a summary of the more significant laws and regulations.
Regulators – The Corporation is a registered financial holding company and its subsidiary banks are depository institutions whose deposits are insured by the FDIC. The Corporation and its subsidiaries are subject to various regulations and examinations by regulatory authorities. The following table summarizes the charter types and primary regulators for each of the Corporation’s subsidiary banks.
         
        Primary
Entity   Charter   Regulator(s)
Fulton Bank
  PA   PA/FDIC
Lebanon Valley Farmers Bank
  PA   PA/FRB
Swineford National Bank
  National   OCC (1)
Lafayette Ambassador Bank
  PA   PA/FRB
FNB Bank, N.A
  National   OCC
Hagerstown Trust
  MD   MD/FDIC
Delaware National Bank
  National   OCC
The Bank
  NJ   NJ/FDIC
Peoples Bank of Elkton
  MD   MD/FDIC
Skylands Community Bank
  NJ   NJ/FDIC
Resource Bank
  VA   VA/FRB
First Washington State Bank
  NJ   NJ/FDIC
Somerset Valley Bank
  NJ   NJ/FDIC
The Columbia Bank
  MD   MD/FDIC
Fulton Financial Advisors, N.A
  National (2)   OCC
Fulton Financial (Parent Company)
  N/A   FRB
 
(1)   Office of the Comptroller of the Currency.
 
(2)   Fulton Financial Advisors, N.A. is chartered as an uninsured national trust bank.

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Federal statutes that apply to the Corporation and its subsidiaries include the GLB Act, the Bank Holding Company Act (BHCA), the Federal Reserve Act and the Federal Deposit Insurance Act. In general, these statutes establish the eligible business activities of the Corporation, certain acquisition and merger restrictions, limitations on inter-company transactions such as loans and dividends, and capital adequacy requirements, among other regulations.
The Corporation is subject to regulation and examination by the FRB, and is required to file periodic reports and to provide additional information that the FRB may require. In addition, the FRB must approve certain proposed changes in organizational structure or other business activities before they occur. The BHCA imposes certain restrictions upon the Corporation regarding the acquisition of substantially all of the assets of or direct or indirect ownership or control of any bank of which it is not already the majority owner.
Capital Requirements – There are a number of restrictions on financial and bank holding companies and FDIC-insured depository subsidiaries that are designed to minimize potential loss to depositors and the FDIC insurance funds. If an FDIC-insured depository subsidiary is “undercapitalized”, the bank holding company is required to ensure (subject to certain limits) the subsidiary’s compliance with the terms of any capital restoration plan filed with its appropriate banking agency. Also, a bank holding company is required to serve as a source of financial strength to its depository institution subsidiaries and to commit resources to support such institutions in circumstances where it might not do so absent such policy. Under the BHCA, the FRB has the authority to require a bank holding company to terminate any activity or to relinquish control of a non-bank subsidiary upon the FRB’s determination that such activity or control constitutes a serious risk to the financial soundness and stability of a depository institution subsidiary of the bank holding company.
Bank holding companies are required to comply with the FRB’s risk-based capital guidelines that require a minimum ratio of total capital to risk-weighted assets of 8%. At least half of the total capital is required to be Tier 1 capital. In addition to the risk-based capital guidelines, the FRB has adopted a minimum leverage capital ratio under which a bank holding company must maintain a level of Tier 1 capital to average total consolidated assets of at least 3% in the case of a bank holding company which has the highest regulatory examination rating and is not contemplating significant growth or expansion. All other bank holding companies are expected to maintain a leverage capital ratio of at least 1% to 2% above the stated minimum.
Dividends and Loans from Subsidiary Banks – There are also various restrictions on the extent to which the Corporation and its non-bank subsidiaries can receive loans from its banking subsidiaries. In general, these restrictions require that such loans be secured by designated amounts of specified collateral and are limited, as to any one of the Corporation or its non-bank subsidiaries, to 10% of the lending bank’s regulatory capital (20% in the aggregate to all such entities).
The Corporation is also limited in the amount of dividends that it may receive from its subsidiary banks. Dividend limitations vary, depending on the subsidiary bank’s charter and whether or not it is a member of the Federal Reserve System. Generally, subsidiaries are prohibited from paying dividends when doing so would cause them to fall below the regulatory minimum capital levels. Additionally, limits exist on paying dividends in excess of net income for specified periods. See “Note J – Regulatory Matters” in the Notes to Consolidated Financial Statements for additional information regarding regulatory capital and dividend and loan limitations.
Federal Deposit Insurance – Substantially all of the deposits of the Corporation’s subsidiary banks are insured up to the applicable limits by the Bank Insurance Fund of the FDIC, generally up to $100,000 per insured depositor and up to $250,000 for retirement accounts. The subsidiary banks pay deposit insurance premiums to the FDIC based on an assessment rate established by the FDIC for Bank Insurance Fund member institutions. The FDIC has established a risk-based assessment system under which institutions are classified and pay premiums according to their perceived risk to the federal deposit insurance funds. The FDIC is not required to charge deposit insurance premiums when the ratio of deposit insurance reserves to insured deposits is maintained above specified levels. During the past several years, the ratio has been above the minimum level and, accordingly, the Corporation has not been required to pay premiums. However, in 2006 legislation was passed reforming the bank deposit insurance system. The reform act allowed the FDIC to raise the minimum reserve ratio and allowed eligible insured institutions an initial one-time credit to be used against premiums due. As a result, beginning in 2007 the Corporation will be assessed insurance premiums, which may be partly offset by the one-time credit.
USA Patriot Act – Anti-terrorism legislation enacted under the USA Patriot Act of 2001 (Patriot Act) expanded the scope of anti-money laundering laws and regulations and imposed significant new compliance obligations for financial institutions, including the

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Corporation’s subsidiary banks. These regulations include obligations to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing.
Failure to comply with the Patriot Act’s requirements could have serious legal, financial and reputational consequences for the institution. The Corporation has adopted appropriate policies, procedures and controls to address compliance with the Patriot Act and will continue to revise and update its policies, procedures and controls to reflect changes required, as necessary.
Sarbanes-Oxley Act of 2002 The Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley), which was signed into law in July 2002, impacts all companies with securities registered under the Securities Exchange Act of 1934, including the Corporation. Sarbanes-Oxley created new requirements in the areas of corporate governance and financial disclosure including, among other things, (i) increased responsibility for Chief Executive Officers and Chief Financial Officers with respect to the content of filings with the SEC; (ii) enhanced requirements for audit committees, including independence and disclosure of expertise; (iii) enhanced requirements for auditor independence and the types of non-audit services that auditors can provide; (iv) accelerated filing requirements for SEC reports; (v) disclosure of a code of ethics (vi) increased disclosure and reporting obligations for companies, their directors and their executive officers; and (vii) new and increased civil and criminal penalties for violations of securities laws. Many of the provisions became effective immediately, while others became effective as a result of rulemaking procedures delegated by Sarbanes-Oxley to the SEC.
Section 404 of Sarbanes Oxley became effective for the year ended December 31, 2004. This section required management to issue a report on the effectiveness of its internal controls over financial reporting. In addition, the Corporation’s independent registered public accountants were required to issue an opinion on management’s assessment and an opinion on the effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2004. These reports can be found in Item 8, “Financial Statements and Supplementary Information”. Certifications of the Chief Executive Officer and the Chief Financial Officer as required by Sarbanes-Oxley and the resulting SEC rules can be found in the “Signatures” and “Exhibits” sections.
Monetary and Fiscal Policy – The Corporation and its subsidiary banks are affected by fiscal and monetary policies of the Federal government, including those of the FRB, which regulates the national money supply in order to manage recessionary and inflationary pressures. Among the techniques available to the FRB are engaging in open market transactions of U.S. Government securities, changing the discount rate and changing reserve requirements against bank deposits. These techniques are used in varying combinations to influence the overall growth of bank loans, investments and deposits. Their use may also affect interest rates charged on loans and paid on deposits. The effect of monetary policies on the earnings of the Corporation cannot be predicted.
Item 1A. Risk Factors
An investment in the Corporation’s common stock involves certain risks, including, among others, the risks described below. In addition to the other information contained in this report, you should carefully consider the following risk factors.
Changes in interest rates may have an adverse effect on the Corporation’s profitability.
The Corporation is affected by fiscal and monetary policies of the federal government, including those of the Federal Reserve Board (FRB), which regulates the national money supply in order to manage recessionary and inflationary pressures. Among the techniques available to the FRB are engaging in open market transactions of U.S. Government securities, changing the discount rate and changing reserve requirements against bank deposits. The use of these techniques may also affect interest rates charged on loans and paid on deposits.
Net interest income is the most significant component of the Corporation’s net income, accounting for approximately 78% of total revenues in 2006. The narrowing of interest rate spreads, the difference between interest rates earned on loans and investments and interest rates paid on deposits and borrowings, could adversely affect the Corporation’s net income and financial condition. Based on the current interest rate environment and the price sensitivity of customers, loan demand could continue to outpace the growth of core demand and savings accounts, resulting in compression of net interest margin. Furthermore, the U. S. Treasury yield curve, which is a plot of the yields on treasury securities over various maturity terms was relatively flat, and at times, downward sloping, with minimal differences between long and short-term rates during 2006, resulting in a negative impact to the Corporation’s net interest income and net interest margin. Finally, regional and local economic conditions as well as fiscal and monetary policies of the federal government, including those of the FRB, may affect prevailing interest rates. The Corporation cannot predict or control changes in interest rates.

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Changes in economic conditions and the composition of the Corporation’s loan portfolio could lead to higher loan charge-offs or an increase in the Corporation’s provision for loan losses and may reduce the Corporation’s net income.
Changes in national and regional economic conditions could impact the loan portfolios of the Corporation’s subsidiary banks. For example, an increase in unemployment, a decrease in real estate values or increases in interest rates, as well as other factors, could weaken the economies of the communities the Corporation serves. Weakness in the market areas served by the Corporation’s subsidiary banks could depress its earnings and consequently its financial condition because:
    customers may not want or need the Corporation’s products or services;
 
    borrowers may not be able to repay their loans;
 
    the value of the collateral securing the Corporation’s loans to borrowers may decline; and
 
    the quality of the Corporation’s loan portfolio may decline.
Any of the latter three scenarios could require the Corporation to charge-off a higher percentage of its loans and/or increase its provision for loan losses, which would reduce its net income.
In addition, the amount of the Corporation’s provision for loan losses and the percentage of loans it is required to charge-off may be impacted by the overall risk composition of the loan portfolio. In recent years, the amount of the Corporation’s commercial loans (including agricultural loans) and commercial mortgages has increased, comprising a greater percentage of its overall loan portfolio. These loans are inherently more risky than certain other types of loans, such as residential mortgage loans. While the Corporation believes that its allowance for loan losses as of December 31, 2006 is sufficient to cover losses inherent in the loan portfolio on that date, the Corporation may be required to increase its loan loss provision or charge-off a higher percentage of loans due to changes in the risk characteristics of the loan portfolio, thereby reducing its net income. To the extent any of the Corporation’s subsidiary banks rely more heavily on loans secured by real estate, a decrease in real estate values could cause higher loan losses and require higher loan loss provisions.
Fluctuations in the value of the Corporation’s equity portfolio, or assets under management by the Corporation’s investment management and trust services, could have an impact on the Corporation’s results of operations.
At December 31, 2006, the Corporation’s investments consisted of $72.3 million of FHLB and other government agency stock, $72.3 million of stocks of other financial institutions and $13.5 million of mutual funds. The Corporation’s equity portfolio consists primarily of common stocks of publicly traded financial institutions. The Corporation realized net gains on sales of financial institutions stocks of $7.0 million in 2006, $5.8 million in 2005 and $14.8 million in 2004. The value of the securities in the Corporation’s equity portfolio may be affected by a number of factors, including factors that impact the performance of the U.S. securities market in general and, due to the concentration in stocks of financial institutions in the Corporation’s equity portfolio, specific risks associated with that sector. If the value of one or more equity securities in the portfolio were to decline significantly, the unrealized gains in the portfolio could be reduced or lost in their entirety. In addition to the Corporation’s equity portfolio, the Corporation’s investment management and trust services income could be impacted by fluctuations in the securities market. A portion of the Corporation’s trust revenue is based on the value of the underlying investment portfolios. If the values of those investment portfolios decrease, whether due to factors influencing U.S. securities markets in general, or otherwise, the Corporation’s revenue could be negatively impacted. In addition, the Corporation’s ability to sell its brokerage services is dependent, in part, upon consumers’ level of confidence in the outlook for rising securities prices.
If the Corporation is unable to acquire additional banks on favorable terms or if it fails to successfully integrate or improve the operations of acquired banks, the Corporation may be unable to execute its growth strategies.
The Corporation has historically supplemented its internal growth with strategic acquisitions of banks, branches and other financial services companies. There can be no assurance that the Corporation will be able to complete future acquisitions on favorable terms or that it will be able to assimilate acquired institutions successfully. In addition, the Corporation may not be able to achieve anticipated cost savings or operating results associated with acquisitions. Acquired institutions also may have unknown or contingent liabilities or deficiencies in internal controls that could result in material liabilities or negatively impact the Corporation’s ability to complete the internal control procedures required under federal securities laws, rules and regulations or by certain laws, rules and regulations applicable to the banking industry.

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If the goodwill that the Corporation has recorded in connection with its acquisitions becomes impaired, it could have a negative impact on the Corporation’s profitability.
Applicable accounting standards require that the purchase method of accounting be used for all business combinations. Under purchase accounting, if the purchase price of an acquired company exceeds the fair value of the company’s net assets, the excess is carried on the acquirer’s balance sheet as goodwill. At December 31, 2006, the Corporation had approximately $626.0 million of goodwill on its balance sheet. Companies must evaluate goodwill for impairment at least annually. Write-downs of the amount of any impairment, if necessary, are to be charged to the results of operations in the period in which the impairment occurs. Based on tests of goodwill impairment conducted to date, the Corporation has concluded that there has been no impairment, and no write-downs have been recorded. However, there can be no assurance that the future evaluations of goodwill will not result in findings of impairment and write-downs.
The competition the Corporation faces is increasing and may reduce the Corporation’s customer base and negatively impact the Corporation’s results of operations.
There is significant competition among commercial banks in the market areas served by the Corporation’s subsidiary banks. In addition, as a result of the deregulation of the financial industry, the Corporation’s subsidiary banks also compete with other providers of financial services such as savings and loan associations, credit unions, consumer finance companies, securities firms, insurance companies, commercial finance and leasing companies, the mutual funds industry, full service brokerage firms and discount brokerage firms, some of which are subject to less extensive regulations than the Corporation is with respect to the products and services they provide. Some of the Corporation’s competitors, including certain super-regional and national bank holding companies that have made acquisitions in its market area, have greater resources than the Corporation has, and as such, may have higher lending limits and may offer other services not offered by the Corporation.
The Corporation also experiences competition from a variety of institutions outside its market areas. Some of these institutions conduct business primarily over the internet and may thus be able to realize certain cost savings and offer products and services at more favorable rates and with greater convenience to the customer.
Competition may adversely affect the rates the Corporation pays on deposits and charges on loans, thereby potentially adversely affecting the Corporation’s profitability. The Corporation’s profitability depends upon its continued ability to successfully compete in the market areas it serves while achieving its objectives.
The supervision and regulation to which the Corporation is subject can be a competitive disadvantage.
The Corporation is a registered financial holding company, and its subsidiary banks are depository institutions whose deposits are insured by the Federal Deposit Insurance Corporation (FDIC). As a result, the Corporation and its subsidiaries are subject to regulations and examinations by various regulatory authorities. In general, statutes establish the eligible business activities for the Corporation, certain acquisition and merger restrictions, limitations on inter-company transactions such as loans and dividends, capital adequacy requirements, requirements for anti-money laundering programs and other compliance matters, among other regulations. The Corporation is extensively regulated under federal and state banking laws and regulations that are intended primarily for the protection of depositors, federal deposit insurance funds and the banking system as a whole. Compliance with these statutes and regulations is important to the Corporation’s ability to engage in new activities and to consummate additional acquisitions. In addition, the Corporation is subject to changes in federal and state tax laws as well as changes in banking and credit regulations, accounting principles and governmental economic and monetary policies. The Corporation cannot predict whether any of these changes may adversely and materially affect it. Federal and state banking regulators also possess broad powers to take supervisory actions, as they deem appropriate. These supervisory actions may result in higher capital requirements, higher insurance premiums and limitations on the Corporation’s activities that could have a material adverse effect on its business and profitability. While these statutes are generally designed to minimize potential loss to depositors and the FDIC insurance funds, they do not eliminate risk, and compliance with such statutes increases the Corporation’s expense, requires management’s attention and can be a disadvantage from a competitive standpoint with respect to non-regulated competitors.
Item 1B. Unresolved Staff Comments
None.

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Item 2. Properties
The following table summarizes the Corporation’s branch properties, by subsidiary bank as of December 31, 2006. Remote service facilities (mainly stand-alone automated teller machines) are excluded.
                         
                    Total  
Bank   Owned     Leased     Branches  
Fulton Bank
    56       27       83  
Lebanon Valley Farmers Bank
    11       1       12  
Swineford National Bank
    5       2       7  
Lafayette Ambassador Bank
    14       10       24  
FNB Bank, N.A
    6       2       8  
Hagerstown Trust
    9       3       12  
Delaware National Bank
    11       1       12  
The Bank
    25       6       31  
The Peoples Bank of Elkton
    2             2  
Skylands Community Bank
    5       7       12  
Resource Bank
    2       5       7  
Somerset Valley Bank
          13       13  
First Washington State Bank
    7       9       16  
The Columbia Bank
    4       21       25  
 
                 
Total
    157       107       264  
 
                 

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The following table summarizes the Corporation’s other significant properties (administrative headquarters locations generally include a branch; these are also reflected in the preceding table):
                 
            Owned/
Bank   Property   Location   Leased
Fulton Financial Corp.
  Operations Center   East Petersburg, PA   Owned
Fulton Bank/Fulton Financial Corp.
  Admin. Headquarters   Lancaster, PA     (1 )
Fulton Bank
  Operations Center   Mantua, NJ   Owned
Fulton Bank, Drovers Division
  Admin. Headquarters   York, PA   Leased (2)
Fulton Bank, Great Valley Division
  Admin. Headquarters   Reading, PA   Leased (5)
Fulton Bank, Premier Division
  Admin. Headquarters   Doylestown, PA   Owned
Lebanon Valley Farmers Bank
  Admin. Headquarters   Lebanon, PA   Owned
Swineford National Bank
  Admin. Headquarters   Hummels Wharf, PA   Owned
Lafayette Ambassador Bank
  Admin. Headquarters   Easton, PA   Owned
Lafayette Ambassador Bank
  Operations Center   Bethlehem, PA   Owned
Lafayette Ambassador Bank
  Corp Service Center   Bethlehem, PA   Leased (6)
FNB Bank, N.A
  Admin. Headquarters   Danville, PA   Owned
Hagerstown Trust
  Admin. Headquarters   Hagerstown, MD   Owned
Delaware National Bank
  Admin. Headquarters   Georgetown, DE   Leased (3)
The Bank
  Admin. Headquarters   Woodbury, NJ   Owned
Peoples Bank of Elkton
  Admin. Headquarters   Elkton, MD   Owned
Skylands Community Bank
  Admin. Headquarters   Hackettstown, NJ   Leased (4)
Resource Bank
  Admin. Headquarters   Herndon, VA   Owned
Somerset Valley Bank
  Admin. Headquarters   Somerville, PA   Owned
First Washington State Bank
  Admin. Headquarters   Windsor, NJ   Owned
The Columbia Bank
  Admin. Headquarters   Columbia, MD   Leased (7)
 
(1)   Includes approximately 100,000 square feet which is owned by an independent third party who financed the construction through a loan from Fulton Bank. The Corporation is leasing this space from the third party in an arrangement accounted for as a capital lease. The lease term expires in 2027. The remainder of the Administrative Headquarters location is owned by the Corporation.
 
(2)   Lease expires in 2013.
 
(3)   Lease expires in 2011.
 
(4)   Lease expires in 2009.
 
(5)   Lease expires in 2016.
 
(6)   Lease expires in 2017.
 
(7)   Lease expires in 2013.
Item 3. Legal Proceedings
There are no legal proceedings pending against Fulton Financial Corporation or any of its subsidiaries which are expected to have a material impact upon the financial position and/or the operating results of the Corporation.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders of Fulton Financial Corporation during the fourth quarter of 2006.

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PART II
Item 5.   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Common Stock
As of December 31, 2006, the Corporation had 173.6 million shares of $2.50 par value common stock outstanding held by 51,000 holders of record. The common stock of the Corporation is traded on The NASDAQ Stock Market under the symbol FULT.
The following table presents the quarterly high and low prices of the Corporation’s common stock and per-share cash dividends declared for each of the quarterly periods in 2006 and 2005. Per-share amounts have been retroactively adjusted to reflect the effect of stock dividends and splits.
                         
    Price Range   Per-Share
    High   Low   Dividend
2006
                       
First Quarter
  $ 17.35     $ 16.07     $ 0.138  
Second Quarter
    16.47       15.36       0.1475  
Third Quarter
    16.99       15.55       0.1475  
Fourth Quarter
    16.88       15.65       0.1475  
 
                       
2005
                       
First Quarter
  $ 17.92     $ 16.00     $ 0.126  
Second Quarter
    17.14       15.68       0.138  
Third Quarter
    18.00       15.43       0.138  
Fourth Quarter
    16.90       14.87       0.138  
Securities Authorized for Issuance under Equity Compensation Plans
The following table provides information about options outstanding under the Corporation’s 1996 Incentive Stock Option Plan and 2004 Stock Option and Compensation Plan as of December 31, 2006:
                         
                    Number of securities  
                    remaining available for  
                    future issuance under  
    Number of securities to     Weighted-average     equity compensation  
    be issued upon exercise     exercise price of     plans (excluding  
    of outstanding options,     outstanding options,     securities reflected in  
Plan Category   warrants and rights     warrants and rights     first column)  
Equity compensation plans approved by security holders
    7,996,776     $ 12.65       14,864,642  
 
                       
Equity compensation plans not approved by security holders
                —           —                   —  
 
                       
 
                 
Total
    7,996,776     $ 12.65       14,864,642  
 
                 

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Performance Graph
The graph below shows cumulative investment returns to shareholders based on the assumptions that (A) an investment of $100.00 was made on December 31, 2001, in each of the following: (i) Fulton Financial Corporation common stock; (ii) the stock of all U. S. companies traded on The NASDAQ Stock Market and (iii) common stock of the performance peer group approved by the Board of Directors on September 21, 2004 consisting of bank and financial holding companies located throughout the United States with assets between $6-20 billion which were not a party to a merger agreement as of the end of the period and (B) all dividends were reinvested in such securities over the past five years. The graph is not indicative of future price performance.
The graph below is furnished under this Part II Item 5 of this Form 10-K shall not be deemed to be “soliciting material” or to be “filed” with the Commission or subject to Regulation 14A or 14C, or to the liabilities of Section 18 of the Exchange Act of 1934, as amended.

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(PERFORMANCE GRAPH)
                                                 
    Period Ending December 31
Index   2001   2002   2003   2004   2005   2006
 
Fulton Financial Corporation
  $ 100.00     $ 104.42     $ 140.24     $ 161.58     $ 157.56     $ 162.67  
NASDAQ Composite
  $ 100.00     $ 68.76     $ 103.67     $ 113.16     $ 115.57     $ 127.58  
Fulton Financial Peer Group
  $ 100.00     $ 100.53     $ 130.70     $ 151.98     $ 151.50     $ 165.31  
Issuer Purchases of Equity Securities
                                 
                    Total number of    
                    shares purchased   Maximum number of
    Total           as part of a   shares that may yet
    number of   Average price   publicly   be
    shares   paid per   announced plan   purchased under the
Period   purchased   share   or program   plan or program
(10/01/06 - 10/31/06)
                      1,043,490  
(11/01/06 - 11/30/06)
                      1,043,490  
(12/01/06 - 12/31/06)
    5,000     $ 15.99       5,000       1,038,490  
On March 21, 2006 a stock repurchase plan was approved by the Board of Directors to repurchase up to 2.1 million shares through December 31, 2006. On December 19, 2006 the Board of Directors extended the stock repurchase plan through June 30, 2007. As of December 31, 2006, 1.1 million shares were repurchased under this plan. No stock repurchases were made outside the plans and all were made under the guidelines of Rule 10b-18 and in compliance with Regulation M.

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Item 6. Selected Financial Data
5-YEAR CONSOLIDATED SUMMARY OF FINANCIAL RESULTS
(dollars in thousands, except per-share data and ratios)
                                         
    For the Year  
    2006     2005     2004     2003     2002  
SUMMARY OF INCOME
                                       
Interest income
  $ 864,507     $ 625,768     $ 493,643     $ 435,531     $ 469,288  
Interest expense
    378,944       213,220       135,994       131,094       158,219  
 
                             
Net interest income
    485,563       412,548       357,649       301,437       311,069  
Provision for loan losses
    3,498       3,120       4,717       9,705       11,900  
Other income
    149,875       144,298       138,864       134,370       114,012  
Other expenses
    365,991       316,291       277,515       233,651       226,046  
 
                             
Income before income taxes
    265,949       237,435       214,281       195,451       187,135  
Income taxes
    80,422       71,361       64,673       59,084       56,181  
 
                             
Net income
  $ 185,527     $ 166,074     $ 149,608     $ 136,367     $ 130,954  
 
                             
 
                                       
PER-SHARE DATA (1)
                                       
Net income (basic)
  $ 1.07     $ 1.01     $ 0.95     $ 0.93     $ 0.88  
Net income (diluted)
    1.06       1.00       0.94       0.92       0.88  
Cash dividends
    0.581       0.540       0.493       0.452       0.405  
RATIOS
                                       
Return on average assets
    1.30 %     1.41 %     1.45 %     1.55 %     1.66 %
Return on average equity
    12.84       13.24       13.98       15.23       15.61  
Return on average tangible equity (2)
    23.87       20.28       18.58       17.33       17.25  
Net interest margin
    3.82       3.93       3.83       4.35       4.27  
Efficiency ratio
    56.00       55.50       56.90       54.00       53.10  
Average equity to average assets
    10.10       10.60       10.30       10.20       10.60  
Dividend payout ratio
    54.80       54.00       52.50       49.20       46.00  
 
                                       
PERIOD-END BALANCES
                                       
Total assets
  $ 14,918,964     $ 12,401,555     $ 11,160,148     $ 9,768,669     $ 8,388,915  
Investment securities
    2,878,238       2,562,145       2,449,859       2,927,150       2,407,344  
Loans, net of unearned income
    10,374,323       8,424,728       7,533,915       6,140,200       5,295,459  
Deposits
    10,232,469       8,804,839       7,895,524       6,751,783       6,245,528  
Federal Home Loan Bank advances and long-term debt
    1,304,148       860,345       684,236       568,730       535,555  
Shareholders’ equity
    1,516,310       1,282,971       1,244,087       948,317       864,879  
 
                                       
AVERAGE BALANCES
                                       
Total assets
  $ 14,297,681     $ 11,781,618     $ 10,347,290     $ 8,805,807     $ 7,903,920  
Investment securities
    2,869,862       2,498,671       2,562,165       2,569,421       1,949,635  
Loans, net of unearned income
    9,892,082       7,981,604       6,857,386       5,564,806       5,381,950  
Deposits
    9,955,247       8,364,435       7,285,134       6,505,371       6,052,667  
Federal Home Loan Bank advances and long-term debt
    1,069,868       839,827       640,176       568,959       478,937  
Shareholders’ equity
    1,444,793       1,254,476       1,069,904       895,616       839,111  
 
(1)   Adjusted for stock dividends and stock splits.
 
(2)   Net income, as adjusted for intangible amortization (net of tax), divided by average shareholders’ equity, net of goodwill and intangible assets.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations (Management’s Discussion) concerns Fulton Financial Corporation (the Corporation), a financial holding company registered under the Bank Holding Company Act and incorporated under the laws of the Commonwealth of Pennsylvania in 1982, and its wholly owned subsidiaries. This discussion and analysis should be read in conjunction with the consolidated financial statements and other financial information presented in this report.
FORWARD-LOOKING STATEMENTS

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The Corporation has made, and may continue to make, certain forward-looking statements with respect to acquisition and growth strategies, market risk, the effect of competition and interest rates on net interest margin and net interest income, investment strategy and income growth, investment securities gains, other-than-temporary impairment of investment securities, deposit and loan growth, asset quality, balances of risk-sensitive assets to risk-sensitive liabilities, employee benefits and other expenses, amortization of intangible assets, goodwill impairment, capital and liquidity strategies and other financial and business matters for future periods. The Corporation cautions that these forward-looking statements are subject to various assumptions, risks and uncertainties. Because of the possibility that the underlying assumptions may change, actual results could differ materially from these forward-looking statements.
OVERVIEW
As a financial institution with a focus on traditional banking activities, the Corporation generates the majority of its revenue through net interest income, or the difference between interest earned on loans and investments and interest paid on deposits and borrowings. Growth in net interest income is dependent upon balance sheet growth and/or maintaining or increasing the net interest margin, which is net interest income (fully taxable-equivalent) as a percentage of average interest-earning assets. The Corporation also generates revenue through fees earned on the various services and products offered to its customers and through sales of assets, such as loans, investments, or properties. Offsetting these revenue sources are provisions for credit losses on loans, operating expenses and income taxes.
The Corporation’s net income for 2006 increased $19.5 million, or 11.7%, from $166.1 million in 2005 to $185.5 million in 2006. Diluted net income per share increased $0.06, or 6.0%, from $1.00 per share in 2005 to $1.06 per share in 2006. In 2006, the Corporation realized a return on average assets of 1.30% and a return on average tangible equity of 23.87%, compared to 1.41% and 20.28%, respectively, in 2005. Net income for 2005 increased $16.5 million, or 11.0%, from $149.6 million in 2004. Diluted net income per share for 2005 increased $0.06, or 6.4%, from $0.94 per share in 2004.
The 2006 increase in net income was driven by a $72.6 million, or 17.7%, increase in net interest income after the provision for loan losses, primarily due to external growth through acquisitions, which contributed $60.4 million to the increase. Also contributing to the increase was a $4.8 million, or 3.5%, increase in other income (excluding securities gains), primarily as a result of acquisitions. These items were offset by a $49.7 million, or 15.7%, increase in other expenses, also primarily due to acquisitions, and a $9.1 million increase in income tax expense.
In 2006, the Corporation experienced a decline in net interest margin of 11 basis points. Significant increases in loans and investments, due to both external and internal growth, were funded by higher cost certificates of deposits and short-term borrowings, as opposed to lower cost core demand and savings accounts. If loan demand continues to outpace the growth of core demand and savings accounts based upon the continuation of the current interest rate environment and price sensitivity of customers, then further compression of the net interest margin may occur.
The following summarizes some of the more significant factors that influenced the Corporation’s 2006 results.
Interest RatesChanges in the interest rate environment can impact both the Corporation’s net interest income and its non-interest income. The term “interest rate environment” generally refers to both the level of interest rates and the shape of the U. S. Treasury yield curve, which is a plot of the yields on treasury securities over various maturity terms. Typically, the shape of the yield curve is upward sloping, with longer-term rates exceeding short-term rates. However, during 2006, the yield curve was relatively flat, and at times, downward sloping, with minimal differences between long and short-term rates, resulting in a negative impact to the Corporation’s net interest income and net interest margin.
Floating rate loans, short-term borrowings and savings and time deposit rates are generally influenced by short-term rates. During 2006, the FRB raised the Federal funds rate four times, for a total increase of 100 basis points since December 31, 2005, with the overnight borrowing, or Federal funds, rate ending the year at 5.25%. The Corporation’s prime lending rate had a corresponding increase, from 7.25% to 8.25%, resulting in an increase in the rates on floating rate loans as well as the rates on new fixed-rate loans. More significantly, the increase in short-term rates also resulted in increased funding costs, with short-term borrowings immediately repricing to higher rates and deposit rates, although more discretionary, increasing due to competitive pressures. Additionally, as rates increased, customers shifted funds from lower rate core demand and savings accounts to fixed rate certificates of deposit in order to

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lock into higher rates. As a result, the net interest margin was negatively impacted when compared to the prior year, as shown in the following table:
                 
    2006   2005
1st Quarter
    3.88 %     3.96 %
2nd Quarter
    3.90       3.92  
3rd Quarter
    3.85       3.91  
4th Quarter
    3.68       3.92  
Year to Date
    3.82       3.93  
With respect to longer-term rates, the 10-year treasury yield, which is a common benchmark for evaluating residential mortgage rates, increased to 4.71% at December 31, 2006 as compared to 4.39% at December 31, 2005. Higher mortgage rates resulted in slower refinance activity and origination volumes and, therefore, lower net gains for the Corporation on fixed rate residential mortgages, which are generally sold in the secondary market. While absolute longer-term rates increased, the 32 basis point increase in the 10-year treasury yield was significantly less than the 100 basis point increase in short-term rates, resulting in a flattened and, at times, downward sloping, yield curve during 2006. If rates continue to rise and the yield curve steepens, residential mortgage volume could decrease even further, resulting in a greater negative impact on non-interest income, as gains on sales would decline. The “Market Risk” section of Management’s Discussion summarizes the expected impact of rate changes on net interest income.
AcquisitionsIn February 2006, the Corporation acquired Columbia Bancorp (Columbia) of Columbia, Maryland. Columbia was a $1.3 billion bank holding company whose primary subsidiary was The Columbia Bank, which operates 20 full-service community banking offices and five retirement community offices in Frederick, Howard, Montgomery, Prince George’s and Baltimore Counties and Baltimore city. In July 2005, the Corporation acquired SVB Financial Services, Inc. (SVB) of Somerville, New Jersey, a $530 million bank holding company whose primary subsidiary was Somerset Valley Bank. Period-to-period comparisons in the “Results of Operations” section of Management’s Discussion are impacted by these acquisitions when 2006 results are compared to 2005. Results for 2005 in comparison to 2004 were impacted by the acquisition of SVB, Resource Bancshares Corporation (Resource) in April 2004 and First Washington FinancialCorp (First Washington) in December 2004. The discussion and tables within the “Results of Operations” section of Management’s Discussion highlight the contributions of these acquisitions in addition to internal changes.
Acquisitions have long been a supplement to the Corporation’s internal growth. These recent acquisitions provide the opportunity for additional growth, as they have allowed the Corporation’s existing products and services to be sold in new markets. The Corporation’s acquisition strategy focuses on high growth areas with strong market demographics and targets organizations that have a comparable corporate culture, strong performance and sound asset quality, among other factors. Under the Corporation’s “super-community” banking philosophy, acquired organizations generally retain their status as separate legal entities, unless consolidation with an existing subsidiary bank is practical. Back office functions are generally consolidated to maximize efficiencies.
Merger and acquisition activity in the financial services industry has been very competitive in recent years, as evidenced by the prices paid for certain acquisitions. While the Corporation has been an active acquirer, management is committed to basing its pricing on rational economic models. Management will continue to focus on generating growth in the most cost-effective manner.
Merger and acquisition activity has also impacted the Corporation’s capital and liquidity. In order to complete acquisitions, the Corporation implemented strategies to maintain appropriate levels of capital and to provide necessary cash resources. See additional information in the “Liquidity” section of Management’s Discussion.
Deposits and Borrowings – The Corporation’s interest-bearing liabilities increased from 2005 to 2006 in order to fund acquisitions and loan growth.
During 2006, the Corporation experienced a shift from lower cost interest-bearing demand and savings deposit accounts (36.9% of total interest-bearing liabilities in 2006, compared to 40.9% in 2005) to higher cost certificates of deposit and short-term borrowings (53.2% in 2006, compared to 49.5% in 2005). The shift to higher cost liabilities has contributed to the decline in net interest margin. Obtaining cost-effective funding will continue to be a challenge for the Corporation and the financial institutions industry in general.

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Asset Quality – Asset quality refers to the underlying credit characteristics of borrowers and the likelihood that defaults on contractual loan payments will result in charge-offs of account balances. Asset quality is generally a function of economic conditions, but can be managed through conservative underwriting and sound collection policies and procedures.
The Corporation has been able to maintain strong asset quality through different economic cycles, attributable to its credit culture and underwriting policies. This trend continued in 2006 with net charge-offs to average loans decreasing from 0.04% in 2005 to 0.02% in 2006. Non-performing assets to total assets slightly increased to 0.39% at December 31, 2006, from 0.38% at December 31, 2005; however, this level is still relatively low in absolute terms. While overall asset quality has remained strong, deterioration in quality of one or several significant accounts could have a detrimental impact on the ability of some to pay according to the terms of their loans. In addition, rising interest rates could increase the total payments of borrowers and could have a negative impact on their ability to pay according to the terms of their loans. Finally, decreases in the values of underlying collateral as a result of market or economic conditions could negatively affect asset quality.
Equity Markets – As disclosed in the “Market Risk” section of Management’s Discussion, equity valuations can have an impact on the Corporation’s financial performance. In particular, bank stocks account for a significant portion of the Corporation’s equity investment portfolio. Historically, gains on sales of these equities have been a recurring component of the Corporation’s earnings. Declines in bank stock portfolio values could have a detrimental impact on the Corporation’s ability to recognize gains in the future.

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RESULTS OF OPERATIONS
Net Interest Income
Net interest income is the most significant component of the Corporation’s net income. The ability to manage net interest income over changing interest rate and economic environments is important to the success of a financial institution. Growth in net interest income is generally dependent upon balance sheet growth and/or maintaining or increasing the net interest margin. The “Market Risk” section of Management’s Discussion provides additional information on the policies and procedures used by the Corporation to manage net interest income. The following table provides a comparative average balance sheet and net interest income analysis for 2006 compared to 2005 and 2004. Interest income and yields are presented on a fully taxable-equivalent (FTE) basis, using a 35% Federal tax rate. The discussion following this table is based on these tax-equivalent amounts.
                                                                         
    Year Ended December 31  
(dollars in thousands)   2006     2005     2004  
    Average             Yield/     Average             Yield/     Average             Yield/  
  Balance     Interest     Rate     Balance     Interest     Rate     Balance     Interest     Rate  
ASSETS
                                                                       
Interest-earning assets:
                                                                       
Loans and leases (1)
  $ 9,892,082     $ 731,057       7.39 %   $ 7,981,604     $ 520,565       6.52 %   $ 6,857,386     $ 398,190       5.82 %
Taxable inv. securities (2)
    2,268,209       97,652       4.31       1,996,240       74,921       3.75       2,162,695       76,792       3.54  
Tax-exempt inv. securities (2)
    447,000       21,770       4.87       368,845       17,971       4.87       264,578       14,353       5.43  
Equity securities (2)
    154,653       7,341       4.75       133,586       5,562       4.16       134,892       4,974       3.92  
 
                                                     
Total investment securities
    2,869,862       126,763       4.42       2,498,671       98,454       3.94       2,562,165       96,119       3.76  
Loans held for sale
    215,255       15,564       7.23       241,996       14,940       6.17       135,758       8,407       6.19  
Other interest-earning assets
    53,211       2,530       4.73       48,357       1,586       3.27       6,067       103       1.70  
 
                                                     
Total interest-earning assets
    13,030,410       875,914       6.73       10,770,628       635,545       5.90       9,561,376       502,819       5.26  
Noninterest-earning assets:
                                                                       
Cash and due from banks
    335,935                       346,535                       316,170                  
Premises and equipment
    185,084                       158,526                       128,902                  
Other assets (2)
    852,186                       598,709                       425,825                  
Less: Allowance for loan losses
    (105,934 )                     (92,780 )                     (84,983 )                
 
                                                                 
Total Assets
  $ 14,297,681                     $ 11,781,618                     $ 10,347,290                  
 
                                                                 
 
                                                                       
LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                
Interest-bearing liabilities:
                                                                       
Demand deposits
  $ 1,673,407     $ 25,112       1.50 %   $ 1,547,766     $ 15,370       0.99 %   $ 1,364,953     $ 7,201       0.53 %
Savings deposits
    2,340,402       51,394       2.19       2,055,503       27,116       1.32       1,846,503       11,928       0.65  
Time deposits
    4,134,190       170,435       4.12       3,171,901       98,288       3.10       2,693,414       70,650       2.62  
 
                                                     
Total interest-bearing deposits
    8,147,999       246,941       3.03       6,775,170       140,774       2.08       5,904,870       89,779       1.52  
Short-term borrowings
    1,653,974       78,043       4.67       1,186,464       34,414       2.87       1,238,073       15,182       1.23  
Long-term debt
    1,069,868       53,960       5.04       839,827       38,031       4.53       640,176       31,033       4.85  
 
                                                     
Total interest-bearing liabilities
    10,871,841       378,944       3.48       8,801,461       213,219       2.42       7,783,119       135,994       1.75  
Noninterest-bearing liabilities:
                                                                       
Demand deposits
    1,807,248                       1,589,265                       1,380,264                  
Other
    173,799                       136,416                       114,003                  
 
                                                                 
Total Liabilities
    12,852,888                       10,527,142                       9,277,386                  
Shareholders’ equity
    1,444,793                       1,254,476                       1,069,904                  
 
                                                                 
Total Liabs. and Equity
  $ 14,297,681                     $ 11,781,618                     $ 10,347,290                  
 
                                                                 
Net interest income/net interest margin (FTE)
            496,970       3.82 %             422,326       3.93 %             366,825       3.83 %
 
                                                                 
Tax equivalent adjustment
            (11,407 )                     (9,778 )                     (9,176 )        
 
                                                                 
Net interest income
          $ 485,563                     $ 412,548                     $ 357,649          
 
                                                                 
 
(1)   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.

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The following table sets forth a summary of changes in FTE interest income and expense resulting from changes in average balances (volumes) and changes in rates:
                                                 
    2006 vs. 2005     2005 vs. 2004  
    Increase (decrease) due     Increase (decrease) due  
    to change in     to change in  
    Volume     Rate     Net     Volume     Rate     Net  
    (in thousands)  
Interest income on:
                                               
Loans and leases
  $ 135,262     $ 75,230     $ 210,492     $ 69,877     $ 52,457     $ 122,334  
Taxable investment securities
    10,929       11,802       22,731       (6,194 )     4,638       (1,556 )
Tax-exempt investment securities
    3,805       (6 )     3,799       5,192       (1,700 )     3,492  
Equity securities
    942       837       1,779       (51 )     326       275  
Loans held for sale
    (1,762 )     2,386       624       6,532       1       6,533  
Short-term investments
    173       771       944       1,305       178       1,483  
 
                                   
 
Total interest-earning assets
  $ 149,349     $ 91,020     $ 240,369     $ 76,661     $ 55,900     $ 132,561  
 
                                   
 
                                               
Interest expense on:
                                               
Demand deposits
  $ 1,335     $ 8,407     $ 9,742     $ 1,076     $ 7,093     $ 8,169  
Savings deposits
    4,229       20,049       24,278       1,488       13,700       15,188  
Time deposits
    34,536       37,611       72,147       13,676       13,962       27,638  
Short-term borrowings
    16,848       26,781       43,629       (645 )     19,877       19,232  
Long-term debt
    11,254       4,675       15,929       9,152       (2,154 )     6,998  
 
                                   
 
Total interest-bearing liabilities
  $ 68,202     $ 97,523     $ 165,725     $ 24,747     $ 52,478     $ 77,225  
 
                                   
Note: Changes which are partly attributable to rate and volume are allocated based on the proportion of the direct changes attributable to rate and volume.
2006 vs. 2005
Net interest income (FTE) increased $74.6 million, or 17.7%, from $422.3 million in 2005 to $497.0 million in 2006, primarily as a result of increases in average balances of interest-earning assets and partially as a result of increases in rates.
Average interest-earning assets grew 21.0%, from $10.8 billion in 2005 to $13.0 billion in 2006, with acquisitions contributing approximately $1.4 billion to this increase. Interest income increased $240.4 million, or 37.8%, primarily as a result of the increase in average interest-earning assets, which contributed $149.3 million of the increase, with the remaining growth in interest income due to the 83 basis point, or 14.1%, increase in average rates on interest-earning assets.

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The increase in average interest-earning assets was primarily due to loan growth, and partially due to investment growth. Average loans increased by $1.9 billion, or 23.9%, to $9.9 billion in 2006. The following table presents the growth in average loans, by type:
                                 
                    Increase  
    2006     2005     $     %  
    (dollars in thousands)  
Commercial — industrial and financial
  $ 2,478,893     $ 2,022,615     $ 456,278       22.6 %
Commercial — agricultural
    335,596       324,637       10,959       3.4  
Real estate — commercial mortgage
    3,073,830       2,621,730       452,100       17.2  
Real estate — residential mortgage and home equity
    2,058,034       1,710,736       347,298       20.3  
Real estate — construction
    1,345,191       732,847       612,344       83.6  
Consumer
    522,761       501,926       20,835       4.2  
Leasing and other
    77,777       67,113       10,664       15.9  
 
                       
Total
  $ 9,892,082     $ 7,981,604     $ 1,910,478       23.9 %
 
                       
Acquisitions contributed approximately $1.2 billion to the increase in average balances. The following table presents the average balance impact of acquisitions, by type:
                         
    2006     2005     Increase  
    (in thousands)  
Commercial — industrial and financial
  $ 337,062     $ 32,576     $ 304,486  
Real estate — commercial mortgage
    261,493       73,743       187,750  
Real estate — residential mortgage and home equity
    263,370       28,509       234,861  
Real estate — construction
    435,092       17,700       417,392  
Consumer
    4,992       864       4,128  
Leasing and other
    3,725       119       3,606  
 
                 
Total
  $ 1,305,734     $ 153,511     $ 1,152,223  
 
                 
The following table presents the growth in average loans, by type, excluding the average balances contributed by acquisitions:
                                 
                    Increase  
    2006     2005     $     %  
    (dollars in thousands)  
Commercial — industrial and financial
  $ 2,141,831     $ 1,990,039     $ 151,792       7.6 %
Commercial — agricultural
    335,596       324,637       10,959       3.4  
Real estate — commercial mortgage
    2,812,337       2,547,987       264,350       10.4  
Real estate — residential mortgage and home equity
    1,794,664       1,682,227       112,437       6.7  
Real estate — construction
    910,099       715,147       194,952       27.3  
Consumer
    517,769       501,062       16,707       3.3  
Leasing and other
    74,052       66,994       7,058       10.5  
 
                       
Total
  $ 8,586,348     $ 7,828,093     $ 758,255       9.7 %
 
                       
Excluding the impact of acquisitions, loan growth continued to be strong in the commercial mortgage and construction categories, which together increased $459.3 million, or 14.1%, over 2005. Commercial and agricultural loans grew $162.8 million, or 7.0%, in comparison to 2005. Residential mortgage and home equity loans increased $112.4 million, or 6.7%, in comparison to 2005 due to promotional efforts and customers using home equity loans as a cost-effective refinance alternative.

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The average yield on loans during 2006 of 7.39% represented an 87 basis point, or 13.3%, increase in comparison to 2005. This increase reflected the impact of a significant portfolio of floating rate loans, which repriced as interest rates rose, as they did in 2006, and the addition of higher yielding new loans.
Average investments increased $371.2 million, or 14.9%, in comparison to 2005. Excluding the impact of acquisitions, the investment balances increased $86.0 million, or 3.5%. During the second half of 2006, the Corporation pre-purchased approximately $250.0 million of investment securities, based on expected cash inflows from maturities of investments over the subsequent six-month period. These were funded by a combination of short and longer-term borrowings, a portion of which have been repaid with maturities of investments, while the remaining portion will be repaid during 2007.
The average yield on investment securities improved 48 basis points to 4.42% in 2006 from 3.94% in 2005. The increase was due to the maturity of lower yielding investments, with reinvestment at higher rates. Also contributing to the increase was a reduction in premium amortization, which is accounted for as a reduction of interest income, from $6.9 million in 2005 to $4.8 million in 2006, due to both a reduction in premiums on purchases of mortgage-backed securities in 2006 and due to decreased prepayments on mortgage-backed securities as interest rates rose.
The increase in interest income (FTE) was offset by an increase in interest expense of $165.7 million, or 77.7%, to $378.9 million in 2006 from $213.2 million in 2005. The increase in interest expense was primarily due to a 106 basis point, or 43.8%, increase in the cost of total interest-bearing liabilities in 2006 in comparison to 2005. The remaining increase in interest expense was due to a $2.1 billion, or 23.5%, increase in total interest-bearing liabilities, partially due to acquisitions and partially due to internal growth.
The increase in interest expense was primarily due to the increase in interest rates, and partially due to the increase in interest-bearing deposits. The following table presents average deposits, by type:
                                 
                    Increase  
    2006     2005     $     %  
    (dollars in thousands)  
Noninterest-bearing demand
  $ 1,807,248     $ 1,589,265     $ 217,983       13.7 %
Interest-bearing demand
    1,673,407       1,547,766       125,641       8.1  
Savings/money market
    2,340,402       2,055,503       284,899       13.9  
Time deposits
    4,134,190       3,171,901       962,289       30.3  
 
                       
Total
  $ 9,955,247     $ 8,364,435     $ 1,590,812       19.0 %
 
                       
Acquisitions accounted for approximately $1.1 billion of the increase in average balances. The following table presents the average balance impact of acquisitions, by type:
                         
    2006     2005     Increase  
    (in thousands)  
Noninterest-bearing demand
  $ 289,332     $ 33,042     $ 256,290  
Interest-bearing demand
    160,938       53,461       107,477  
Savings/money market
    277,736       76,251       201,485  
Time deposits
    628,881       74,907       553,974  
 
                 
Total
  $ 1,356,887     $ 237,661     $ 1,119,226  
 
                 

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The following table presents the growth in average deposits, by type, excluding the contribution of acquisitions:
                                 
                    Increase (decrease)  
    2006     2005     $     %  
    (dollars in thousands)  
Noninterest-bearing demand
  $ 1,517,916     $ 1,556,223     $ (38,307 )     (2.5 )%
Interest-bearing demand
    1,512,469       1,494,305       18,164       1.2  
Savings/money market
    2,062,666       1,979,252       83,414       4.2  
Time deposits
    3,505,309       3,096,994       408,315       13.2  
 
                       
Total
  $ 8,598,360     $ 8,126,774     $ 471,586       5.8 %
 
                       
Excluding the impact of acquisitions, the Corporation experienced significant growth in certificates of deposit as a result of the FRB’s rate increases over the past year, making them an attractive investment alternative for customers. The change in the composition of deposits contributed to the 95 basis point, or 45.7%, increase in the average cost of interest-bearing deposits in comparison to 2005.
Average borrowings increased $697.6 million, or 34.4%, during 2006. Excluding the impact of acquisitions, average short-term borrowings increased $242.9 million, or 20.5%, to $1.4 billion. The increase in short-term borrowings was mainly due to an increase in Federal funds purchased to fund loan growth, offset slightly by lower borrowings outstanding under customer repurchase agreements. Average long-term debt increased $230.0 million, or 27.4%, to $1.1 billion, with acquisitions contributing $29.3 million. The additional increase in long-term debt was primarily due to the issuance of $154.6 million of junior subordinated deferrable interest debentures in January 2006, the impact of $100.0 million of subordinated debt issued and outstanding since March 2005 and additional Federal Home Loan Bank (FHLB) advances.
2005 vs. 2004
Net interest income (FTE) increased $55.5 million, or 15.1%, from $367.0 million in 2004 to $422.3 million in 2005, due to both average balance sheet growth and a higher net interest margin for 2005 in comparison to 2004.
Average interest-earning assets grew 12.6%, from $9.6 billion in 2004 to $10.8 billion in 2005. Acquisitions contributed approximately $1.1 million to this increase. Interest income increased $132.7 million, or 26.4%, partially as a result of the increase in average earning assets, which contributed $76.7 million of the increase, with the remaining growth in interest income due to an increase in rates on interest-earning assets.
Average loans increased by $1.1 billion, or 16.4%, to $8.0 billion in 2005. Acquisitions contributed approximately $694.5 million to this increase in average balances. Loan growth was strong in the commercial and commercial mortgage categories, which together increased $284.6 million, or 7.0%, over 2004. Construction loans grew $40.0 million, or 14.5%, in comparison to 2004 mainly due to increased activity in the Pennsylvania and New Jersey markets. Residential mortgage and home equity loans showed strong growth of approximately $114.8 million due to promotional efforts and customers using home equity loans as a cost-effective refinance alternative. The average yield on loans during 2005 was 6.52%, a 70 basis point, or 12.0%, increase from 2004. This increase reflects the impact of a significant portfolio of adjustable rate loans, which repriced as interest rates increased throughout the year.
Average investments decreased $63.5 million, or 2.5%, in comparison to 2004. Excluding the impact of acquisitions, the investment balances would have decreased $390.7 million, or 15.8%. During 2004, proceeds from investment maturities were used to fund loan growth, however during 2005, the Corporation’s purchases of new investment securities exceeded proceeds from sales and maturities. The average yield on investment securities improved 18 basis points from 3.76% in 2004 to 3.94% in 2005. This improvement was due partially to premium amortization decreasing, which is accounted for as a reduction of interest income, from $10.5 million in 2004 to $6.9 million in 2005 as prepayments on mortgage-backed securities decreased. The remaining increase was due to the maturity of lower yielding investments, with reinvestment at higher rates.
Interest expense increased $77.2 million, or 56.8%, to $213.2 million in 2005 from $136.0 million in 2004. The increase in interest expense was primarily due to a 67 basis point, or 38.3%, increase in the cost of total interest-bearing liabilities in 2005 in comparison to 2004. Competitive pricing pressures resulted in increased deposit rates in response to the FRB’s rate increases throughout 2005.

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The remaining increase in interest expense was due to a $1.0 billion, or 13.1%, increase in total interest-bearing liabilities, resulting from both acquisitions and internal growth.
Average borrowings increased slightly during 2005, with the $51.6 million decrease in average short-term borrowings more than offset by a $199.7 million increase in long-term debt. Excluding the impact of acquisitions, average short-term borrowings decreased $147.4 million, or 13.4%, mainly due to a decrease in Federal funds purchased. In addition, customer cash management accounts, which are included in short-term borrowings, decreased $20.6 million, or 5.1%, to an average of $385.7 million in 2005. Average long-term debt increased $199.7 million, or 31.2%, to $839.8 million, with acquisitions contributing $51.7 million to the long-term debt increase. The additional increase in long-term borrowings was due to the Corporation’s issuance of $100.0 million ten-year subordinated notes in March 2005 and an increase in FHLB advances as longer-term rates were locked in anticipation of continued rate increases.
Provision and Allowance for Loan Losses
The Corporation accounts for the credit risk associated with lending activities through its allowance and provision for loan losses. The provision is the expense recognized in the income statement to adjust the allowance to its proper balance, as determined through the application of the Corporation’s allowance methodology procedures. These procedures include the evaluation of the risk characteristics of the portfolio and documentation in accordance with the Securities and Exchange Commission’s (SEC) Staff Accounting Bulletin No. 102, “Selected Loan Loss Allowance Methodology and Documentation Issues” (SAB 102). See the “Critical Accounting Policies” section of Management’s Discussion for a discussion of the Corporation’s allowance for loan loss evaluation methodology.

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A summary of the Corporation’s loan loss experience follows:
                                         
    Year Ended December 31  
    2006     2005     2004     2003     2002  
    (dollars in thousands)  
Loans outstanding at end of year
  $ 10,374,323     $ 8,424,728     $ 7,533,915     $ 6,140,200     $ 5,295,459  
 
                             
Daily average balance of loans and leases
  $ 9,892,082     $ 7,981,604     $ 6,857,386     $ 5,564,806     $ 5,381,950  
 
                             
Balance of allowance for loan losses at beginning of year
  $ 92,847     $ 89,627     $ 77,700     $ 71,920     $ 71,872  
Loans charged off:
                                       
Commercial – financial and agricultural
    3,013       4,095       3,482       6,604       7,203  
Real estate – mortgage
    429       467       1,466       1,476       2,204  
Consumer
    3,138       3,436       3,476       4,497       5,587  
Leasing and other
    389       206       453       651       676  
 
                             
Total loans charged off
    6,969       8,204       8,877       13,228       15,670  
 
                             
Recoveries of loans previously charged off:
                                       
Commercial – financial and agricultural
    2,863       2,705       2,042       1,210       842  
Real estate – mortgage
    268       1,245       906       711       669  
Consumer
    1,289       1,169       1,496       1,811       2,251  
Leasing and other
    97       77       76       97       56  
 
                             
Total recoveries
    4,517       5,196       4,520       3,829       3,818  
 
                             
Net loans charged off
    2,452       3,008       4,357       9,399       11,852  
Provision for loan losses
    3,498       3,120       4,717       9,705       11,900  
Allowance purchased
    12,991       3,108       11,567       5,474        
 
                             
Balance at end of year
  $ 106,884     $ 92,847     $ 89,627     $ 77,700     $ 71,920  
 
                             
 
                                       
Selected Asset Quality Ratios:
                                       
Net charge-offs to average loans
    0.02 %     0.04 %     0.06 %     0.17 %     0.22 %
Allowance for loan losses to loans outstanding at end of year
    1.03 %     1.10 %     1.19 %     1.27 %     1.36 %
Non-performing assets (1) to total assets
    0.39 %     0.38 %     0.30 %     0.33 %     0.47 %
Non-accrual loans to total loans
    0.32 %     0.43 %     0.30 %     0.37 %     0.45 %
 
(1)   Includes accruing loans past due 90 days or more.

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The following table presents the aggregate amount of non-accrual and past due loans and other real estate owned (1):
                                         
    December 31  
    2006     2005     2004     2003     2002  
    (in thousands)  
Non-accrual loans (2) (3)
  $ 33,113     $ 36,560     $ 22,574     $ 22,422     $ 24,090  
Accruing loans past due 90 days or more
    20,632       9,012       8,318       9,609       14,095  
Other real estate
    4,103       2,072       2,209       585       938  
 
                             
Total
  $ 57,848     $ 47,644     $ 33,101     $ 32,616     $ 39,123  
 
                             
 
(1)   In 2006, the total interest income that would have been recorded if non-accrual loans had been current in accordance with their original terms was approximately $2.6 million. The amount of interest income on non-accrual loans that was included in 2006 income was approximately $800,000.
 
(2)   Accrual of interest is generally discontinued when a loan becomes 90 days past due as to principal and interest. When interest accruals are discontinued, interest credited to income is reversed. Non-accrual loans are restored to accrual status when all delinquent principal and interest becomes current or the loan is considered secured and in the process of collection. Certain loans, primarily adequately collateralized mortgage loans, that are determined to be sufficiently collateralized may continue to accrue interest after reaching 90 days past due.
 
(3)   Excluded from the amounts presented at December 31, 2006 were $212.4 million in loans where possible credit problems of borrowers have caused management to have doubts as to the ability of such borrowers to comply with the present loan repayment terms. These loans were reviewed for impairment under Statement 114, but continue to pay according to their contractual terms and are therefore not included in non-performing loans. Non-accrual loans include $18.5 million of impaired loans.
The following table summarizes the allocation of the allowance for loan losses by loan type:
                                                                                 
    December 31  
    2006     2005   2004   2003   2002  
    (dollars in thousands)  
            % of             % of             % of             % of         % of  
            Loans             Loans in             Loans in             Loans in             Loans in  
    Allow-     In Each     Allow-     Each     Allow-     Each     Allow-     Each     Allow-     Each  
    ance     Category     ance     Category     ance     Category     ance     Category     ance     Category  
Comm’l –financial & agricultural
  $ 52,942       28.6 %   $ 52,379       28.2 %   $ 43,207       30.1 %   $ 34,247       31.7 %   $ 33,130       31.6 %
Real estate – Mortgage
    37,197       65.5       17,602       64.7       19,784       62.5       14,471       59.0       13,099       56.8  
Consumer, leasing & other
    6,475       5.9       7,935       7.1       16,289       7.4       16,279       9.3       14,178       11.6  
Unallocated
    10,270             14,931             10,347             12,703             11,513        
 
                                                           
Total
  $ 106,884       100.0 %   $ 92,847       100.0 %   $ 89,627       100.0 %   $ 77,700       100.0 %   $ 71,920       100.0 %
 
                                                           
The provision for loan losses increased $378,000 from $3.1 million in 2005 to $3.5 million in 2006, after decreasing $1.6 million in 2005. Net charge-offs as a percentage of average loans were 0.02% in 2006, a two basis point decrease from 0.04% in 2005, which was a two basis point decrease from 2004. Total net charge-offs were $2.5 million in 2006 and $3.0 million in 2005. Non-performing assets as a percentage of total assets increased slightly from 0.38% at December 31, 2005 to 0.39% at December 31, 2006, after increasing nine basis points in 2005. While the non-performing assets ratio increased slightly in comparison to 2005, the level of non-performing assets was still relatively low in absolute terms. The 2006 increase was due primarily to the impact of a $10.0 million loan, which the Corporation placed on non-accrual in October 2006. This loan was for a community reinvestment act project that had

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been delayed as a result of funding shortfalls. The 2006 increase in accruing loans past due 90 days or more was due to a number of factors, most significantly the timing of certain loan payments and the adequate collateralization of certain real estate mortgage loans.
In recent years, net charge-offs approximated the amounts recorded for the provision for loan losses. In 2006, net charge-offs were less than the provision for loan losses due to adjustments to the allowance for loan loss during the year based on application of the Corporation’s allowance methodology.
The provision for loan losses is determined by the allowance allocation process, whereby an estimated “need” is allocated to impaired loans as defined in Statement of Financial Accounting Standards No. 114, “Accounting by Creditors for Impairment of a Loan”, or to pools of loans under Statement of Financial Accounting Standards No. 5, “Accounting for Contingencies”. The allocation is based on risk factors, collateral levels, economic conditions and other relevant factors, as appropriate. The Corporation also maintains an unallocated allowance, which was approximately 10% at December 31, 2006. The unallocated allowance is used to cover any factors or conditions that might exist at the balance sheet date, but are not specifically identifiable. Management believes such an unallocated allowance is reasonable and appropriate as the estimates used in the allocation process are inherently imprecise. See additional disclosures in Note A, “Summary of Significant Accounting Policies”, in the Notes to Consolidated Financial Statements and “Critical Accounting Policies”, in Management’s Discussion. Management believes that the allowance balance of $106.9 million at December 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 and Expenses
2006 vs. 2005
Other Income
The following table presents the components of other income for the past two years:
                                 
                    Increase (decrease)  
    2006     2005     $     %  
    (dollars in thousands)  
Investment management and trust services
  $ 37,441     $ 35,669     $ 1,772       5.0 %
Service charges on deposit accounts
    43,773       40,198       3,575       8.9  
Other service charges and fees
    26,792       24,229       2,563       10.6  
Gains on sales of loans
    21,086       25,032       (3,946 )     (15.8 )
Gain on sale of deposits
          2,200       (2,200 )     N/A  
Other
    13,344       10,345       2,999       29.0  
 
                       
Total, excluding investment securities gains
    142,436       137,673       4,763       3.5  
Investment securities gains
    7,439       6,625       814       12.3  
 
                       
Total
  $ 149,875     $ 144,298     $ 5,577       3.9 %
 
                       
The following table presents the amounts which were contributed by acquisitions:
                         
    2006     2005     Increase  
    (in thousands)  
Investment management and trust services
  $ 805     $ 114     $ 691  
Service charges on deposit accounts
    2,508       217       2,291  
Other service charges and fees
    958       171       787  
Gains on sales of loans
    1,089       33       1,056  
Other
    1,161       217       944  
 
                 
Total, excluding investment securities gains
    6,521       752       5,769  
Investment securities gains
    57             57  
 
                 
Total
  $ 6,578     $ 752     $ 5,826  
 
                 

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The following table presents the components of other income for each of the past two years, excluding the amounts contributed by acquisitions:
                                 
                    Increase (decrease)  
    2006     2005     $     %  
    (dollars in thousands)  
Investment management and trust services
  $ 36,636     $ 35,555     $ 1,081       3.0 %
Service charges on deposit accounts
    41,265       39,981       1,284       3.2  
Other service charges and fees
    25,834       24,058       1,776       7.4  
Gains on sales of loans
    19,997       24,999       (5,002 )     (20.0 )
Gain on sale of deposits
          2,200       (2,200 )     N/A  
Other
    12,183       10,128       2,055       20.3  
 
                       
Total, excluding investment securities gains
  $ 135,915     $ 136,921     $ (1,006 )     (0.7 )%
Investment securities gains
    7,382       6,625       757       11.4  
 
                       
Total
  $ 143,297     $ 143,546     $ (249 )     (0.2 )%
 
                       
The discussion that follows, unless otherwise noted, addresses changes in other income, excluding acquisitions.
Excluding investment securities gains, total other income decreased $1.0 million, or 0.7%, as slight growth in fee income was more than offset by decreased gains on sales of mortgage loans. The decrease in gains on sales of loans was due to the change in gains on the sale of mortgage loans, which were impacted by the increase in longer-term mortgage rates, resulting in both decreased volumes of $351.8 million, or 15.3%, and lower spreads on sales of 17 basis points.
Investment management and trust services increased slightly by $1.1 million, or 3.0%, primarily due to increases in trust commission income of $496,000, or 2.2%, resulting from positive trends within equity markets as well as expanded marketing initiatives to attract new customers.
Total service charges on deposit accounts increased $1.3 million, or 3.2%. The increase was due to increases of $1.2 million in overdraft fees and $1.2 million in cash management fees, offset by a $1.1 million decrease in other service charges on deposit accounts, primarily related to lower fees earned on both personal and commercial non-interest and interest-bearing demand accounts. During 2006, the rising interest rate environment made cash management services more attractive for business customers.
Other service charges and fees increased $1.8 million, or 7.4%, due to increases in letter of credit fees ($921,000, or 21.5%) and debit card fees ($951,000, or 14.7%), offset by decreases in merchant fees ($366,000, or 5.1%). Other income increased $2.1 million, or 20.3%, due to $2.2 million of gains on sales of branch and office facilities during 2006.
Including the impact of acquisitions, investment securities gains increased $814,000, or 12.3%, in 2006. Investment securities gains, net of realized losses, included realized gains on the sale of equity securities of $7.0 million in 2006, compared to $5.8 million in 2005, and $474,000 and $843,000 in 2006 and 2005, respectively, on the sale of debt securities, which were generally sold to take advantage of the interest rate environment.

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Other Expenses
The following table presents the components of other expenses for each of the past two years:
                                 
                    Increase (decrease)  
    2006     2005     $     %  
            (dollars in thousands)          
Salaries and employee benefits
  $ 213,913     $ 181,889     $ 32,024       17.6 %
Net occupancy expense
    36,493       29,275       7,218       24.7  
Equipment expense
    14,251       11,938       2,313       19.4  
Data processing
    12,228       12,395       (167 )     (1.3 )
Advertising
    10,638       8,823       1,815       20.6  
Telecommunications
    7,966       7,035       931       13.2  
Intangible amortization
    7,907       5,311       2,596       48.9  
Supplies
    6,245       5,736       509       8.9  
Postage
    5,154       4,716       438       9.3  
Professional fees
    5,057       5,393       (336 )     (6.2 )
Other
    46,139       43,780       2,359       5.4  
 
                       
Total
  $ 365,991     $ 316,291     $ 49,700       15.7 %
 
                       
The following table presents the amounts included in the above totals which were contributed by acquisitions:
                         
    2006     2005     Increase  
    (in thousands)  
Salaries and employee benefits
  $ 27,643     $ 3,483     $ 24,160  
Net occupancy expense
    6,162       1,029       5,133  
Equipment expense
    2,121       328       1,793  
Data processing
    1,560       377       1,183  
Advertising
    1,475       173       1,302  
Telecommunications
    1,007       109       898  
Intangible amortization
    3,483       711       2,772  
Supplies
    572       132       440  
Postage
    485       48       437  
Professional fees
    403       82       321  
Other
    4,818       562       4,256  
 
                 
Total
  $ 49,729     $ 7,034     $ 42,695  
 
                 

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The following table presents the components of other expenses for each of the past two years, excluding the amounts contributed by acquisitions:
                                 
                    Increase (decrease)  
    2006     2005     $     %  
    (dollars in thousands)  
Salaries and employee benefits
  $ 186,270     $ 178,406     $ 7,864       4.4 %
Net occupancy expense
    30,331       28,246       2,085       7.4  
Equipment expense
    12,130       11,610       520       4.5  
Data processing
    10,668       12,018       (1,350 )     (11.2 )
Advertising
    9,163       8,650       513       5.9  
Telecommunications
    6,959       6,926       33       0.5  
Intangible amortization
    4,424       4,600       (176 )     (3.8 )
Supplies
    5,673       5,604       69       1.2  
Postage
    4,669       4,668       1        
Professional fees
    4,654       5,311       (657 )     (12.4 )
Other
    41,321       43,218       (1,897 )     (4.4 )
 
                       
Total
  $ 316,262     $ 309,257     $ 7,005       2.3 %
 
                       
The discussion that follows addresses changes in other expenses, excluding acquisitions.
Salaries and employee benefits increased $7.9 million, or 4.4%, in 2006, with the salary expense component increasing $6.8 million, or 4.7%. The increase was driven primarily by normal salary increases for existing employees and, to a lesser extent, due to an increase in the number of full-time employees. Also contributing to the increase in salaries was a $646,000 increase in stock-based compensation expense and $1.3 million of bonuses accrued under a new corporate management incentive compensation plan, offset by a $630,000 decrease in bonuses accrued under pre-existing incentive compensation plans. Employee benefits increased $1.0 million, or 3.0%, due primarily to increased healthcare costs of $1.4 million, or 9.2%. Also contributing to the increase was a $626,000, or 8.0%, increase in profit sharing expenses. These increases were offset by decreased costs related to the Corporation’s defined benefit pension plan of $1.3 million, or 36.1%, as a result of a $10.7 million contribution to the plan in 2005.
Net occupancy expense increased $2.1 million, or 7.4%, due to the expansion of the branch network, higher maintenance and utility costs, increased rent expense and depreciation of real property. Equipment expense increased $520,000, or 4.5%, in 2006, due to increased depreciation expense for equipment, higher rent expense related to office equipment and additions from the expansion of the branch network. A total of 12 and 8 new branch offices were opened in 2006 and 2005, respectively.
Data processing expense decreased $1.4 million, or 11.2%, due to savings realized from the consolidation of back office systems of two of the Corporation’s recently acquired affiliate banks. Advertising expense increased $513,000, or 5.9%, primarily related to increased discretionary promotional campaigns during 2006. Professional fees decreased $657,000, or 12.4%, primarily related to legal fee recoveries in 2006 related to recoveries of non-accrual loans.
Other expense decreased $1.9 million, or 4.4%, in 2006 mainly due to a decrease of $1.0 million in losses recorded in connection with the settlement of a previously disclosed lawsuit. In addition, in 2005, the Corporation recorded a $600,000 expense for a loss incurred in an affiliate bank’s mortgage operations. Finally, the Corporation realized certain state tax recoveries in 2006.
2005 vs. 2004
Other Income
In 2005, total other income increased $5.4 million, or 3.9%, including $10.5 million contributed by the acquisitions of SVB, First Washington and Resource. Excluding acquisitions and investment securities gains, other income increased $5.7 million, or 5.4%. The discussion that follows, unless noted, addresses changes in other income, excluding acquisitions.

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Investment management and trust services decreased slightly by $104,000, or 0.3%. The 2005 decrease was due to brokerage revenue decreasing $242,000, or 2.0%, offset by trust commission income increasing $138,000, or 0.6%.
Total service charges on deposit accounts decreased $477,000, or 1.2%. The decrease was due to the Corporation reducing service charges on deposit accounts in an effort to remain competitive and the impact of rising interest rates on commercial deposit account service charge credits. This decrease was offset by increases in overdraft and cash management fees. Overdraft fees increased $778,000, or 4.7%, and cash management fees increased $229,000, or 3.0%. During 2005, the rising interest rate environment began to make cash management services more attractive for business customers.
Other service charges and fees increased $3.0 million, or 14.6%. The increase was driven by growth in letter of credit fees ($553,000, or 15.6%, increase), merchant fees ($2.2 million, or 44.4%, increase) and debit card fees ($712,000, or 12.6%, increase). The growth in merchant fees was primarily due to continued penetration in new markets. Debit card fees increased due to increased volume.
Gains on sales of loans decreased only $108,000, or 1.3%, as overall volumes remained strong despite a slight increase in longer-term mortgage rates. Other income increased $1.2 million, or 26.8%, due to growth in net servicing income on mortgage loans and gains on sales of other real estate owned.
The gain on sale of deposits resulted from the Corporation selling three branches and related deposits in two separate transactions during the second quarter of 2005. Virtually the entire $2.2 million gain resulted from the premiums received on the $36.7 million of deposits sold.
Including the impact of acquisitions, investment securities gains decreased $11.1 million, or 62.6%, in 2005. Investment securities gains included realized gains on the sale of equity securities of $5.8 million in 2005, down from $14.8 million in 2004, reflecting the general decline in the equity markets and bank stocks in particular, and $843,000 and $3.1 million in 2005 and 2004, respectively, on the sale of debt securities, which were generally sold to take advantage of the interest rate environment.
Other Expenses
Total other expenses increased $38.8 million, or 14.0%, in 2005, including $34.1 million due to acquisitions. The discussion that follows addresses changes in other expenses, excluding acquisitions.
Salaries and employee benefits increased $1.0 million, or 0.7%, in 2005, with the salary expense component increasing $856,000, or 0.7%. The increase was driven by normal salary increases for existing employees and a slight increase in the number of full-time employees, offset by a decrease in stock-based compensation expense from $3.9 million in 2004 to $1.0 million in 2005. The decrease in stock-based compensation expense was primarily due to a change in vesting for stock options from 100% vesting for the 2004 grant to a three-year vesting period for the 2005 grant. Employee benefits increased $163,000, or 0.6%, due primarily to increased retirement plan expenses, offset by lower healthcare expenses as the Corporation changed to a lower cost healthcare provider in 2005.
Net occupancy expense increased $1.8 million, or 8.4%. The increase resulted from the expansion of the branch network and the addition of new office space for certain affiliates. Equipment expense decreased $396,000, or 4.1%, in 2005, due to lower depreciation expense for equipment as items became fully depreciated, offset partially by increases due to additions for branch network and office expansions.
Data processing expense decreased $324,000, or 3.0%, reflecting the Corporation’s success over the past few years in renegotiating key processing contracts with certain vendors, most notably an automated teller service provider, in 2005. Advertising expense increased $1.2 million, or 18.3%, mainly due to growth in retail promotional campaigns.
Intangible amortization decreased $785,000, or 18.1%. 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. The decrease in 2005 was related to lower amortization related to core deposit intangible assets, which are amortized on an accelerated basis over the estimated life of the acquired core deposits.

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Other expense increased $2.2 million, or 4.6%, in 2005 mainly due to a $2.2 million legal reserve recorded during the fourth quarter of 2005 related to the settlement of a lawsuit, which alleged that Resource Bank violated the Telephone Consumer Protection Act (TCPA), prior to being acquired by Fulton Financial in April 2004.
Income Taxes
Income taxes increased $9.1 million, or 12.7%, in 2006 and $6.7 million, or 10.3%, in 2005. The Corporation’s effective tax rate (income taxes divided by income before income taxes) remained fairly stable at 30.2%, 30.1% and 30.2% in 2006, 2005 and 2004, respectively. In general, the variances from the 35% Federal statutory rate consisted of tax-exempt interest income and investments in low and moderate income housing partnerships (LIH Investments), which generate Federal tax credits. Net credits associated with LIH investments were $3.9 million, $4.9 million and $4.5 million in 2006, 2005 and 2004, respectively.
For additional information regarding income taxes, see Note K, “Income Taxes”, in the Notes to Consolidated Financial Statements.

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FINANCIAL CONDITION
Total assets increased $2.5 billion, or 20.3%, to $14.9 billion at December 31, 2006, from $12.4 billion at December 31, 2005. Excluding the Columbia acquisition in February 2006, total assets increased $969.0 million, or 7.8%. Total loans, net of the allowance for loan losses, increased $1.9 billion, or 23.2% ($882.9 million, or 10.6%, excluding the acquisition of Columbia). During 2006, increases in deposits and proceeds from short and long-term borrowings were used to fund loan growth, and to a lessor extent, investment security purchases. Total deposits increased $1.4 billion, or 16.2%, to $10.2 billion at December 31, 2006 ($458.7 million, or 5.2%, excluding the acquisition of Columbia), and total borrowings increased $825.7 million, or 38.2% ($561.5 million, or 26.0%, excluding the acquisition of Columbia).
The table below presents a condensed ending balance sheet for the Corporation, adjusted for the balances recorded for the 2006 acquisition of Columbia, in comparison to 2005 ending balances.
                                                 
    2006     2005     Increase (decrease) (3)  
    Fulton             Fulton                    
    Financial     Columbia     Financial     Fulton              
    Corporation     Bancorp     Corporation     Financial              
    (As Reported)     (1)     (2)     Corporation     $     %  
    (dollars in thousands)  
Assets:
                                               
Cash and due from banks
  $ 355,018     $ 46,407     $ 308,611     $ 368,043     $ (59,432 )     (16.1 )%
Other earning assets
    267,230       16,854       250,376       275,310       (24,934 )     (9.1 )
Investment securities
    2,878,238       186,034       2,692,204       2,562,145       130,059       5.1  
Loans, net allowance
    10,267,439       1,052,684       9,214,755       8,331,881       882,874       10.6  
Premises and equipment
    191,401       7,775       183,626       170,254       13,372       7.9  
Goodwill and intangible assets
    663,775       218,060       445,715       448,422       (2,707 )     (0.6 )
Other assets
    295,863       20,586       275,277       245,500       29,777       12.1  
 
                                   
Total Assets
  $ 14,918,964     $ 1,548,400     $ 13,370,564     $ 12,401,555     $ 969,009       7.8 %
 
                                   
 
                                               
Liabilities and Shareholders’ Equity:                                
Deposits
  $ 10,232,469     $ 968,936     $ 9,263,533     $ 8,804,839     $ 458,694       5.2 %
Short-term borrowings
    1,680,840       184,083       1,496,757       1,298,962       197,795       15.2  
Long-term debt
    1,304,148       80,136       1,224,012       860,345       363,667       42.3  
Other liabilities
    185,197       9,495       175,702       154,438       21,264       13.8  
 
                                   
 
                                               
Total Liabilities
    13,402,654       1,242,650       12,160,004       11,118,584     $ 1,041,420       9.4  
 
                                   
 
                                               
Shareholders’ equity
    1,516,310       305,750       1,210,560       1,282,971       (72,411 )     (5.6 )
 
                                   
 
                                               
Total Liabilities and Shareholders’ Equity
  $ 14,918,964     $ 1,548,400     $ 13,370,564     $ 12,401,555     $ 969,009       7.8 %
 
                                   
 
(1)   Balances recorded for the February 1, 2006 acquisition of Columbia Bancorp.
 
(2)   Excluding balances recorded for Columbia Bancorp.
 
(3)   Fulton Financial Corporation, excluding balances recorded for Columbia Bancorp, as compared to 2005.

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Loans
The following table presents loans outstanding, by type, as of the dates shown:
                                         
    December 31  
    2006     2005     2004     2003     2002  
    (in thousands)  
Commercial – industrial and financial
  $ 2,603,224     $ 2,044,010     $ 1,946,962     $ 1,594,451     $ 1,489,990  
Commercial – agricultural
    361,962       331,659       326,176       354,517       189,110  
Real-estate – commercial mortgage
    3,213,809       2,831,405       2,461,016       1,992,650       1,527,143  
Real-estate – residential mortgage and home equity
    2,152,275       1,773,256       1,650,139       1,322,977       1,239,603  
Real-estate – construction
    1,428,809       851,451       595,567       307,108       248,565  
Consumer
    523,066       520,098       488,059       498,428       526,611  
Leasing and other
    100,711       79,738       72,795       77,646       84,063  
 
                             
 
    10,383,856       8,431,617       7,540,714       6,147,777       5,305,085  
Unearned income
    (9,533 )     (6,889 )     (6,799 )     (7,577 )     (9,626 )
 
                             
Total
  $ 10,374,323     $ 8,424,728     $ 7,533,915     $ 6,140,200     $ 5,295,459  
 
                               
Total loans, net of unearned income, increased $1.9 billion, or 23.1%, in 2006 ($884.8 million, or 10.5%, excluding the acquisition of Columbia). The internal growth of $884.8 million included increases in total commercial loans ($282.3 million, or 13.8%), commercial mortgage loans ($245.1 million, or 8.7%), residential mortgage and home equity loans ($166.7 million, or 9.4%) and construction loans ($142.4 million, or 16.7%).
Approximately $4.6 billion, or 44.8%, of the Corporation’s loan portfolio was in commercial mortgage and construction loans at December 31, 2006, compared to 43.7% at December 31, 2005. While the Corporation does not have a concentration of credit risk with any single borrower or industry, repayments on loans in these portfolios can be negatively influenced by decreases in real estate values. The Corporation mitigates this risk through stringent underwriting policies and procedures. In addition, more than half of commercial mortgages were for owner-occupied properties as of December 31, 2006. These types of loans are generally considered to involve less risk than non-owner-occupied mortgages.
Investment Securities
The following table presents the carrying amount of investment securities held to maturity (HTM) and available for sale (AFS) as of the dates shown:
                                                                         
    December 31  
    2006     2005     2004  
    HTM     AFS     Total     HTM     AFS     Total     HTM     AFS     Total  
    (in thousands)  
 
                                                                       
Equity securities
  $     $ 165,636     $ 165,636     $     $ 135,532     $ 135,532     $     $ 170,065     $ 170,065  
U.S. Government securities
          17,066       17,066             35,118       35,118             68,449       68,449  
U.S. Government sponsored agency securities
    7,648       288,465       296,113       7,512       212,650       220,162       6,903       66,468       73,371  
State and municipal
    1,262       488,279       489,541       5,877       438,987       444,864       10,658       332,455       343,113  
Corporate debt securities
    75       70,637       70,712             65,834       65,834       650       71,127       71,777  
Collateralized mortgage obligations
          492,524       492,524             262,503       262,503             1,374       1,374  
Mortgage-backed securities
    3,539       1,343,107       1,346,646       4,869       1,393,263       1,398,132       6,790       1,714,920       1,721,710  
 
                                                     
Total
  $ 12,524     $ 2,865,714     $ 2,878,238     $ 18,258     $ 2,543,887     $ 2,562,145     $ 25,001     $ 2,424,858     $ 2,449,859  
 
                                                     

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Total investment securities increased $316.1 million, or 12.3% ($202.3 million, or 7.9%, excluding the acquisition of Columbia), to a balance of $2.9 billion at December 31, 2006.
The Corporation classified 99.6% of its investment portfolio as available for sale at December 31, 2006 and, as such, these investments were recorded at their estimated fair values. The net unrealized loss on non-equity available for sale investment securities decreased $18.9 million to a net unrealized loss of $41.0 million at December 31, 2006 from a net unrealized loss of $59.9 million at December 31, 2005, generally due to changes in interest rates.
At December 31, 2006, equity securities consisted of FHLB and other government agency stock ($72.3 million), stocks of other financial institutions ($79.8 million) and mutual funds ($13.5 million). The financial institutions stock portfolio has historically been a source of capital appreciation and realized gains ($7.0 million in 2006, $5.8 million in 2005 and $14.8 million in 2004). Management periodically sells bank stocks when, in its opinion, valuations and market conditions warrant such sales.
Other Assets
Cash and due from banks decreased $13.0 million, or 3.5% ($59.4 million, or 16.1%, excluding the acquisition of Columbia). Because of the daily fluctuations that result in the normal course of business, cash is more appropriately analyzed in terms of average balances. On an average balance basis, cash and due from banks decreased $10.6 million, or 3.1%, from $346.5 million in 2005 to $335.9 million in 2006. The decrease resulted from a reduction in the level of cash reserves required to be held against deposit liabilities as transaction account balances decreased.
Premises and equipment increased $21.1 million, or 12.4%, to $191.4 million, which included $7.8 million as a result of the acquisition of Columbia. The remaining increase reflects additions primarily for the construction of new branch facilities, offset by the sales of branch and office facilities during 2006.
Goodwill and intangible assets increased $215.4 million, or 48.0%, primarily due to the acquisition of Columbia. Other assets increased $50.4 million, or 20.5%, to $295.9 million, which included $20.6 million as a result of the acquisition of Columbia. The remaining net increase was due primarily to an increase in accrued interest receivable, as both loan balances and interest rates increased, and an increase in the cash surrender value of the Corporation’s life insurance plans. These increases were offset by a decrease in the defined benefit pension plan asset as a result of recognizing the underfunded status of the plan, as required by Financial Accounting Standards Board (FASB) Statement No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (Statement 158). See also Note L, “Employee Benefit Plans”, in the Notes to Consolidated Financial Statements for additional information related to the Corporation’s pension plan.
Deposits and Borrowings
Deposits increased $1.4 billion, or 16.2%, to $10.2 billion at December 31, 2006 ($458.7 million, or 5.2%, excluding the acquisition of Columbia). During 2006, total demand deposits increased $205.6 million, or 6.2% (decreased $128.5 million, or 3.9%, excluding the acquisition of Columbia), savings deposits increased $161.7 million, or 7.6% (decreased $9.1 million, or 0.4%, excluding the acquisition of Columbia), and time deposits increased $1.1 billion, or 31.5% ($596.2 million, or 17.7%, excluding the acquisition of Columbia). During 2006, consumers shifted from core demand and savings accounts to higher yielding time deposits due to increases in available interest rates.
Short-term borrowings, which consist mainly of Federal funds purchased and customer cash management accounts, increased $381.9 million, or 29.4% ($197.8 million, or 15.2%, excluding the acquisition of Columbia). The increase in 2006 was due to increases in customer cash management accounts, in the form of short-term promissory notes and purchases of Federal funds as loan growth outpaced deposit increases. Long-term debt increased $443.8 million, or 51.6% ($363.7 million, or 42.3%, excluding the acquisition of Columbia), primarily due to an increase in FHLB advances to fund loan growth and investment purchases, as well as the Corporation’s issuance of $154.6 million of junior subordinated deferrable interest debentures in January 2006.

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Other Liabilities
Other liabilities increased $30.8 million, or 19.9% ($21.3 million, or 13.7%, excluding the acquisition of Columbia). The increase was primarily attributable to an increase in accrued interest payable related to the increase in available rates and time deposit balances, the recognition of the Corporation’s underfunded defined benefit pension plan liability, as required by Statement 158, and an increase in dividends payable to shareholders.
Shareholders’ Equity
Total shareholders’ equity increased $233.3 million, or 18.2%, to $1.5 billion, or 10.2% of ending total assets, as of December 31, 2006. This growth was due primarily to 2006 net income of $185.5 million and $154.2 million of stock issued for the Columbia acquisition, offset by $100.9 million of dividends paid to shareholders.
The Corporation periodically repurchases shares of its common stock under repurchase plans approved by the Board of Directors. These repurchases have historically been through open market transactions and have complied with all regulatory restrictions on the timing and amount of such repurchases. Shares may also be repurchased through an “Accelerated Share Repurchase” Program (ASR), which allows shares to be purchased immediately from an investment bank. The investment bank, in turn, repurchases shares on the open market over a period that is determined by the average daily trading volume of the Corporation’s shares, among other factors. Shares repurchased have been added to treasury stock and are accounted for at cost. These shares are periodically reissued for various corporate needs.
Total treasury stock purchases were approximately 1.1 million shares in 2006, 5.3 million shares in 2005 and 4.9 million shares in 2004. Included in these amounts are shares purchased under ASR’s, totaling 4.5 million in 2005 and 1.3 million in 2004. As of December 31, 2006, the Corporation had a stock repurchase plan in place for 2.1 million shares through June 30, 2007. Through December 31, 2006, 1.1 million shares had been repurchased under this plan.
The Corporation and its subsidiary banks are subject to regulatory capital requirements administered by various 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), and Tier I capital to average assets (as defined). As of December 31, 2006, the Corporation and each of its bank subsidiaries met the minimum capital requirements. In addition, the Corporation and each of its bank subsidiaries’ capital ratios exceeded the amounts required to be considered “well-capitalized” as defined in the regulations. See also Note J, “Regulatory Matters”, in the Notes to Consolidated Financial Statements .

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Contractual Obligations and Off-Balance Sheet Arrangements
The Corporation has various financial obligations that require future cash payments. These obligations include the payment of liabilities recorded on the Corporation’s consolidated balance sheet as well as contractual obligations for purchased services or for operating leases. The following table summarizes significant contractual obligations to third parties, by type, that were fixed and determinable at December 31, 2006:
                                         
    Payments Due In  
    One Year     One to     Three to     Over Five          
    or Less     Three Years     Five Years     Years     Total  
    (in thousands)          
 
                                       
Deposits with no stated maturity (1)
  $ 5,802,422     $     $     $     $ 5,802,422  
Time deposits (2)
    3,414,830       603,802       191,573       219,842       4,430,047  
Short-term borrowings (3)
    1,680,840                         1,680,840  
Long-term debt (3)
    190,305       243,732       89,711       780,400       1,304,148  
Operating leases (4)
    11,813       17,741       13,325       44,000       86,879  
Purchase obligations (5)
    15,511       23,239       6,676             45,426  
 
(1)   Includes demand deposits and savings accounts, which can be withdrawn by customers at any time.
 
(2)   See additional information regarding time deposits in Note H, “Deposits”, in the Notes to Consolidated Financial Statements.
 
(3)   See additional information regarding borrowings in Note I, “Short-Term Borrowings and Long-Term Debt”, in the Notes to Consolidated Financial Statements.
 
(4)   See additional information regarding operating leases in Note N, “Leases”, in the Notes to Consolidated Financial Statements.
 
(5)   Includes significant information technology, telecommunication and data processing outsourcing contracts. Variable obligations, such as those based on transaction volumes, are not included.
In addition to the contractual obligations listed in the preceding table, 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. These financial instruments include commitments to extend credit and standby letters of credit, which involve, to varying degrees, elements of credit and interest rate risk that are not recognized in the consolidated balance sheets. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Standby letters of credit are conditional commitments issued to guarantee the financial or performance obligation of a customer to a third party. Commitments and standby letters of credit do not necessarily represent future cash needs as they may expire without being drawn.
The following table presents the Corporation’s commitments to extend credit and letters of credit as of December 31, 2006 (in thousands):
         
Commercial mortgage, construction and land development
  $ 571,499  
Home equity
    674,089  
Credit card
    367,406  
Commercial and other
    2,702,516  
 
     
Total commitments to extend credit
  $ 4,315,510  
 
     
 
       
Standby letters of credit
  $ 739,056  
Commercial letters of credit
    34,193  
 
     
Total letters of credit
  $ 773,249  
 
     

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CRITICAL ACCOUNTING POLICIES
The following is a summary of those accounting policies that the Corporation considers to be most important to the portrayal of its financial condition and results of operations, as they require management’s most difficult judgments as a result of the need to make estimates about the effects of matters that are inherently uncertain.
Allowance and Provision for Loan Losses – The Corporation accounts for the credit risk associated with its lending activities through the allowance and provision for loan losses. The allowance is an estimate of the losses inherent in the loan portfolio as of the balance sheet date. The provision is the periodic charge to earnings, which is necessary to adjust the allowance to its proper balance. On a quarterly basis, the Corporation assesses the adequacy of its allowance through a methodology that consists of the following:
  -   Identifying loans for individual review under Statement 114. In general, these consist of large balance commercial loans and commercial mortgages that are rated less than “satisfactory” based upon the Corporation’s internal credit-rating process.
 
  -   Assessing whether the loans identified for review under Statement 114 are “impaired”. That is, whether it is probable that all amounts will not be collected according to the contractual terms of the loan agreement, generally representing loans that management has placed on non-accrual status.
 
  -   For loans reviewed under Statement 114, calculating the estimated fair value, using observable market prices, discounted cash flows or the value of the underlying collateral.
 
  -   Classifying all non-impaired large balance loans based on credit risk ratings and allocating an allowance for loan losses based on appropriate factors, including recent loss history for similar loans.
 
  -   Identifying all smaller balance homogeneous loans for evaluation collectively under the provisions of Statement of Financial Accounting Standards No. 5, “Accounting for Contingencies” (Statement 5). In general, these loans include residential mortgages, consumer loans, installment loans, smaller balance commercial loans and mortgages and lease receivables.
 
  -   Statement 5 loans are segmented into groups with similar characteristics and an allowance for loan losses is allocated to each segment based on recent loss history and other relevant information.
 
  -   Reviewing the results to determine the appropriate balance of the allowance for loan losses. This review gives additional consideration to factors such as the mix of loans in the portfolio, the balance of the allowance relative to total loans and non-performing assets, trends in the overall risk profile of the portfolio, trends in delinquencies and non-accrual loans and local and national economic conditions.
 
  -   An unallocated allowance is maintained to recognize the inherent imprecision in estimating and measuring loss exposure.
 
  -   Documenting the results of its review in accordance with SAB 102.
The allowance review methodology is based on information known at the time of the review. Changes in factors underlying the assessment could have a material impact on the amount of the allowance that is necessary and the amount of provision to be charged against earnings. Such changes could impact future results.
Accounting for Business Combinations – The Corporation accounts for all business acquisitions using the purchase method of accounting as required by Statement of Financial Accounting Standards No. 141, “Business Combinations” (Statement 141). Purchase accounting requires the purchase price to be allocated to the estimated fair values of the assets acquired and liabilities assumed. It also requires assessing the existence of and, if necessary, assigning a value to certain intangible assets. The remaining excess purchase price over the fair value of net assets acquired is recorded as goodwill.
The purchase price is established as the value of securities issued for the acquisition, cash consideration paid and certain acquisition-related expenses. The fair values of assets acquired and liabilities assumed are typically established through appraisals, observable market values or discounted cash flows. Management has engaged independent third-party valuation experts to assist in valuing certain assets, particularly intangibles. Other assets and liabilities are generally valued using the Corporation’s internal asset/liability modeling system. The assumptions used and the final valuations, whether prepared internally or by a third party, are reviewed by management. Due to the complexity of purchase accounting, final determinations of values can be time consuming and, occasionally,

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amounts included in the Corporation’s consolidated balance sheets and consolidated statements of income are based on preliminary estimates of value.
Goodwill and Intangible Assets – Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (Statement 142) addresses the accounting for goodwill and intangible assets subsequent to acquisition. Intangible assets are amortized over their estimated lives. Some intangible assets have indefinite lives and are, therefore, not amortized. All intangible assets must be evaluated for impairment if certain events occur. Any impairment write-downs are recognized as expense in the consolidated income statement.
Goodwill is not amortized to expense, but is evaluated at least annually for impairment. The Corporation completes its annual goodwill impairment test as of October 31st of each year. The Corporation tests for impairment by first allocating its goodwill and other assets and liabilities, as necessary, to defined reporting units. A fair value is then determined for each reporting unit. If the fair values of the reporting units exceed their book values, no write-down of the recorded goodwill is necessary. If the fair values are less than the book values, an additional valuation procedure is necessary to assess the proper carrying value of the goodwill. The Corporation determined that no impairment write-offs were necessary during 2006, 2005 and 2004.
Business unit valuation is inherently subjective, with a number of factors based on assumptions and management judgments. Among these are future growth rates for the reporting units, selection of comparable market transactions, discount rates and earnings capitalization rates. Changes in assumptions and results due to economic conditions, industry factors and reporting unit performance and cash flow projections could result in different assessments of the fair values of reporting units and could result in impairment charges in the future.
If an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount, an impairment test between annual tests is necessary. Such events may include adverse changes in legal factors or in the business climate, adverse actions by a regulator, unauthorized competition, the loss of key employees, or similar events. The Corporation has not performed an interim goodwill impairment test during the past three years as no such events have occurred. However, such an interim test could be necessary in the future.
Income Taxes – The provision for income taxes is based upon income before income taxes, adjusted for the effect of certain tax-exempt income and non-deductible expenses. In addition, certain items of income and expense are reported in different periods for financial reporting and tax return purposes. The tax effects of these temporary differences are recognized currently in the deferred income tax provision or benefit. Deferred tax assets or liabilities are computed based on the difference between the financial statement and income tax bases of assets and liabilities using the applicable enacted marginal tax rate.
The Corporation must also evaluate the likelihood that deferred tax assets will be recovered from future taxable income. If any such assets are more likely than not to not be recovered, a valuation allowance must be recognized. The Corporation recorded a valuation allowance of $11.1 million as of December 31, 2006 for certain state net operating losses that are not expected to be recovered. The assessment of the carrying value of deferred tax assets is based on certain assumptions, changes in which could have a material impact on the Corporation’s financial statements.
See also Note K, “Income Taxes”, in the Notes to Consolidated Financial Statements .
Recent Accounting Pronouncements
In February 2006, the FASB issued Statement of Financial Accounting Standards No. 155, “Accounting for Certain Hybrid Financial Instruments – an amendment of FASB Statements No. 133 and 140” (Statement 155). Statement 155 amends the guidance in FASB Statements No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” Statement 155 allows financial instruments that have embedded derivatives to be accounted for as a whole, thereby eliminating the need to bifurcate the derivative from its host, if the holder elects to account for the whole instrument on a fair value basis. Statement 155 is effective for all financial instruments acquired, issued, or subject to a remeasurement date after the beginning of a company’s first fiscal year that begins after September 15, 2006, or January 1, 2007 for the Corporation. The adoption of Statement 155 did not have an impact on the Corporation’s consolidated financial statements.

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In March 2006, the FASB issued Statement of Financial Accounting Standards No. 156, “Accounting for Servicing of Financial Assets — an amendment of FASB Statement No. 140” (Statement 156). Statement 156 requires recognition of a servicing asset or 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 had elected to continue amortizing mortgage servicing rights over the estimated lives of the underlying loans. As a result, the adoption of this standard did not impact the Corporation’s consolidated financial statements.
In April 2006, the FASB issued Staff Position FIN 46(R)-6, “Determining the Variability to Be Considered in Applying FASB Interpretation No. 46(R)” (Staff Position FIN 46(R)-6). This staff position addresses how an entity should determine the variability to be considered in 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 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 staff position had no impact the Corporation’s consolidated financial statements.
In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48). The interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes”. Specifically, the interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of an income tax position taken or expected to be taken in a tax return. This interpretation is effective for fiscal years beginning after December 15, 2006, or January 1, 2007 for the Corporation. The Corporation is evaluating the impact of FIN 48 on all tax positions and does not believe there is any material impact of adopting FIN 48 upon any recognized tax positions as of December 31, 2006. See Note K, “Income Taxes”, in the Notes to Consolidated Financial Statements.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurement” (Statement 157). Statement 157 defines fair value, establishes a framework for measuring fair value in U.S. generally accepted accounting principles, and expands disclosure requirements for fair value measurements. Statement 157 does not require any new fair value measurements and is effective for financial statements issued for fiscal years beginning after November 15, 2007, or January 1, 2008 for the Corporation. The Corporation is currently evaluating the impact of Statement 157 on the consolidated financial statements.
In September 2006, the FASB issued Statement 158, which requires employers to recognize the overfunded or underfunded status of defined benefit pension and post-retirement plans as an asset or liability in its balance sheet and to recognize changes in that funded status in the year in which changes occur through other comprehensive income, in addition to expanded disclosure requirements. The standard requires employers to measure defined benefit plan assets and obligations as of the date of the employer’s fiscal year-end balance sheet, for fiscal years ending after December 15, 2008, or December 31, 2008 for the Corporation. All other requirements of the standard are effective for employers with defined benefit pension or post-retirement plans that issue publicly traded equity securities, for fiscal years ending after December 15, 2006, or December 31, 2006 for the Corporation. As of December 31, 2006, the Corporation adopted Statement 158 on a prospective basis, resulting in a reclassification of the Corporation’s Pension Plan and Post-retirement Plan liabilities. For details related to the Corporation’s adoption of Statement 158, see Note L, “Employee Benefit Plans”, in the Notes to Consolidated Financial Statements.
In September 2006, the FASB ratified Emerging Issues Task Force (EITF) 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements” (EITF 06-4). EITF 06-4 addresses accounting for endorsement split-dollar life insurance arrangements that provide a benefit to an employee that extends to post-retirement periods. EITF 06-4 requires that the post-retirement benefit aspects of an endorsement-type split-dollar life insurance arrangement be recognized as a liability by the employer and that the obligation is not settled upon entering into an insurance arrangement. EITF 06-4 is effective for fiscal years beginning after December 15, 2007, or January 1, 2008 for the Corporation. The Corporation is currently evaluating the impact of EITF 06-4 on the consolidated financial statements.

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In February 2007, the FASB issued Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115” (Statement 159). Statement 159 permits entities to choose to measure many financial instruments and certain other items at fair value and amends Statement 115 to, among other things, require certain disclosures for amounts for which the fair value option is applied. Additionally, this standard provides that an entity may reclassify held-to-maturity and available-for-sale securities to the trading account when the fair value option is elected for such securities, without calling into question the intent to hold other securities to maturity in the future. This standard is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007, or January 1, 2008 for the Corporation. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of Statement 157. The Corporation has not completed its assessment of SFAS 159 and the impact, if any, on the consolidated financial statements.

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Item 7A. 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 of common stocks of publicly traded financial institutions, U.S. Government sponsored agency stocks and money market mutual funds. The equity investments most susceptible to equity market price risk are the financial institutions stocks, which had a cost basis of approximately $79.7 million and a fair value of $79.6 million at December 31, 2006. Gross unrealized gains in this portfolio were approximately $2.9 million at December 31, 2006.
Although the carrying value of the financial institutions stocks accounted for only 0.5% of the Corporation’s total assets, any unrealized gains in the portfolio represent a potential source of revenue. The Corporation has a history of realizing gains from this portfolio and, if values were to decline significantly, this revenue could be materially impacted.
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 48 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 write-downs of $122,000 in 2006, $65,000 in 2005 and $137,000 in 2004 for specific equity securities which were deemed to exhibit other-than-temporary impairment in value. 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. See also Note C, “Investment Securities”, in the Notes to Consolidated Financial Statements.
In addition to the risk of changes in the value of its equity portfolio, the Corporation’s investment management and trust services revenue could also 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 brokerage services is dependent, in part, upon consumers’ level of confidence in the outlook for rising securities prices.
Interest Rate Risk, Asset/Liability Management and Liquidity
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 interest income and changes in the economic value of its equity.
The Corporation employs various management techniques to minimize its exposure to interest rate risk. An Asset/Liability Management Committee (ALCO), consisting of key financial and senior management personnel, meets on a bi-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 interest income risks noted above.
From a liquidity standpoint, the Corporation must maintain a sufficient level of liquid assets to meet the ongoing cash flow requirements of customers, who, as depositors, may want to withdraw funds or who, as borrowers, need credit availability. Liquidity sources are found on both sides of the balance sheet. Liquidity is provided on a continuous basis through scheduled and unscheduled principal reductions and interest payments on outstanding loans and investments. Liquidity is also provided through the availability of deposits and borrowings.

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The Corporation’s sources and uses of cash were discussed in general terms in the “Overview” section of Management’s Discussion. The consolidated statements of cash flows provide additional information. The Corporation generated $199.3 million in cash from operating activities during 2006, mainly due to net income. Investing activities resulted in a net cash outflow of $1.1 billion, compared to a net cash outflow of $588.5 million in 2005. Financing activities resulted in net cash proceeds of $911.8 million in 2006, compared to net cash proceeds of $532.0 million in 2005 as net funds were provided by increases in time deposits and borrowings, outpacing repayments of long-term debt and shareholder dividends.
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. The Parent Company meets its cash needs through dividends and loans from subsidiary banks, and through external borrowings.
In January 2006, the Corporation purchased all of the common stock of a new Delaware business trust, 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 the Parent Company issued $154.6 million of junior subordinated deferrable interest debentures to the trust. These debentures carry the same rate and mature on February 1, 2036. In 2005, the Corporation issued $100.0 million of ten-year subordinated notes, which mature April 1, 2015 and carry a fixed rate of 5.35%. Interest is paid semi-annually.
In 2004, the Parent Company entered into a revolving line of credit agreement with an unaffiliated bank. Under the terms of the agreement, the Parent Company can borrow up to $100.0 million with interest calculated at the one-month London Interbank Offering Rate (LIBOR) plus 0.35%. The credit agreement requires the Corporation to maintain certain financial ratios related to capital strength and earnings. As of December 31, 2006, there was $36.3 million borrowed against this line. The Corporation was in compliance with all required covenants under the credit agreement as of December 31, 2006.
These borrowings, most notably the revolving line of credit agreement, supplement the liquidity available from subsidiaries through dividends 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.
At December 31, 2006, liquid assets (defined as cash and due from banks, short-term investments, Federal funds sold, mortgages available for sale, securities available for sale, and non-mortgage-backed securities held to maturity due in one year or less) totaled $3.5 billion, or 23.2% of total assets. This compares to $3.2 billion, or 25.5% of total assets, at December 31, 2005.

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The following tables present the expected maturities of investment securities at December 31, 2006 and the weighted average yields of such securities (calculated based on historical cost):
HELD TO MATURITY (at amortized cost)
                                                                 
    MATURING  
                    After One But     After Five But        
    Within One Year     Within Five Years     Within Ten Years     After Ten Years  
    Amount     Yield     Amount     Yield     Amount     Yield     Amount     Yield  
    (dollars in thousands)  
U.S. Government sponsored agency securities
  $           $ 7,648       4.03 %   $           $        
State and municipal (1)
    142       3.56       941       5.93       179       5.59              
Other securities
    50             25       2.00                          
 
                                               
Total
  $ 192       2.63 %   $ 8,614       4.23 %   $ 179       5.59 %   $        
 
                                               
 
                                                               
Mortgage-backed securities (2)
  $ 3,539       6.44 %                                                
 
                                                           
AVAILABLE FOR SALE (at estimated fair value)
                                                                 
    MATURING  
                    After One But     After Five But        
    Within One Year     Within Five Years     Within Ten Years     After Ten Years  
    Amount     Yield     Amount     Yield     Amount     Yield     Amount     Yield  
    (dollars in thousands)  
U.S. Government securities
  $ 17,066       5.16 %   $           $           $        
U.S. Government sponsored agency securities (3)
    38,600       4.36       243,777       5.08       4,771       5.13       1,317       7.04  
State and municipal (1)
    24,320       5.14       274,567       4.70       84,737       5.65       104,655       6.84  
Other securities
    50       5.30       4,191       6.22                   66,396       7.17  
 
                                               
Total
  $ 80,036       4.77 %   $ 522,535       4.89 %   $ 89,508       5.63 %   $ 172,368       6.97 %
 
                                               
 
                                                               
Collateralized mortgage obligations (2)
  $ 492,524       5.24 %                                                
 
                                                           
Mortgage-backed securities (2)
  $ 1,343,107       4.02 %                                                
 
                                                           
 
(1)   Weighted average yields on tax-exempt securities have been computed on a fully tax-equivalent basis assuming a tax rate of 35 percent.
 
(2)   Maturities for mortgage-backed securities and collateralized mortgage obligations are dependent upon the interest rate environment and prepayments on the underlying loans. For the purpose of this table, the entire balance and weighted average rate is shown in one period.
 
(3)   Includes Small Business Administration securities, whose maturities are dependent upon prepayments on the underlying loans. For the purpose of this table, amounts are based upon contractual maturities.
The Corporation’s investment portfolio consists mainly of mortgage-backed securities and collateralized mortgage obligations which have stated maturities that may differ from actual maturities due to borrowers’ ability to prepay obligations. Cash flows from such investments are dependent upon the performance of the underlying mortgage loans, and are generally influenced by the level of interest rates. As rates increase, cash flows generally decrease as prepayments on the underlying mortgage loans decrease. As rates decrease, cash flows generally increase as prepayments increase.

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The following table presents the approximate contractual maturity and interest rate sensitivity of certain loan types, excluding consumer loans and leases, subject to changes in interest rates as of December 31, 2006:
                                 
            One              
    One Year     Through     More Than        
    or Less     Five Years     Five Years     Total  
            (in thousands)          
Commercial, financial and agricultural:
                               
Floating rate
  $ 1,456,715     $ 475,713     $ 225,704     $ 2,158,132  
Fixed rate
    309,313       407,876       89,865       807,054  
 
                       
Total
  $ 1,766,028     $ 883,589     $ 315,569     $ 2,965,186  
 
                       
 
                               
Real-estate – mortgage:
                               
Floating rate
  $ 620,216     $ 1,594,790     $ 1,377,582     $ 3,592,588  
Fixed rate
    370,450       976,975       426,071       1,773,496  
 
                       
Total
  $ 990,666     $ 2,571,765     $ 1,803,653     $ 5,366,084  
 
                       
 
                               
Real-estate – construction:
                               
Floating rate
  $ 1,029,168     $ 152,214     $ 47,538     $ 1,228,920  
Fixed rate
    85,380       39,078       75,431       199,889  
 
                       
Total
  $ 1,114,548     $ 191,292     $ 122,969     $ 1,428,809  
 
                       
From a funding standpoint, the Corporation has been able to rely over the years on a stable base of “core” deposits. Even though the Corporation has experienced notable changes in the composition and interest sensitivity of this deposit base, it has been able to rely on this base to provide needed liquidity. In addition, the Corporation issues certificates of deposits in various denominations, including jumbo time deposits, repurchase agreements and short-term borrowings as potential sources of liquidity.
Contractual maturities of time deposits of $100,000 or more outstanding at December 31, 2006 are as follows (in thousands):
         
Three months or less
  $ 369,560  
Over three through six months
    291,073  
Over six through twelve months
    394,241  
Over twelve months
    161,242  
 
     
Total
  $ 1,216,116  
 
     
Each of the Corporation’s subsidiary banks is a member of the FHLB and has access to FHLB overnight and term credit facilities. At December 31, 2006, the Corporation had $998.5 million in term advances from the FHLB with an additional $1.3 billion of borrowing capacity (including both short-term funding on its lines of credit and long-term borrowings). This availability, along with Federal funds lines at various correspondent banks, provides the Corporation with additional liquidity.

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The following table provides information about the Corporation’s interest rate sensitive financial instruments. The table presents expected cash flows and weighted average rates for each significant interest rate sensitive financial instrument, by expected maturity period (dollars in thousands).
                                                                 
    Expected Maturity Period             Estimated  
    2007     2008     2009     2010     2011     Beyond     Total     Fair Value  
Fixed rate loans (1)
  $ 924,799     $ 605,999     $ 511,552     $ 358,602     $ 248,512     $ 596,918     $ 3,246,382     $ 3,135,763  
Average rate
    6.64 %     6.35 %     6.47 %     6.60 %     6.65 %     6.33 %     6.50 %        
Floating rate loans (7) (8)
    3,136,621       780,789       616,523       502,517       416,318       1,655,019       7,107,787       7,045,241  
Average rate
    8.27 %     7.74 %     7.74 %     7.77 %     7.27 %     6.72 %     7.71 %        
 
                                                               
Fixed rate investments (2)
    485,813       465,730       414,713       618,332       263,061       419,856       2,667,505       2,626,069  
Average rate
    4.27 %     3.97 %     4.17 %     4.02 %     4.52 %     5.10 %     4.30 %        
Floating rate investments (2)
    70       1,592       101       500             91,727       93,990       94,320  
Average rate
    5.12 %     4.99 %     5.72 %     6.25 %           5.57 %     5.56 %        
 
                                                               
Other interest-earning assets
    267,230                                     267,230       267,230  
Average rate
    6.92 %                                   6.92 %        
     
Total
  $ 4,814,533     $ 1,854,110     $ 1,542,889     $ 1,479,951     $ 927,891     $ 2,763,520     $ 13,382,894     $ 13,168,623  
Average rate
    7.48 %     6.34 %     6.36 %     5.92 %     6.32 %     6.35 %     6.70 %        
     
 
                                                               
Fixed rate deposits (3)
  $ 3,422,714     $ 457,792     $ 137,390     $ 99,857     $ 82,354     $ 194,524     $ 4,394,631     $ 4,377,688  
Average rate
    4.50 %     4.22 %     4.14 %     4.45 %     4.75 %     4.53 %     4.46 %        
Floating rate deposits (4)
    1,737,694       273,033       273,033       260,297       253,787       3,039,959       5,837,803       5,837,803  
Average rate
    3.01 %     1.02 %     1.02 %     0.90 %     0.84 %     0.69 %     1.43 %        
 
                                                               
Fixed rate borrowings (5)
    284,564       196,989       59,565       89,565       536       261,435       892,654       909,647  
Average rate
    5.10 %     5.17 %     4.95 %     5.92 %     4.75 %     5.87 %     5.41 %        
Floating rate borrowings (6)
    1,861,951       228,000                         1,565       2,091,516       2,091,516  
Average rate
    5.03 %     4.73 %                       8.44 %     5.00 %        
     
Total
  $ 7,306,923     $ 1,155,814     $ 469,988     $ 449,719     $ 336,677     $ 3,497,483     $ 13,216,604     $ 13,216,654  
Average rate
    4.30 %     3.73 %     2.43 %     2.69 %     1.80 %     1.30 %     3.27 %        
     
 
(1)   Amounts are based on contractual payments and maturities, adjusted for estimated prepayments.
 
(2)   Amounts are based on contractual maturities; adjusted for estimated prepayments on mortgage-backed securities, collateralized mortgage obligations and expected call on agency and municipal securities.
 
(3)   Amounts are based on contractual maturities of time deposits.
 
(4)   Estimated based on history of deposit flows.
 
(5)   Amounts are based on contractual maturities of debt instruments, adjusted for possible calls.
 
(6)   Amounts include Federal funds purchased, short-term promissory notes, floating FHLB advances and securities sold under agreements to repurchase, which mature in less than 90 days, in addition to junior subordinated deferrable interest debentures.
 
(7)   Floating rate loans include adjustable rate mortgages.
 
(8)   Line of credit amounts are based on historical cash flows, with an average life of approximately 5 years.
The preceding table and discussion addressed the liquidity implications of interest rate risk and focused on expected cash flows from financial instruments. Expected maturities, however, do not necessarily reflect 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 market value adjustments related to acquisitions are not included in the preceding table.
In addition to the interest rate sensitive financial instruments included in the preceding table, the Corporation also had interest rate swaps with a notional amount of $290.0 million as of December 31, 2006. These swaps were used to hedge certain long-term fixed rate certificates of deposit. The terms of the certificates of deposit and the interest rate swaps are similar and were committed to simultaneously. Under the terms of the swap agreements, the Corporation is the fixed rate receiver and the floating rate payer (generally tied to the three-month LIBOR, a common index used for setting rates between financial institutions). The combination of

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the interest rate swaps and the issuance of the certificates of deposit generates long-term floating rate funding for the Corporation. As of December 31, 2006, the Corporation’s weighted average receive and pay rates were 4.62% and 5.28%, respectively.
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.
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 repricing periods. The sum of assets and liabilities in each of these periods are compared for mismatches within that maturity segment. Core deposits having non-contractual maturities are placed into repricing periods based upon historical balance performance. Repricing for mortgage loans, mortgage-backed securities and collateralized mortgage obligations 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 six-month gap to plus or minus 15% of total earning assets. The cumulative six-month gap as of December 31, 2006 was negative 4.1%. The cumulative six-month ratio of rate sensitive assets to rate sensitive liabilities as of December 31, 2006 was 0.91.
Simulation of net interest 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. 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 short-term interest rates with changes across the yield curve based upon industry projections. The following table summarizes the expected impact of interest rate shocks on net interest income:
         
    Annual change    
   Rate Shock   
  in net interest income   % Change
+300 bp
  + $7.5 million   +1.6%
+200 bp
  + $5.1 million   +1.1%
+100 bp
  + $2.7 million   +0.6%
-100 bp
  - $4.4 million   -0.9%
-200 bp
  - $11.8 million   -2.4%
-300 bp
  - $21.2 million   -4.4%
Economic value of equity estimates the discounted present value of asset cash flows and liability cash flows. Discount rates are based upon market prices for like assets and liabilities. Upward and downward shocks of interest rates are used to determine the comparative effect of such interest rate movements relative to the unchanged environment. This measurement tool is used primarily to evaluate the longer-term repricing risks and options in the Corporation’s balance sheet. A policy limit of 10% of economic equity may be at risk for every 100 basis point “shock” in interest rates. As of December 31, 2006, the Corporation was within policy limits for every basis point “shock” movement in interest rates.
As with any modeling system, the results of the static gap and simulation of net interest income and economic value of equity are a function of the assumptions and projections built into the model. The actual behavior of the financial instruments could differ from these assumptions and projections.

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Item 8. Financial Statements and Supplementary Data
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per-share data)
                 
    December 31  
    2006     2005  
Assets
               
Cash and due from banks
  $ 355,018     $ 368,043  
Interest-bearing deposits with other banks
    27,529       31,404  
Federal funds sold
    659       528  
Loans held for sale
    239,042       243,378  
Investment securities:
               
Held to maturity (estimated fair value of $12,534 in 2006 and $18,317 in 2005)
    12,524       18,258  
Available for sale
    2,865,714       2,543,887  
 
               
Loans, net of unearned income
    10,374,323       8,424,728  
Less: Allowance for loan losses
    (106,884 )     (92,847 )
 
           
Net Loans
    10,267,439       8,331,881  
 
           
 
               
Premises and equipment
    191,401       170,254  
Accrued interest receivable
    71,825       53,261  
Goodwill
    626,042       418,735  
Intangible assets
    37,733       29,687  
Other assets
    224,038       192,239  
 
           
 
               
Total Assets
  $ 14,918,964     $ 12,401,555  
 
           
 
               
Liabilities
               
Deposits:
               
Noninterest-bearing
  $ 1,831,419     $ 1,672,637  
Interest-bearing
    8,401,050       7,132,202  
 
           
Total Deposits
    10,232,469       8,804,839  
 
           
 
               
Short-term borrowings:
               
Federal funds purchased
    1,022,351       939,096  
Other short-term borrowings
    658,489       359,866  
 
           
Total Short-Term Borrowings
    1,680,840       1,298,962  
 
           
 
               
Accrued interest payable
    61,392       38,604  
Other liabilities
    123,805       115,834  
Federal Home Loan Bank advances and long-term debt
    1,304,148       860,345  
 
           
Total Liabilities
    13,402,654       11,118,584  
 
           
 
               
Shareholders’ Equity
               
Common stock, $2.50 par value, 600 million shares authorized, 190.8 million shares issued in 2006 and 181.0 million shares issued in 2005
    476,987       430,827  
Additional paid-in capital
    1,246,823       996,708  
Retained earnings
    92,592       138,529  
Accumulated other comprehensive loss
    (39,091 )     (42,285 )
Treasury stock (17.1 million shares in 2006 and 16.1 million shares in 2005), at cost
    (261,001 )     (240,808 )
 
           
Total Shareholders’ Equity
    1,516,310       1,282,971  
 
           
 
               
Total Liabilities and Shareholders’ Equity
  $ 14,918,964     $ 12,401,555  
 
           
See Notes to Consolidated Financial Statements

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CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per-share data)
                         
    Year Ended December 31  
    2006     2005     2004  
Interest Income
                       
Loans, including fees
  $ 727,297     $ 517,413     $ 394,765  
Investment securities:
                       
Taxable
    97,652       74,921       76,792  
Tax-exempt
    14,896       12,114       9,553  
Dividends
    6,568       4,793       4,023  
Loans held for sale
    15,564       14,940       8,407  
Other interest income
    2,530       1,586       103  
 
                 
Total Interest Income
    864,507       625,767       493,643  
 
                       
Interest Expense
                       
Deposits
    246,941       140,774       89,779  
Short-term borrowings
    78,043       34,414       15,182  
Long-term debt
    53,960       38,031       31,033  
 
                 
Total Interest Expense
    378,944       213,219       135,994  
 
                 
 
                       
Net Interest Income
    485,563       412,548       357,649  
Provision for Loan Losses
    3,498       3,120       4,717  
 
                 
Net Interest Income After Provision for Loan Losses
    482,065       409,428       352,932  
 
                 
 
                       
Other Income
                       
Investment management and trust services
    37,441       35,669       34,817  
Service charges on deposit accounts
    43,773       40,198       39,451  
Other service charges and fees
    26,792       24,229       20,494  
Gains on sales of loans
    21,086       25,032       19,262  
Investment securities gains
    7,439       6,625       17,712  
Other
    13,344       12,545       7,128  
 
                 
Total Other Income
    149,875       144,298       138,864  
 
                       
Other Expenses
                       
Salaries and employee benefits
    213,913       181,889       166,026  
Net occupancy expense
    36,493       29,275       23,813  
Equipment expense
    14,251       11,938       10,769  
Data processing
    12,228       12,395       11,430  
Advertising
    10,638       8,823       6,943  
Intangible amortization
    7,907       5,311       4,726  
Other
    70,561       66,660       53,808  
 
                 
Total Other Expenses
    365,991       316,291       277,515  
 
                 
 
                       
Income Before Income Taxes
    265,949       237,435       214,281  
Income Taxes
    80,422       71,361       64,673  
 
                 
 
                       
Net Income
  $ 185,527     $ 166,074     $ 149,608  
 
                 
 
                       
Per-Share Data:
                       
Net Income (Basic)
  $ 1.07     $ 1.01     $ 0.95  
Net Income (Diluted)
    1.06       1.00       0.94  
Cash Dividends
    0.581       0.540       0.493  
See Notes to Consolidated Financial Statements

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CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
                                                         
                                    Accumulated              
    Number of             Additional             Other              
    Shares     Common     Paid-in     Retained     Comprehensive     Treasury        
    Outstanding     Stock     Capital     Earnings     Income (Loss)     Stock     Total  
    (dollars in thousands)  
Balance at January 1, 2004
    149,189,000     $ 284,480     $ 648,155     $ 104,187     $ 12,267     $ (100,772 )   $ 948,317  
Comprehensive Income:
                                                       
Net Income
                            149,608                       149,608  
Unrealized loss on securities (net of $5.6 million tax effect)
                                    (10,329 )             (10,329 )
Less — reclassification adjustment for gains included in net income (net of $6.2 million tax expense)
                                    (11,513 )             (11,513 )
Minimum pension liability adjustment (net of $300,000 tax effect)
                                    (558 )             (558 )
 
                                                     
Total comprehensive income
                                                    127,208  
 
                                                     
Stock dividend - 5%
            15,278       100,247       (115,615 )                     (90 )
Stock issued, including related tax benefits
    1,376,000               (9,141 )                     19,027       9,886  
Stock-based compensation awards
                    3,900                               3,900  
Stock issued for acquisition of Resource Bankshares Corporation
    11,851,000       21,498       164,365                               185,863  
Stock issued for acquisition of First Washington FinancialCorp.
    7,533,000       14,348       110,877                               125,225  
Acquisition of treasury stock
    (4,941,000 )                                     (78,966 )     (78,966 )
Cash dividends — $0.493 per share
                            (77,256 )                     (77,256 )
     
 
                                                       
Balance at December 31, 2004
    165,008,000     $ 335,604     $ 1,018,403     $ 60,924     $ (10,133 )   $ (160,711 )   $ 1,244,087  
Comprehensive Income:
                                                       
Net Income
                            166,074                       166,074  
Unrealized loss on securities (net of $14.1 million tax effect)
                                    (26,219 )             (26,219 )
Unrealized loss on derivative financial instruments (net of $1.2 million tax effect)
                                    (2,185 )             (2,185 )
Less — reclassification adjustment for gains included in net income (net of $2.3 million tax expense)
                                    (4,306 )             (4,306 )
Minimum pension liability adjustment (net of $300,000 tax effect)
                                    558               558  
 
                                                     
Total comprehensive income
                                                    133,922  
 
                                                     
5-for-4 stock split paid in the form of a 25 % stock dividend
            84,046       (84,114 )                             (68 )
Stock issued, including related tax benefits
    1,176,000       1,809       4,179                       5,071       11,059  
Stock-based compensation awards
                    1,041                               1,041  
Stock issued for acquisition of SVB Financial Services, Inc.
    3,934,000       9,368       57,199                               66,567  
Acquisition of treasury stock
    (5,250,000 )                                     (85,168 )     (85,168 )
Cash dividends — $0.540 per share
                            (88,469 )                     (88,469 )
     
 
                                                       
Balance at December 31, 2005
    164,868,000     $ 430,827     $ 996,708     $ 138,529     $ (42,285 )   $ (240,808 )   $ 1,282,971  
Comprehensive Income:
                                                       
Net Income
                            185,527                       185,527  
Unrealized gain on securities (net of $9.8 million tax effect)
                                    18,132               18,132  
Unrealized loss on derivative financial instrument (net of $702,000 tax effect)
                                    (1,304 )             (1,304 )
Less — reclassification adjustment for gains included in net income (net of $2.6 million tax expense)
                                    (4,835 )             (4,835 )
 
                                                     
Total comprehensive income
                                                    197,520  
 
                                                     
Adjustment to initially apply Statement 158 (net of $3.1 million tax effect)
                                    (8,799 )             (8,799 )
Stock dividend - 5%
            22,648       107,952       (130,600 )                      
Stock issued, including related tax benefits
    1,222,000       2,989       6,868                               9,857  
Stock-based compensation awards
                    1,687                               1,687  
Stock issued for acquisition of Columbia Bancorp
    8,619,000       20,523       133,608                               154,131  
Acquisition of treasury stock
    (1,061,000 )                                     (16,770 )     (16,770 )
Accelerated share repurchase settlement
                                            (3,423 )     (3,423 )
Cash dividends — $0.581 per share
                            (100,864 )                     (100,864 )
     
 
                                                       
Balance at December 31, 2006
    173,648,000     $ 476,987     $ 1,246,823     $ 92,592     $ (39,091 )   $ (261,001 )   $ 1,516,310  
 
                                         
See Notes to Consolidated Financial Statements

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CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
                         
    Year Ended December 31  
    2006     2005     2004  
CASH FLOWS FROM OPERATING ACTIVITIES:
                       
Net Income
  $ 185,527     $ 166,074     $ 149,608  
 
                       
Adjustments to reconcile net income to net cash provided by operating activities:
                       
Provision for loan losses
    3,498       3,120       4,717  
Depreciation and amortization of premises and equipment
    16,905       14,338       12,409  
Net amortization of investment security premiums
    3,608       5,158       9,906  
Deferred income tax (benefit) expense
    (5,779 )     990       816  
Investment securities gains
    (7,439 )     (6,625 )     (17,712 )
Gains on sales of loans
    (21,086 )     (25,468 )     (19,262 )
Proceeds from sales of mortgage loans held for sale
    1,948,276       2,300,098       1,475,000  
Originations of mortgage loans held for sale
    (1,922,854 )     (2,315,410 )     (1,456,465 )
Amortization of intangible assets
    7,907       5,311       4,726  
Stock-based compensation
    1,687       1,041       3,900  
Excess tax benefits from stock-based compensation
    (783 )     (269 )     (177 )
(Increase) decrease in accrued interest receivable
    (11,908 )     (10,501 )     22  
(Increase) decrease in other assets
    (12,613 )     5,376       4,636  
Increase (decrease) in accrued interest payable
    21,741       11,008       (759 )
(Decrease) increase in other liabilities
    (7,384 )     (7,756 )     3,266  
 
                 
Total adjustments
    13,776       (19,583 )     25,023  
 
                 
Net cash provided by operating activities
    199,303       146,491       174,631  
 
                 
 
                       
CASH FLOWS FROM INVESTING ACTIVITIES:
                       
Proceeds from sales of securities available for sale
    147,194       143,806       235,332  
Proceeds from maturities of securities held to maturity
    5,923       10,846       8,870  
Proceeds from maturities of securities available for sale
    598,111       666,060       816,834  
Purchase of securities held to maturity
    (698 )     (4,403 )     (11,402 )
Purchase of securities available for sale
    (868,876 )     (861,897 )     (269,776 )
Decrease (increase) in short-term investments
    20,598       78,265       (9,188 )
Net increase in loans
    (886,372 )     (589,053 )     (577,403 )
Net cash (paid for) received from acquisitions
    (109,729 )     (3,791 )     7,810  
Net purchase of premises and equipment
    (30,277 )     (28,336 )     (16,161 )
 
                 
Net cash (used in) provided by investing activities
    (1,124,126 )     (588,503 )     184,916  
 
                 
 
                       
CASH FLOWS FROM FINANCING ACTIVITIES:
                       
Net (decrease) increase in demand and savings deposits
    (137,546 )     35,153       293,331  
Net increase (decrease) in time deposits
    596,240       400,672       (174,453 )
Additions to long-term debt
    550,166       319,606       45,000  
Repayments of long-term debt
    (186,499 )     (168,207 )     (63,509 )
Increase (decrease) in short-term borrowings
    197,795       104,438       (338,845 )
Dividends paid
    (98,022 )     (85,495 )     (74,802 )
Net proceeds from issuance of common stock
    9,074       10,722       9,619  
Excess tax benefits from stock-based compensation
    783       269       177  
Acquisition of treasury stock
    (20,193 )     (85,168 )     (78,966 )
 
                 
Net cash provided by (used in) financing activities
    911,798       531,990       (382,448 )
 
                 
 
                       
Net (Decrease) Increase in Cash and Due From Banks
    (13,025 )     89,978       (22,901 )
Cash and Due From Banks at Beginning of Year
    368,043       278,065       300,966  
 
                 
Cash and Due From Banks at End of Year
  $ 355,018     $ 368,043     $ 278,065  
 
                 
 
                       
Supplemental Disclosures of Cash Flow Information
                       
Cash paid during period for:
                       
Interest
  $ 357,203     $ 202,211     $ 136,753  
Income taxes
    77,327       60,539       54,457  
See Notes to Consolidated Financial Statements

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business: Fulton Financial Corporation (Parent Company) is a multi-bank financial holding company which provides a full range of banking and financial services to businesses and consumers through its wholly owned banking subsidiaries: Fulton Bank, Lebanon Valley Farmers Bank, Swineford National Bank, Lafayette Ambassador Bank, FNB Bank N.A., Hagerstown Trust, Delaware National Bank, The Bank, The Peoples Bank of Elkton, Skylands Community Bank, Resource Bank, First Washington State Bank, Somerset Valley Bank and The Columbia Bank as well as its financial services subsidiaries, Fulton Financial Advisors, N.A., and Fulton Insurance Services Group, Inc. In addition, the Parent Company owns the following non-bank subsidiaries: Fulton Financial Realty Company, Fulton Reinsurance Company, LTD, Central Pennsylvania Financial Corp., FFC Management, Inc. and FFC Penn Square, Inc. Collectively, the Parent Company and its subsidiaries are referred to as the Corporation.
The Corporation’s primary sources of revenue are interest income on loans and investment securities and fee income on its products and services. Its expenses consist of interest expense on deposits and borrowed funds, provision for loan losses, other operating expenses and income taxes. The Corporation’s primary competition is other financial services providers operating in its region. Competitors also include financial services providers located outside the Corporation’s geographical market as a result of the growth in electronic delivery systems. The Corporation is subject to the regulations of certain Federal and state agencies and undergoes periodic examinations by such regulatory authorities.
The Corporation offers, through its banking subsidiaries, a full range of retail and commercial banking services throughout central and eastern Pennsylvania, Maryland, Delaware, New Jersey and Virginia. Industry diversity is the key to the economic well being of these markets and the Corporation is not dependent upon any single customer or industry.
Basis of Financial Statement Presentation: The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States (U.S. GAAP) and include the accounts of the Parent Company and all wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements as well as revenues and expenses during the period. Actual results could differ from those estimates.
Investments: Debt securities are classified as held to maturity at the time of purchase when the Corporation has both the intent and ability to hold these investments until they mature. Such debt securities are carried at cost, adjusted for amortization of premiums and accretion of discounts using the effective yield method. The Corporation does not engage in trading activities, however, since the investment portfolio serves as a source of liquidity, most debt securities and all marketable equity securities are classified as available for sale. Securities available for sale are carried at estimated fair value with the related unrealized holding gains and losses reported in shareholders’ equity as a component of other comprehensive income, net of tax. Realized security gains and losses are computed using the specific identification method and are recorded on a trade date basis. Securities are evaluated periodically to determine whether a decline in their value is other than temporary. Declines in value that are determined to be other than temporary are recorded as realized losses.
Loans and Revenue Recognition: Loan and lease financing receivables are stated at their principal amount outstanding, except for loans held for sale which are carried at the lower of aggregate cost or market value. Interest income on loans is accrued as earned. Unearned income on lease financing receivables is recognized on a basis which approximates the effective yield method. Premiums and discounts on purchased loans are amortized as an adjustment to interest income using the effective yield method.
Accrual of interest income is generally discontinued when a loan becomes 90 days past due as to principal or interest, except for adequately collateralized mortgage loans. When interest accruals are discontinued, unpaid interest credited to income is reversed. Non-accrual loans are restored to accrual status when all delinquent principal and interest become current or the loan is considered secured and in the process of collection.
Loan Origination Fees and Costs: Loan origination fees and the related direct origination costs are offset and the net amount is deferred and amortized over the life of the loan using the effective interest method as an adjustment to interest income. For mortgage loans sold, the net amount is included in gain or loss upon the sale of the related mortgage loan.

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Allowance for Loan Losses: The allowance for loan losses is increased by charges to expense and decreased by charge-offs, net of recoveries. Management’s periodic evaluation of the adequacy of the allowance for loan losses is based on the Corporation’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrowers’ ability to repay, the estimated fair value of the underlying collateral, and current economic conditions. Management believes that the allowance for loan losses is adequate, however, future changes to the allowance may be necessary based on changes in any of these factors.
The allowance for loan losses consists of two components – specific allowances allocated to individually impaired loans, as defined by the Financial Accounting Standards Board’s (FASB) Statement of Financial Accounting Standards No. 114, “Accounting by Creditors for Impairment of a Loan” (Statement 114), and allowances calculated for pools of loans under Statement of Financial Accounting Standards No. 5, “Accounting for Contingencies” (Statement 5).
Commercial loans and commercial mortgages are reviewed for impairment under Statement 114 if they are both greater than $100,000 and are rated less than “satisfactory” based upon the Corporation’s internal credit-rating process. A satisfactory loan does not present more than a normal credit risk based on the strength of the borrower’s management, financial condition and trends, and the type and sufficiency of underlying collateral. It is expected that the borrower will be able to satisfy the terms of the loan agreement.
A loan is considered to be impaired when, based on current information and events, it is probable that the Corporation will be unable to collect all amounts due according to the contractual terms of the loan agreement. Generally, these are loans that management has placed on non-accrual status. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, or at the loan’s observable market price or fair value of the collateral if the loan is collateral dependent. An allowance is allocated to an impaired loan if the carrying value exceeds the calculated estimated fair value.
All loans not reviewed for impairment are evaluated under Statement 5. In addition to commercial loans and mortgages not meeting the impairment evaluation criteria discussed above, these include residential mortgages, consumer loans, installment loans and lease receivables. These loans are segmented into groups with similar characteristics and an allowance for loan losses is allocated to each segment based on quantitative factors such as recent loss history and qualitative factors such as economic conditions and trends.
Loans and lease financing receivables deemed to be a loss are written off through a charge against the allowance for loan losses. Consumer loans are generally charged off when they become 120 days past due if they are not adequately secured by real estate. All other loans are evaluated for possible charge-off when it is probable that the balance will not be collected, based on the ability of the borrower to pay and the value of the underlying collateral. Recoveries of loans previously charged off are recorded as an increase to the allowance for loan losses. Past due status is determined based on contractual due dates for loan payments.
Lease financing receivables include both open and closed end leases for the purchase of vehicles and equipment. Residual values are set at the inception of the lease and are reviewed periodically for impairment. If the impairment is considered to be other than temporary, the resulting reduction in the net investment in the lease is recognized as a loss in the period.
Premises and Equipment: Premises and equipment are stated at cost, less accumulated depreciation and amortization. The provision for depreciation and amortization is generally computed using the straight-line method over the estimated useful lives of the related assets, which are a maximum of 50 years for buildings and improvements, 8 years for furniture and 5 years for equipment. Leasehold improvements are amortized over the shorter of 15 years or the non-cancelable lease term. Interest costs incurred during the construction of major bank premises are capitalized.
Other Real Estate Owned: Assets acquired in settlement of mortgage loan indebtedness are recorded as other real estate owned and are included in other assets initially at the lower of the estimated fair value of the asset less estimated selling costs or the carrying amount of the loan. Costs to maintain the assets and subsequent gains and losses on sales are included in other income and other expense.
Mortgage Servicing Rights: The estimated fair value of mortgage servicing rights (MSR’s) related to loans sold and serviced by the Corporation is recorded as an asset upon the sale of such loans. MSR’s are amortized as a reduction to servicing income over the estimated lives of the underlying loans. In addition, MSR’s are evaluated quarterly for impairment and, if necessary, additional amortization is recorded.
In March 2006, the FASB issued Statement of Financial Accounting Standards No. 156, “Accounting for Servicing of Financial Assets — an amendment of FASB Statement No. 140” (Statement 156). Statement 156 requires recognition of a servicing asset or liability at fair value each time an obligation is undertaken to service a financial asset by entering into a servicing contract. Statement

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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 has elected to continue amortizing MSR’s over the estimated lives of the underlying loans. As a result, the adoption of this standard did not impact the Corporation’s consolidated financial statements.
Derivative Financial Instruments: As of December 31, 2006, interest rate swaps with a notional amount of $290.0 million were used to hedge certain long-term fixed rate certificates of deposit. The terms of the certificates of deposit and the interest rate swaps are similar and were committed to simultaneously. Under the terms of the swap agreements, the Corporation is the fixed rate receiver and the floating rate payer (generally tied to the three month London Interbank Offering Rate, or LIBOR, a common index used for setting rates between financial institutions). The interest rate swaps 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 to other income or expense. For interest rate swaps accounted for as fair value hedges, ineffectiveness is the difference between the changes in the fair value of the interest rate swaps and the hedged items, in this case the certificates of deposit. The Corporation’s analysis of effectiveness indicated the hedges were highly effective as of December 31, 2006. For the year ended December 31, 2006, a net gain of $217,000 was recorded in other expense, representing the net impact of the changes in fair values of the interest rate swaps and the certificates of deposit, compared to a net loss of $110,000 recorded for the year ended December 31, 2005.
The Corporation entered into a forward-starting interest rate swap with a notional amount of $150.0 million in October 2005 in anticipation of the issuance of $150.0 million of trust preferred securities in January 2006. This was accounted for as a cash flow hedge as it hedges 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 in January 2006 for 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 a $751,000 tax effect. The total amount recorded to other comprehensive loss, $3.6 million, 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 loss that will be reclassified to interest expense in 2007 is expected to be approximately $185,000.
In February 2006, the FASB issued Statement of Financial Accounting Standards No. 155, “Accounting for Certain Hybrid Financial Instruments – an amendment of FASB Statements No. 133 and 140” (Statement 155). Statement 155 amends the guidance in FASB Statements No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” Statement 155 allows financial instruments that have embedded derivatives to be accounted for as a whole, thereby eliminating the need to bifurcate the derivative from its host, if the holder elects to account for the whole instrument on a fair value basis. Statement 155 is effective for all financial instruments acquired, issued, or subject to a remeasurement date after the beginning of a company’s first fiscal year that begins after September 15, 2006, or January 1, 2007 for the Corporation. Adoption of Statement 155 did not have an impact on the Corporation’s consolidated financial statements.
Income Taxes: The provision for income taxes is based upon income before income taxes, adjusted primarily for the effect of tax-exempt income and net credits received from investments in low and moderate income housing partnerships (LIH investments). Certain items of income and expense are reported in different periods for financial reporting and tax return purposes. The tax effects of these temporary differences are recognized currently in the deferred income tax provision or benefit. Deferred tax assets or liabilities are computed based on the difference between the financial statement and income tax bases of assets and liabilities using the applicable enacted marginal tax rate. Deferred income tax expenses or benefits are based on the changes in the deferred tax asset or liability from period to period.
In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48). The interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes”. Specifically, the interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation is effective for fiscal years beginning after December 15, 2006, or January 1, 2007 for the Corporation. The Corporation is evaluating the impact of FIN 48 in all tax positions and does not believe there is any material impact of adopting FIN 48 on the Corporation’s consolidated financial statements.
Stock-Based Compensation: The Corporation accounts for its stock-based compensation awards in accordance with Statement of Financial Accounting Standards No. 123R, “Share-Based Payment” (Statement 123R), which requires public companies to recognize compensation expense related to stock-based compensation awards in their income statements. Compensation expense is equal to the

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fair value of the stock-based compensation awards, net of estimated forfeitures, and is recognized over the vesting period of such awards.
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 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. There were no adjustments to net income to arrive at diluted net income per share.
                         
    2006     2005     2004  
    (in thousands)  
Weighted average shares outstanding (basic)
    172,830       164,234       156,759  
Impact of common stock equivalents
    2,042       2,026       1,694  
 
                 
Weighted average shares outstanding (diluted)
    174,872       166,260       158,453  
 
                 
 
                       
Stock options excluded from the diluted shares computation as their effect would have been anti-dilutive
    2,179       1,197        
 
                 
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 several separate banks, each engages in similar activities, provides similar products and services, and operates in the same general geographical area. The Corporation’s non-banking activities are immaterial and, therefore, separate information has not been disclosed.
Financial Guarantees: Financial guarantees, which consist primarily of standby and commercial letters of credit, are accounted for by recognizing a liability equal to the fair value of the guarantees and crediting the liability to income over the term of the guarantee. Fair value is estimated using the fees currently charged to enter into similar agreements with similar terms.
Business Combinations and Intangible Assets: The Corporation accounts for its acquisitions using the purchase accounting method as required by Statement of Financial Accounting Standards No. 141, “Business Combinations”. Purchase accounting requires the total purchase price to be allocated to the estimated fair values of assets and liabilities acquired, including certain intangible assets that must be recognized. Typically, this allocation results in the purchase price exceeding the fair value of net assets acquired, which is recorded as goodwill.
As required by Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (Statement 142), goodwill is not amortized to expense, but is tested for impairment at least annually. Write-downs of the balance, if necessary as a result of the impairment test, are to be charged to expense in the period in which goodwill is determined to be impaired. The Corporation performs its annual test of goodwill impairment as of October 31st of each year. Based on the results of these tests the Corporation concluded that there was no impairment and no write-downs were recorded in 2006, 2005 or 2004. If certain events occur which might indicate goodwill has been impaired between annual tests, the goodwill must be tested when such events occur.
As required by Statement of Financial Accounting Standards No. 147, “Acquisitions of Certain Financial Institutions” the excess purchase price recorded in qualifying branch acquisitions are treated in the same manner as Statement 142 goodwill.
Variable Interest Entities: FASB Interpretation No. 46, “Consolidation of Variable Interest Entities – An Interpretation of ARB No. 51” (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. For the Corporation, FIN 46 affects securities issued by subsidiary trusts (Subsidiary Trusts) and its LIH investments.

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As required by Staff Position FIN 46(R)-6, “Determining the Variability to Be Considered in Applying FASB Interpretation No. 46(R)” (Staff Position FIN 46(R)-6), the Corporation has addressed how an entity should determine the variability to be considered in applying FIN 46, including, the determination of (a) whether the entity is a VIE, (b) which interests are “variable interests” in the entity and (c) which party, if any, is the primary beneficiary of the VIE. The staff position had no impact the Corporation’s consolidated financial statements.
The provisions of FIN 46 related to Subsidiary Trusts, as interpreted by the Securities and Exchange Commission (SEC), disallow consolidation of Subsidiary Trusts in the financial statements of the Corporation. As a result, securities that were issued by the trusts (Trust Preferred Securities) are not included in the Corporation’s consolidated balance sheets. The junior subordinated debentures issued by the Parent Company to the Subsidiary Trusts, which have the same total balance and rate as the combined equity securities and trust preferred securities issued by the Subsidiary Trusts, remain in long-term debt (See Note I, “Short-Term Borrowings and Long-Term Debt”).
LIH Investments are 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 December 31, 2006 and 2005, the Corporation’s LIH Investments, included in other assets in the consolidated balance sheets, totaled $41.3 million and $44.2 million, respectively. The net income tax benefit associated with these investments was $3.9 million, $4.9 million, and $4.5 million in 2006, 2005 and 2004, respectively. None of the Corporation’s LIH Investments met the consolidation criteria of FIN 46 or Staff Position FIN 46(R)-6 as of December 31, 2006 or 2005.
Fair Value Measurements: In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurement” (Statement 157). Statement 157 defines fair value, establishes a framework for measuring fair value in U.S. GAAP, and expands disclosure requirements for fair value measurements. Statement 157 does not require any new fair value measurements and is effective for financial statements issued for fiscal years beginning after November 15, 2007, or January 1, 2008 for the Corporation. The Corporation is currently evaluating the impact of Statement 157 on the consolidated financial statements.
Endorsement Split-Dollar Life Insurance Arrangements: In September 2006, the FASB ratified Emerging Issues Task Force (EITF) issue 06-4, “Accounting for Deferred Compensation and Post-retirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements ” (EITF 06-4). EITF 06-4 addresses accounting for endorsement split-dollar life insurance arrangements that provide a benefit to an employee that extends to post-retirement periods. EITF 06-4 would require that the post-retirement benefit aspects of an endorsement-type split-dollar life insurance arrangement be recognized as a liability by the employer and that the obligation is not settled upon entering into an insurance arrangement. EITF 06-4 is effective for fiscal years beginning after December 15, 2007, or January 1, 2008 for the Corporation. The Corporation is currently evaluating the impact of EITF 06-4 on the consolidated financial statements.
Fair Value Option for Financial Assets and Liabilities: In February 2007, the FASB issued Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115” (Statement 159). Statement 159 permits entities to choose to measure many financial instruments and certain other items at fair value and amends Statement 115 to, among other things, require certain disclosures for amounts for which the fair value option is applied. Additionally, this standard provides that an entity may reclassify held-to-maturity and available-for-sale securities to the trading account when the fair value option is elected for such securities, without calling into question the intent to hold other securities to maturity in the future. This standard is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007, or January 1, 2008 for the Corporation. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of Statement 157. The Corporation has not completed its assessment of SFAS 159 and the impact, if any, on the consolidated financial statements.
Reclassifications and Restatements: Certain amounts in the 2005 and 2004 consolidated financial statements and notes have been reclassified to conform to the 2006 presentation.
The Corporation paid a 5% stock dividend in June 2006. All share and per-share information has been restated to reflect the impact of this stock dividend.
NOTE B – RESTRICTIONS ON CASH AND DUE FROM BANKS
The Corporation’s subsidiary banks are required to maintain reserves, in the form of cash and balances with the Federal Reserve Bank, against their deposit liabilities. The amount of such reserves as of December 31, 2006 and 2005 was $13.7 million and $97.4 million, respectively.

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NOTE C – INVESTMENT SECURITIES
The following tables present the amortized cost and estimated fair values of investment securities as of December 31:
                                 
            Gross     Gross     Estimated  
    Amortized     Unrealized     Unrealized     Fair  
    Cost     Gains     Losses     Value  
    (in thousands)  
2006 Held to Maturity
                               
 
                               
U.S. Government sponsored agency securities
  $ 7,648     $     $ (68 )   $ 7,580  
State and municipal securities
    1,262       11             1,273  
Corporate debt securities
    75                   75  
Mortgage-backed securities
    3,539       68       (1 )     3,606  
 
                       
 
 
  $ 12,524     $ 79     $ (69 )   $ 12,534  
 
                       
 
                               
2006 Available for Sale
                               
 
                               
Equity securities
  $ 165,931     $ 2,960     $ (3,255 )   $ 165,636  
U.S. Government securities
    17,062       5       (1 )     17,066  
U.S. Government sponsored agency securities
    289,816       129       (1,480 )     288,465  
State and municipal securities
    493,525       1,599       (6,845 )     488,279  
Corporate debt securities
    69,575       1,449       (387 )     70,637  
Collateralized mortgage obligations
    494,484       1,609       (3,569 )     492,524  
Mortgage-backed securities
    1,376,651       2,265       (35,809 )     1,343,107  
 
                       
 
  $ 2,907,044     $ 10,016     $ (51,346 )   $ 2,865,714  
 
                       
 
                               
2005 Held to Maturity
                               
 
                               
U.S. Government sponsored agency securities
  $ 7,512     $     $ (103 )   $ 7,409  
State and municipal securities
    5,877       19             5,896  
Mortgage-backed securities
    4,869       143             5,012  
 
                       
 
  $ 18,258     $ 162     $ (103 )   $ 18,317  
 
                       
 
                               
2005 Available for Sale
                               
 
                               
Equity securities
  $ 137,462     $ 2,029     $ (3,959 )   $ 135,532  
U.S. Government securities
    35,124             (6 )     35,118  
U.S. Government sponsored agency securities
    213,748       163       (1,261 )     212,650  
State and municipal securities
    444,034       1,044       (6,091 )     438,987  
Corporate debt securities
    64,478       1,860       (504 )     65,834  
Collateralized mortgage obligations
    265,033       301       (2,831 )     262,503  
Mortgage-backed securities
    1,445,796       556       (53,089 )     1,393,263  
 
                       
 
  $ 2,605,675     $ 5,953     $ (67,741 )   $ 2,543,887  
 
                       

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The amortized cost and estimated fair value of debt securities at December 31, 2006, by contractual maturity, are shown in the following table. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
                                 
    Held to Maturity     Available for Sale  
    Amortized     Estimated     Amortized     Estimated  
    Cost     Fair Value     Cost     Fair Value  
            (in thousands)          
Due in one year or less
  $ 192     $ 192     $ 80,242     $ 80,036  
Due from one year to five years
    8,614       8,556       529,333       522,535  
Due from five years to ten years
    179       179       90,153       89,508  
Due after ten years
                170,250       172,368  
 
                       
 
    8,985       8,927       869,978       864,447  
Collateralized mortgage obligations
                494,484       492,524  
Mortgage-backed securities
    3,539       3,607       1,376,651       1,343,107  
 
                       
 
  $ 12,524     $ 12,534     $ 2,741,113     $ 2,700,078  
 
                       
Gross gains totaling $7.1 million, $5.9 million and $14.8 million were realized on the sale of equity securities during 2006, 2005 and 2004, respectively. Gross losses on the sale of equity securities, including losses recognized for other than temporary impairment, as discussed below, totaling $163,000, $68,000 and $149,000 were realized during 2006, 2005 and 2004, respectively. Gross gains totaling $555,000, $1.7 million and $3.1 million were realized on the sale of debt securities during 2006, 2005 and 2004, respectively. Gross losses totaling $81,000, $811,000 and $28,000 were realized on the sale of debt securities during 2006, 2005 and 2004, respectively.
Securities carried at $1.4 billion and $1.3 billion at December 31, 2006 and 2005, respectively, were pledged as collateral to secure public and trust deposits, customer repurchase agreements and interest rate swaps. Available for sale equity securities include restricted investment securities issued by the Federal Home Loan Bank and Federal Reserve Bank totaling $71.8 million and $56.9 million at December 31, 2006 and 2005, respectively.
The following table presents the gross unrealized losses and estimated fair values of investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2006:
                                                 
    Less Than 12 months     12 Months or Longer     Total  
    Estimated     Unrealized     Estimated     Unrealized     Estimated     Unrealized  
    Fair Value     Losses     FairValue     Losses     Fair Value     Losses  
                    (in thousands)                  
U.S. Government securities
  $ 5,948     $ (1 )   $     $     $ 5,948     $ (1 )
U.S. Government sponsored agency securities
    121,546       (361 )     130,767       (1,187 )     252,313       (1,548 )
State and municipal securities
    60,640       (500 )     294,956       (6,345 )     355,596       (6,845 )
Corporate debt securities
    8,112       (145 )     13,180       (242 )     21,292       (387 )
Collateralized mortgage obligations
    175,527       (1,045 )     120,192       (2,524 )     295,719       (3,569 )
Mortgage-backed securities
    99,432       (2,075 )     1,034,860       (33,735 )     1,134,292       (35,810 )
 
                                   
Total debt securities
    471,205       (4,127 )     1,593,955       (44,033 )     2,065,160       (48,160 )
Equity securities
    22,325       (1,638 )     16,623       (1,617 )     38,948       (3,255 )
 
                                   
 
  $ 493,530     $ (5,765 )   $ 1,610,578     $ (45,650 )   $ 2,104,108     $ (51,415 )
 
                                   
The majority of the mortgage-backed securities shown in the above table were purchased during 2003 and 2004 when mortgage rates were at historical lows. Unrealized losses on these securities at December 31, 2006 resulted from the increase in market rates over the past 30 months. Because the Federal Home Loan Mortgage Corporation and the Federal National Mortgage Association guarantee the timely payment of principal on mortgage-backed securities, the credit risk for these securities is minimal and, as such, no impairment write-offs were considered to be necessary. For similar reasons, the Corporation does not consider unrealized losses associated with U.S. government sponsored agency securities or state and municipal securities as an indication of impairment.

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The Corporation evaluates whether unrealized losses on equity investments indicate other than temporary impairment. Based upon this evaluation, losses of $122,000, $65,000 and $137,000 were recognized in 2006, 2005 and 2004, respectively.
NOTE D – LOANS AND ALLOWANCE FOR LOAN LOSSES
Gross loans are summarized as follows as of December 31:
                 
    2006     2005  
    (in thousands)  
Commercial — industrial and financial
  $ 2,603,224     $ 2,044,010  
Commercial — agricultural
    361,962       331,659  
Real-estate — commercial mortgage
    3,213,809       2,831,405  
Real-estate — residential mortgage
    696,836       567,733  
Real-estate — home equity
    1,455,439       1,205,523  
Real-estate — construction
    1,428,809       851,451  
Consumer
    523,066       520,098  
Leasing and other
    100,711       79,738  
 
           
 
    10,383,856       8,431,617  
Unearned income
    (9,533 )     (6,889 )
 
           
 
  $ 10,374,323     $ 8,424,728  
 
           
Changes in the allowance for loan losses were as follows for the years ended December 31:
                         
    2006     2005     2004  
    (in thousands)  
Balance at beginning of year
  $ 92,847     $ 89,627     $ 77,700  
 
                       
Loans charged off
    (6,969 )     (8,204 )     (8,877 )
Recoveries of loans previously charged off
    4,517       5,196       4,520  
 
                 
Net loans charged off
    (2,452 )     (3,008 )     (4,357 )
 
                       
Provision for loan losses
    3,498       3,120       4,717  
Allowance purchased
    12,991       3,108       11,567  
 
                 
 
                       
Balance at end of year
  $ 106,884     $ 92,847     $ 89,627  
 
                 
The following table presents non-performing assets as of December 31:
                 
    2006     2005  
    (in thousands)  
Non-accrual loans
  $ 33,113     $ 36,560  
Accruing loans greater than 90 days past due
    20,632       9,012  
Other real estate owned
    4,103       2,072  
 
           
 
  $ 57,848     $ 47,644  
 
           
The amount of overdraft deposit balances that have been reported as loans were $24.3 million and $18.9 million as of December 31, 2006 and 2005, respectively.
Interest of approximately $2.6 million, $3.0 million and $1.5 million was not recognized as interest income due to the non-accrual status of loans during 2006, 2005 and 2004, respectively.
The recorded investment in loans that were considered to be impaired as defined by Statement 114 was $18.5 million and $13.2 million at December 31, 2006 and 2005, respectively. At December 31, 2006 and 2005, impaired loans had related allowances for loan losses of $5.1 million and $5.9 million, respectively. There were no impaired loans in 2006 and 2005 that did not have a related

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allowance for loan losses. The average recorded investment in impaired loans during the years ended December 31, 2006, 2005 and 2004 was approximately $13.7 million, $9.1 million and $7.4 million, respectively.
The Corporation applies all payments received on non-accruing impaired loans to principal until such time as the principal is paid off, after which time any additional payments received are recognized as interest income. The Corporation recognized interest income of approximately $636,000, $462,000 and $55,000 on impaired loans in 2006, 2005 and 2004, respectively.
The Corporation has extended credit to the officers and directors of the Corporation and to their associates. Related-party loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and do not involve more than the normal risk of collectibility. The aggregate dollar amount of these loans, including unadvanced commitments, was $273.8 million and $267.2 million at December 31, 2006 and 2005, respectively. During 2006, additions totaled $65.3 million and repayments totaled $90.0 million. The Columbia Bank added $16.4 million to related party loans.
The total portfolio of mortgage loans serviced by the Corporation for unrelated third parties was $981.4 million and $1.1 billion at December 31, 2006 and 2005, respectively.
NOTE E – PREMISES AND EQUIPMENT
The following is a summary of premises and equipment as of December 31:
                 
    2006     2005  
    (in thousands)  
Land
  $ 30,610     $ 26,693  
Buildings and improvements
    203,551       180,153  
Furniture and equipment
    136,576       119,179  
Construction in progress
    8,034       5,483  
 
           
 
    378,771       331,508  
Less: Accumulated depreciation and amortization
    (187,370 )     (161,254 )
 
           
 
  $ 191,401     $ 170,254  
 
           
NOTE F – GOODWILL AND INTANGIBLE ASSETS
The following table summarizes the changes in goodwill:
                         
    2006     2005     2004  
    (in thousands)  
Balance at beginning of year
  $ 418,735     $ 364,019     $ 127,202  
Goodwill additions
    207,307       54,716       236,817  
 
                 
Balance at end of year
  $ 626,042     $ 418,735     $ 364,019  
 
                 
See Note Q, “Mergers and Acquisitions” for information regarding goodwill acquired in 2006 and 2005.

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The following table summarizes intangible assets at December 31:
                                                 
    2006     2005  
            Accumulated                     Accumulated        
    Gross     Amortization     Net     Gross     Amortization     Net  
                    (in thousands)                  
Amortizing:
                                               
Core deposit
  $ 50,279     $ (17,927 )   $ 32,352     $ 35,590     $ (11,214 )   $ 24,376  
Non-compete
    475       (230 )     245       475       (135 )     340  
Unidentifiable
    8,897       (6,305 )     2,592       8,897       (5,206 )     3,691  
 
                                   
Total amortizing
    59,651       (24,462 )     35,189       44,962       (16,555 )     28,407  
Non-amortizing
    2,544             2,544       1,280             1,280  
 
                                   
 
  $ 62,195     $ (24,462 )   $ 37,733     $ 46,242     $ (16,555 )   $ 29,687  
 
                                   
Core deposit intangible assets are amortized using an accelerated method over the estimated remaining life of the acquired core deposits. As of December 31, 2006, these assets had a weighted average remaining life of approximately eight years. Unidentifiable intangible assets related to branch acquisitions are amortized on a straight-line basis over ten years. Non-compete intangible assets are being amortized on a straight-line basis over five years, which is the term of the underlying contracts. Amortization expense related to intangible assets totaled $7.9 million, $5.3 million and $4.7 million in 2006, 2005 and 2004, respectively.
Amortization expense for the next five years is expected to be as follows (in thousands):
         
Year        
2007
  $ 7,463  
2008
    6,222  
2009
    5,489  
2010
    4,692  
2011
    3,514  
NOTE G – MORTGAGE SERVICING RIGHTS
The following table summarizes the changes in mortgage servicing rights (MSR’s), which are included in other assets in the consolidated balance sheets:
                         
    2006     2005     2004  
    (in thousands)  
Balance at beginning of year
  $ 7,515     $ 8,157     $ 8,396  
Originations of mortgage servicing rights
    724       1,548       2,138  
Amortization expense
    (1,640 )     (2,190 )     (2,377 )
 
                 
Balance at end of year
  $ 6,599     $ 7,515     $ 8,157  
 
                 
MSR’s represent the economic value to be derived by the Corporation from its existing contractual rights to service mortgage loans that have been sold. Accordingly, prepayments of the underlying mortgage loan prepayments can impact the value of MSR’s.
The Corporation estimates the fair value of its MSR’s by discounting the estimated cash flows of servicing revenue, net of costs, over the expected life of the underlying loans at a discount rate commensurate with the risk associated with these assets. Expected life is based on the contractual terms of the loans, as adjusted for prepayment projections for mortgage-backed securities with rates and terms comparable to the loans underlying the MSR’s. The estimated fair value of MSR’s was approximately $8.2 million and $8.8 million at December 31, 2006 and 2005, respectively.

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Estimated MSR amortization expense for the next five years, based on balances at December 31, 2006 and the expected remaining lives of the underlying loans follows (in thousands):
         
Year        
2007
  $ 1,649  
2008
    1,477  
2009
    1,280  
2010
    1,055  
2011
    800  
NOTE H – DEPOSITS
Deposits consisted of the following as of December 31:
                 
    2006     2005  
    (in thousands)  
Noninterest-bearing demand
  $ 1,831,419     $ 1,672,637  
Interest-bearing demand
    1,683,857       1,637,007  
Savings and money market accounts
    2,287,146       2,125,475  
Time deposits
    4,430,047       3,369,720  
 
           
 
  $ 10,232,469     $ 8,804,839  
 
           
Included in time deposits were certificates of deposit equal to or greater than $100,000 of $1.2 billion and $749.6 million at December 31, 2006 and 2005, respectively. The scheduled maturities of time deposits as of December 31, 2006 were as follows (in thousands):
         
Year        
2007
  $ 3,414,830  
2008
    461,853  
2009
    141,949  
2010
    104,901  
2011
    86,672  
Thereafter
    219,842  
 
     
 
  $ 4,430,047  
 
     
NOTE I – SHORT-TERM BORROWINGS AND LONG-TERM DEBT
Short-term borrowings at December 31, 2006, 2005 and 2004 and the related maximum amounts outstanding at the end of any month in each of the three years then ended are presented below. The securities underlying the repurchase agreements remain in available for sale investment securities.
                                                 
    December 31     Maximum Outstanding  
    2006     2005     2004     2006     2005     2004  
                    (in thousands)                  
Federal funds purchased
  $ 1,022,351     $ 939,096     $ 676,922     $ 1,236,941     $ 939,096     $ 849,200  
Securities sold under agreements to repurchase
    339,207       352,937       500,206       498,541       573,991       708,830  
Short-term promissory notes
    279,076                   282,035              
FHLB overnight repurchase agreements
          2,000             2,000       2,000        
Revolving line of credit
    36,318             11,930       55,600       33,180       26,000  
Other
    3,888       4,929       5,466       5,435       13,219       5,807  
 
                                         
 
  $ 1,680,840     $ 1,298,962     $ 1,194,524                          
 
                                         

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The following table presents information related to securities sold under agreements to repurchase:
                         
    December 31
    2006   2005   2004
    (dollars in thousands)
Amount outstanding at December 31
  $ 339,207     $ 352,937     $ 500,206  
Weighted average interest rate at year end
    3.57 %     2.61 %     1.03 %
Average amount outstanding during the year
  $ 356,561     $ 436,244     $ 531,196  
Weighted average interest rate during the year
    3.40 %     2.12 %     0.97 %
The Corporation has a $100.0 million revolving line of credit agreement with an unaffiliated bank that provides for interest to be paid on outstanding balances at the one-month LIBOR plus 0.35%. The credit agreement requires the Corporation to maintain certain financial ratios related to capital strength and earnings. The Corporation was in compliance with all required covenants under the credit agreement as of December 31, 2006.
Federal Home Loan Bank advances and long-term debt included the following as of December 31:
                 
    2006     2005  
    (in thousands)  
Federal Home Loan Bank advances
  $ 998,521     $ 717,037  
Junior subordinated deferrable interest debentures
    206,705       40,724  
Subordinated debt
    100,000       100,000  
Other long-term debt
    1,999       3,880  
Unamortized issuance costs
    (3,077 )     (1,296 )
 
           
 
  $ 1,304,148     $ 860,345  
 
           
Excluded from the preceding table is the Parent Company’s revolving line of credit with its subsidiary banks ($75.0 million and $61.4 million outstanding at December 31, 2006 and 2005, respectively). This line of credit is secured by equity securities and insurance investments and bears interest at the prime rate, minus 1.5%. Although the line of credit and related interest have been eliminated in consolidation, this borrowing arrangement is senior to the subordinated debt and the junior subordinated deferrable interest debentures.
In January 2006, the Corporation purchased all of the common stock of a subsidiary trust, Fulton Capital Trust I, which was formed for the purpose of issuing $150.0 million of Trust Preferred Securities at a fixed rate of 6.29% and an effective rate of approximately 6.50% as a result of issuance costs and the settlement cost of the forward-starting interest rate swap. 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.

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In addition to Fulton Capital Trust I, the Parent Company owns all of the common stock of eight Subsidiary Trusts, which have issued Trust Preferred Securities in conjunction with the Parent Company issuing junior subordinated deferrable interest debentures to the trusts. The terms of the junior subordinated deferrable interest debentures are the same as the terms of the Trust Preferred Securities. The Parent Company’s obligations under the debentures constitute a full and unconditional guarantee by the Parent Company of the obligations of the trusts. The Trust Preferred Securities are redeemable on specified dates, or earlier if the deduction of interest for Federal income taxes is prohibited, the Trust Preferred Securities no longer qualify as Tier I regulatory capital, or if certain other contingencies arise. The Trust Preferred Securities must be redeemed upon maturity. The following table details the terms of the debentures (dollars in thousands):
                                     
        Rate at                        
    Fixed/   December 31,                     Callable  
Debentures Issued to   Variable   2006     Amount     Maturity   Callable   Rate  
Premier Capital Trust
  Fixed     8.57 %   $ 10,310     8/15/2028   8/15/2008     104.3 %
PBI Capital Trust II
  Variable     8.86 %     15,464     11/7/2032   11/7/2007     100.0  
Resource Capital Trust III
  Variable     8.86 %     3,093     11/7/2032   11/7/2007     100.0  
Bald Eagle Statutory Trust I
  Variable     8.81 %     4,124     7/31/2031   7/31/2006     107.5  
Bald Eagle Statutory Trust II
  Variable     8.92 %     2,578     6/26/2032   6/26/2007     100.0  
Columbia Capital Trust I
  Variable     8.01 %     6,186     6/30/2039   6/30/2009     100.0  
Columbia Capital Trust II
  Variable     7.25 %     4,124     3/15/2035   3/15/2010     100.0  
Columbia Capital Trust III
  Variable     7.13 %     6,186     6/15/2035   6/15/2010     100.0  
Fulton Capital Trust I
  Fixed     6.29 %     154,640     12/31/2036   NA     NA   
 
                                 
 
              $ 206,705                  
 
                                 
The $100.0 million of subordinated debt matures April 1, 2015 and carries a fixed rate of 5.35%. Interest is paid semi-annually in October and April of each year.
Federal Home Loan Bank advances mature through March 2027 and carry a weighted average interest rate of 4.76%. As of December 31, 2006, the Corporation had an additional borrowing capacity of approximately $1.3 billion with the Federal Home Loan Bank. Advances from the Federal Home Loan Bank are secured by Federal Home Loan Bank stock, qualifying residential mortgages, investments and other assets.
The following table summarizes the scheduled maturities of Federal Home Loan Bank advances and long-term debt as of December 31, 2006 (in thousands):
         
Year        
2007
  $ 190,305  
2008
    184,594  
2009
    59,138  
2010
    89,116  
2011
    595  
Thereafter
    780,400  
 
     
 
  $ 1,304,148  
 
     
NOTE J – REGULATORY MATTERS
Dividend and Loan Limitations
The dividends that may be paid by subsidiary banks to the Parent Company are subject to certain legal and regulatory limitations. Under such limitations, the total amount available for payment of dividends by subsidiary banks was approximately $320 million at December 31, 2006.
Under current Federal Reserve regulations, the subsidiary banks are limited in the amount they may loan to their affiliates, including the Parent Company. Loans to a single affiliate may not exceed 10%, and the aggregate of loans to all affiliates may not exceed 20%

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of each bank subsidiary’s regulatory capital. At December 31, 2006, the maximum amount available for transfer from the subsidiary banks to the Parent Company in the form of loans and dividends was approximately $410 million.
Regulatory Capital Requirements
The Corporation’s subsidiary banks are subject to various regulatory capital requirements administered by banking regulators. Failure to meet minimum capital requirements can initiate certain mandatory – and possibly additional discretionary – actions by regulators that, if undertaken, could have a direct material effect on the Corporation’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the subsidiary banks must meet specific capital guidelines that involve quantitative measures of the subsidiary banks’ assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The subsidiary banks’ capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the subsidiary banks to maintain minimum amounts and ratios of total and Tier I capital to risk-weighted assets, and of Tier I capital to average assets (as defined in the regulations). Management believes, as of December 31, 2006, that all of its bank subsidiaries meet the capital adequacy requirements to which they are subject.
As of December 31, 2006, the Corporation’s five significant subsidiaries, Fulton Bank, The Columbia Bank, Lafayette Ambassador Bank, The Bank and Resource Bank were well-capitalized under the regulatory framework for prompt corrective action based on their capital ratio calculations. As of December 31, 2005, the Corporation’s four significant subsidiaries, Fulton Bank, Lafayette Ambassador Bank, The Bank and Resource Bank were also well-capitalized. To be categorized as well-capitalized, these banks must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the following table. There are no conditions or events since December 31, 2006 that management believes have changed the institutions’ categories.
The following tables present the total risk-based, Tier I risk-based and Tier I leverage requirements for the Corporation and its significant subsidiaries with total assets in excess of $1.0 billion.
                                                 
                    For Capital    
    Actual   Adequacy Purposes   Well-Capitalized
As of December 31, 2006   Amount   Ratio   Amount   Ratio   Amount   Ratio
                    (dollars in thousands)                
Total Capital (to Risk-Weighted Assets):
                                               
Corporation
  $ 1,287,443       11.7 %   $ 880,074       8.0 %   $ 1,100,093       10.0 %
Fulton Bank
    496,555       11.2       356,238       8.0       445,297       10.0  
The Columbia Bank
    147,565       11.9       99,272       8.0       124,090       10.0  
The Bank
    119,237       11.4       83,679       8.0       104,599       10.0  
Lafayette Ambassador Bank
    107,102       10.7       80,069       8.0       100,086       10.0  
Resource Bank
    107,459       11.2       76,921       8.0       96,151       10.0  
Tier I Capital (to Risk-Weighted Assets):
                                               
Corporation
  $ 1,083,953       9.9 %   $ 440,037       4.0 %   $ 660,056       6.0 %
Fulton Bank
    401,584       9.0       178,119       4.0       267,178       6.0  
The Columbia Bank
    134,167       10.8       49,636       4.0       74,454       6.0  
The Bank
    96,821       9.3       41,840       4.0       62,759       6.0  
Lafayette Ambassador Bank
    90,332       9.0       40,035       4.0       60,052       6.0  
Resource Bank
    89,215       9.3       38,460       4.0       57,691       6.0  
Tier I Capital (to Average Assets):
                                               
Corporation
  $ 1,083,953       7.7 %   $ 425,125       3.0 %   $ 708,541       5.0 %
Fulton Bank
    401,584       7.1       168,974       3.0       281,624       5.0  
The Columbia Bank
    134,167       9.2       43,573       3.0       72,622       5.0  
The Bank
    96,821       7.5       38,821       3.0       64,701       5.0  
Lafayette Ambassador Bank
    90,332       7.0       38,942       3.0       64,904       5.0  
Resource Bank
    89,215       7.0       38,209       3.0       63,681       5.0  

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e

                                                 
                    For Capital    
    Actual   Adequacy Purposes   Well-Capitalized
As of December 31, 2005   Amount   Ratio   Amount   Ratio   Amount   Ratio
    (dollars in thousands)
Total Capital (to Risk-Weighted Assets):
                                               
Corporation
  $ 1,102,891       12.1 %   $ 730,115       8.0 %   $ 912,644       10.0 %
Fulton Bank
    409,653       11.1       295,353       8.0       369,191       10.0  
Lafayette Ambassador Bank
    102,007       11.6       70,539       8.0       88,173       10.0  
The Bank
    101,532       11.0       73,965       8.0       92,456       10.0  
Resource Bank
    105,343       11.9       70,786       8.0       88,482       10.0  
Tier I Capital (to Risk-Weighted Assets):
                                               
Corporation
  $ 910,044       10.0 %   $ 365,057       4.0 %   $ 547,586       6.0 %
Fulton Bank
    323,466       8.8       147,676       4.0       221,515       6.0  
Lafayette Ambassador Bank
    85,331       9.7       35,269       4.0       52,904       6.0  
The Bank
    80,820       8.7       36,983       4.0       55,474       6.0  
Resource Bank
    86,825       9.8       35,393       4.0       53,089       6.0  
Tier I Capital (to Average Assets):
                                               
Corporation
  $ 910,044       7.7 %   $ 355,090       3.0 %   $ 591,817       5.0 %
Fulton Bank
    323,466       7.1       137,077       3.0       228,462       5.0  
Lafayette Ambassador Bank
    85,331       7.0       36,492       3.0       60,821       5.0  
The Bank
    80,820       7.0       34,606       3.0       57,676       5.0  
Resource Bank
    86,825       7.9       33,116       3.0       55,194       5.0  
NOTE K – INCOME TAXES
The components of the provision for income taxes are as follows:
                         
    Year ended December 31  
    2006     2005     2004  
    (in thousands)  
Current tax expense:
                       
Federal
  $ 85,010     $ 69,611     $ 63,440  
State
    1,191       760       417  
 
                 
 
    86,201       70,371       63,857  
Deferred tax (benefit) expense
    (5,779 )     990       816  
 
                 
 
  $ 80,422     $ 71,361     $ 64,673  
 
                 
The differences between the effective income tax rate and the Federal statutory income tax rate are as follows:
                         
    Year ended December 31  
    2006     2005     2004  
Statutory tax rate
    35.0 %     35.0 %     35.0 %
Effect of tax-exempt income
    (3.1 )     (2.8 )     (2.9 )
Effect of low income housing investments
    (1.5 )     (2.1 )     (2.1 )
State income taxes, net of Federal benefit
    0.3       0.2       0.1  
Bank-owned life insurance
    (0.4 )     (0.3 )     (0.3 )
Other
    (0.1 )     (0.1 )     0.4  
 
                 
Effective income tax rate
    30.2 %     30.1 %     30.2 %
 
                 

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Table of Contents

The net deferred tax asset recorded by the Corporation is included in other assets and consists of the following tax effects of temporary differences at December 31:
                 
    2006     2005  
    (in thousands)  
Deferred tax assets:
               
Allowance for loan losses
  $ 37,409     $ 32,496  
Unrealized holding losses on securities available for sale
    14,432       21,592  
Loss and credit carryforwards
    11,111       9,217  
Deferred compensation
    8,954       7,234  
Post-retirement and defined benefit plans
    5,370       621  
LIH Investments
    3,644       3,318  
Other accrued expenses
    2,594       2,412  
Stock-based compensation
    1,930       1,867  
Derivative financial instruments
    1,868       1,177  
Premises and equipment
    1,059        
Other than temporary impairment of investments
    568       1,400  
Other
    175       129  
 
           
Total gross deferred tax assets
    89,114       81,463  
 
           
 
               
Deferred tax liabilities:
               
Intangible assets
    10,368       6,847  
Direct leasing
    5,007       9,357  
Mortgage servicing rights
    2,315       2,653  
Acquisition premiums/discounts
    983       1,832  
Premises and equipment
          747  
Other
    2,700       2,997